Securities class actions

Securities Class Actions: A successful application for preliminary discovery requires more than just ‘conjecture, suspicion or speculation’ – Bonham v Iluka Resources Limited [2015] FCA 713

Key points:

  1. If the basis for the allegations contained in a prospective claim are merely speculative, the Court will not grant orders for preliminary discovery.
  2. Evidence of the belief subjectively held by the prospective applicant is required.
  3. An inference drawn from a falling share price will not suffice for the making of the order.
  4. Lawyers should avoid making statements to investors that a decision has been made to commence proceedings, whilst (as was the case here) an application is on foot seeking access to documents in order to form a view on prospects.
  5. No guidance was given as to the applicability of the “fraud on the market theory” in Australia.


Iluka Resources Limited (Iluka) is an ASX listed company specialising in the production of mineral sands. On 8 May 2012, Iluka announced a downgrade in its previous guidance. On 15 May 2012, the applicant purchased shares in Iluka. On 9 July 2012, Iluka announced that it expected considerably lower sales due to both below expectation sales and a deteriorating economic landscape. Following the July announcement, the share price fell 24%.

Prospective class action and the application:

ACA Lawyers published in March 2014 that it had secured funding to instigate a representative proceeding against Iluka, in which it would be alleged that Iluka failed to comply with its continuing disclosure obligations and engaged in misleading and deceptive conduct for investors who purchased securities between 8 May 2012 and 8 July 2012. Mr Bonham fell within this class.

In November 2014, ACA Lawyers requested that Iluka provide access to a number of documents to enable the prospective application to determine whether to commence the action and the strength of any defence available to Iluka. Iluka declined. Mr Bonham applied to the Court for preliminary discovery.

The law:

The Court set out the relevant considerations for the making of an order pursuant to rule 7.23 of the Federal Court Rules as follows:

  1. The existence of a reasonable belief in a right to obtain relief in the court;
  2. The making of reasonable inquiries directed to obtaining sufficient information to decide whether to start a proceeding in the court to obtain that relief;
  3. An insufficiency of information to enable that decision to be made;
  4. The existence of a reasonable belief that the prospective respondent has or had, or is likely to have or have had, documents:
  1. that are directly relevant to the question whether the putative right to relief exists; and
  2. whose inspection would assist in making a decision whether to start a proceeding in the court to obtain that relief[1].

Application of the law:

Reasonable belief

The Court held that Mr Bonham had not demonstrated the facts or circumstances that would give rise to an objectively reasonable belief in a right to relief. It was stated that reasonable grounds for a state of mind, require the existence of facts and circumstances which would induce that state of mind in a reasonable person. Kerr J stated that none of the facts or circumstances advanced by the prospective applicant amount to more than “conjecture, suspicion or speculation”. Essentially, it was not enough to look back in hindsight at the fall in share price to suggest that misleading or deceptive conduct had occurred. Mr Bonham was required to point specifically to the matters that led him to believe that Iluka knew or ought to have known of the circumstances which led to the downgrade before it was announced.

In terms of the sharp decline of the security, the Court inferred that this was a result of the market’s surprise but not, the basis of the evidence available before it, any fact or circumstance attributable to Iluka’s failure to disclose a matter which it knew or ought to have known. It is important to look at the question of whether a person had reasonable ground for making a representation of a future matter, as at the date when the representation was made. Iluka adduced evidence as to the reasonableness of its grounds for making the May 2012 update, in the face of deteriorating market conditions. The Court considered this evidence was plausible.

Finally, there was no evidence before the Court of that the belief was held by the applicant personally. Mr Bonham’s solicitors had put forth evidence of their beliefs and objective facts that founded those beliefs. The Court held this was inadequate. Kerr J, following Perry J’s view in ObjectiVision v Visionsearch [2014] FCA 1087 at [35], required evidence of the belief of the applicant himself (so as to give credence to the proposition that other shareholders may have held the same belief).

The book building process

Kerr J stated that ACA Lawyers’ announcement to investors of the proposed class action, whilst initiating an application for preliminary discovery (due to uncertainty as to the reasonable prospects of such action) was contradictory. It could be inferred from their conduct that they had already made a decision to instigate the proceedings.  It was said that ACA Lawyers’ statements published on its website “conveyed at least inaccurate and false impressions”. As a result, Kerr J forwarded his decision to the Office of the Legal Services Commissioner in NSW.

Fraud on the market theory

The Court indicated that Mr Bonham’s proposed claim (as propounded in the draft statement of claim) attempted to invoke the doctrine of “fraud on the market” to prove causation. Kerr J confirmed that there is no Australian decision that has given assented its use. His Honour referred to the obiter remarks in the recent decision in Grant-Taylor v Babcock & Brown (in Liquidation) [2015] FCA 149 to conclude that he did not believe the case did “more than endorsing the efficient market hypothesis as an available mechanism to measure loss”. Notably, the Court did not consider the theory any further, as the applicant had made an alternative pleading of actual reliance.

Mr Bonham’s application was dismissed.

[1] Per Yates J in Reeve v Aqualast Pty Ltd [2012] FCA 679 at [63].

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