Causation in Securities and Financial Product Disclosure Cases: An Analysis and Critique
| DOI | 10.1177/0067205X19856499 |
| Author | Benjamin B Saunders |
| Published date | 01 September 2019 |
| Date | 01 September 2019 |
| Subject Matter | Articles |
Article
Causation in Securities
and Financial Product Disclosure
Cases: An Analysis and Critique
Benjamin B Saunders*
Abstract
This article critically examines the approach adopted by the courts to causation in securities and
financial product disclosure cases, where a plaintiff alleges loss as a result of defective disclosure by
a product issuer. The article argues that the reliance approach should be rejected as the sole
approach to causation in securities and financial product disclosure cases. The article gives two
principal arguments in support of this claim. Firstly, the reliance approach, by insisting that cau-
sation may only be established by proving reliance on the disclosure document, implicitly assumes a
‘rational choice’ approach to investor decision-making which, as demonstrated by a significant
body of behavioural research, does not accurately reflect the reality of investor decision-making.
Secondly, the reliance approach sits at odds with other developments in securities cases and
misleading and deceptive conduct jurisprudence. I argue that the courts should recognise that
causation may potentially be demonstrated in a variety of ways other than reliance on the dis-
closure document, including reliance on sources such as communications from financial advisers,
newspapers, online sources, briefings, investor roadshows, social media and other marketing
practices.
I Introduction
Actions by shareholders against companies for misleading or defective disclosure in connection
with the issue of securities or financ ial products are an increasingly impor tant feature of the
Australian legal landscape.
1
While some view shareholder actions as opportunistic attempts to
extort money from wealthy co rporate entities,
2
shareholder litigation also pla ys an important
corporate governance role in providing a check on management misconduct.
3
While the Australian
Securities and Investments Commission (‘ASIC’) has a key public role to play in enforcing
breaches of disclosure laws,
4
its ability to do so is limited due to resourcing and other constraints;
5
accordingly, the availability of private remedies is an important feature of an effective disclosure
regime.
6
* Senior Lecturer and Alfred Deakin Postdoctoral Research Fellow, Deakin Law School, Deakin University. Many thanks
to the anonymous reviewers for their helpful comments. The author may be contacted at b.saunders@deakin.edu.au.
Federal Law Review
2019, Vol. 47(3) 494–518
ªThe Author(s) 2019
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DOI: 10.1177/0067205X19856499
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This article examines one aspect of the disclosure provisions that impacts their effectiveness,
namely the courts’ approach to causation and reliance. This article focuses on disclosure in relation
to the issue or sale of securities and financial products under the prospectus disclosure and the
financial product disclosure provisions of the Corporations Act 2001 (Cth) (‘Corporations Act’), in
particular, where a person acquires securities or financial products and the issuer breached obli-
gations of disclosure, either by failing to disclose information it was required to disclose or by
making a disclosure that was misleading or deceptive.
7
Although it is necessary for shareholders to demo nstrate that the de fective disclo sure caused
the loss in some way, Australian law has struggled with the appropriate test for causation in the
context of shareholder actions.
8
There have been two lines of cases which are not easily recon-
cilable in terms of their underlying philosophy and legal effect. One line of authority views
shareholder actions for defective disclosure as analogous to common law misrepresentation and
adopts a narrow conception of causation which is effectively limited to reliance. This approach,
referred to in this article as the ‘reliance approach’, requires the p laintiff to demonstrate that he
or she relied on the prospectus or product disclosure statement (‘PDS’) when entering into the
transaction. A second line of cases have recognisedthatthestatutorycausesofactiondonot
expressly require reliance by the plaintiff on the misleading conduct of the defendant and so have
held that causation can be demonstrated in other ways. This approach, referred to in this article as
the ‘indirect causation approach’, has held that causation is a broader concept than reliance.
These lines of cases reflect different conceptions of shareholde r decision-making: the reliance
approach adopts something akin to the ‘rational choice’ view of investor decision-making and
considers the disclosure document to be central to the decision-making process. By contrast, the
indirect causation approach reflects an understanding that many factors may contribute to the
investment decision, and that investors draw from a range of sources when considering whether
to invest.
This article argues that the reliance approach should be rejected as the sole approach to causa-
tion in securities and financial product disclosure cases. I argue that causation should not be limited
to reliance, and that the courts should recognise that causation may potentially be demonstrated in
a variety of ways other than reliance on the disclosure document. A range of sources of information
may be relevant to a person’s decision to acquire financial products, such as communications from
financial advisers, newspapers, online sources, briefings, investor roadshows, social media and
other marketing practices. Indeed, such sources in many cases will be more significant than the
formal disclosure document. Accordingly, this article proposes that causation could be established
through a causal chain which originated with the defendant’s conduct, and the plaintiff should be
entitled to establish causation even where the plaintiff did not directly rely on the disclosu re
document.
This article gives two principal arguments in support of its overall claim. Firstly, the reliance
approach, by insisting that causation may only be established by proving reliance on the disclosure
document, implicitly assumes a ‘rational choice’ approach to investor decision-making. However,
as discussed in Part III, it has increasingly been shown that these assumptions do not accurately
reflect the reality of investor decision-making. There has been a significant body of behavioural
research which shows that information disclosure by issuers of securities is not an effective tool for
informing prospective investors and that investors have limited capacity to digest lengthy disclo-
sure documents. As put by one scholar, prospectus documents are typically used as ‘ex-post legal
documents rather than ex-ante information sources’.
9
By adopting a narrow approach to causation,
Saunders 495
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