This article was written by Moira Saville, Alexander Morris and David Kennelly.
Listed companies are subject to continuous disclosure obligations under the Corporations Act 2001 (the Act) and the ASX Listing Rules. Some of the principles underpinning those continuous disclosure obligations remain contested or unclear. Two recent Federal Court of Australia decisions, handed down within the past week, have offered some 500 pages of valuable judicial discussion regarding a company’s continuous disclosure obligations, what constitutes disclosable information, and what losses may flow from a breach established by indirect, market-based causation.
On Thursday 24 October 2019, Justice Beach handed down his decision in Myer, a securities class action about alleged misleading and deceptive conduct by Myer in the course of profit and earnings guidance statements. His Honour found that Myer failed to correct earnings guidance that it knew was unachievable but that there was no loss created by that failure because the market was sceptical about the correctness of the guidance.
On Friday 18 October 2019, Justice Foster handed down his decision in Babcock & Brown, a case with some similarities to Myer but with contesting views on market-based causation.
The Myer decision
On 11 September 2014, Myer released its Preliminary Financial Report, accompanied by media and ASX releases, for its financial year ending 26 July 2014. Within those releases, Myer said nothing about whether it would achieve profit growth or Net Profit After Tax (NPAT) for the financial year ending 26 July 2015. On the same date, on its earnings call, Myer’s then CEO Bernie Brookes said that “we will therefore not only have anticipated sales growth, but anticipated profit growth this year”.
Myer wound back its guidance on 19 March 2015 when it released an ASX and media release disclosing that its expected NPAT would be in the range of $75 to $80 million. Subsequent to this there was an immediate drop in Myer’s share price on the ASX, totalling approximately $114 million of its market capitalisation.
On 29 December 2016, TPT Patrol Pty Limited, as trustee for Amies Superannuation Fund (the Applicant), filed ‘representative proceedings’ (commonly known as a class action) in the Federal Court of Australia. The Applicant claimed that:
- Myer made the 11 September 2014 disclosures without reasonable basis which were representations about a future matter and therefore misleading and deceptive, contravening section 1041H of the Act;
- Myer’s failure to correct its guidance during the period between the 11 September 2014 disclosures and the 19 March 2015 disclosure, particularly after it became aware of certain information no later than 11 November 2014, constituted a breach of its continuous disclosure obligations contained within section 674 of the Act and rule 3.1 of the ASX Listing Rules, which also contravened section 1041H;
- Myer’s publications on 21 October, 11 November and 21 November 2014, and 2 and 3 March 2015 constituted misleading conduct because those publications did not disclose the specific information in claim 2 above; and
- Mr Brookes’ statement on the earnings call was a continuing representation without reasonable basis, contravening section 769C of the Act.
The Applicant was not successful in the first, third or fourth claim, but was on the second. Justice Beach found that adjusted guidance that Myer failed to disclose on the five separate dates outlined in claim 3 above was in the range of $89-92 million, not as low as $75-$80 million as the applicant claimed. However, Justice Beach was not convinced there was subsequent loss or damage flowing from the failure to update the ASX and the market. His Honour found that ‘the hard-edged scepticism of market analysts and market markers at the time of the contraventions had already deflated Mr Brookes’ inflated views’.
The Babcock & Brown decision
The Babcock & Brown decision does not concern a class action; it consisted of roughly 1,200 claims by separate plaintiffs across three proceedings that were heard together. That procedural difference aside, the plaintiffs pleaded similar facts to the Myer case, though sought relief based upon the alleged breach by Babcock & Brown of section 674 of the Act pursuant to section 1317HA which permits recovery of compensation for damage resulting from a breach of a financial services civil penalty provision.
In its 2007 Annual Report, published on 17 April 2008, Babcock & Brown announced its expected group NPAT for the 2008 financial year to be at least $750 million, a year on year improvement in excess of 15%. That guidance was reaffirmed at its AGM on 30 May 2008.
On 11 August 2008, Babcock & Brown announced that its interim results in terms of NPAT were expected to be 25%-40% lower than the previous year’s interim result, explaining the discrepancy by reference to the emerging global financial crisis (as it is now known) and subsequently downgrading its expected annual NPAT to less than $643 million. It made further announcements on 18 and 21 August detailing the reasoning for such a significant downgrade.
Several further announcements followed during the following months, leading up to its 7 January 2009 release to the ASX which stated that it would be in a ‘substantial negative net asset position at 31 December 2008’ which led to an immediate trading halt and ultimately its entry into liquidation.
The plaintiffs alleged that five separate non-disclosures outlined in "Ramification for securities litigation in Australia" below. Justice Foster found that the alleged breaches were either not made out, subject to listing rule exemptions, or did not pass the test for ‘materiality’ in the Act.
This proceeding is not the first to have tested Babcock & Brown’s disclosures against the continuous disclosure regime, following the 2015 Federal Court proceedings before Justice Perram and the subsequent appeal to the Full Court of the Federal Court.
Ramifications for securities litigation in Australia
In order to successfully establish a misleading or deceptive conduct claim, a plaintiff must establish that the conduct caused loss or damage. In shareholder class actions, there are various causation possibilities including: (a) establishing direct reliance; (b) satisfying a form of indirect causation; or (c) invoking the US-style “fraud on the market” causation theory. The legal causation test relevant to misleading or deceptive conduct is found in section 1041I of the Act which requires establishing “loss or damage by conduct of another person”.
Market-based causation in Myer
In Myer, Justice Beach held that the applicant had made out a cogent argument that market-based causation applied to the misleading and deceptive conduct claim, but that it resulted in no loss.
In order to establish a breach of section 674 of the Act, there are hurdle requirements in section 676 (when information is generally available) and relevantly section 677 (material effect on price or value), which says:
… a reasonable person would be taken to expect information to have a material effect on the price or value of ED securities of a disclosing entity 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 ED securities.
The applicant’s expert Mr Houston used Bloomberg consensus estimates as a proxy for the opinion of the ‘persons who commonly invest in securities’. At paragraph 1512, his Honour explains his reasoning as to why Mr Houston stated the market-based causation hypothesis in such a way that it presents no loss or damage:
As I have previously indicated, Mr Houston has used the wrong hypothesised counterfactual disclosure. Further, when one uses the correct counterfactual disclosure it would seem, given how the event study analysis has been carried out and using the inflation based measure of loss, that there is no meaningful share price inflation and accordingly no loss. This is because Mr Houston used Bloomberg consensus estimates as a proxy for market expectations as to NPAT which he said was factored into the price of MYR ED securities. But the correct counterfactual disclosure concerning FY15 NPAT would have disclosed, in essence, similar figures to that of the Bloomberg consensus save with two qualifications. First, the disclosure required by Myer on 21 November 2014 would not have mirrored that consensus. Second, Myer’s disclosure would have reflected its own opinions as to NPAT which, as I have said, were of a different quality to the Bloomberg consensus.
Later at paragraph 1714 his Honour confirms that:
Mr Houston’s evidence establishes that his inflation figures would only represent loss if the case against Myer was that it was under an obligation to disclose, earlier than it did, that it expected its FY15 NPAT to be below consensus. But such a case has not been established.
There is an implication that, if the case were stated in that way, then his Honour would find market-based causation to be a valid means of establishing loss and damage. His Honour agreed (at ) with Myer’s argument that the drop on 19 March 2015 was attributable to the market being informed that Myer expected its NPAT to be below analyst consensus. There was no evidence to suggest the share price would have fallen if the market had merely been informed that Myer expected its NPAT to be below its guidance statement.
Market-based causation in Babcock & Brown
In Babcock & Brown, Justice Foster considered that the authorities are conflicting. His Honour undertakes a review of the authorities before him from paragraphs  to  before noting at  that:
It is not a self-evident proposition that, in all circumstances and in respect of all listed companies, the downgrading of earnings forecasts, even to a substantial degree, necessarily leads to a reduction in the price of the shares in the entity.
While it was not required to be ruled upon in this case, his Honour concedes at  that market-based causation could be invoked by leading extensive economic expert evidence, though caution should be taken about the appropriateness of its application. His Honour expressed some disquiet that there is ‘a serious problem with the theory’ in that it ‘allows compensation to people who actually suffered no loss’ (at –).
Authorities prior to Myer and Babcock & Brown
In the mid-2000s two NSW Court of Appeal cases Digi-Tech and Ingot Capital Investments found ‘that an indirect causation case will not be available where the relevant security holder’s investment decision is part of the causal chain, without proof of his or her individual reliance on the misrepresentation’.
This was not the first time that, strictly in obiter, a judge has accepted that market-based causation could be a viable way to examine loss if liability were established in the context of the liquidation of Babcock & Brown; see KWM’s note on the 2015 first instance decision of Justice Perram. That judgment was upheld (without considering market-based causation) in the 2016 Full Court appeal in Grant-Taylor v Babcock & Brown.
Outside of the context of securities class actions, Justice Brereton in HIH Insurance accepted that market-based causation could be used to establish that a transaction would have taken place at a different price but for the contravening conduct. However, his Honour did not accept that market-based causation could establish whether a transaction would or would not have otherwise proceeded. See KWM’s note on that decision here.
These somewhat conflicting decisions mean that the concept of market-based causation is still very much contested by divergent lines of authority. It may well continue to be so until an appellate court firmly rules on its validity.
However, the Myer decision strikes a blow to its efficacy as a form of relief in class action proceedings; the solicitor for the applicant in Myer has already indicated that “he would now ask for access to the Myer share register so that he could write to shareholders and invite them to individually prove their loss”. Nonetheless, companies should continue to consider the impact that guidance statements and other disclosures (or their absence) will have upon the market, but bear in mind that the listing rule exemptions offer a level of protection as outlined below.
What kind of ‘information’ is disclosable?
In each of these cases, there were 5 pieces of information that were assessed by the court for determination as to whether they should have been disclosed.
Babcock & Brown
- A memorandum from the CFO of B&B Mr Larkin to its Board dated 13 August 2008 containing information that FY08 earnings were expected to be ‘materially lower’ than as was stated in the 11 August 2008 guidance. However, Mr Larkin recommended to the Board that it retain its most recent guidance due to the lack of clarity around his figures, which were presented with a potential variance of $100 million. Justice Foster found this uncertainty to mean this information was both subject to a listing rule 3.1A.1 exemption and was not material.
- An email dated 20 August 2008 sent on behalf of Mr Larkin to Elizabeth Nosworthy and others proposing new guidance of full-year NPAT of $400 million and a related memorandum from Mr Larkin to the Board noting ‘significant limitations and qualifications’ to the $400 million estimate. Justice Foster found this non-disclosure to be uncertain information and thus subject to the listing rule exemption.
- A draft revised earnings guidance dated on or about 8 October 2008, the existence of which the plaintiffs had deduced from the mention of that figure and date in a report provided by the plaintiff’s expert witness. The plaintiffs also referred to this combination of date and figure in reference to a different profit and loss forecast document entitled “FLASH” presented to the Board. His Honour found this alleged non-disclosure to be insufficiently made-out, due to the inappropriate inference about the first document and the lack of weight the second document provided.
- Another “FLASH” document presented to the board dated 8 November 2008. His Honour found this allegation to be better made-out but nonetheless subject to the listing rule exemption on the basis that it was a document prepared for the purposes of internal management.
- Two documents purportedly prepared for an audit committee meeting that was to be held on 19 December 2008 but never took place which the plaintiffs allege were prepared as early as October 2008. The documents were a Finance Report prepared by the CFO and a draft forecast for review and discussion. His Honour found that the information contained within these documents that the plaintiffs sought to rely on was both subject to a listing rule 3.1A.1 exemption and was not material.
His Honour notes at paragraphs  to  the arguments put forward by the parties about the interpretation of the term ‘information’ before finding ‘that the wider interpretation of “information” was the correct interpretation’.
- Myer’s 2014 Annual Report dated 21 October 2014. Justice Beach held that Myer did not yet know that its guidance was not supported by a reasonable basis and thus this allegation was not proven.
- A Q1 2015 Myer Holdings Ltd Corporate Sales Call on 11 November 2014. Justice Beach held that Myer did not yet know that its guidance was not supported by a reasonable basis and thus this allegation was not proven.
- Myer Holdings Limited Annual General Meeting Chairman’s Address on 21 November 2014. His Honour accepted the applicant’s misleading and deceptive conduct claim in respect of this announcement. His Honour found that the officer of Myer by this date held the opinion that the NPAT guidance statement would not be met.
- A Myer Holdings Ltd Strategic Review Conference Call on 2 March 2015 and ASX & Media Release of 2 March 2015 entitled “Myer announces CEO succession and update on strategic review to transform business for future growth. His Honour accepted the applicant’s misleading and deceptive conduct claim in respect of this announcement.
- A letter to shareholders on 3 March 2015. His Honour accepted the applicant’s misleading and deceptive conduct claim in respect of this document.
His Honour undertakes an extensive review of the listing rule exemptions and precisely why these documents are not caught by them which is discussed in "Key takeaways for companies" below.
Justice Beach found that Myer’s non-disclosures were misleading not only by way of the discrete pieces of information above but also due to the continuing representation argument made by the plaintiffs.
After the substantive hearing had concluded, the applicant sought leave to amend its Statement of Claim to include the pleading that Mr Brookes’ comments on the earnings call was a continuous representation which caused Myer’s conduct, in failing to correct his comments, to be misleading or deceptive. This argument allowed his Honour to find that Myer should have corrected the disclosure and therefore concluded on that basis, as well as the discrete bases in paragraphs 3–5 in 3.2 above, that Myer’s non-disclosures were misleading or deceptive.
Statements as to future matters
Myer admitted that their 11 September 2014 releases constituted statements as to future matters but denied that they had no reasonable basis for making them. No argument about the construction of such statements was heard and so his Honour’s references to these types of representations are in passing. There was also no substantive discussion about statements as to future matters in Babcock & Brown.
Key takeaways for companies
Listing rule exemptions
Paragraph 1 of ASX Listing Rule 3.1A allows for exemptions to continuous disclosure obligations for information if:
- It would be a breach of a law to disclose the information;
- The information concerns an incomplete proposal or negotiation;
- The information comprises matters of supposition or is insufficiently definite to warrant disclosure;
- The information is generated for the internal management purposes of the entity; or
- The information is a trade secret.
Paragraphs 2 and 3 require that these types of information must also be confidential (and ASX must not have formed the view that it is not confidential) and it must pass a ‘reasonable person’ test, who would not expect the information to be disclosed.
The Myer judgment discussed rule 3.1A in depth from paragraphs  to . At  his Honour refers to page 38 ASX Guidance Note 8 which:
… goes on to say (p 38) that the reasonable person test also reinforces that listing rule 3.1A does not operate to protect information from disclosure if that information is required to be released in order to correct or prevent a false market. This is because a reasonable person would expect a listed entity, acting responsibly, to immediately disclose any information necessary to correct or prevent a false market in its securities.
His Honour accepted Myer’s argument that the information in question (e.g. draft internal forecasts from October and November 2014) was caught by paragraphs 1 and 2 (i.e. that it is insufficiently certain and that it is confidential) but that, in light of Mr Brookes public forecast on 11 September 2014, a reasonable person would have expected the information to be disclosed. His Honour accepted Myer’s reasons for why the information was insufficiently certain (which are set out at ), including that the documents in question were draft working documents that were subject to further work and did not reflect the views of management let alone senior management or any officer, and that they were never presented to, let alone approved by, the board.
In Babcock & Brown Justice Foster did not need to consider the effect of the reasonable person test which at the relevant time was in paragraph 1 of rule 3.1A in identical terms, because he found that the information did not satisfy the materiality test due to its uncertainty and is therefore not caught by the Act.
So what does all of this mean for companies presented with information that may need to be disclosed? The exception to Listing Rule 3.1 should still be available in appropriate factual circumstances.
Future of class action claims depending on market-based causation
Despite the headline-grabbing finding that Myer contravened its continuous disclosure obligations and was thereby found to have breached misleading and deceptive conduct provisions, the Myer decision can be seen as a dagger to the heart of future class action claims relying on market-based causation. Both the Myer and Babcock & Brown decisions found that there was no market-based causation on the facts of these cases.
It is clear 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 market inflation was caused by the defendant’s misconduct. As intimated by the applicant in Myer, it is likely that future actions will attempt to establish what was previously seen as the more difficult form of causation, being direct reliance.
 TPT Patrol Pty Limited as trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747.
 Masters v Lombe (liquidator): In the Matter of Babcock & Brown Limited (In Liq)  FCA 1720.
 Section 769C(1) of the Corporations Act 2001 (Cth) deems representations made with respect to future matters that do not have a reasonable basis to be misleading.
 ASX Listing Rule 3.1A.1 contains exceptions for, amongst other things, indefinite information or information generated for the purposes of internal management. The leading case for the test for materiality is Grant-Taylor v Babcock & Brown Limited (in liq) (2016) 245 FCR 402.
 Baxt, Black and Hanrahan, Securities and Financial Services Law (9th ed, 2017, LexisNexis Butterworths); referring to Digi-Tech (Australia) Limited v Brand (2004) 62 IPR 184; Ingot Capital Investments Pty Limited v Macquarie Equity Capital Markets Limited (2008) 73 NSWLR 653.
 Grant-Taylor v Babcock & Brown Limited (in liq) (2015) 322 ALR 723; Grant-Taylor v Babcock & Brown Limited (in liq) (2016) 245 FCR 402.
 Re HIH Insurance Limited (in liq) (2016) 335 ALR 320.