Another one bites the dust: The Federal Court dismisses the Quintis Shareholder Class Action

The Federal Court has dismissed the Quintis Class Action – a shareholder class action against the former CEO and Managing Director of Quintis Ltd and Quintis' auditor in Davis v Wilson [2025] FCA 108.

What you need to know

• Justice Shariff's decision joins the growing list of unsuccessful shareholder class actions that have raised significant questions about how causation, loss and damage can be established. See our previous publications IOOF, Worley (here) and CBA (here).
• Although the Court found that one of the company's discounted cash flow assumptions (used to determine the carrying value of the company's primary cash generating units) was unrealistic, the Applicants failed to establish an appropriate alternative cash flow assumption that should have been applied in the discounted cash flow model (DCF Model).
• The Court was therefore unable to determine what impact the company's unrealistic discounted cash flow assumption had on the carrying value of the company's primary cash generating units.
• The Court also considered whether the Applicants' expert evidence had established a link between the company's net asset position and its share price. His Honour found that neither the Applicants' direct or indirect case established a relevant association between the net asset position of the company and its share price.
• The outcome demonstrates the difficulties faced by plaintiffs in shareholder class actions when it comes to establishing causation, loss and damage.

What you need to do

• Listed entities must ensure that they have adequate basis and evidence to support their disclosures and representations in Financial Reports, and that they can defend their decisions and actions in the event of litigation.

What was the case about?

The Quintis Class Action concerned alleged misleading statements in Quintis' FY15 and FY16 financial results about the reported value of the company’s principal cash generating assets, being Indian Sandalwood trees. The key allegation was that the reported value of these assets was overstated in the financial results because the company had failed to properly forecast heartwood yield. (Heartwood is the core of the Indian Sandalwood Tree. Fragrant oil, which is commonly used in medicines and cosmetic products, can be distilled from heartwood.)

Liability

The yield assumption made by the company was that Sandalwood Trees aged under five would produce a 100% heartwood yield.

His Honour found that the overall assumption as to heartwood yield was materially higher than that which an entity in Quintis’ position would have assessed a market participant to have assumed. This was a significant assumption as it related to approximately 60% of Quintis' plantations.

Justice Shariff found that both the managing director and auditor:

• ought to have known that the 100% heartwood yield assumption for trees under five was unreasonable and unrealistic; and
• therefore, engaged in misleading or deceptive conduct in respect of the FY15 and FY16 Financial Reports.

Causation and loss not established

The Applicants' case was that the company would have adopted a lower and more appropriate heartwood yield assumption if its DCF model had been developed and applied in accordance with the Accounting Standard.

However, Justice Shariff rejected the Applicants' expert evidence about expected heartwood yield. His Honour was therefore unable to determine an appropriate alternative (counterfactual) cash flow assumption that should have been applied in the company's DCF Model to determine the carrying value of the company's primary cash generating units.

Notwithstanding the absence of an alternative cash flow assumption, his Honour briefly considered and commented on the Applicants' direct and indirect market-based causation cases.

Direct reliance case

His Honour observed that the Applicants' case was impacted by a "high degree of imprecision" and it "simply assumed" that the Applicants would not have invested in Quintis shares at all.

Indirect market-based causation case

The Applicants' indirect case was that the misleading representations in the FY15 and FY16 Financial Reports caused the market price of Quintis shares to be substantially greater than their true value or the market price that would have prevailed but for the contravention(s).

The Applicants sought to establish this case by relying on an expert who had determined the value of Quintis' shares by applying the "price to net assets" method (P/NA Method). His Honour did not accept that there was a "relevant causal relationship between Quintis’ net assets and its share price" for the following reasons:

• The methodology proposed did no more than establish that one could create a relationship between Quintis' reported net assets and share price by identifying each of them and creating a ratio between them. This merely assumed the effect because of the supposed cause.
• There is a conceptual difference between the value of a company (including its assets) and its share price. It is too simplistic to accept that because Quintis’ biological assets were central to its generation of cash flow, it followed that a reduction in those assets would lead to a proportional reduction in its share price.
• The Respondents presented examples that showed the lack of a causal relationship between movements in Quintis’ reported net assets and its share price.

As a result, his Honour was not satisfied that the Applicants had established that the reported value of the net assets as contained in the FY15 and FY16 Financial Reports caused Quintis’ share price to trade at an inflated price, being a price that was (as pleaded) substantially greater than the market price that would have prevailed but for the contravention(s).

What does this mean for shareholder class actions?

This further unsuccessful shareholder class action reinforces the difficulty in establishing causation, loss and damage in such claims.

Further guidance may be obtained from appeals from the recent unsuccessful shareholder class action decisions.

Putting the brakes on shareholder class action claims (8 February 2024)

More headwinds for shareholder class actions: no continuous disclosure breach by CBA in not disclosing regulatory issues (16 May 2024)

Authors: John Pavlakis, Partner; Sophia Kwiet, Senior Associate and Sarah Philipson, Lawyer.