First defendant win in a shareholder class action

A landmark decision for class action defendants and corporate Australia, this represents the first dismissal of a shareholder class action after a full trial. It is the ninth shareholder class action to progress to trial.

First defendant win in a shareholder class action: Crowley v Worley Limited [2020] FCA 1522.

On 22 October 2020, the Federal Court of Australia delivered the second shareholder class action judgment in the country in Crowley v Worley Limited [2020] FCA 1522.

This case is a landmark decision for class action defendants and corporate Australia. It represents the first dismissal of a shareholder class action after a full trial. It is the ninth shareholder class action to progress to trial.

Outcome

This Court found in favour of Worley on liability, and dismissed the claims (with the applicant to pay Worley’s costs). As the Court dismissed the claims on liability grounds, questions of causation and loss were not addressed.

Key facts

• On 14 August 2103, Worley issued its FY14 earning guidance, stating that it expected to deliver “increased earnings” in FY14 compared to FY13. In FY13, Worley reported an NPAT of $322m.
• This guidance was based, in part, on its internal FY14 budget of $352m NPAT, which was approved by the Board. The FY14 budget was the subject of a bottom-up build from individual business units and layers of top-down review by senior management and the Board.
• Worley re-affirmed its FY14 earnings guidance at its AGM on 9 October 2013. Six weeks later, on 20 November 2013, it issued revised earnings guidance to “ the range of $260m to $300m”. Following the announcement, Worley’s share price declined by $5.59 per share (a drop of ~26% from the previous day).

Key allegations

The applicant alleged that:

• (the budget case) Worley did not have a reasonable basis for its FY14 earnings guidance, because a reasonable FY14 budget would have forecast an NPAT of $284m;
• (the performance case) in the alternative, on or from 14 August 2013, due to Worley’s underperformance in the early months of FY14, Worley did not have a reasonable basis for maintaining its FY14 earnings guidance and failed to correct its FY14 earnings guidance statement; and
• (consensus case) on or from 14 August 2013, Worley was aware of a consensus expectation of market analysts that it would deliver between $354-368m and was aware that its earnings would likely fall materially short of the consensus expectation.

Accordingly, Worley allegedly breached its continuous disclosure obligations and engaged in misleading or deceptive conduct by failing to inform that market that its FY14 earnings guidance lacked a reasonable basis, or inform the market that its FY14 earnings would likely fall materially short of consensus expectations.

Key findings

The Court found that:

• Worley, through its Board, considered that its stated expectation for FY14 earnings was held on reasonable grounds (being the FY14 budget);
• Worley, through its Audit & Risk Committee, was “very careful in its choice of language in its earnings guidance”;
• The Board and the CEO individually had reasonable grounds for the FY14 guidance representation at all relevant times (being the FY14 budget and the monitoring of monthly financial performance and budget reforecast processes);
• The process by which the FY14 budget was developed was reasonable. Specifically, although there is some evidence (particularly in post-event documents) that senior management may have applied unreasonable pressure to locations to grow revenue, grow earnings and reduce overheads, the evidence does not show that particular integers or portions of the FY14 budget were overstated or understated so as to be unreasonable or unjustifiable.

Given these findings, the Applicant’s primary ‘budget’ case and ‘performance’ case failed.

The ‘consensus’ case was predicated on demonstrating that Worley knew that its FY14 earnings would fall materially short of a range of $354-368m. The Court assumed the 5% materiality threshold adopted in Myer with little commentary, and found that at no stage did any director or office of Worley knew or believed its FY14 earnings would fall materially short of the consensus range. Accordingly, the Applicant’s ‘consensus’ case also failed.

Overall, the Court rejected the Applicant’s interpretation of the facts, noting that the evidence that supported the Applicant’s case was mostly hindsight and not supported by detail that might contradict the evidence of Worley.

This article was first published by Herbert Smith Freehills