Another win for defendants in Australian shareholder class actions

Introduction

Only two shareholder class actions have reached judgment in Australia, both are wins for companies listed on the Australian Stock Exchange (ASX). Neither resulted in an award of damages to group members.

The first judgment, TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited¹(Myer) was handed down by Justice Jonathan Beach on 24 October 2019. We discussed Myer in our October 2019 newsletter (click here to read), The second, Crowley v Worley Limited² (Worley) was handed down by Justice Jacqueline Gleeson (soon to be appointed to the High Court of Australia) on 22 October 2020.

Both judgments discuss the extent of the continuous disclosure obligations imposed on ASX listed companies  by s 674 of the Corporations Act 2001 (Cth) and rule 3.1 of the ASX Listing Rules, and the losses which flow from breaches of those obligations.

In Myer the Court found that Myer had failed to correct earnings guidance which it knew it was unachievable. The Court considered a 5% departure from the published earnings guidance statement to be material. However, Justice Beach was not persuaded that Myer’s failure to correct the ASX and the market caused loss or damage to its shareholders. His Honour determined that ‘the hard-edged scepticism of market analysts and market markers…had already deflated [Myer’s then CEO’s] inflated views’. In other words, the market had adjusted Myer share prices down regardless and there was no market-based causation.

In Worley, Justice Gleeson dismissed Mr Cowley’s proceeding and ordered costs in favour of the defendant (WOR). Justice Gleeson determined that:

• WOR had a reasonable basis for issuing the guidance and announcements it issued between August and November 2013; and

• representations made in WOR’s 2013 annual report did not contravene its continuous disclosure obligations.

It is noteworthy that Justice Gleeson followed the approach taken by Justice Beach as to materiality in Myer.

Facts

The applicant, Larry Crowley, is a self-funded retiree and former accountant who manages his own retirement fund, including a share portfolio. WOR is a provider of project assets in the energy, chemicals and resources sectors and is listed on the ASX.

Significantly, WOR issued the following guidance and announcements:

• On 14 August 2013 it delivered an earnings guidance statement (August 2013 earnings guidance statement) which stated ‘while recognising the uncertainties in world markets, we expect our geographic and sector diversification to provide a solid foundation to deliver increased earnings in FY14’ and cited expected earnings growth (net profit after tax) in FY14 in excess of the $322M it had achieved in FY13. The August 2013 earnings guidance statement was heavily based on an internal FY14 budget of $352M, which had been approved by WOR’s board in August 2013. 

• On 9 October 2013 WOR made another announcement to the market that its first-half result would be lower than the earlier year but affirmed the August 2013 earnings guidance statement.

• On 10 and 15 October 2013 the August 2013 earnings guidance statement was repeated.

• On 20 November 2013 it delivered revised earnings guidance which stated that it expected a net profit after tax for FY14 of between $260M to $300M, ie much lower than the August 2013 earnings guidance statement.

Mr Crowley commenced representative proceedings against WOR on his own behalf and on behalf of other group members who had purchased shares in WOR during the period 14 August 2013 and 20 November 2013.

The proceedings alleged that:

• following the corrective disclosure made on 20 November 2013 the WOR share price fell by almost 26%;

• at the time of the 14 August 2013 announcement, WOR knew or ought to have known that its expected earnings growth was not a reasonable expectation; and

• the corrective disclosure on 20 November 2013 served to adjust the market price to where it should have been when he purchased shares, causing Mr Crowley and other group members to pay inflated price for shares, and sought to recover that overpayment.

Argument

There were three aspects to Mr Crowley’s claim:

• The budget case - that the FY14 budget prepared by WOR on which the August 2013 earnings guidance statement was based did not provide reasonable grounds for the August 2013 earnings guidance statement; or in the alternative;
• The performance case - that WOR’s actual performance in the early months of FY14 ‘dissolved whatever hopes that had underpinned the FY14 budget’ giving rise to circumstances were WOR did not have reasonable grounds to maintain the August 2013 earnings guidance statement; and
• The consensus case - that WOR was aware of a consensus expectation of market analysis that it would deliver between $354M and $368M net profit after tax for FY14, and was aware that its earnings would fall ‘materially short’ of that range.

Mr Crowley alleged that WOR had, by way of the budget case, the performance case and/or the consensus case, contravened:

• its continuous disclosure obligations which arose under s 674 of the Corporations Act 2001 (Cth) and r3.1 of the ASX Listing Rules; or
• proscriptions on misleading or deceptive conduct in s 1041H of the Corporations Act 2001 (Cth), s 12D of the Australian Securities and Investments Act 2001 (Cth) and/or s 18 of the Australian Consumer Law (ie Schedule 2 of the Competition and Consumer Act 2010 (Cth)).

The decision

Although her Honour Justice Gleeson accepted that the FY14 budget may have been ‘overly optimistic’, she was not satisfied that that the August 2013 earnings guidance statement lacked reasonable grounds at any relevant time, having noted WOR’s ongoing and regular monitoring of performance and forecast. Underpinning this was a finding that the FY14 budget on which the August 2013 earnings guidance statement was based and the methodology used in its preparation were also reasonable.

Of note, the Court found the evidence relied on by Mr Crowley in support of his case was ‘mostly hindsight and not supported by detail that might have contradicted the evidence of [WOR’s] witnesses in substantial respects’. A claim of such serious nature requires specific evidence.

With respect to the consensus case, the Court adopted the materiality threshold of 5% as applied in Myer³ and found that to the extent that there was any consensus expectation ‘it was not the case at any relevant time that WOR’s FY14 earnings were likely to fall materially short’ of the consensus expectation range.

The Court dismissed Mr Crowley’s claims in their entirety and ordered him to pay WOR’s costs.

Conclusion

The decisions in Worley and Myer turn on their own facts and are not expected to have any significant impact on the future of securities class actions in Australia, save in relation to shareholder class actions based on alleged misleading earnings guidance. However, in the light of these decisions litigation funders may become more cautious about funding similar shareholder class actions. Conversely, listed companies who are defending claims based on alleged misleading earnings guidance, and their insurers, may be more inclined to defend such matters to trial.

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Julie Bowker

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