This landmark decision is the first time that a shareholder class action for a listed company has gone to judgment in Australia, and the first time that a listed company, or its insurer, has decided not to settle with its shareholders before judgment.

Justice Jonathan Beach of the Federal Court of Australia found that Myer Holdings Ltd (Company) breached its continuous disclosure obligations and engaged in misleading and deceptive conduct by not correcting the market in relation to its financial profit forecast for the year ended July 2015. The Judge, however, found such conduct did not cause any loss to shareholders as the market had already adjusted the share price to factor in a lower profit.

Key facts

• On 11 September 2014, the Company’s former Chief Executive Officer, Mr Brookes, advised analysts and journalists that the Company would likely have a net profit after tax (NPAT) in excess of the last financial year’s NPAT (which was AU$98.5 million for the 2015 financial year) (Representation).
• Between 21 November 2014 and 27 February 2015, the Company became aware of information that indicated it would not meet the projected forecast stated in the Representation.
• On 19 March 2015, Myer announced that it expected its NPAT for the 2015 financial year to be between AU$75 million and AU$80 million which led to a material decrease in its share price by more than 10 percent.
• TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund (Applicant) brought a class action on behalf of all persons (Shareholder Class) who acquired shares in the Company between 11 September 2014 and 29 March 2015 (Trading Period).
• The Applicant alleged that the Company’s failure to correct the Representation caused the Shareholder Class to suffer loss and damage due to the market price of shares during the Trading Period being inflated as a result of the Representation.

Issues

• Did the Company engage in misleading or deceptive conduct by failing to correct the Representation?
• Did the Company breach its continuous disclosure obligations by failing to correct the Representation?
• Did the Representation cause the shareholders to purchase the shares at inflated prices?

Finding

The Federal Court ruled in favour of the Applicant, finding that the Company had engaged in misleading or deceptive conduct, and had also contravened its continuous disclosure obligations, by failing to promptly correct the Representation. The Federal Court acknowledged that Mr Brookes had reasonable grounds for his opinion that profits would grow when he made the Representation in September 2014. However, Justice Beach found that the Company was obligated to correct the Representation when it became known in November 2014 that it no longer had a reasonable basis for maintaining that Representation.

Justice Beach also accepted the market based causation theory, which provides that a plaintiff has a cause of action if: 

• A misrepresentation is made which inflates the price of shares to be purchased.
• The plaintiff purchases the shares at the inflated price.
• The plaintiff has suffered loss as it had purchased at the inflated price, and would have acquired the shares for a lesser amount had there been no misrepresentation.

Under this theory, there is no need for the plaintiff to establish that it relied on the misrepresentation in making a purchase.

Notwithstanding the positive ruling for the Applicant, the Federal Court did not award compensation for the Shareholder Class as it was found that the Company’s contraventions may not have caused the Shareholder Class to suffer any loss or damage as a result of the delay in correcting the Representation.

Justice Beach reasoned that the “… hard-edged scepticism of market analysts and market makers at the time of the contraventions had already deflated Mr Brooke’s inflated views”, and the market price for the Company’s shares reflected this view to the extent that if the Company had corrected the Representation, it would have likely had no material effect on the Company’s share trading price at all. His view was that the price drop that ultimately occurred as a result of the correcting announcement occurred because the NPAT did not meet analyst guidance, rather than the expectations of Mr Brookes as stated on 11 September 2014.

Key takeaways

1. Under section 674 of the Corporations Act (Continuous Disclosure) listed companies are required to disclose information a reasonable person would expect, if the information were generally available, to have a material effect on the price or value of shares. This case highlighted the following points that listed entities should be aware of when considering their disclosure obligations:
             a. The objective ‘reasonable person’ test is a broader concept than the market consensus which is driven by a limited number of analysts’ expectations and is not indicative of how the reasonable person may be influenced. Accordingly, companies should refrain from using the market consensus as a benchmark when reviewing discrepancies between internal and external earnings forecasts and whether to issue corrective disclosure.
             b. Companies cannot place reliance on information generated from the market consensus, and the fact that the market will take into account such information, as fulfilling the company’s disclosure obligations. There is a positive obligation on the company to disclose its own expectations when it no longer has reasonable grounds for maintaining previous statements regarding future earnings forecasts.
2. The Federal Court indicated that where companies have announced financial forecasts, and the company becomes aware of information that would mean that its actual earnings are likely to be materially different from its previous guidance, the carve outs in Listing Rule 3.1A will not apply as a reasonable person would expect that information to be disclosed to the market. 
3. In some cases, class action applicants will need to show that the market had not already corrected the misrepresentation, making loss more difficult to establish.
4. While Justice Beach found that the Company in this case did mislead its investors, breaching its obligations to keep investors informed of movements in its stated forecasts, he also found that there was no proof that the deception resulted in shareholder loss for all sub-classes of shareholders. It remains to be seen whether that finding on loss was case-specific or whether it has larger implications for the future of shareholder class actions in Australia. The likely result is that the decision will assist those bringing class actions to argue that market based causation is now good law in Australia, but it should also embolden listed companies to think carefully about whether, in their case, the facts give rise to any actual losses to all shareholder class members.

Conclusion

The Federal Court ultimately concluded that the Company had contravened its obligations under the Corporations Act and Listing Rules. Although Justice Beach accepted the indirect market causation theory (thereby dispensing the need for the Applicant to establish reliance on the contraventions), there was not sufficient evidence in this case that the 4 Applicant suffered any loss or damage when acquiring their shares due to the alleged inflated share price, as the market may have already corrected the price at the relevant times. Should you have any queries in relation to your continuous disclosure obligations, please contact Hamish Walton and Ben Allen.