Shareholder class action damages estimation

Although shareholder class actions have become an established part of the Australian legal landscape, almost all claims have settled prior to trial. A significant factor bearing on settlement decisions is the extent of potential damages arising from the defendant’s conduct, a process that can be greatly assisted by careful quantitative analysis.

Greg Houston, Sarah Turner and Alyse Corcoran advised a S&P/ASX 50 listed company on the extent of liability and potential damages arising from a shareholder class action alleging breach of its ASX disclosure obligations in 2013. In this instance, our involvement focused on estimating the number of shares that were affected by the alleged conduct.

Since the alleged inflation of the firm’s share price was constant throughout the period, the potential damages could be estimated by multiplying the number of retained shares by assumed values for the extent of ‘share price inflation’. This task involved two steps, ie, estimation of:

1. the number of shares acquired during the period their price was alleged to be inflated and retained by that purchaser through the relevant period; and
2. the potential value of damages, being the product of the number of retained shares and assumed values for the extent of share price inflation.

In performing the first of these steps, it became apparent that the company’s share exhibited some unusual trading patterns that greatly affected the resulting damages estimate. Our analysis focused on estimating the number of retained shares.

We estimates the number of retained shares using three approaches for taking into account the sequence in which shares that had also been sold by the purchaser in the relevant period were offset against those retained, ie, a first-in, first-out (FIFO), last-in, first-out (LIFO) and netting basis. These estimates were combinedwith several alternative assumptions for the timing and extent of share price inflation, from which to estimate the value of damages. Our analysis produced damages estimates under various scenarios that combined three sequencing approaches for the number retained shares and different sets of assumptions for share price inflation, including five different start dates for the alleged conduct and nine alternative share price inflation estimates.

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