This article was written by Jason Watts and Miriam Kleiner.
The landmark decision in TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747 was the first shareholder class action to reach judgment in Australia. The decision clarifies various aspects of the continuous disclosure regime and endorses much of the approach taken in ASX Guidance Note 8 on the issue of providing and updating guidance.
Myer released its financial report on 11 September 2014, accompanied by media and ASX releases announcing that its net profit after tax ("NPAT") for FY14 was $98.5 million. These releases did not address whether Myer would achieve NPAT growth for FY15.
On the same day, Myer’s then CEO, Bernie Brookes, commented during an analyst and media call that Myer’s expected FY15 NPAT would be in excess of the previous financial year. His statements included “we will therefore not only have anticipated sales growth, but anticipated profit growth this year” and, following the question “Myer was guiding for a net profit increase 2015 on 2014…is that correct?”, he answered “that is correct, yes”. Evidence during trial indicated that the board had decided during their 10 September 2014 board meeting that they would not provide such guidance.
It was not until 19 March 2015 that Myer updated this guidance, disclosing in its half year results that its forecasted NPAT would be in the range of $75-80 million. There was an immediate drop in Myer’s share price, amounting to approximately $114 million of its market capitalisation.
TPT Patrol Pty Limited filed a class action in the Federal Court on 29 December 2016, claiming that:
- Myer engaged in misleading and deceptive conduct by forecasting NPAT on 11 September 2014 with no reasonable grounds, in breach of s1041H of the Corporations Act ("Act").
- Mr Brookes’ statement on the earnings call was a continuing representation without reasonable basis, contravening section 796C of the Act.
- Myer breached its continuous disclosure obligations contained within section 674 of the Act and ASX Listing Rule (“LR”) 3.1 in failing to correct its guidance during the period between 11 September 2014 to 19 March 2015, which also contravened section 1041H of the Act.
- Myer engaged in misleading and deceptive conduct because they did not disclose updated guidance between October 2014 and March 2015.
Justice Beach found that Myer had breached its continuous disclosure obligations in failing to update the ASX and the market of revised NPAT projections for FY15. However, Justice Beach was not convinced there was subsequent loss or damage flowing from this failure. His Honour found that the market was already trading on the basis of a consensus markedly lower than the company’s guidance, reflecting scepticism about Myer’s ability to meet the NPAT projection made by the CEO on 11 September 2014. The fall in share price on 19 March 2015 was a result of the disclosure that the FY15 NPAT forecast would be below consensus, rather than below the guidance given by the CEO.
De facto earnings guidance
As outlined in ASX Guidance Note 8, issuers should be careful not to make statements that could be construed as de facto guidance. In this case, the CEO’s comments were specific enough and widely enough reported to amount to de facto earning guidance. As the CEO had ostensible authority to speak on behalf of the board, it was irrelevant that the board had not approved the CEO’s statements and Myer was obliged to monitor and update this guidance.
It was not open to Myer to argue that that the representation was only made to a small group of sophisticated market participants given that the recording of the discussion/presentation was made available on Myer’s website - the representation was effectively made to members of the public, many of whom were ordinary investors, as well as to sophisticated market participants.
Myer had argued that the decline in profits that would be material to disclose to the market should be in the order of a 10% decline on the basis that Myer was not a large entity and its earnings were generally not predictable nor did Myer have a history of stable earnings. This approach was broadly consistent with the guidance given in ASX Guidance Note 8. However, the judge found that a 5% decline would be material in light of the overall trend of declining NPAT which Myer had experienced over several years and confirmation of that ongoing trend was material to the market for disclosure. This finding reinforces that materiality is not an arbitrary numerical measure but must be considered against the circumstances of the company.
Myer argued that it did not need to update its de facto earnings guidance, principally on the basis that its internal NPAT forecast was consistent with and not materially different from the Bloomberg consensus. However, his Honour found that the Bloomberg consensus is a median or mean of a small set of analysts and their expectations and is narrower than the perspective of the reasonable person test under the Listing Rules and the Act. Many investors would not be aware of the consensus numbers or analyst reports including “mum and dad” investors who may continue to be influenced by the company’s own representation. Information in analysts’ reports is not considered to be generally available.
Only if Myer had not provided guidance would the earnings forecasts of analysts be an appropriate measure of the market’s expectations for Myer’s earnings. Having provided de facto guidance, Myer should have disclosed changes against that guidance, even if consensus had shifted downwards.
Exceptions to continuous disclosure – internal budgets
Justice Beach agreed that in the circumstances, Myer’s various internal budgets and associated information was generated for internal management purposes, that it was comprised of matters of supposition and it was insufficiently definite (meeting the requirements in LR 3.1A.1). His Honour also considered that this information had been kept confidential (meeting the requirement in LR 3.1A.2).
However, his Honour did not consider the third limb to the continuous disclosure exception in LR 3.1A.3 was met. Having provided guidance, once Myer became aware of a material variation to that guidance (i.e. through the internal budget/re-forecasting process) then a reasonable person would expect corrective disclosure.
When considering at which time Myer was “aware” of information for the purpose of LR 3.1, his Honour noted that there was a detailed analysis on a week by week basis of information flows. Whether documents were headed “Draft”, whether they were included on board meeting agendas, who sent the documents and their specific content was analysed in detail. This is a reminder of the level of forensic analysis that can be applied when issues of awareness for continuous disclosure are tested and the discipline that needs to be applied when preparing internal papers. At the same time, the fact that the drafts are in existence does not, of itself, mean that the content of the draft reflects the view of an officer of the company as to a state of facts.
Use of disclaimers
Mr Brooke’s comments were accompanied by a generic disclaimer in the materials available to analysts who attended the presentation and to those who viewed the 11 September 2014 webcast. The disclaimer comprised of statements along the lines of “actual results, performance or achievements may vary materially from any forward-looking statements….”. His Honour found that a reasonable person would not regard a standard form disclaimer as “gutting” an opinion from the CEO which was meaningful - it did not negate the representations or relieve Myer from its obligation to have reasonable grounds for its forecasts.
Justice Beach accepted the application of a market-based or indirect causation theory. Market-based causation effectively means that individual shareholders do not have to demonstrate reliance on direct information from a company, often considered to be a considerable hurdle for those bringing shareholder class actions. While this aspect of the decision may buoy class action lawyers and litigation funders, the concept of market-based causation is still contested by divergent lines of authority. It may well continue to be so until an appellate court firmly rules on its validity. In any event, Myer suggests that the courts will not lightly find that such causation exists and, even if it does, there will need to be a clear evidentiary basis that share price inflation was caused by the defendant’s misconduct.