In brief 7 min read
The Federal Court has handed down the first judgment in a shareholder class action, more than 20 years after the first case was filed, in the class action arising from an earnings forecast Myer gave in late 2014. Whilst we don't expect the judgment to have a material impact of the level of shareholder class action activity, there is nonetheless plenty in the decision for board members and senior executives to consider in the application of the continuous disclosure laws.
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What was the case about?
In essence, class members claimed they suffered loss when they purchased shares in that period at an allegedly inflated price caused by [Myer's] allegedly misleading September disclosure.
On 11 September 2014, Myer announced Net Profit After Tax (NPAT) for FY2014 of $98.5 million and its CEO told analysts he anticipated profit growth in FY2015. On 19 March 2015, Myer announced that its expected FY2015 NPAT at that time was between $75-$85 million (excluding one-off costs), well short of its FY2014 result. Following that announcement Myer's share price fell by roughly 10%.
These facts were the basis for a class action on behalf of persons who bought shares between September 2014 and March 2015 that alleged the September 2014 statements about anticipated profit growth were misleading or deceptive, and a breach of Myer's disclosure obligations.
In essence, class members claimed they suffered loss when they purchased shares in that period at an allegedly inflated price caused by the allegedly misleading September disclosure.
Who won?
The shareholders were successful in establishing Myer contravened its continuous disclosure obligations for part of (but not all) the period claimed, and engaged in misleading or deceptive conduct. Materially, the court found that:
- Myer's CEO had reasonable grounds for his opinion that profit would grow when he spoke to analysts in September 2014; but
- by November 2014, Myer had enough information about deteriorating profits that it should have issued a corrective disclosure.
The decision is, however, ultimately a win for Myer because the court held that, even though the share price fell when Myer corrected its earlier guidance, there was no evidence the disclosure contraventions inflated Myer's share price.
Share price drop, but no inflation?
The court found that Myer's contraventions did not artificially inflate the price of the stock because the market price already factored in an NPAT 'well south' of the CEO's 'rosy picture painted on 11 September 2014'. In that respect, Justice Beach said:
In other words, the hard-edged scepticism of market analysts and market makers at the time of the contraventions had already deflated [the CEO's] inflated views. So, any required corrective statement that should have been made at the time of the contraventions, if it had been made, is likely to have had no or no material effect on the market price of [Myer] securities.
This, of course, raises the question of why the price fell when the March 2015 announcement was made. In this respect the court found the dip occurred because the expected NPAT announced on March 2015 was below that market consensus – in other words, this was new information not already factored into the market price and hence resulted in a price adjustment. Importantly, the judge found that the new information had been promptly disclosed by Myer, which meant there was no period in which the market price was artificially inflated prior to that disclosure.
The absence of inflation meant class members did not suffer a loss when they purchased Myer shares during the disclosure contravention period.
Continuous disclosure – safe harbours will not always provide protection
As well as being the first shareholder class action decision, it is also one of the first decisions to give more than passing reference to the 'safe harbour' exceptions in ASX Listing Rule 3.1A.
The court held that the information Myer had about its deteriorating earnings position would ordinarily have been protected by the safe harbours because (in addition to being confidential) it was generated for internal management purposes and was insufficiently definite to warrant disclosure.
However, having made the earlier representation about anticipated profit growth, the court found Myer was not permitted to rely on the safe harbours because a reasonable person would expect the information to be disclosed notwithstanding its confidentiality and uncertainty.
Continuous disclosure – materiality
Section 674 of the Corporations Act requires the disclosure of information 'a reasonable person would expect, if it were generally available, to have a material effect on the price or value of' shares.
Although the market consensus played a pivotal role in the outcome, the court made it clear that, in considering materiality in this context, market consensus cannot be substituted for a reasonable person. In the particular circumstances of this case (and Myer's performance at the time), the court indicated that a reasonable person would expect a variation of 5% or more was likely to have a material effect of the price of Myer securities.
Market-based causation confirmed
As expected, the court held that the market-based causation approach could be used to establish that any loss was caused by the non-disclosure. This means it is not necessary for each shareholder to prove they relied on the impugned disclosure, so long as they can prove it distorted the share price.
However, in a somewhat unexpected twist, his Honour suggested that, at least on one view, class members might need to give some evidence that, but for the contravention, they would not have purchased the shares, or not purchased at the price paid. His Honour was, however, quick to say this would not be an onerous burden and could perhaps be addressed by a statutory declaration or ticking of boxes on a questionnaire after judgment on the common issues.
How is loss calculated?
One of the most anticipated aspects of this judgment was that it was expected to be the first to consider the event study approach to calculating inflation (ie assessing the impact of an event on the value of a company), and also the method for calculating loss once inflation had been determined.
Importantly, the court accepted the event study methodology in a general sense. However, it is apparent that the critical issue will be the way the general methodology in any given case is applied by the experts for each side (and, in the particular, the assumptions made in that process).
The court's findings in respect of inflation meant that the important question of how each shareholder's loss (when inflation is found) is to be calculated remains unresolved. The key issue is whether a LIFO (last in first out), FIFO (first in first out) or netting (whereby the shareholders' aggregate profits are offset against aggregate losses) approach to determining the number of affected shares (to which the inflation figure is applied) should be applied. The answer to this question significantly affects a company's potential exposure.
What next?
The judgment leaves open the possibility that there may be a further chapter in this story by inviting the parties to provide short submissions on a range of matters, including further proceedings on loss and damage. We will report further on any material developments in this respect.
What does the judgment mean for listed companies?
The outcome ultimately turned on the factual issues underpinning the court's decision on the lack of inflation in the share price. As such, it did not provide guidance on a number of key issues, including the practical application of the market based causation theory and loss calculation – these will remain to be decided in another case.
The nature of the findings is such that we don't expect the judgment to have a material impact of the level of shareholder class action activity.
The nature of the findings is such that we don't expect the judgment to have a material impact of the level of shareholder class action activity. Most shareholder class actions have been run on the basis that market-based causation is likely to be available to the plaintiffs and, in that respect, the decision preserves the status quo. It also seems likely that the possible need for individual declarations by registering shareholders can be addressed in a way that does not significantly impact the economics of funding these claims. That said, the finding in respect of no inflation and, therefore, no loss, should provide food for thought for those who think any updating disclosure that triggers a price decline is solid grounds for a shareholder class action.
There is, however, plenty in the decision for board members and senior executives to consider in the application of the continuous disclosure laws. In particular, it emphasises that heightened disclosure obligations will apply where companies have given forward-looking guidance to ensure the market is promptly informed when questions arise as to whether that guidance can continue to be supported.
Please contact any of the people below for more information on the issues this landmark judgment raises.