Rural Funds Management court win unlikely to deter short sellers

The ASX-listed firm is unlikely to be able to enforce its win over the US-based Bonitas Research, but having a judge find in its favor is victory enough.

Short-selling attacks on Australian Securities Exchange-listed agribusinesses have played out in much the same way over the last two years or so.

The short seller, usually based overseas, publishes a highly critical report of the business, which triggers a trading halt on the shares. The targeted company then hunkers down and produces a rebuttal. This is then subject to a further response from the attacker, which in turn doubles down on its claims.

At this point, the share price falls – if it hasn’t already – and the short seller profits.

That’s how it played out with Blue Sky Alternative Investments, Quintis and Treasury Wine Estates, with varying degrees of ‘success’. But it’s not quite how things worked out with Rural Funds Group.

Rather than engaging in tit-for-tat arguments via ASX announcements after the initial attack from short seller Bonitas Research on 6 August, the firm quickly commissioned EY to produce a report which, while not answering every criticism completely, helped it back up its response to Bonitas.

More unusually, though, it then took legal action against the Texas-based short seller.

At the time, Bonitas was typically aggressive in dismissing the threat. Last week’s judgement revealed that the firm had decided not to participate in the proceedings or defend itself, choosing not to recognize the jurisdiction of the Australian courts.

This itself wasn’t surprising, King & Wood Mallesons senior associate Mark Vandeneut told Agri Investor, because short-sellers’ modus operandi involves acting assertively, and this fits with that approach.

But the lack of participation meant that all Justice David Hammerschlag had to go on in deciding the outcome on the evidence presented by Rural Funds Management, the responsible entity for the listed firm, which arguably made it a pretty straightforward result.

The US has no system in place to automatically recognize the judgement of a foreign court (though Australia, it should be noted, does have one in place to recognize US judgements). It is therefore going to be difficult to enforce the ruling, and Bonitas is unlikely to appeal.

More importantly for Rural Funds, however, is that it has got a New South Wales Supreme Court judge to say, quite explicitly, that statements made and disseminated by Bonitas and its chief executive Matthew Wiechert were “false in material particulars and materially misleading,” and that they “did not care” that the statements were false, amounting to a breach of the Corporations Act.

Vanderneut said the judgement is a “positive outcome” for Rural Funds, but it will not necessarily put off other short sellers.

“Short-sellers have had some success in the last two years, but it’s unusual to see court action because it’s expensive and it’s not clear what the material benefits will be,” he said.

Agri Investor also contacted Bucephalus Research for comment. The Hong Kong-based analyst is not a short seller but produced a highly critical report of Rural Funds following Bonitas’s research.

Bucephalus managing partner Rob Medd told us the judgement was “certainly not a vindication of RFM’s approach to managing Rural Funds Group.” He argued that the judgement was fair “only because it deals with Bonitas’ wording which should have been tighter.

“None of [the main points in our report] were in anyway challenged or disabused in the ruling. As such, we stand by our report.”

Rural Funds Management declined to respond to Bucephalus’s latest assertion when contacted by Agri Investor.

Regardless, the market has responded positively: shares in RFF closed at A$2.06 ($1.38; €1.27) on February 18, the first time they closed above A$2 since Bonitas launched its attack in August 2019. They still have some way to go to get back to the A$2.35 seen before the attack, but the firm will be hoping that the judgement helps to put the matter behind it.

Whether overseas short sellers will be deterred by the outcome of the court case, given how little they have to lose, looks unlikely. It remains to be seen how seriously they will be taken when they come back next time around.

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