Australia has had a class action regime since 1992. Despite all of the claims activity in the time since with around 120 actions commenced, no securities class action has proceeded to judgment in Australia. That changed recently, with judgment being delivered in the Myer shareholder class action.1
Whilst the Court found that Myer had breached its continuous disclosure obligations by failing to disclose to the market that it was not likely to reach its forecasted net profit, and had engaged in misleading or deceptive conduct, it was not accepted that the Applicant and Group Members had suffered any loss. This is because the market price of Myer’s shares at the time these contraventions occurred already factored in an impact well south of what had been forecast.
This decision is undeniably relevant to ASX-listed companies and their directors and officers, shareholders, litigation funders and insurers. However the decision illustrates that these cases are so fact specific in determining:
– firstly, threshold liability questions, being whether there is any information that was material to investors that was not disclosed to the market, and if there was whether any exceptions to disclosure under the listing rules apply; and
– secondly, that expert evidence on loss and quantum will continue to be a central battleground on which these cases are fought beyond the threshold liability questions.
The facts of this case are typical of most shareholder claims involving forecasting. Central to the case was a forecast made by the then CEO as to the retailer’s expected net profit after tax (NPAT) in FY2015. The representation allegedly disclosed to the market that Myer expected to achieve NPAT in FY15 in excess of AUD98.5m. When Myer issued a subsequent release to the ASX, the NPAT it disclosed was significantly less when compared to the forecast made nearly six months beforehand.
The shareholders alleged that Myer:
– contravened its continuous disclosure obligations under the Corporations Act 2001 (Cth) (the Act);
– contravened the ASX Listing Rules (Listing Rules) in failing to advise the ASX of information which was likely to have a material impact on the value of Myer’s shares; and
– engaged in misleading or deceptive conduct.
Myer shareholders claimed that they lost money as a result of those contraventions. Myer denied all allegations made against it.
Decision on contravention
The class succeeded on the part of its case concerning continuous disclosure. His Honour Justice Beach found that there should have been disclosure as to the likely FY15 NPAT under Listing Rule 3.1 and section 674 of the Act on a number of occasions. Further, by not having so corrected at each of these points in time, Myer engaged in misleading or deceptive conduct in contravention of section 1041H of the Act. This is a timely reminder that when a company makes a forecast it has an ongoing obligation to monitor that forecast and change it if, at any time, it is no longer valid.
Myer deployed a defence under Listing Rule 3.1A which provides for a number of exceptions to disclosure. However, that defence was not available to the retailer because a “reasonable person” would have expected the information to be disclosed by Myer to correct or prevent a false market in its securities.
Causation and quantum
As to whether the shareholders established that such conduct caused loss and damage, and if so, how much, Justice Beach found that the shareholders did not suffer any loss by reason of the contraventions. This was because the market had already factored in an NPAT well below the forecast by the time the contraventions occurred. In addition to expert evidence, contemporaneous evidence sourced from market analyst reports was important, as analysts had already factored in and come to an expectation that Myer was not going to perform as well as it did in FY2014. For that reason, even if a corrective statement had been made it was likely to have had no or no material effect on the market.
Despite the no loss finding, Justice Beach dealt with two important issues in his judgment. These were:
– Firstly, whether causation needs to be demonstrated on a direct (individual reliance) or indirect (market) causation basis i.e. whether a shareholder needs to have been aware of a misrepresentation and relied upon it to recover any loss. Justice Beach accepted indirect or market-based causation theory. This is consistent with some other first instance decisions of Australian courts outside of the class action space which suggested that market based causation is available.2
– Secondly, what the appropriate loss methodology is in these types of claims with his Honour commenting on the use of event studies. These measure the effect of a specific “event” (such as a market announcement) on the price of a company’s shares which are valuable tools in assessing materiality and share price inflation.
It remains to be seen if an appeal will be filed. Whilst the Myer securities class action was the first to proceed to judgment in Australia, our prediction is that it will not be the last. Notwithstanding that this is a first instance decision, some jurisprudence in such an active part of the commercial litigation market is welcome given shareholder claims have dominated class actions in the past decade. But until there is a body of case law, including authoritative statements from appeal courts and the High Court, we expect uncertainty to continue on central questions in these claims relating to such matters as causation and loss.