Class Actions Update: Market based causation finds its feet in first shareholder class action judgment - but that does not mean damages

What you need to know 

• The Federal Court has confirmed the availability of market-based causation in Australia for both continuous disclosure and misleading or deceptive conduct cases.
• We don't expect this to increase the volume of shareholder class actions: it has long been assumed that a first instance decision would most likely support market-based causation (particularly in continuous disclosure claims), and the judgment actually demonstrates that damages will not necessarily be awarded.
• The decision is also one of the first major discussions of continuous disclosure laws. In particular, companies that provide forward looking earnings guidance must ensure that the market is informed of any changes to that guidance – even if the information would otherwise be protected by a listing rule exception.

What was the case about?

On 11 September 2014, Myer's CEO told analysts that he expected Net Profit After Tax (NPAT) in FY15 to exceed A$98.5 million. On 19 March 2015, Myer announced to the ASX that it then expected its FY15 NPAT to be between A$75 million to A$80 million excluding one-off costs. Immediately after the announcement, its share price dropped by approximately 10%.

The allegations were essentially that Myer:

• did not have a reasonable basis for its September 2014 NPAT representations;
• breached its continuous disclosure obligations by not later disclosing that NPAT would be materially lower; and
• engaged in misleading conduct by not making the disclosure.

Shareholders claimed that they purchased shares at an inflated price during the period from the September 2014 representation to the ASX announcement in March 2015 – as evidenced by the share price drop.

What was the outcome?

The Court found that Myer did have a reasonable basis to make the representations in September (and so there was no contravention then), but from November 2014 it knew NPAT would be lower and so from that time it contravened its continuous disclosure obligations and engaged in misleading or deceptive conduct.

However, shareholders were not entitled to damages, because the contraventions did not inflate the share price in this period. This was because:

• Despite the CEO's September 2014 forecast of more than A$98.5 million, market analysis consensus was that NPAT would be around A$90 million.
• There was no share price decline on 2 March 2015 when Myer made statements to the effect that it agreed with the lower market analysis consensus.
• The share drop on 19 March 2015 was the market reacting to the announcement of a new forecast that was below consensus.

In other words, the share price already factored in a lower forecast NPAT despite the company's representations - and was not inflated because of the contraventions.

As the lead applicant only advanced a market-based causation theory and an inflation based measure for loss, all claims for damages would appear to have failed. However the Court has asked to hear further from the parties as to the precise consequences of the findings in terms of causation, share price inflation (if any) and damages. This may leave open the (theoretical) possibility of some shareholder claims on a "no transaction" basis, ie based upon actual reliance on the 11 September 2014 forecast. Such claims would likely be time consuming and difficult to establish (given the market analysts' views at the time), and would also raise questions about any connection between the contraventions and loss.

Green light for market-based causation

The Court confirmed that market-based causation (or indirect causation) in Australia is available for both continuous disclosure and misleading or deceptive conduct cases – although the reasoning for each was different.

For continuous disclosure claims, the Court held that:

• The statutory regime does not require direct causation. The court described it as "conceptually incoherent" to require shareholders to prove reliance on a non-disclosure.
• The statutory regime does not exclude indirect causation. Indeed, the purpose of the statute is to achieve a well-informed market. Causation is established if an investor suffers a loss by trading at prices different to the price that would have prevailed if the market was fully informed.

For misleading or deceptive conduct claims, the Court held it is sufficient to show that the plaintiff unknowingly acted by acquiring shares at the prevailing market price during the period of inflation. This was the same conclusion as in the HIH Insurance decision (which endorsed market based causation for misleading or deceptive conduct cases), although the reasoning was different.

This comes after some other earlier decisions suggesting market based causation would likely be available – including In the Matter of Babcock & Brown Limited (In Liq) [2019] FCA 1720 a few days earlier. The result is that – at least at first instance - shareholders do not individually need to show that they directly relied on the non-disclosure to establish loss, regardless of the cause of action underlying their claim.

But that does not mean a green light for damages when there is a share price fall

However, as the outcome demonstrates, while market-based causation is available as a matter of law, there are separate forensic questions as to the cause of a share price fall and whether any share price inflation occurred in the period beforehand.

Guidance on continuous disclosure obligations – particularly around earnings guidance

The decision is also one of the first substantive discussions on continuous disclosure requirements. In particular:

• There needs to be precision about the information that is said should have been disclosed. Subject to the Listing Rule exceptions, the regime requires disclosure where five elements are satisfied:

1. the company has specific information,
2. it is aware of that information through one of more of its officers,
3. the information is not "generally available",
4. it would have a material impact on price, and
5. it is that specific information that must be disclosed.

• Information about earnings can fall within the Listing Rule exceptions if it is generated for internal management purposes, insufficiently definite to warrant disclosure, and confidential.
• However, a company cannot rely on the exceptions if it has made a representation to the market about expected earnings or profit and that expectation materially changes. If a company provides forward-looking guidance, it must ensure that the market is promptly informed of changes to that guidance.
• The fact that the company's views do not differ from market consensus (i.e. analysts) does not dispense with the obligation for a company to make a market disclosure – market consensus is not the same as a 'reasonable person'. (However, as the case demonstrates, this may affect exposure to damages.)
• Companies must carefully consider whether disclosure is required with an expected earnings guidance variation of 5% - the materiality threshold will depend on the particular company and its circumstances.
• While forward looking statements regarding earnings guidance have inherent uncertainties, a standard disclaimer is unlikely to negate the representations or relieve the company from the obligation to have a reasonable basis for that representation.

What does this mean for "the floodgates"?

While this is a landmark judgment, we don't think it will lead to an increase in shareholder class actions. It may even lead to a bit more caution in the analysis of the cause of share price falls before consideration is given to the commencement of such actions.

First, a first instance judgment endorsing market-based causation has long been expected and is consistent with comments in earlier cases. Plaintiff firms and funders appear to have been proceeding on this basis for some time.

Secondly, the case demonstrates that contraventions do not necessarily lead to damages – even where there is a share price decline coupled with what at first blush might look like "corrective disclosure". The full facts need to be explored – and will be when matters go to hearing. This highlights the risks of a rush to be the first to begin a class action.

Thirdly, while the judgment did provide some guidance surrounding how event studies should be conducted, there is still uncertainty about how courts will approach assessment of damages based on these studies.

Finally, while this decision is an important (but not unexpected) step in the developing line of authorities supporting the availability of market based causation in Australia, the position will not be settled until it has been considered by the High Court of Australia.

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

Authors: Ian Bolster, Partner; John Pavlakis, Partner; Sally-Anne Stewart, Senior Associate; and Ellena Petinos, Senior Associate.