The plaintiffs in the case were shareholders (‘the shareholders’) who acquired shares in HIH Insurance (‘the company’) between October 1998 and March 2001.
The shareholders contended and the company admitted that it published misleading financial statements in 1999 and 2000. The financial statements overstated HIH’s profits by $100m and HIH’s net assets by almost $200m (‘the misrepresentations’).
What was interesting about this case was that the shareholders never looked at the financial statements and never contended that the misrepresentations caused them to buy the shares. They agreed that they would have bought the shares anyway.
What the shareholders said was that the misrepresentations caused the shares’ market price to be higher at the time the shareholders bought them than it would have been but for the misrepresentations. The shareholders said that they should be compensated for the difference between the high price at which they bought the shares and the lower price that they would have been able to buy them if the market was not falsely inflated by the misrepresentations.
The company argued that the shareholders’ argument had no legal basis. The company submitted that it was necessary for the shareholders to prove that they relied on the misrepresentations in purchasing the shares, or, that the shareholders would have acted differently if it were not for the misrepresentations. The company said that there was no ‘causative bridge’ between the misrepresentations and the shareholders’ loss.
The judge sided with the shareholders. Expert evidence proved that between June 1999 and June 2000, the company’s shares traded between 6% and 13% higher than they would have done if it were not for the misrepresentations. The judge ordered the company to pay the plaintiffs damages to that extent.
The judge’s decision was a novel one and the company has appealed to the High Court.
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