Useful reminders on continuous disclosure from across the ditch

Myer was found to have breached its continuous disclosure obligations and to have engaged in misleading or deceptive conduct by failing to correct earlier statements. However, the applicant was unable to provide evidence that proved a loss by shareholders as a result of those contraventions. 

This case highlights the difficulties involved in proving both reliance and loss by shareholders, despite the application of the “market based causation theory”, and may challenge the perceived wisdom that listed companies are best to settle such shareholder claims. This conclusion may also be reinforced by comments in another recent Australian judgment in relation to the collapse of Babcock & Brown, where no breach of continuous disclosure was found. 

Background to the Case

Myer Holdings Limited is an ASX-listed issuer and is subject to the continuous disclosure obligations in the ASX Listing Rules. On 11 September 2014, Myer released its full year results for its 2014 financial year ended 26 July 2014 to the ASX. The documents released to the ASX did not provide any guidance as to Net Profit After Tax (NPAT) for Myer's 2015 financial year ended 26 July 2015. However, in presentation and question and answer sessions with equity analysts and financial journalists on the same day, the then-CEO of Myer, Bernie Brookes, said “We will therefore not only have anticipated sales growth, but anticipated profit growth this year". Myer's profit in its 2014 financial year was $98.5m.

Six months later, Myer pulled back on that earlier guidance with an ASX announcement stating “The Company now expects FY2015 NPAT to be between $75-80 million". Following the 19 March 2015 release, Myer's share price dropped more than 10%.

Justice Beach found that by no later than 21 November 2014, Myer had become aware that its FY2015 NPAT would not be 5% more than its FY2014 NPAT (i.e. not materially more than FY2014 NPAT), and this should have been disclosed to the market by 21 November 2014 at the latest.

Breaches by Myer…

In late December 2016, an aggrieved Myer shareholder filed a class action by way of a representative proceeding on behalf of shareholders who had acquired shares after Myer provided the initial guidance on 11 September 2014 and who remained holders at 19 March 2015 when Myer updated the guidance. 

The applicant successfully argued that Myer’s failure to correct the 11 September 2014 guidance was both a breach of Myer’s continuous disclosure obligations under the ASX Listing Rules and was misleading and deceptive conduct. 

Part 2 of the Financial Markets Conduct Act 2013 (FMCA) provides for substantially identical “fair dealing” obligations that apply to NZX-listed issuers. As such, even if an exclusion to continuous disclosure is available, an issuer may still have engaged in misleading or deceptive conduct by failing to correct an earlier statement.

Reminders for continuous disclosure and earning guidance

The decision takes an orthodox approach to continuous disclosure, but is a useful reminder of the considerations that listed issuers should take into account when considering whether it is necessary to update the market for an earnings “surprise". The key points to note are:

1. Issuers should be aware that even informal statements by a person with ostensible authority to make such a statement can be considered “de facto earnings guidance" (such as the statement by Mr Brookes that profit growth was anticipated). 
2. Justice Beach considered the ASX Guidance Note on continuous disclosure, which notes that an issuer will generally be required to correct any earlier earnings guidance if it later expects that earnings will differ by 10% or more, and may need to make such a correction where earnings will differ by between 5% and 10%. In this case, Justice Beach noted that a 5% threshold was appropriate for an issuer of the size of Myer.
3. Myer appeared to approach its obligation to update the market by assessing whether there was a deviation between its earnings forecast and analyst consensus. Justice Beach found that this was not the appropriate measure where Myer had itself published de facto earnings guidance, and the consideration as to whether a revised expectation for NPAT was material information should be assessed against this earlier statement.
4. Even if the information underlying the updated earnings guidance is confidential, and has been prepared for internal use or is otherwise incomplete or speculative, the ASX Listing Rules exception to the requirement to disclose material information will not apply where there has been an express previous statement. This is because a reasonable person would expect the issuer to release the information to correct an inaccuracy in the earlier statement. 

The case was argued on the basis of actual knowledge only, and not on the “controversial" constructive knowledge concept. Justice Beach noted comments from earlier Australian decisions to the effect that the obligation to disclose material information “is not engaged where the officers of a company should have, but did not, realise the implications of information of which they were aware".

…but no damages (yet?)

In order to succeed in the claim, it was necessary for the applicant to show that shareholders had relied upon the relevant statements, or misleading or deceptive conduct, and had suffered a loss as a result of doing so (i.e. showing that the contravention by Myer caused the loss). The Myer judgment is useful for its discussion of market based causation (indirect causation), which was the basis upon which the applicant sought to establish reliance and loss. Justice Beach accepted that market based causation theory is a valid approach to these matters.

The market based causation theory is grounded in the efficient market hypothesis, which suggests that share prices should quickly incorporate and reflect any new information about the company. Under market based causation, the applicant does not need to show that each shareholder consciously relied upon the specific misleading or deceptive statements made by the issuer – instead, the applicant can show that shareholders suffered loss by acquiring shares at a market price which was higher than it would have been had the relevant information been disclosed to the market and the misleading or deceptive conduct not occurred (as the “market” as a whole is relying on the truth of those statements, and they are factored into the share price).

In Myer, the applicant’s financial expert failed to provide evidence to show that the share price was inflated following Myer’s 11 September 2014 guidance compared to what it would have been had Myer not breached its continuous disclosure obligations (and not engaged in misleading or deceptive conduct). Instead, the expert appeared to apply a counterfactual that the 19 March 2015 guidance had been released as at 11 September 2014, and calculated a loss on the basis of what the share price would have been had that occurred.

Accordingly, Justice Beach found that the applicant’s evidence did not show that shareholders had suffered a loss by reason of the contravention he found by Myer and therefore did not award any damages.

The other issue facing the applicant in trying to show a loss using the market based causation theory was that the applicant’s expert used analyst consensus expectations as a proxy for market expectations in assessing whether Myer’s share price was inflated. Analyst consensus expectation was at all relevant times below the guidance given by Myer on 11 September 2014, and tracked substantially in line with the information Justice Beach concluded Myer should have disclosed, so the evidence did not show any share price inflation (and therefore no loss by shareholders), on the basis that the share price would not have moved had Myer disclosed that it was in line with analyst consensus for forecast FY2015 NPAT.

Justice Beach appears to have left open the possibility that the applicant, and other shareholders involved in the class action, may be able to show reliance and loss on an alternative basis.

In another recent Australian case relating to alleged breaches of continuous disclosure, Babcock & Brown, Justice Foster was not convinced that market-based causation theory was a valid theory to apply on the facts of that case. His Honour was concerned that the theory allowed those who would have taken no notice of the information had it been disclosed to recover. Further, his Honour noted that the theory allows purchasers of inflated shares who on-sell at the same or higher price to recover damages, despite not actually suffering loss. In this case, no breach of continuous disclosure was found, so the comments were obiter, but the contrasting approach to the market based causation theory is of interest.

Application to New Zealand securities class actions

New Zealand courts have not yet expressly addressed the market based causation theory, so it will be interesting to see how the courts treat both the Myer judgment, and the comments from Justice Foster in the Babcock & Brown case. Both cases highlight the difficulty involved in shareholders being able to accurately quantify and prove what the share price would have been, and would have subsequently done, if certain information had been disclosed (or disclosed at an earlier date) as this is inherently uncertain. This difficulty is lessened in a claim based on defective disclosure under a regulated offer document where the shares subsequently decline in value, as the Financial Markets Conduct Act 2013 imposes a rebuttable presumption that shareholders who acquired the shares under the relevant regulated offer have suffered a loss because of such defective disclosure.

The High Court is currently hearing the reliance and loss claim in the long-running Feltex case, so there may be further guidance on the approach to be taken to securities class damages claims in New Zealand forthcoming. In the Supreme Court judgment on the Feltex case, the Court did however note its view that an investor could show it had invested “on the faith" of, and in reliance on, the prospectus for the Feltex offer without having to prove that he or she had in fact read or received the prospectus (while leaving this as an issue to be determined in the High Court hearing).

In applying a market based causation theory, which does appear to have some common roots with the United States “fraud on the market" theory, it is important to bear in mind that it is not necessary to show any wilfulness, recklessness or other mental state in establishing a breach of continuous disclosure or misleading or deceptive conduct in New Zealand and Australia. In contrast, in the United States, some degree of culpability is required (either an intent to deceive, manipulate or defraud or recklessness as to doing so).

Arguably, this means that New Zealand and Australian courts should be more judicious when determining the level of damages that have been suffered as a result of breaches of continuous disclosure, or associated misleading or deceptive conduct, given the possibility for an issuer to breach these provisions without any moral turpitude on the part of the issuer.

In another development in this area, New Zealand's Court of Appeal recently affirmed the first New Zealand “opt out" representative action, arguably overturning earlier High Court authority.Class actions in Australia, like the Myer case, are “opt out" rather than “opt in" for the class of persons covered by the order, meaning that there is a higher starting pool of damages potentially available (rather than this being built up as persons choose to be part of the claim).

In the Southern Response case, the New Zealand Court of Appeal said New Zealand should adopt a “liberal and flexible" approach to representative claims, noting that the purposes of the representative action rule will “in most cases be better served by adopting an opt out approach". This is consistent with the approach adopted by the higher courts in Australia and Canada, and may also prove an attractive line of argument for representative claims in the securities law context in New Zealand as well. It is important to note that this decision may be subject to appeal to the Supreme Court.

Our thanks to Eleanor Burkin for writing this Brief Counsel.

¹ TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747.