Continuous disclosure - the tide turns on shareholder class actions

Background

Plaintiff firms are less likely to rush into continuous disclosure class actions having lost 5 major cases in a row – Myer[1], Iluka Resources[2], Worley[3], CBA[4] and Insignia Financial (formerly IOOF) [5].  Myer was the first shareholder class action to go all the way to judgment.  Previously shareholder class actions had been settled, often at the eleventh hour.  Even where applicants have successfully proved a breach of continuous disclosure obligations, they have failed to show causation for loss (Myer, Worley (No 2) and CBA).

Encouragingly, the Courts have shown a propensity to avoid the hindsight bias that often troubles practitioners and disclosing entities when making more finely balanced disclosure decisions (Iluka and CBA).

In favour of the plaintiff firms

One troubling development is the Courts finding that continuous disclosure laws apply to an opinion that an officer of a disclosing entity should have reasonably formed based on information that was available to them even if they did not actually form that opinion (Iluka, Worley and CBA).  This substantially lowers the bar for determining when a disclosing entity is deemed to have information for the purpose of continuous disclosure laws.

In Worley, Worley argued against a claim that it did not have reasonable grounds for making its FY14 earnings statement that where the information requiring disclosure is an opinion, continuous disclosure rules require only the disclosure of opinions actually held or possessed by the company.  The Court rejected this argument.

The defence strikes back

In Iluka, the Court found that Iluka had reasonable grounds for making and maintaining its 2012 sales guidance through the claim period.  Importantly, the Court found that qualifications and disclaimers accompanying the relevant statements meant that an ordinary and reasonable reader would have appreciated that the statements did not provide a prediction of the sales levels and that the statements represented that no prediction or expectation could in fact be provided.

CBA involved an alleged breach of continuous disclosure laws and misleading and deceptive conduct concerning CBA’s non-compliance with anti-money lending and counter terrorism laws and penalties imposed by AUSTRAC.  The case shows the difficulties faced by applicants in proving that information was known or had been pieced together at earlier points in time, notwithstanding the benefit of hindsight.  The applicant’s case was based on facts that could only be ascertained at a later point in time and was divorced from the reality of whether an officer of CBA actually knew or ought to have known those facts at the time when disclosure should allegedly have been made.

Insignia Financial is the first shareholder class action concerning the materiality of non-financial information.  The case involved alleged contraventions of continuous disclosure laws and misleading and deceptive conduct on the basis that Insignia failed to disclose material information about governance and compliance issues, including claims of insider trading and front running.  The applicant alleged that the information was substantially disclosed in media articles and through comments made before the Australian Senate’s Economics References Committee, resulting in Insignia’s share price falling.  The Court found that none of the alleged information – individually or cumulatively – constituted material information under the ASX Listing Rules.

Damages hurdles

Even where applicants have successfully proved a breach of continuous disclosure obligations, they have struggled to prove causation for loss.

Myer was found to have breached continuous disclosure laws, but no damages were awarded - shareholders were found not to have suffered any loss because of the “hard edged scepticism” of analysts who doubted Myer would ever achieve its projection of bettering its prior year profit.

Crowley was not entitled to damages in Worley (No 2) as while Crowley had proved the FY14 forecast was not based on reasonable grounds he was not able to prove what Worley’s FY14 forecast should have been and therefore what the share price would have been had a correct forecast been disclosed.

The Court found in CBA that even if the applicants had succeeded in their case on contravention, they would have lost on causation and loss.  Similarly in Insignia Financial, while it was unnecessary for the Court to determine damages, the Court noted a number of challenges the applicant would have faced in doing so.

Appeals have been filed in both Worley (No 2) and CBA.

State of mind provisions remain untested with amendments expected

During COVID, the government made amendments to the Corporations Act requiring a disclosing entity’s state of mind to be considered when determining whether it contravened the continuous disclosure obligations (2021 Amendments). 

Following a review of these provisions, the government accepted a recommendation to repeal the 2021 Amendments to the extent they apply in civil penalty proceedings initiated by ASIC, but to keep them in place for private litigants alleging a breach of continuous disclosure obligations.  We expect amendments to the continuous disclosure regime to address explicitly the way knowledge, recklessness or negligence can be attributed to an entity.

While none of the cases in this note considered the 2021 Amendments, in our view none would have produced a different result had the 2021 Amendments been applicable.

Takeaways

• Carefully consider the form of any disclaimer which accompanies forward looking disclosure. Iluka shows that disclaimers have real work to do and can help qualify and contextualise guidance statements.  However, a disclaimer is not a substitute for being able to demonstrate reasonable grounds for a forward-looking statement.
• Disclosing entities should ensure they have robust reporting systems to ensure relevant information is brought to the attention of continuous disclosure committees and ultimately the board.
• While there may still be individual cases where the fault element contained in the 2021 Amendments is relevant in determining class action liability, generally disclosing entities should continue to take steps to ensure compliance with the primary disclosure obligations, and not put any weight on the reduced risk of liability from class actions.
• Don’t assume it’s all over for plaintiff firms. Many of the challenges faced in the cases above resulted from the way the particular cases were pleaded.