6 November, 2019
The door is well and truly open: The acceptance of "indirect market-based" causation in an Australian securities class action confirms shareholders in listed companies can recover damages for breach of continuous disclosure obligations, and for misleading and deceptive conduct, without needing to establish personal reliance
Overview
The landmark decision in TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited1(Myer) on 24 October 2019 has confirmed that shareholders in listed companies may be entitled to recover damages for breaches of continuous disclosure obligations, and for misleading and deceptive conduct, upon the basis of "indirect market-based" causation, thereby avoiding the need to establish direct, personal reliance by the affected shareholder upon either the absence of appropriate disclosure or that misleading and deceptive conduct.
Myer not only confirms support for the "indirect market-based" causation thesis which has been developing in Australia over a number of years2, it is a critical development as the first case in which "indirect market-based" causation has been held to apply in an Australian securities class action. Myer is also the first securities class action to go to final judgment.
Despite the fact that the Court went on to conclude that the applicant (TPT) had failed to prove the share price inflation required to establish recoverable loss or damage in this particular case (including because of fundamental problems with its expert evidence), the acceptance of "indirect market-based" causation will undoubtedly further embolden securities class action plaintiffs, their solicitors and litigation funders.
The decision also provides useful reminders regarding the risks associated with providing earnings or other guidance (particularly forecasts) and to the limitations of written disclaimers.
Myer – the facts and decision
In Myer, the Court considered the issue of causation in the context of claims for loss and damage said to have been caused by:
- the failure of the ASX listed Myer to make timely disclosure, to the ASX, of price sensitive information concerning its ordinary fully paid shares (Securities) in breach of its continuous disclosure obligations; and/or
- Myer's alleged misleading or deceptive conduct, including by making and/or failing to correct or modify earnings guidance (specifically, a forecast as to expected future earnings).
In short3:
- on 11 September 2014, Myer issued an ASX and media release dealing with its full year results for FY14, which provided little guidance concerning FY15, and no FY15 earning forecasts;
- later on 11 September 2014, there was an equity analyst webcast, which included a slide presentation. Once again, the slide presentation provided little guidance concerning FY15, and no FY15 earning forecasts;
- both the ASX release and the slide presentation included written disclaimers (Myer Disclaimers), which were in reasonably standard form and included that:
- indications of plans, sales and financial performance were forward-looking statements;
- forward-looking statements are not guarantees of future performance and involve known and unknown risks;
- actual results may vary;
- "readers are cautioned not to place undue reliance on forward-looking statements, which are current only as at the date of …[ the] … release"; and
- subject to law, Myer assumes no obligation to update such information;
- on 11 September 2014, despite having a company policy of not providing earnings guidance, Myer's then CEO (Mr Brookes) stated, in the course of his presentation to the equity analysts, in Q&A with the equity analysts and in a subsequent conference call with financial journalists, that it was likely that Myer's net profit after tax (NPAT) in FY15 would exceed Myer's NPAT in FY14 ($98.5 million);
- on 19 March 2015, Myer announced, to the ASX, that it expected its FY15 NPAT to only be between $75 – $80 million (excluding one-off costs); and
- immediately after that announcement on 19 March 2015, Myer's share price and market capitalisation declined materially (by about 10%).
TPT subsequently brought proceedings, claiming damages both on its own behalf and also on behalf of a class of persons who acquired Securities on or after 11 September 2014, who were holders of any of those Securities at the commencement of trading on 19 March 2015 and who had claims for loss and damage (Class Members).
TPT did not seek to prove that individual shareholders suffered loss or damage by reason of their direct or specific reliance upon Mr Brookes' statement (or, even, that that they were aware of it having been made).
Instead, TPT:
- relied only on an "indirect or market-based" causation thesis, that is, in essence, that the market for Myer's Securities had been misled by Myer's conduct (both Mr Brookes' statement and what was alleged to be Myer's failure to correct or modify that statement in a timely manner), resulting in TPT and Class Members purchasing their Securities at an inflated price; and
- the contraventions.but for that loss should be measured as the difference between the (inflated) price at which TPT and Class Members acquired their Securities and the market price that would have prevailed at those times 4 ultimately argued
The Court found that, while Mr Brookes' statement (a forecast) was not misleading when made because there was a reasonable basis for it at the time (11 September 2014), Myer should have disclosed to the market:
- by no later than 21 November 2014, that it was no longer likely that its FY15 NPAT would be materially above its FY14 NPAT; and
- by no later than 9 December 2014, that it was likely that its FY15 NPAT would be lower than its FY14 NPAT by reference to specific amounts which (depending upon the date) were between $6.5 million and $11.5 million less.
While the focus of this alert is on indirect market-based causation, it is worthwhile also noting that:
- the Court also found that Myer had wrongly assumed that its continuous disclosure obligations did not require it to correct or modify Mr Brookes' 11 September 2014 statement because its subsequent expectations of a likely lower FY15 NPAT, prior to its eventual market disclosure on 19 March 2015, remained in line with Bloomberg's average ("consensus") of key equity analysts' FY15 NPAT expectations for Myer, which was approximately 10% lower than Myer's FY14 NPAT; and
- the Court held that "not too much emphasis" should be put on the fact that Mr Brookes' statement was made in the context of the Myer Disclaimers because, while the sophisticated members of the equity analyst and financial journalist audiences would have appreciated the inherent uncertainties involved in forward-looking earnings statement in any event, "a reasonable person would not regard a standard form of disclaimer as gutting … [Mr Brooke's] … forecast of meaningful content", with the result that "the prospect that the printed disclaimers could effectively negate the representations or relieve Myer from its obligations to have reasonable grounds is problematic to say the least".
Although TPT's claim for damages was ultimately unsuccessful, including because the Court found that "the hard-edge scepticism" of market analysts and market makers at the time of the contraventions (as reflected in the Bloomberg consensus expectations) had already deflated Mr Brookes' inflated views so that any corrective statement, at the time of the contraventions, would not have had a material effect on the market price for Myer's Securities, what is important is that the Court accepted that "indirect market-based" causation (the unknowing acquisition of shares, at a prevailing market price, during a period of share price inflation induced by misconduct) was available as an alternative to establishing reliance, both for breaches of continuous disclosure obligations and for misleading or deceptive conduct.
Potential issues with indirect marked based causation
In another recent decision of the Federal Court handed down on 18 October 2019 (Masters v Lombe (Liquidator); In the Matter of Babcock & Brown Limited (In Liquidation) [2019] FCA 1720) (Babcock & Brown), Foster J made observations directed at a number of potential issues with the "indirect market-based" causation thesis, including that it potentially leaves open the possibility of recovery by a shareholder who either knew the true position or who would not have acted differently if they had known the true position.
While it was ultimately unnecessary for the Court to determine those issues in Myer because of the problems with TPT's expert evidence as to share price inflation, the Court did discuss potential "antidotes" to those issues, including the possibility of holding that the relevant misconduct could not ultimately cause the loss claimed by a shareholder in those particular situations because that knowledge or attitude amounted to an intervening, disqualifying act. While Foster J plainly expressed some scepticism regarding these potential "solutions", such an approach would be consistent with the consideration previously given to the same issues in HIH Insurance Limited.
What does this mean for ASX listed companies?
Apart from anything else, Myer reminds ASX listed companies and their advisers of the critical importance of strict compliance with continuous disclosure obligations and prohibitions on misleading and deceptive conduct.
Myer also illustrates:
- the inherent dangers involved in giving earnings guidance or making other forward-looking statements;
- that written disclaimers as to the (limited) effect of forward-looking and other statements, and as to limitations upon the reliance to be placed upon them, are rarely successful, without more, in avoiding or limiting responsibility and liability; and
- the (obvious but overlooked) fact that proper disclosure, and the avoidance of misleading and deceptive conduct, requires effective clarification of all material prior statements, even where those statements have already been "discounted" by the market (for example, in analysts' or commentators' "consensus" forecasts).
More broadly, Myer will have important ramifications for ASX listed companies because it makes it clear that:
- a shareholder can prove causation without the need to show that they personally relied upon, or even read, or heard, a listed company's misleading statement; and
- a court can apply an indirect causation test to breaches of the continuous disclosure regime.
Finally, Myer will only further encourage shareholders and lawyers to bring (and litigation funders to fund) shareholder class actions given that application of the "indirect market-based" causation thesis can overcome the significant evidentiary challenges, time and cost associated with proving reliance by each group member in securities class actions.
For further information, please contact:
Mark D. Chapple Partner, Baker & McKenzie
mark.chapple@bakermckenzie.com
1. [2019] FCA 1747
2. initially in literature but, more recently, also in a series of other first instance decisions, including Re HIH Insurance Ltd (in liquidation) & Ors(2016) 335 ALR 320; [2016] NSWSC 482, Grant-Taylor v Babcock and Brown Ltd (in liq) [2015] FCA 149 where Perram J said, in obiter, " …a party who acquires shares on a stock exchange could recover compensation for price inflation arising from a failure to disclose material required to be disclosed, so long as they were not themselves aware of the non-disclosed material" and Caason Investments Pty Ltd v Cao (2015) 328 ALR 396.
3. extracted from a 1,721 paragraph judgment
4. having abandoned its argument that its loss should be measured as the difference between the price at which the shareholder acquired its interest and the true value of that interest (what the Court called the “true value measure”).
