The Federal Court’s recent decision in TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747 (Myer Case) – which represents the first shareholder class action that has proceeded to judgment – shows just how easily a board’s best laid plans can come unstuck.

Although the board of Myer uncategorically refused to provide earnings forecasts, Justice Beach found that the CEO’s post-briefing discussions with analysts in September 2014 constituted ‘de facto’ profit guidance, and that Myer had an obligation to update the market even if the actual performance was in line with the consensus views of sell-side analysts.

It was, however, not all bad news for Myer (who might now feel a connection to the American writer Leon Uris, who once famously lost a liable suit but was ordered to pay one halfpenny to the plaintiff) – Justice Beach found that the shareholders had not suffered any loss because of ‘the hard-edged scepticism’ of market analysts and market makers, who doubted Myer would ever achieve its ambitious de facto projections.

This is the first judgment in a continuous disclosure shareholder class action. The judgment includes a comprehensive discussion of the ‘market-based causation’ theory of shareholder loss. This theory holds that the Myer shareholders did not need to show that they personally relied on the de facto guidance to recover, and says that a party who acquires shares on market does so on the assumption that the ASX price represents the out workings of a fully informed and efficient market. The failure to keep the market fully informed therefore ‘causes’ the loss. The application of this theory in Australia has been a point of contention in shareholder class actions for more than 20 years.

From a continuous disclosure perspective, there is little in the judgement that is novel or surprising. The Court affirmed the correctness of ASX Guidance Note 8 and the judgment is generally consistent with how the market has understood the continuous disclosure obligations on an issuer in the context of earnings guidance. As Justice Beach pointed out, neither the Corporations Act nor the ASX Listing Rules use the concept of ‘guidance’ but it has long been a burning issues for listed entities.

What was the impugned disclosure and what was the alleged loss?

The case concerned disclosures made by Myer and its CEO on 11 September 2014.

Myer announced net profit after tax (NPAT) for FY14 of $98.5 million, and in a post release interview the CEO told analysts and the media that in FY15 Myer would likely have a NPAT in excess of its FY14 NPAT. On 19 March 2015, Myer announced that its expected FY15 NPAT was not going to be more than $85 million. Following that announcement, Myer's share price fell by around 10%.

It was alleged that the CEO’s statement was misleading or deceptive, a breach of the obligation to have a reasonable basis for any forecasts and a breach of Myer’s continuous disclosure obligations. The applicant claimed that it suffered loss when they purchased Myer at an inflated price. The Court found that the CEO’s statement was not misleading and the CEO had a reasonable basis for making the statement, but that from no later than 21 November 2014, Myer should have made a corrective disclosure and in failing to do so had breached its continuous disclosure obligation and engaged in misleading or deceptive conduct; but that failure did not give rise to any meaningful share price inflation and accordingly no loss was suffered by the Myer shareholders.

Informal guidance is still guidance

The Court found that the CEO’s comments in September 2014 amounted to de facto profit guidance despite them being ‘informal’, despite the board expressly deciding not to provide profit guidance to the market, and despite the fact that the statement was acknowledged not to be formal guidance.

ASX Guidance Note 8 guides issuers on the subject of ‘de facto earnings guidance’. It says that something falling short of formal guidance is still guidance and once given, the issuer is bound to correct it if it ceases to be materially correct. The Court placed a heavy reliance on ASX Guidance Note 8 in forming its view about Myer’s obligations. This suggests that the guidance note is in line with judicial opinion, even though it does not represent a legal determination.

Where an entity has published earnings guidance for the current reporting period and it expects its earnings to differ materially from that guidance, it needs to give careful consideration to its potential exposure under s 1041H for misleading conduct, as well as its responsibilities under Listing Rule 3.1 and s 674.

Guidance, consensus and continuous disclosure

Having provided the market with guidance, Myer was bound to correct that guidance when it became aware that its own reforecast disclosed a belief by management that the actual performance was likely to be materially short of that guidance.

The Court found that a 5% discrepancy was material in the circumstances. In determining the 5% threshold, context was important – for Myer, a decline in NPAT would be confirmation of a trend of profit declines.

Rather than assessing materiality against the guidance provided by the CEO, Myer determined materiality principally on the basis of whether its reforecast was consistent with or materially different from the Bloomberg consensus. The Court did not agree that was the right point to test materiality. Ultimately, the Court found a series of failures by the board in failing to disclose material variations from the CEO’s informal guidance and found that the board was mistaken in measuring its continuous disclosure obligations against consensus rather than the CEO’s statement.

The Court did not provide much assistance on the vexed issue of when the issuer has knowledge of a matter, where that knowledge is the product of a series of ongoing management inputs. The Court does not point to the generation or receipt of any particular piece of information as the trigger giving rise to the disclosure obligation. Instead, the Court found that Myer had enough information available to it by the AGM on 20 November 2015, that they should have made disclosure at that point. This doesn’t sit well with the obligation to disclose information ‘immediately’. Interestingly, the Court rejected any suggestions that sell-side analysts’ expectations render predictions of performance as being generally available.

Despite the disclaimers in the results presentation that “… readers are cautioned not to place undue reliance on forward-looking statements, which are current only as at the date of this release. Subject to law, Myer assumes no obligation to update such information… ”, the Court found that a representation was made about forecast NPAT and that the prospect that the printed disclaimers could effectively negate the representations was unlikely. Indeed “… a reasonable person would not regard a standard form disclaimer as gutting the opinion or forecast of meaningful content.”

Listing Rule 3.1A and the reasonable person test

The Court supported the generally accepted view that the exceptions arising under Listing Rule 3.1A apply to internal forecasts as they are confidential and generated for the internal management purposes and insufficiently definite to warrant disclosure. As such, there was no need to disclose unless a reasonable person would not expect the information to be disclosed.

What is a reasonable person’s expectation? The Court recognises that the test has a very narrow range of operation and one of those will be the case of informal guidance – here, the issuer needs to make disclosure if that information is required to be released in order to correct or prevent a false market, as was the case here. This is because a reasonable person would expect a listed entity, acting responsibly, to immediately disclose any information necessary to correct or prevent a false market in its securities.

Reasonable grounds when making a profit forecast

The Court was not persuaded that Myer had failed to have reasonable grounds, within the meaning of s 769C, for making a profit forecast. The Court found that the CEO had made a genuine assessment as to the appropriateness of the forecast given in September 2014.

Relevantly, the mere bona fide holding of an opinion will be insufficient, and where it alleged that the board held an opinion that the company did not have reasonable grounds for a representation, the opinion does not need to be held by a majority of the board. An opinion held by senior management who were officers may be sufficient to constitute the opinion of the company and hence awareness for the purposes of s 674.

Market-based theory of causation accepted

Justice Beach accepted the availability of a market-based theory of causation and loss in the context of a shareholder class action. This means it is not necessary for each shareholder to prove they actually relied on the impugned disclosure, so long as they can prove it inflated the share price.

Justice Beach suggested that shareholders 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. However, Justice Beach said this would not be an onerous burden and could perhaps be addressed by a statutory declaration or ticking boxes on a questionnaire after judgment on the common issues.

Breach of disclosure obligations, but why no loss?

The Court found that Myer's breaches did not artificially inflate the price of Myer shares because the market price already factored in an NPAT ‘well south’ of the CEO's ‘rosy picture painted on 11 September 2014’. Rather, the 10% drop occurred because the expected NPAT announced on 19 March 2015 was below the market consensus, being new information not already factored into the market price. Critically, Justice Beach found that the new information had been promptly disclosed by Myer, which meant the market price was not artificially inflated prior to that disclosure.

While the Court accepted the event study methodology as a useful tool in calculating share price inflation and shareholder loss, the critical issue will be how that methodology is applied by the experts, including the assumptions on which their opinions are based. Here, the Court did not accept the applicant’s counterfactual disclosure which was provide to the applicant’s expert as a critical assumption upon which his evidence was based.

Lessons to be learned

  1. Profit guidance can be binding on an issuer despite it being ‘informal’, despite the board expressly deciding not to provide explicit profit guidance to the market and despite the fact that it is acknowledged not to be formal or specific guidance. De facto earnings guidance is still guidance and once given the issuer is bound to correct it if ceases to be materially correct.
  2. While materiality is always highly fact dependent, in general a 5% or more decline in profit is material to the market and needs to be disclosed.
  3. The fact that the performance of the issuer is in line with the sell-side analysts’ consensus is not an excuse for failing to correct material variations between the issuer’s reforecast of performance and any guidance provided to the market.
  4. In general terms, internal forecasts and reforecasts of performance are not documents that require disclosure under Listing Rule 3.1A but in circumstances where the issuer has provided earnings guidance – the reasonable person test in Listing Rule 3.1A will require disclosure of the reforecast results.
  5. There will be very few situations where a generally worded disclaimer will be sufficient to absolve an issuer for liability for its statement (or misstatements).
  6. The market-based theory of causation and loss in the context of a shareholder class action is here to stay.