Securities class action lawsuits have been an important part of the litigation scene in Australia for many years. But even though the current class action procedural regime has been in place since 1992, no Australian securities class action lawsuit ever went all the way to judgment – that is, no case ever went to judgment until last week. On October 24, 2019, the Federal Court of Australia issued a post-trial Order in the TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited. The court’s ruling, a copy of which can be found here, contains a number of interesting points and could have important implications. A detailed October 25, 2019 memo from the Clyde & Co law firm about the judgment can be found here.
The lawsuit was filed as a representative action by a Myer Holdings Limited shareholder on behalf of all investors who acquired Myer securities between September 11, 2014 and March 19, 2015. The allegations in the lawsuit related to statements made on September 11, 2014 by Myer’s CEO, Bernie Brooks, at a meeting with analysts and journalists. Among other things, Brooks expressed his belief that in the financial year ending in July 2015 Myer would likely have a net profit after tax (NPAT) in excess of Myer’s NPAT in the previous financial year. As it turned out, when the company updated its financial performance in March 2015, the company’s updated NPAT forecast for the fiscal year was stated as significantly below the prior financial year. The company’s share price declined about 10% on this news.
The plaintiff shareholder commenced an action against Myer, alleging that the company and Brooks did not have a reasonable basis for the September 2014 forecast. The plaintiff further alleged that the company’s failure to clarify or revise its September 2014 forecast was in violation of the company’s continuous disclosure obligations under the Companies Act of DATE and under the ASX Rules. The plaintiff also alleged that Myer engaged in misleading or deceptive conduct. The case proceeded to trial.
The October 24, 2019 Order
In a 389-page October 24, 2019 order, Justice Jonathan Beach found that the plaintiff had established that Myer had violated its continuous disclosure obligations under both the Companies Act and the ASX rules. He specifically found that the company should have updated its prior disclosure on several difference occasions. Justice Beach also rejected the company’s attempt to rely on various exceptions to the disclosure obligations, holding that a “reasonable person” would have expected the updated information to be disclosed.
However Justice Beach also said that “notwithstanding” the “contraventions” of the continuing disclosure obligations, he was “not convinced that the applicant and the group members have suffered any loss flowing from the contraventions.”
In order to reach the loss questions, Justice Beach had to first decide whether loss causation was to be demonstrated on a direct (individual reliance) basis or on an indirect (market) causation basis. Justice Beach addressed the issue on a market basis, and also found that the use of “event studies” were useful in terms of assessing both materiality and share price inflation issues.
However, in reliance on these principles, tools, and approaches, Justice Beach concluded that “because the market price for Myer securities at the time the contraventions occurred already factored in an NPAT well south of Mr Brookes’ rosy picture painted on 11 September 2014.” In other words, Justice Beach concluded, “the hard-edged scepticism of market analysts and market makers at the time of the contraventions had already deflated Mr Brookes’ inflated views.”
U.S.-based readers undoubtedly were struck by the key role that Australia’s distinctive continuous disclosure regime played in this case. Whereas in the U.S., public companies are subject only to a periodic reporting requirement, Australian-listed companies are subject to a continuing duty to update and clarify. The distinction between the U.S. periodic reporting approach and the Australian continuous disclosure requirement is one of the very important differences between the public company duties (and potential liability risks) in the two countries’ systems.
From my perspective, there are several noteworthy things about his ruling, the first of which is that Myer was found to have violated its continuing disclosure obligation. As Clyde & Co noted in its memo about the ruling, this ruling 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.”
Another noteworthy thing about this ruling is that notwithstanding Justice Beach’s conclusion that the company did not fulfill its continuing disclosure obligation, he nevertheless concluded that neither the plaintiff nor the class had suffered damages as a result. This conclusion that there were no damages caused by the failure to update and correct the forecast is noteworthy in and of itself, but the reason for Justice Beach’s conclusion is all the more striking – he basically concluded that the market discounted the inflated forecast at the time it was made. As a result of their “hard-edged skepticism,” market observers disregarded the forecast.
But the most significant thing about this ruling is that it happened at all. All prior securities class action lawsuits in Australia were either dismissed, withdrawn, or settled. Because there have been no prior judgments, there has been little case law addressing the important issues Justice Beach discussed in his opinion; the “jurisprudence” that this ruling represents is, the Clyde & Co memo notes, “welcome.” However, the rulings is subject to appeal. And as the law firm memo notes, “until there is a body of case law, including authoritative statements from appeal courts and the High Court, we expect uncertainty on central questions in these claims relating to such matters as causation and loss.”
One final note of importance from the law firm memo is its message that while this case was the first to proceed to judgment in Australia, “our prediction is that it will not be the last.”
Financial Lines Conference in Hamburg: On January 21 and 22, 2019, I will be participating as a International Keynote speaker at the Haftpflicht 2020 conference to be held in Hamburg, Germany. The conference will address a wide-variety of D&O and other financial lines topics, as detailed in the conference brochure, which can be found here. Readers of The D&O Diary are eligible for a €200 discount. To take advantage of the discount, visit the conference registration page here, and enter the VIP-code 77D02530R01.