Australia: Shareholder Seeks Preliminary Discovery Against ASX Listed Company After Share Price Plummets

Potential litigants sometimes lack sufficient documentation to make an informed decision whether to commence litigation against another party. Often, the party against whom litigation is contemplated is the same party who holds the documentation, and logically will not provide the documentation voluntarily.  In the recent decision of Bonham v Iluka Resources Limited, the full Federal Court overturned the primary judge's decision declining to grant preliminary discovery (that is, an application for the production of documents prior to commencement of proceedings) and in doing so, considered the elements that must be satisfied to obtain an order for preliminary discovery.

Background: Shareholder application for preliminary discovery following a drop in share price

The timeline of events was as follows.

  • In May 2012, Iluka Resources Limited, an ASX-listed mining company, published an announcement slightly downgrading sales forecasts recorded in an earlier report.
  • 4 days later, Mr Bonham, the applicant, purchased shares in Iluka Resources.
  • About 2 months later, Iluka Resources published an ASX notice, this time significantly downgrading its sales forecasts, causing its share price to drop by 24%.
  • Subsequently, Mr Bonham's solicitors issued a media release announcing a shareholder class action against Iluka Resources relating to the share price drop (with Mr Bonham named as the lead applicant in the action).
  • Mr Bonham applied to the Court for preliminary discovery. Mr Bonham's application was based on potential causes of action against Iluka Resources including misleading and deceptive conduct as well as failure to comply with market disclosure obligations.

The Rules: When can a party apply for preliminary discovery?

Under the Federal Court Rules, a prospective applicant may apply for an order for preliminary discovery if the prospective applicant:

  • reasonably believes that he or she may have the right to obtain relief from an identified prospective respondent;
  • after making reasonable inquiries, does not have sufficient information to decide whether to commence proceedings to obtain that relief; and
  • reasonably believes that:
    • the prospective respondent has or had, or is likely to have or had, in his or her control, documents directly relevant to the question whether the prospective applicant has a right to obtain the relief; and
    • inspection of the documents would assist in making that decision.

The application at first instance and on appeal

The primary judge dismissed Mr Bonham's application on 3 grounds.

  1. Mr Bonham did not demonstrate that he held the subjective belief that he may have a claim for relief.
  2. Mr Bonham did not have an objectively reasonable basis for believing he had a right to obtain relief.
  3. The Court's discretionary right to refuse the application should be exercised because of Mr Bonham's solicitor's conduct in "book building" (this related to the primary judge's criticism that the solicitors "book built" for the purpose of recruiting potential members of a class action through statements by them suggesting that a determination had already been made to commence proceedings when it was clear from the preliminary discovery application that that was not the case).

On appeal, the Full Court agreed with the primary judge that Mr Bonham had insufficient information to decide whether to commence proceedings. Otherwise, the Full Court disagreed with the above 3 grounds.

In relation to 1, the only affidavit put on was by Mr Bonham's solicitor. The primary judge found the solicitor's affidavit was insufficient evidence of Mr Bonham's subjective belief. The Full Court held other evidence, being correspondence between the parties' solicitors, was sufficient evidence of Mr Bonham's subjective belief.

In relation to point 2, the Full Court found that the primary judge incorrectly focused, not on whether Mr Bonham's belief was reasonable, but whether Iluka Resources had reasonable grounds for making its 8 May 2012 announcement. The Full Court found that to prove an objectively reasonable belief, Mr Bonham did not need to prove Iluka Resources had prior knowledge, or should have known certain facts, when making its 8 May announcement. That is, Mr Bonham did not need to establish a prima facie case. The announcements provided an objectively reasonable ground for Mr Bonham to believe he had a right to obtain relief, and it was unnecessary to prove whether these announcements were reasonably made by Iluka Resources.

In relation to 3, the Full Court found that the conduct of Mr Bonham's solicitors should not prejudice his application, and determined that the power to refuse an application on discretionary grounds could not be exercised for illegitimate purposes such as refusing Mr Bonham's claim because of his solicitor's conduct.

What does this mean for you?

If you are considering an application for preliminary discovery, bear in mind the following.

  • An affidavit from a solicitor may not be enough to meet the subjective belief requirement. Ideally, an affidavit from the applicant is preferable. In Mr Bonham's case, he was lucky that there was other evidence before the Court that established the requisite belief.
  • You must demonstrate to the Court a reasonable belief that the documentation sought is directly relevant to the question whether you have a right to obtain the relief and that inspection of the documents by you would assist in making a decision whether to litigate.
  • You do not need to establish a prima facie case. But, you must establish that you have objectively reasonable ground to believe you have a right to obtain relief.

If you are a prospective respondent resisting a claim for preliminary discovery, consider whether:

  • you have a proper basis to argue that the applicant does not have the requisite reasonable belief or has not made the reasonable inquiries required by the Rule outline above; and
  • the documentation sought is directly relevant to the question whether the applicant has a right to obtain relief and whether inspection of the documents would aid a decision whether to litigate.

Following the above decision, on 20 June 2017, the Supreme Court of New South Wales granted preliminary discovery in Wright Medical Australia Pty Limited v Johnston [2017] NSWSC 761. In doing so, Justice Hallen limited the discovery sought to "no more than that which is necessary, to overcome the insufficiency of information already possessed by the Plaintiff to enable a decision to be made whether to commence a proceeding." This factor should also be borne in mind, whether you are seeking or resisting an order for preliminary discovery.

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