Reasons for the Underwriters' recommendation
181 After considering, at length, evidence concerning the Underwriters and how they came to recommend to ANZ that a significant proportion of the stock be issued to them, the primary judge set out his findings in a section headed "Why the Underwriters made their recommendation" (LJ [292]ff).
182 Relevantly, his Honour found as follows (LJ [295]-[297], emphasis added):
Having regard to the evidence as a whole, including in relation to the six specific investors, I find that the reasons why the Underwriters recommended the allocation that they did (that is, to not allocate, and to take up, approximately $754 million of the shares) included that: certain hedge funds had made it clear that they did not want to receive the full amount of their applications; certain hedge funds were accustomed to receiving only a certain percentage of their application; the Underwriters were concerned that certain hedge funds would not complete the transaction if allocated more than proposed; and the Underwriters were concerned that certain hedge funds would sell their shares quickly if allocated more than proposed, creating a disorderly after-market.
Further, I infer that the Underwriters considered that they had no choice (in practical terms) but to recommend the allocation that they did, having regard to these reasons. In other words, I infer that they felt that they had no choice but to take up approximately $754 million of the shares notwithstanding that applications had been received for (slightly) more than 100% of the book.
As to whether the above reasons were communicated to ANZ, I have made findings, above, in relation to what ANZ was told by the Underwriters during the course of 6 August 2015, in particular during the conference call that took place shortly after 8.35 pm on 6 August 2015 (at which the allocation recommendation was made). I have found (at [130]) that the Underwriters expressed the view that it was better for them to pick up a portion of the stock and not have an unorderly sale coming from the hedge funds.
183 At LJ [130], to which the primary judge referred in the last of the extracted paragraphs above, his Honour found that words to the effect that "it was better for the Joint Lead managers to pick up a portion of the stock and not have an unorderly sale coming from the hedge funds" were said by the Underwriters on a call attended by Mr Needham of ANZ.
184 As noted above, the primary judge set out (LJ [453]) the information that ANZ contended it was aware of, and which was said to reveal that the pleaded information was not material, or, if disclosed, would have been misleading. Two of those pieces of information were (LJ [453(b)-(c)]) that:
(a) the Underwriters recommended scaling back certain hedge fund investors and having the Underwriters take up a portion of the placement shares; and
(b) a substantial reason for the recommendation to scale back was that, if not scaled back, the hedge funds might deal with their shares in such a way as to create a disorderly, or volatile, after-market for ANZ shares.
185 The primary judge said as follows in relation to those two pieces of information (LJ [456]-[457]):
In relation to paragraph (b) (that the Joint Lead Managers were to acquire a significant proportion of the Placement shares because they recommended scaling-back certain hedge fund investors), while this is broadly correct factually, the way in which it is expressed may suggest that the Underwriters were indicating that there was a choice as to whether to scale back certain hedge funds. However, as discussed at [129] above, the evidence generally suggests that allocating to hedge funds the full amount of their applications (as listed in the Draft Allocation List) was not a viable option from the perspective of the Joint Lead Managers. I have found that, in these circumstances, it is unlikely that they would have discussed this as an option. This conclusion is also supported by the words "No other choices" in Mr Needham's notes of the call. The way in which paragraph (b) is expressed does not capture this. I am not satisfied that the information in paragraph (b) (adjusted to better capture the facts) constitutes necessary contextual information. It does not meaningfully affect the assessment of the materiality of the pleaded information.
In relation to paragraph (c) (that a substantial reason for the Joint Lead Managers recommending scaling-back hedge funds was that if not scaled-back they might deal with their shares in such a way as to create a disorderly, or volatile, after-market for ANZ shares), this does not fully or accurately capture the reasons why the Joint Lead Managers made the allocation recommendation that they did. I have made findings, at [295]-[296] above, about the reasons why the Joint Lead Managers made their allocation recommendation. In light of those findings, paragraph (c) does not fully or accurately capture the relevant facts. I am therefore not satisfied that it constitutes necessary contextual information.
186 While I have set out above two pieces of related information that ANZ relied on before the primary judge (both of which were referred to by ANZ in its submissions), it should be noted that, in its Notice of Appeal, ANZ only relied on the second of these two pieces of information, being the finding (LJ [295]) as to the reasons for the Underwriters' recommendation, which was addressed by the primary judge at [457]. The second piece of information also assumed greater significance in the parties' submissions. Nevertheless, I deal with the first piece of information for completeness at paragraph 201 below.
187 The thrust of ANZ's submission on appeal was that the fact that one of the reasons why the Underwriters opted to allocate placement shares to themselves was precisely in order to avoid shares being allocated to short-term holders, and that this negatives the prompt seller inference. ANZ submitted that, contrary to the reasons of the primary judge in rejecting the reason known to ANZ as necessary contextual information, it did not matter that the Underwriters had additional reasons for making the recommendation that they made. ANZ submitted that that did not matter and, in any case, the other reasons as found by the primary judge were also apt to negative the prompt seller inference. Related to that, ANZ submitted that the Underwriters' lack of viable choices other than to allocate shares to themselves, only underscores that the Underwriters felt compelled to avoid an allocation to hedge funds, thus further evidencing their desire to avoid a disorderly after-market.
188 In relation to ground 3 specifically, ANZ submitted that, as the fourth reason identified by the primary judge (LJ [295]) (that the Underwriters were concerned that certain hedge funds would sell their shares quickly if allocated more than proposed, creating a disorderly after market) was in fact the only reason of which ANZ was aware, the primary judge should not have rejected the significance of that reason just because there were other reasons for the Underwriters' recommendation, in addition to that reason.
189 For its part, ASIC submitted that ANZ's submissions relied on a false binary opposition on the basis that it did not follow as a matter of logic that if investors knew of the Underwriters' concern about potential volatility of hedge fund purchasers and that this influenced the Underwriters' recommendation to ANZ, they would have been disabused of any expectation that the Underwriters' intention would be to dispose of their shares promptly. Rather, ASIC submitted, both hedge fund purchasers and the Underwriters may be regarded by investors as potential short-term holders, both of which were likely to act in a manner which could put downward pressure on ANZ's share price.
190 ASIC argued that ANZ's contentions about the effect of the additional information would have to be proved as a matter of fact, and not merely logic, and that the primary judge accepted the evidence led by ASIC as to investor expectations being that the Underwriters would be short-term holders.
191 ASIC further submitted that the general expression by the Underwriters of their intentions did not satisfy senior officers of ANZ, or alleviate their concerns, that the Underwriters would be prompt sellers and thereby put downward pressure on the share price. ANZ knew of the matters in question, yet still had a state of mind consistent with the prompt seller inference (LJ [441]-[442], [459]).
192 The first point to note in addressing this aspect of the primary judge's reasons is that his Honour regarded the information, as it was characterised by ANZ, as not being a full or accurate statement of the reasons why the Underwriters made the recommendation in question. ANZ's characterisation below (as set out in LJ [453(c)]) was:
that a substantial reason for the Joint Lead Managers recommending scaling-back hedge funds was that if not scaled-back they might deal with their shares in such a way as to create a disorderly, or volatile, after-market for ANZ shares.
193 There was no challenge on appeal to the primary judge's finding that this characterisation of the information did not fully or accurately capture the relevant facts.
194 When ANZ's characterisation of the information is contrasted with the findings of the primary judge (to which his Honour referred at [457]), it is evident that the primary judge did not accord an elevated status to any one of the multiple reasons he identified. The concern that, if not scaled back, the hedge funds may deal with their shares in such a way as to create a disorderly, or volatile, after-market was one of a number of reasons which, as the primary judge found, led the Underwriters to consider that they had no practical alternative but to recommend the allocation of shares to themselves.
195 It should be noted that the reasoning of the Underwriters related to the hedge funds behaving in a way that would create a "disorderly market". In the course of cross-examination of ASIC's expert, Mr Pratt, senior counsel for ANZ put questions on the basis that a "disorderly" market was an "unduly volatile" market. In the course of oral submissions on the appeal, senior counsel for ANZ characterised a disorderly market as one that "has inadequate depth, or substantial price movements between trades, or undue volatility".
196 Mr Pratt's evidence was that a "disorderly market" is not the same thing as a market in which there are large downward movements in the share price of a stock, and that there can be a large downward price move without the market being a "disorderly market of itself". Obviously enough, the price of a stock on the stockmarket is a function of the interplay of supply and demand. Downward price movements are not, as Mr Pratt confirmed, the same thing as a disorderly market.
197 That distinction is important because, as noted, the Underwriters' concern, and one of the reasons they made the recommendation they did to ANZ, was a concern about the hedge funds creating a disorderly market. The basis upon which the primary judge found that the pleaded information was material was not that the market would expect the Underwriters to behave in a way that would create a disorderly market, but on the basis that they would promptly dispose of the shares and so place downward pressure on the share price (LJ [431], [436]). It was, as the primary judge found, the prospect that the Underwriters selling their stock over only a few trading days would put downward pressure on the share price, which was of concern to ANZ (LJ [441]-[442]).
198 Further, it should be noted that the primary judge made that finding on materiality on the basis of Mr Pratt's evidence. Mr Pratt's critical evidence was summarised by the primary judge (LJ [437]) with two passages extracted from the joint report (emphasis added):
2. Regarding 3. b) In Pratt's opinion, persons who commonly invested in securities would have expected the [Joint Lead Managers] holding ANZ placement shares, in the amount referred to in the [Underwriter Acquisition Information] or the [Significant Proportion Information], to be sellers of those shares to reduce their financial exposure in the short term to medium term, depending on the types and success of any hedging strategies employed.
3. In Pratt's opinion persons who commonly invest in securities would have expected the [Joint Lead Managers] to be relatively short-term holders of the placement shares compared to most other institutional investors and as such act more like hedge funds in dealing with the placement shares than long term holders.
199 As those extracts expose, the primary judge's materiality finding did not proceed on the basis that the market would expect that the Underwriters would sell in a way that would create a disorderly market. Rather, the expectation was that they would sell in the short to medium term (see also LJ [438]), and, on the continuum between hedge funds and long term investors, would behave "more like" hedge funds than long term holders.
200 Once these matters are appreciated, it can readily be seen that information that one of the reasons the Underwriters made the recommendation that they did was to avoid issuing stock to hedge funds who may create a disorderly market, does not logically undermine the basis upon which the primary judge found that the pleaded information was material. That was not, as set out above, by reason of any expectation that the Underwriters would create a disorderly market. It follows that the contextual information regarding one of the reasons why the Underwriters made the recommendation does not, as ANZ submitted, negative the prompt seller inference and the primary judge did not err as contended by ground 2 in this respect. So far as ground 3 fixes on the sole reason for the recommendation of which ANZ was aware, the fact that ANZ was not aware of the other reasons for the Underwriters' recommendation does not change or enhance the nature of this aspect of the contextual information relied on by ANZ. It remains information that does not negative the prompt seller inference.
201 I am likewise of the view that information that the Underwriters considered that they had no choice (in practical terms) but to recommend the allocation they did, having regard to the reasons identified in LJ [295], does not logically undermine the basis upon which the primary judge found that the pleaded information was material, and it does not, as ANZ contended, negative the prompt seller inference.