This article is written by Moira Saville, Alex Morris and Armen Varvachtian.
In a highly anticipated judgment, the Federal Court of Australia has dismissed a securities class action brought against Worley Limited (Worley) alleging breaches of continuous disclosure laws and the prohibition on misleading or deceptive conduct. In doing so, the Court has provided another salutary reminder about the limits of curial fact-finding based on documentary records.
Worley is an ASX-listed professional services provider to clients in the resources, energy and infrastructure sectors. Its clients include oil and gas, resources, and chemicals companies both with multinational operations and a more regional and local focus.
On 14 August 2013, Worley announced a net profit after tax (NPAT) of $322m for the 2013 financial year, saying also that it expected earnings to grow from that figure. Its earnings guidance statement said as follows:
“While recognizing the uncertainties in world markets, we expect our geographic and sector diversification to provide a solid foundation to deliver increased earnings in FY2014.”
On 9 October 2013, Worley announced that its first-half result would be lower than the previous year, while affirming the earnings guidance given two months earlier. That guidance was repeated on 10 and 15 October 2013.
On 20 November 2013, however, Worley issued revised earnings guidance in these terms:
“On current indications the company now expects to report underlying NPAT for FY2014 in the range of $260 million to $300 million with first half underlying NPAT in the range of $90 million to $100 million.”
Worley’s share price fell precipitously.
The class action
A class action was brought against the company, on behalf of group members who had bought Worley shares between 14 August 2013 and 20 November 2013, and alleged they suffered loss by reason of Worley’s conduct. The representative applicant, Larry Crowley, was a self-funded retiree and former accountant. He managed his own share portfolio and had purchased a number of Worley shares in October 2013. He sold them in May 2015 for a little more than a quarter of his investment.
The case broadly alleged two sets of contraventions:
- contraventions of Worley’s continuous disclosure obligations arising under section 674 of the Corporations Act 2001 (Cth) (Corporations Act) and rule 3.1 of the ASX Listing Rules; and
- contraventions of the statutory prohibitions, in federal legislation, of misleading or deceptive conduct.
There were three aspects to the claim.
The first (the “budget case”) was premised on allegations that, by 14 August 2013, Worley did not have a reasonable basis for making the August 2013 guidance statement (Material Information), and that Worley’s FY14 earnings were likely to fall materially short of the consensus expectation of professional analysts covering Worley securities that its NPAT for FY14 would be about $354m to $368m (Earnings Expectation Material Information). In these circumstances, it was alleged that Worley was obliged to inform the ASX of this information.
The second (the “performance case”) alleged that Worley’s actual performance in early FY14 undermined the hopes on which the FY14 budget was premised. In particular, the applicant alleged that by late September 2013, Worley’s senior management knew that the assumptions in that budget were failing but that they did not revisit them. Mr Crowley said that on 9, 10 or 15 October 2013, Worley did not have a reasonable basis for maintaining the FY14 guidance it had given in August 2013 and that, by failing to correct that representation (or the 9 October 2013 announcement) it engaged in conduct that was misleading or deceptive or likely to mislead or deceive. This case was put as an alternative to the budget case, in case the Court did not find that the August 2013 earnings guidance lacked reasonable grounds.
Thirdly, the “consensus case” alleged that Worley was aware of the consensus expectation of market analysts that its NPAT for FY14 would be about $354m-$368m, and that it ought to have known its earnings would likely fall short of this expectation. The applicant alleged that by failing to disclose that information, Worley breached section 674 of the Corporations Act.
The continuous disclosure case
Justice Gleeson found that the applicant’s case alleging contraventions of Worley’s continuous disclosure obligations, based on a failure to disclose the Material Information, could not succeed because “at all relevant times, it was not the case that [Worley] did not have a reasonable basis for making the August 2013 earnings guidance statement”. That meant that the pleaded Material Information was not actually information to which section 674 of the Corporations Act could have applied.
Further, the non-disclosure of the Earnings Expectation Material Information did not justify a finding that Worley had contravened its continuous disclosure obligations because “at all relevant times, it was not the case that there was a consensus expectation of professional analysts covering the ASX and [Worley] securities that [Worley] would deliver between approximately $354 and $368m in NPAT for FY14”. The evidence did not refer to a consensus NPAT expectation in the form of a range but, rather, identified consensus NPAT figures in particular amounts at various times throughout the relevant period as determined by Worley itself. This suggested that “there was no single consensus expectation of professional analysts during the relevant period”. Even to the extent that her Honour found that there was a consensus expectation about Worley’s FY14 earnings, Gleeson J found that “it was not the case at any relevant time that [Worley’s] FY14 earnings were likely to fall materially short of the consensus expectation”.
In considering the “consensus case”, her Honour noted the following passage of ASX Listing Rules Guidance Note 8:
“ASX does not believe that a listed entity has any obligation, whether under the Listing Rules or otherwise, to correct the earnings forecast of any individual analyst or the consensus estimate of any individual information vendor to bring them into alignment with its own internal earnings forecast.”
Her Honour also adopted the decision of Justice Beach, in the Myer securities class action, that “materially lower” in this context means at least 5% lower.
The misleading or deceptive conduct case
Mr Crowley alleged that by making, repeating and maintaining its August 2013 representation in relation to earnings guidance, Worley represented that:
- it expected to achieve NPAT in excess of $322m in FY14 (that having been its NPAT in FY13); and
- it had reasonable grounds to expect that it would achieve NPAT in excess of $322 million in FY14.
Mr Crowley contended that this representation was a representation with respect to a future matter. If that were the case, it would be deemed to have been misleading if Worley did not have reasonable grounds for making it. Worley would be taken not to have had reasonable grounds for making the representation unless evidence were adduced to the contrary.
Worley agreed that it represented that it expected its NPAT for FY14 to exceed $322m, saying that this representation was true by reference to its FY14 budget. As to the representation that it had reasonable grounds to expect that level of NPAT in FY14, Worley contended that – if it was a representation as to future matters – it had reasonable grounds for making it because “at all relevant times prior to 20 November 2013, [Worley’s] internal forecast NPAT was greater than $322.1 million”.
A question arose as to whether the representation in question was, in fact, a representation about future matters. Worley argued that the representation was directed to its present expectation. Her Honour held, however, that the expectation was plainly directed to a future matter (earnings in FY14) and that this was:
“sufficient to warrant a conclusion that the FY14 guidance representation is a representation with respect to a future matter to the extent that it conveyed [Worley’s] expectation that it would achieve NPAT in excess of $322 million in FY14. To the extent that the FY14 guidance representation conveyed that [Worley] had reasonable grounds to expect that it would achieve NPAT in excess of $322 million in FY14, that is a representation as to the situation at the time of the making of the representation and is not a representation with respect to a future matter.”
The applicant then raised whether Worley’s evidence was “evidence to the contrary” and whether the evidence showed that there were reasonable grounds for the August 2013 earnings guidance. The Court accepted that the relevant inquiry is whether Worley’s senior executives and Board “were aligned in their expectation that [Worley] would achieve increased earnings in FY14” and that “it is relevant to consider the state of mind of the Board collectively and Mr Wood [a senior executive] individually”. Her Honour did not find that the FY14 budget was deficient and rejected Mr Crowley’s argument that “the budget process was not reasonable and that the Board did not have a reasonable basis for relying on it”. Nor was her Honour persuaded that the Board “was insufficiently sceptical or inquisitive”, saying also that:
“In the absence of substantial evidence that the Board’s consideration of the draft FY14 budget was deficient, I do not consider that significant weight should be attached to the fact that none of Board members gave evidence except Mr Wood.”
Her Honour did not accept that Worley should be taken not to have had reasonable grounds for making the relevant representation at the relevant times. Her Honour concluded that:
“On the available evidence, the process by which the FY14 budget was developed was reasonable, contrary to Mr Crowley’s contention. Specifically, and addressing Mr Crowley’s closing written submissions, although there is some evidence (particularly in the Holt Memo interview notes) that senior management may have applied unreasonable pressure to locations to grow revenue, grow earnings and reduce overheads, the evidence does not show that particular integers or portions of the FY14 budget were overstated or understated so as to be unreasonable or unjustifiable.
Mr Crowley identified reasons for the Board to have approached the FY14 budget with scepticism, such as WOR’s historical performance against budget and the available knowledge concerning market conditions in August 2013. However, the evidence does not demonstrate that the Board was not duly sceptical in its consideration of the WOR budget. Nor does the evidence demonstrate that a more sceptical approach would probably have led the Board to conclude that the FY14 budget should not be approved.
The position did not change materially for WOR’s Board between 14 August 2013 and 20 November 2013. That is, there was no circumstance in that period that led the Board to lack a reasonable basis for maintaining or reiterating the FY14 guidance representation.
It follows that Mr Crowley has failed to demonstrate that WOR contravened any of the statutory rules against misleading and deceptive conduct by making, repeating and maintaining the FY14 guidance representation.”
Certain other representations were also the subject of misleading or deceptive conduct allegations but those were said to rise and fall on the success of the cases described above. Given the failure of those cases, her Honour considered it unnecessary to consider the claims in relation to the other representations in detail.
The fact-finding process
Mr Crowley accepted that he bore the onus of proving his case on the balance of probabilities. He observed that the drawing of inferences from documents or the absence of contradictory evidence was part of the Court’s fact-finding process, and that when a party who is capable of giving evidence fails to do so without explanation, that may lead to the inference that their evidence would not have helped their case. Mr Crowley said that:
“by virtue of his position as a former shareholder of [Worley], he has primarily sought to make his case at the initial trial from discovered documents while [Worley] is in possession of all available information concerning its FY14 budget and its performance against that budget. Mr Crowley did not make any complaint about the adequacy of discovery provided but observed that it was necessarily limited, including because of the passage of time, and because all information may not be recorded or recorded in documents that are now retrievable.”
He argued that in the absence of clear evidence from Worley contradicting inferences that were available on the documentary material, the Court could more readily draw the inferences he proposed.
The Court accepted at a general level that Worley’s failure to call certain witnesses could support adverse inferences being made. However, the issue could not be determined at a general level and “it is necessary to address the issue by reference to particular inferences and the available evidence for and against any proposed inference”.
By way of example, Justice Gleeson referred to certain interview notes, in dot-point form, that were in evidence. Her Honour said that “the meanings of the notes is very often unclear, as is the basis upon which interviewees expressed their opinions”. However, while the notes indicated the possibility of defects in the FY14 budgeting process, it was ultimately “necessary to look at all the available evidence concerning the process to determine whether WOR’s failure to call one or more witnesses supports an adverse inference based on documentary evidence (including the interview notes) or the oral evidence of” those witnesses who were called and cross-examined.
This highlights the importance of addressing questions of evidence and proof in a detailed and precise way and serves – like the case of APRA v Kelaher  FCA 1521 – as a warning against relying generally upon documents to prove a party’s case where, instead, detailed and precise evidence is required. This is a warning well worth heeding when embarking upon ambitious proceedings requiring proof of complex factual matters.