Australian Court Asserts Jurisdiction Over Offshore Short Seller
The Situation: ASX-listed companies are increasingly becoming targets for short seller activists. Following an offshore "activist short seller" releasing negative research reports recently, the value of a target's securities fell by around 42%. The short seller's reports in that scenario were found to be false, but it was a pyrrhic victory: the short seller is based outside of Australia, did not appear in the proceedings and can be expected to resist enforcement in other jurisdictions.
The Key Message: Australian companies can have recourse to Australian courts in relation to offshore short sellers who publish reports known or anticipated to be accessed in Australia, but favourable judgments may be limited to relatively small damages awards that need to be enforced overseas.
Looking Ahead: Whilst the judgment may cause some offshore short sellers to pause before publishing reports in relation to Australian companies, we do not expect that short sellers will be deterred from launching negative research campaigns until the consequences for false or misleading statements outweigh the potential profits.
Background
In August 2019, a short seller based in the United States (Bonitas) began publishing tweets and reports in relation to Rural Funds Management Limited ("RFM"), the manager of two managed investment schemes (known as RFF) with units listed on the ASX. Bonitas disclosed that it was short RFF and stood to realize significant gains in the event of price declines.
On the day that Bonitas published its first report, there was a 42% drop in the price of units in RFF.
As is common with the short seller reports which we have seen in the Australian market in recent times, the allegations made about RFM and RFF were colorful and wide ranging, including fraud. The trial judge described Bonitas's conduct as "a concerted course of making statements and disseminating information scathingly critical of RFM and RFF".
RFM engaged lawyers and consultants to assist in preparing responses to the allegations in various reports published by Bonitas during August and September 2019. Despite RFM's responses to the negative research campaign, in early October 2019, the units in RFF were still over 20% down. RFM commenced proceedings against Bonitas seeking declarations as to contraventions of statute, and claiming damages and compensation, including profits made by Bonitas resulting from the contraventions.
Bonitas declined to participate in the proceedings, stating that the Australian courts have no jurisdiction over Bonitas, and that Bonitas will contest any attempts to enforce any orders or judgments.
The Judgment—Rural Funds Management Limited as Responsible Entity for the Rural Funds Trust and RF Active v Bonitas Research LLC [2020] NSWSC 61
Jurisdiction. The court found that not only was Australia an intended destination for the statements and information disseminated by Bonitas but that the statements and information actually reached Australia and were read here.
The court therefore found that the relevant provisions of the Corporations Act 2001 and ASIC Act 2001 apply to the statements, citing the authorities which establish that if a statement is directed from one place to another, where it is known or even anticipated that it will be received, the statement is taken to have in substance been made at the place to which it was directed.
Bonitas Found to have Contravened the Corporations Act/ASIC Act. The court found that the statements which Bonitas made and information which Bonitas disseminated were false in material particulars and materially misleading, and that Bonitas knew or ought reasonably to have known that the statements and information were false in material particulars or were materially misleading.
The court granted declarations as to the contraventions by Bonitas of ss 1041E, 1041F and 1041H of the Corporations Act 2001 and s 12DA(1) of the ASIC Act 2001.
RFM to be Awarded Damages, but Shareholders Cannot Recover Their Losses. The court indicated that RFM would be awarded damages, but not including profits made by Bonitas as a result of the contraventions. Importantly, though, the losses incurred by shareholders would not be able to be recovered by the company. In practical terms, this means that the damages awarded to RFM would be limited to costs incurred by RFM in responding to the Bonitas reports.
Enforcement in the United States
Australian judgments are routinely enforced in US courts. While the standards for recognition and enforcement vary by state, most US states have enacted one of two versions of the Uniform Foreign Money Judgments Recognition Act. Provided that service was completed in a satisfactory manner and the foreign court has justified its jurisdiction in accordance with principles of US due process (i.e., the court of origin could have exercised jurisdiction over the defendant on a basis of jurisdiction available in the United States), recognition of Australian judgments will be a relatively simple process.
In cases where the foreign tort was based on public speech, US judgment-debtors may be able to oppose enforcement on the basis of "public policy" as reflected in the First Amendment to the U.S Constitution; whether that defense will succeed will be a fact-specific inquiry that turns upon, amongst other things, whether the judgment-creditor has carried its burden to prove the defendant's words were false and whether the judgment-debtor's speech was on a matter of public concern.
Five Key Takeaways
- The judgment should be welcomed as a positive step toward maintaining market integrity.
- The judgment may not deter offshore short sellers from publishing misleading reports directed toward Australian companies because the judgment will need to be enforced in a foreign jurisdiction, which will require consideration of the enforcement laws in the relevant jurisdiction and the engagement of local counsel. Even if the Australian judgment can be enforced in the relevant jurisdiction, this will at least result in delay and further cost for the Australian target company.
- The damages awarded against the short seller will be limited to the costs incurred by the target company in responding to the negative research campaign. To the extent that the damages award can be enforced in a foreign jurisdiction, the quantum of damages can be expected to be less than the profits earned by the short seller on the short position.
- Acknowledging these limitations, proceedings against a short seller can still be of significant benefit to a company under attack from activists; a favourable judgment can assist in restoring credibility and provide support for the company's share price.
- Favourable judgments may also put pressure on ASIC to do more to impose itself in this space, including regulating short seller conduct and seeking to recover shareholder losses that cannot be recovered by the target company.
