This type of litigation has permeated discussions around periodic disclosure, continuous disclosure and directors and officers insurance. Directors of listed entities who found the companies they served, or themselves, involved in a shareholder class action faced considerable uncertainty, knowing that not one such action in Australia had proceeded to a court judgment.
This position has now changed. Last week in TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747 Justice Beach of the Federal Court of Australia handed down the first superior court judgment in a securities class action. In doing so, he accepted that market based causation is available under Australian law, but found that there was no evidence that Myer’s contraventions caused its shareholders any loss. At this stage, the findings suggest that Myer may not have to pay any compensation to the Applicant or group members as a result of the complex litigation.
The dispute centred on statements made by Myer’s CEO during calls with equity analysts and financial journalists on 11 September 2014, at the time of its FY14 results announcement.
Myer’s practice at that time was not to issue earnings guidance. Instead, it sought to comply with its continuous disclosure obligations by monitoring analysts’ consensus.
The Court found that, through statements he made on the calls, Myer’s CEO represented that, in his opinion, Myer’s FY15 net profit after tax (NPAT) would likely exceed its FY14 NPAT (of $98.5 million). The Court considered the CEO’s statements to be “de facto” earnings guidance.
On 19 March 2015, Myer announced that its NPAT for FY15 would likely be in the range of $75 to $80 million excluding one off costs. After the 19 March 2015 profit downgrade, Myer’s share price fell materially.
Myer shareholders, who purchased shares on or after 11 September 2014 and still held their shares on 19 March 2015, alleged that by making the NPAT profit forecast in September 2014 and failing to correct it, Myer engaged in misleading or deceptive conduct and breached its continuous disclosure obligations under the Corporations Act.
The Court’s findings
The Court found that:
- Myer’s continuous disclosure obligations were engaged when Myer became aware that earnings would be materially different to the guidance given by the CEO.
- From 21 November 2014 until 19 March 2015, Myer breached its continuous disclosure obligations and engaged in misleading or deceptive conduct by failing to correct the 11 September 2014 representation at various intervals.
- The company’s misconduct may not have caused any loss to shareholders. Myer’s expectation as to its NPAT during the period prior to 19 March 2015 was either above or not materially different from the Bloomberg consensus figure. Because the market had already factored in a lower earnings outlook, there was no evidence before the Court that the company’s misconduct caused any loss to shareholders.
- On 19 March 2015, the market price for Myer securities fell, not because the company revealed that it would not meet the NPAT forecast made on 11 September 2014, but because the announced guidance fell below consensus forecasts.
Significantly, Justice Beach found that market based causation is available in shareholder class actions. This means that shareholders do not need to prove that they read or relied on a company’s misleading statement to recover compensation. Instead shareholders can seek to recover loss by proving that they overpaid for their shares by purchasing shares at a time when the market price was inflated by reason of the misleading statement or omission.
What this means for directors
This decision is an important reminder for listed company directors that:
- Corporate disclosures made outside of ASX announcements, such as on calls with analysts or the media and at annual general meetings, can still be actionable for being misleading or in breach of the continuous disclosure regime;
- Directors and officers need to prepare for and exercise caution when presenting and responding to questions at analyst briefings;
- The prevalence of securities class actions is likely to continue in Australia, given the availability of market based causation. However, the case highlights there are still risks for shareholders in proving that the company’s conduct caused their loss.
- Expert evidence, including event study analysis, will play a central role in these types of matters to determine the precise information which caused a share price decline.
A link to the full judgment is available here.
Damian Grave, Leah Watterson and Helen Mould, Herbert Smith Freehills
AICD’s media commentary on this issue can be accessed below (subject to paywalls):
Myer judgment will have a chilling effect on boards
Myer misled shareholders with 'inflated' forecast
Why Bernie Brookes' bad earnings call may boost class actions