3 December, 2019
Our previous Alert of 28 October 2019 (see link) outlined why the Myer case is a landmark decision, being both the first Australian securities class action to be decided at trial and also the first to accept the concept of "indirect market-based" causation in such cases. This Alert focuses on the practical guidance from the case which can assist directors and executives to comply with their continuous disclosure obligations, and avoid engaging in misleading or deceptive conduct.
Overview
The key facts and aspects of the Myer case, particularly regarding causation and determination of loss, are well covered in our previous Alert.
Briefly, the case stemmed from comments made by Mr Brookes, Myer's then CEO, to analysts and journalists on 11 September 2014. when he referred to an anticipated increase in sales and an increase in net profit in FY15. This was widely reported in analysts' reports and media as referring to Myer expecting to achieve NPAT in FY15 in excess of the $98.5 million NPAT achieved in FY14. On 19 March 2015, Myer announced to ASX that it expected its FY15 NPAT to be between $75 to $80 million, following which Myer's share price and market capitalisation fell by more than 10%.
The applicant succeeded with critical parts of its claim but failed to prove recoverable loss. In particular, the Court concluded that:
- Myer breached its continuous disclosure obligations under ASX Listing Law 3.1 and section 674 of the Corporations Act and had also engaged in misleading and deceptive conduct in contravention of section 1041H of the Corporations Act;
- shareholders of listed companies may be entitled to recover damages for breaches of continuous disclosure obligations, and for misleading and deceptive conduct, on the basis of "indirect market-based" causation, which avoids the need to establish personal reliance by the affected shareholder;
- the applicant had failed to prove recoverable loss based on share price inflation, being the difference between the allegedly inflated price at which shareholders acquired their shares and the market price that it was argued would have prevailed if proper disclosure had been made. This was because the Court found that the market price of Myer shares at the time the contraventions occurred already factored in an NPAT which was less than the guidance given by Mr Brookes on 11 September 2014, as market analysts and market makers "had already deflated Mr Brookes' inflated views".
As part of his judgment, Justice Beach provided valuable guidance for directors and executives of ASX listed companies regarding corporate governance, complying with their continuous disclosure obligations and avoiding misleading or deceptive conduct.
Continuous disclosure
Myer breached ASX Listing Rule 3.1 and section 674
Under ASX Listing Rule 3.1 and section 674 of the Corporations Act, a listed company must immediately tell ASX if it becomes aware of information concerning it that is not generally available and which a reasonable person would expect to have a material effect on the price or value of the company's shares, being information that would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of those shares.
The Court found that Myer had contravened Listing Rule 3.1 and section 674 by failing to subsequently correct the de facto earnings guidance given by Mr Brookes, and that it should have disclosed its correction to the market, when it became aware that the de facto earnings guidance given by Mr Brookes would not be achieved. This should have been done on up to 7 separate occasions, including on the date of Myer's 2014 AGM and each time that successive budget reforecasts showing a declining NPAT were tabled at Myer's Board meetings.
In reaching this conclusion, the Court largely endorsed ASX Guidance Note 8 which contains detailed guidance for ASX listed companies on complying with their continuous disclosure obligations. That Guidance Note has been updated since then, including to deal with disclosures regarding market sensitive contracts, but the substance of matters discussed in this Alert remain the same and relevant.
Informal guidance can be de facto earnings guidance
The Court found that the informal guidance given by Mr Brookes to the effect of anticipating growth in sales and net profit amounted to de facto earnings guidance as envisaged by ASX Guidance Note 8, even though he did not refer to a specific number or range. Therefore, Myer should have made corrective disclosures once there was a material variation from that de facto earnings guidance.
It was apparent the Myer Board didn't really understand their continuous disclosure obligations.The Myer Board wrongly believed that:
- Mr Brookes' statements were not profit guidance as:
- the Board had resolved that it would not provide such guidance to the market; and
- it was not done by formal written ASX release by Myer; and
- Myer only needed to disclose if its subsequent expectations differed materially from Bloomberg consensus estimates of Myers' profit.
Importantly, ASX Guidance Note 8 provides that, even if a company has not provided earnings guidance for the current period, it should still make appropriate disclosure if it expects a material variation from:
- the earnings forecasts of sell-side analysts; or
- the company's earnings for the prior corresponding period, if the company is not covered by sell-side analysts.
Directors and executives need to be careful when discussing prospects or outlook for their company to try to ensure they do not unintentionally provide de facto earnings guidance. The same care should be taken when preparing presentations and scripts for analysts or journalists calls as you would in preparing a formal ASX release. To the extent possible, you should also stick to the script and try not to be drawn in by questions from call participants and not give responses which could amount to de facto guidance. If you do inadvertently disclose materially price sensitive information then you should quickly consider releasing that information to ASX.
You can't rely on analysts to do your job
The Court rejected Myer's argument that, as the majority of analysts' reports forecast that Myer's NPAT for FY15 would be below its NPAT in FY14, this information was "generally available", as there was a view widely held within the market that Mr Brookes' anticipation of profit growth would not come to fruition. Therefore, the information that Myer's FY15 NPAT would be below that figure was not generally available, and it was Myer's responsibility to make appropriate disclosure if there was a material variation from Mr Brookes' de facto earnings guidance. The Court was influenced by the fact that Myer had a large retail shareholder base and that those mum and dad investors would not be aware of consensus figures, and would likely have been influenced by the disclosure of an expected NPAT of less than $98.5 million.
If a company has provided profit guidance or de facto earnings guidance, then it has the responsibility to update the market promptly if it expects a material variation from that guidance, even if that expectation is in line with consensus analysts' estimates. You can't rely on analysts to do your job for you.
The relevant materiality threshold may be lower than you think – 5% may be enough to trigger disclosure
Whether information is material and needs to be disclosed depends on whether a reasonable person would expect the information to have a material effect on the price or value of the relevant securities, which can occur if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the relevant security. Neither the ASX Listing Rules nor the Corporations Act specifically prescribe a percentage variation that would be material. However, ASX Guidance Note 8 envisages that where a company has given guidance:
- it need not update that guidance if the expected variation in earnings is equal to or less than 5%;
- it should presume that the guidance needs updating if the expected variation is equal to or greater than 10%; and
- it needs to form a judgment as to whether or not it is a material, where the expected variation is between 5% to 10%.
The Court found:
- in Myer's circumstances, a decline of 5% or more would be material to the market; and
- this 5% needed to be assessed as a variation from Mr Brookes' de facto earnings guidance, rather than the lower Bloomberg consensus estimates.
On that basis, there was a material variation as early as Myer's AGM and on 6 subsequent occasions before Myer finally disclosed to the market that its expected earnings would be well below both the $98.5 million de facto guidance and also Bloomberg consensus estimates.
Companies will need to take a more cautious approach in assessing what is a material variation from earnings guidance. It would be prudent to carefully consider whether to make appropriate disclosures if the variation is equal to or greater than 5%. Companies which have been relying on higher thresholds may need to reassess their approach.
The ASX Listing Rule 3.1A disclosure exception may not be as helpful as you think
Listing Rule 3.1A contains an exception from the Listing Rule 3.1 continuous disclosure obligation. This allows a company not to disclose information if it is confidential; meets certain criteria such as the information being prepared for internal management purposes or comprising matters of supposition or being insufficiently definite to warrant disclosure; and a reasonable person would not expect the information to be disclosed. This is sometimes referred to in the confidentiality carve-out.
The Court accepted that Myer's reforecast documents prepared after 11 September 2014 were confidential and had been prepared for internal management purposes, contained matters of supposition and were insufficiently definite. However Myer could not rely on the exception as it failed to satisfy the third limb that no reasonable person would expect the information to be disclosed. This was because a reasonable person would expect a listed company, acting responsibly, to immediately disclose any information necessary to correct or prevent a false market in its securities.
Justice Beach comments that this would mean that "any ASX listed company which has given earnings guidance would be required to announce to the market any corrections thereto".
The effect of this is sweeping and perhaps goes too far. This would mean that companies which have provided any earnings guidance would be at risk of having to disclose any material variations identified as part of their normal budgeting process, even if insufficiently definite. Releasing such indefinite and unreliable information could expose companies to a claim for misleading or deceptive conduct. Any such updates will need to be very carefully considered and drafted.
Companies which have provided earnings guidance need to be very careful when preparing internal budgets, forecasts, trading updates and communications about them, and if they identify a potential material variation, they can't assume that this will be covered by the confidentiality carve-out. Any such variation should promptly be brought to the attention of the Board/Continuous Disclosure Committee to determine if appropriate disclosure should be made.
Familiarise yourself with your continuous disclosure policy and comply with it.
Myer had a comprehensive continuous disclosure policy which covered matters such as providing guidance, dealing with analysts, avoiding selective briefings, commenting on analysts' forecasts and dealing with inadvertent disclosures. The Court found that Mr Brookes had breached various requirements of the continuous disclosure policy, but found that this, in itself, did not constitute a breach of the continuous disclosure obligations.
The fact remains that if Mr Brookes had fully complied with Myer's continuous disclosure policy then he would not have provided the defacto earnings guidance and there would not have been a breach of the continuous disclosure requirements.
All ASX listed companies should consider if their continuous disclosure policies need to be revised or enhanced as a result of matters discussed in the Myer case. All directors and executives should re-familiarise themselves with their continuous disclosure policy and take the necessary steps to ensure that they comply with the requirements of that policy at all times. If they become aware of a breach of the policy, then this should be promptly brought to the attention of the Board/Continuous Disclosure Committee to determine how to deal with that breach and if any disclosure to ASX is required.
Misleading or deceptive conduct
Under section 1041H of the Corporations Act, a person must not engage in conduct that is misleading or deceptive or is likely to mislead or deceive. In relation to future matters, section 769C provides that a representation about a future matter is taken to be misleading if the person making the representation does not have reasonable grounds for making it.
Reasonable grounds for guidance
The Court accepted that there were reasonable grounds for Myer (Mr Brookes) to make the representation on 11 September 2014 that it expected, at that time, to achieve NPAT in FY15 in excess of $98.5 million. Key factors in establishing such reasonableness were:
- the detailed process used to prepare the budget;
- the reasonableness of the key underlying assumptions and factors which underpinned the budget;
- that there was a buffer of $8.5 million between the budgeted NPAT of $107 million for FY15 and the FY14 NPAT of $98.5 million FY15; and
- that the FY15 budget was considered and approved by the Myer Board.
This finding provides comfort to companies that implementing a fairly typical approach to preparing a budget or forecast should be sufficient to establish there are reasonable grounds for representations about future matters. You must take care to ensure there is a comprehensive budgeting process and ensure that the underlying assumptions are reasonable.
Continuing representation
The Court accepted that the defacto earnings guidance could be considered a continuing representation which required corrective disclosures if Myer's opinion or expectation about its FY15 NPAT changed. Myer was found to have changed its opinion or expectation as to the likely FY15 NPAT at various times from the date of its AGM onwards and its failure to make corrective disclosures at those points in time meant that Myer engaged in misleading or deceptive conduct in contravention of section 1041H. The Court also accepted that, on each of those dates, Myer no longer had reasonable grounds for the representation made on 11 September 2014, so that a failure to correct was misleading or deceptive.
Companies that have provided earnings guidance should carefully monitor their financial performance and changes in outlook to confirm that they continue to have reasonable grounds for maintaining that guidance. If after giving guidance, your opinion or expectation changes materially, then you should make corrective disclosures.
Disclaimers won't save you
Myer included with its ASX release and presentation slides a fairly standard disclaimer which included that:
- forward-looking statements were not guarantees of future performance and involved risks and uncertainties;
- actual results, performance or achievements may vary materially from forward-looking statements;
- readers should not place undue reliance on forward-looking statements; and
- such statements were current only at the date of the release and, subject to law, Myer assumed no obligation to update such information.
The Court found that such disclaimers were not effective in protecting Myer from contravening the continuous disclosure requirements or engaging in misleading or deceptive conduct. A reasonable person would not regard a standard form disclaimer as "gutting" the opinion or forecast of meaningful content and this could not effectively negate the representations or relieve Myer from its obligations to have reasonable grounds. It was also considered relevant that Mr Brookes' oral statements were not also accompanied by oral disclaimers to the same effect.
While the disclaimer was not effective in the Myer case, it would still be prudent for companies to continue to include these types of disclaimers, which may still have some application, for instance in dealings with institutional shareholders. However, the focus should be on ensuring that there are reasonable grounds for providing guidance or making other forward-looking statements rather than being reliant on disclaimers.
Conclusion and Action Items
In addition to the importance of the Myer case in accepting indirect market causation, the judgment also provides practical guidance for companies and their directors and executives to allow them to better implement effective procedures to comply with continuous disclosure obligations, and to avoid misleading or deceptive conduct.
More immediately, directors and executives should:
- carefully consider if any of their previous statements or comments could amount to defacto earnings guidance and, if so, whether there is any need to update or correct such guidance. The sooner the better;
- be careful at your AGM and any analyst/investor/journalist calls with any statements about outlook or prospects, to avoid giving de facto earnings guidance, if you don't intend to provide such guidance;
- review their continuous disclosure policies and consider if they need to be enhanced to seek to prevent contraventions, as well as regularly monitoring compliance with those policies;
- refresh their knowledge and understanding of their continuous disclosure obligations and how to practically comply with them. You should consider some refresher training – we'd be happy to oblige.
Further, if you have provided any guidance or de facto guidance and are considering a capital raising by way of a placement or rights issue/ entitlement offer, which rely on your company having complied with your continuous disclosure obligations, then you should be rigorous in your due diligence to confirm compliance, and if necessary correct or update that guidance as part of your cleansing notice process. This will be an important issue both for companies and their directors and also for underwriter/lead managers involved in the capital raising.
For further information, please contact:
Frank Castiglia, Partner, Baker & McKenzie
frank.castiglia@bakermckenzie.com
