Myer class action – significant findings on causation and reliance
Oct 2019 | InsuranceThe first judgment in an Australian shareholder class action finds that Myer Holdings Limited’s (Myer) non-disclosure and misleading and deceptive conduct did not cause the class of shareholders to suffer loss or damage.
The decision of Beach J of the Federal Court provides valuable guidance on the steps companies are required to take to comply with their continuous disclosure obligations under the Corporations Act and significantly, approves the application of market-based causation which does not require proof of reliance.
Relevant facts
A class made up of Myer shareholders sought compensation for loss and damage arising out of Myer’s alleged non-disclosure as well as misleading and deceptive conduct.
The class was made up of persons who owned shares in Myer between 11 September 2014 and at least 19 March 2015.
On 11 September 2014, in a Q&A session with analysts and journalists, Myer’s then-CEO Bernie Brookes said that in his opinion the net profit after tax (NPAT) for FY15 would be greater than FY14 (September 2014 representation). The NPAT for FY14 had been announced as $98.5 million that same day.
Some months later, on 19 March 2015, Myer announced its expected FY15 NPAT to the ASX as between $75 million and $80 million. Contrary to the September 2014 representation, the expected FY15 NPAT was less than the FY14 NPAT. Immediately after this announcement, Myer’s share price fell significantly.
Allegations against Myer
The representative applicant argued that:
- Mr Brookes, on behalf of Myer, did not have a reasonable basis for making the September 2014 representation; and
- Myer was aware on 11 September 2014 or alternatively, by no later than certain other dates in 2014/early 2015, that it did not have reasonable grounds for the 11 September 2014 representation, but did not disclose that to the ASX.
Findings
Beach J found that:
- In making the September 2014 representation, Mr Brookes used language that confidently conveyed a considered expectation of improved financial performance in FY15;
- By 21 November 2014, Myer held the view that the NPAT for FY15 was likely not going to be greater than the NPAT for FY14 (the information);
- Contrary to Myer’s submissions, the information was not generally available (and therefore Myer was obliged to disclose the information). A reasonable person would expect that if the information were generally available, it would have had a material effect on Myer’s share price (as per s 674(2)(c)(ii) of the Corporations Act). Consequently, from 21 November 2014 onwards, Myer had failed to satisfy its disclosure obligations.
- In relation to the misleading and deceptive conduct claim:
- The applicant failed to establish that Myer did not have a reasonable basis for making the September 2014 representation, but after 21 November 2014, Myer did have a duty to correct the September 2014 representation because Myer’s expectation of its NPAT for FY15 had changed. Myer therefore engaged in misleading and deceptive conduct by failing to correct the September 2014 representation after 21 November 2014;
- Accordingly, the representation was misleading by virtue of s 769C(1) of the Corporations Act (regarding reasonable grounds for making representations about future matters) and consequently, Myer breached s 1041H of the Corporations Act by engaging in misleading and deceptive conduct.
Causation
His Honour considered various approaches to causation in ascertaining the extent to which the share price had been inflated because of the breaches. However, he ultimately concluded that, based on the applicant’s pleadings and evidence, the share price had dropped in response to an announcement by Myer on 19 March 2015 that the FY15 NPAT was expected to be $75 million to $80 million, which was less than Bloomberg consensus of $90 million (an externally ascertained measure of performance) rather than news that the FY15 NPAT was expected to be less than the FY14 NPAT. Consequently, the failure to correct the expectation that the FY15 NPAT would be more than the FY14 NPAT did not cause the shareholders’ alleged loss.
Also, and significantly, his Honour concluded that the applicant did not need to prove specific reliance by each of the class members on the misleading and deceptive conduct, because, as a matter of law, they were able to plead indirect or market-based causation. The fact that the price of the shares was inflated by the misleading or deceptive conduct would be sufficient. His Honour stated (at [1520]):
'…although past cases in the misleading or deceptive conduct sphere focus on establishing reliance, that experience does not establish the induction that all such cases must establish it; one explanation for the de facto position may be that reliance was the only causation theory advanced in those cases due to the misplaced bias in favour of importing into the statutory test concepts from common law causes of action.'
Conclusion
While it is a first instance decision, the decision highlights that companies need to be vigilant in how financial forecasts are disseminated and that steps need to be taken to correct any prior representations about a company’s financial forecast that have since become incorrect. Where a forecast is inconsistent with market consensus, the company is exposed to risk unless it has a reasonable basis for making that forecast.
Plaintiffs and their litigation funders will likely take heart from the finding that market-based causation (rather than individual reliance) is sufficient. However, the decision demonstrates the need for plaintiffs to clearly and carefully establish the true cause of a company’s change in share price, which is not a straightforward task.
We anticipate that there will be an increase in shareholder class actions because reliance does not have to be proven, however most class actions will continue to be settled out of court due to the evidentiary difficulties highlighted by this case, and the consequent litigation risk.
We await any appeal with interest.
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