As with most litigation, the assessment of loss in the context of a shareholder class action largely depends on how lawyers, on behalf of claimants, frame damages.
As with most litigation, the assessment of loss in the context of a shareholder class action largely depends on how lawyers, on behalf of claimants, frame damages. In our experience, there are a number of methodologies that are often considered when quantifying losses in these types of proceedings:
- 'No Transaction' case – which plead that, but for the alleged conduct, shareholders would not have entered into any transaction.
- 'Inflation' case – but for the alleged conduct, shareholders would still have traded, but at an alternative hypothetical price.
- 'Alternative transaction' case – but for the alleged conduct, shareholders would have entered into an alternative transaction, such as an entirely different investment.
- 'Fundamental value' or "true value" case – which considers the question of what the shares were 'truly' worth, using more traditional valuation methodologies such as a discounted cashflow analysis when quantifying loss.
We often see cases pleaded in such a way that experts are consequently required to quantify losses under several alternative approaches. The methodologies above are not dissimilar to approaches commonly adopted in general commercial litigation. The damages methodology that applies in the context of an inflation case, however, often involves concepts which are unique to securities class actions.
At the core of the damages calculation required for a no transaction or inflation case, experts and lawyers typically ask: how do we determine which shares were 'affected' by the alleged conduct (such as the failure to release material information to the market, causing the share price to be inflated) and what is the loss resulting from that inflation? There are a number of approaches to answering this question, each of which borrows concepts from accounting principles:
- LIFO ('last in, first out');
- FIFO ('first in, first out'); and
- Net Purchases.
Depending on the methodology selected to perform the loss calculations, the resulting quantum outcomes can be very different! Here's a quick video to explain why.
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