Market-based causation – the Myer class action

The Myer case is a landmark case for two reasons. First, it is the first Australian securities class action to proceed to judgement. Second, the Federal Court of Australia has accepted ‘market-based causation’, which has long been debated in Australia. The decision increases the risk of shareholder class actions for publicly listed companies, as, if market-based causation is accepted, plaintiffs will no longer need to establish individual reliance when pursuing a company for breaching its obligations of continuous disclosure. Ironically, market-based causation also assisted Myer in winning this case, as we will explain.

The difficulty in proving reliance has historically been a significant hurdle for plaintiffs to overcome, particularly in a class action. For example, how can a class of shareholders be proven to have read and relied on a particular market release containing the relevant representation in forming their decisions to trade?

Introduction

Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747 involves shareholders of Myer Holdings Limited seeking compensation for misrepresentations made by the company about its financial standing. In its judgement, the Federal Court applied ‘market-based causation’ to determine that shareholders did not need to establish individual reliance when considering breaches of the obligation to disclose material information. The decision increases publicly listed companies’ exposure to securities class actions.

The dispute

The facts

The case involved representations made in 2015FY by Myer regarding the company’s 2015FY net profit after tax (NPAT).

On 11 September 2014, Myer announced an NPAT for the 2015FY of $98.5 million. Myer’s former CEO, Mr Bernie Brookes, also disclosed to the market that the outlook in 2015FY included anticipated sales and profit growth in excess of Myer’s NPAT in the previous financial year (the Representations).

Six months later, Myer subsequently announced that it was downgrading its NPAT for 2015FY to be between $75-80 million (excluding one-off costs).

The claim

The applicant’s claim was primarily in relation to section 674 of the Corporations Act 2001 (Cth) and ASX listing rule 3.1. Those provisions provide an obligation for ASX listed companies to disclose information concerning the company that a reasonable person would expect to have a material effect on the value of its securities. The applicant also claimed that Myer’s conduct constituted misleading and deceptive conduct in contravention of section 1041H of the Corporations Act.

The applicant sought compensation on behalf of all persons who acquired ordinary shares in Myer between 11 September 2014 and 19 March 2015.The applicant’s claim had two parts:

1. Myer did not have reasonable grounds on which to make the Representations.
2. Myer, being a company listed on the ASX, had breached its obligation to inform the market that the Representations were misleading, as soon as it became aware of this fact.

The applicant established that Myer had breached section 674 and ASX Listing Rule 3.1, with Justice Beach finding that, as at 21 November 2014, Myer should have disclosed to the market that its NPAT for FY15 was not likely to be materially above the FY14 NPAT. The Court further found that Myer should have updated the market on six other separate occasions since 21 December 2014. By failing to update the market, Myer had also engaged in misleading or deceptive conduct in contravention of section 1041H of the Corporations Act.

However, even though the applicant established a contravention of the listing rules, there was no evidence to establish that those contraventions caused any loss or damage to the applicant.

The adoption of market-based causation

Market-based causation in the Myer case

The applicant, TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund, brought the proceeding on its own behalf, and on behalf all persons who acquired ordinary shares in Myer between 11 September 2014 and 19 March 2015.

To succeed, the applicant had to prove that Myer’s non-disclosure of material information or misleading and deceptive conduct caused loss. In normal cases, this might occur by the parties leading evidence to demonstrate that the conduct of the company directly caused detriment (usually called ‘direct reliance’). That is, a shareholder may establish that they heard and relied on the contents of representations and in reliance decided to acquire shares.

However, in this case, the Court accepted the use of market-based causation theory. Often called ‘indirect causation’, market-based causation does not require a shareholder to demonstrate reliance on the non-disclosure or misleading or deceptive statement.

The theory provides:

Applying market-based causation theory to the facts, the applicant’s case provided as follows:

1. Myer’s disclosure failures caused the stock market to inflate the trading price of Myer securities above the price that a properly-informed market would have set.
2. The applicant acquired its securities in the inflated market.
3. The applicant would not have acquired those securities at those inflated prices but for the market’s reaction to Myer’s misleading or deceptive conduct and disclosure failures.

Unfortunately for the applicant, the same thinking behind the use of market-based causation theory disentitled the applicant to compensation. This is because Justice Beach found that the market price of Myer securities already factored in an NPAT ’well south of Mr Brookes’ rosy picture painted on 11 September 2014‘. Put another way, the market did not believe Mr Brookes’ representation concerning NPAT. Accordingly, the price for the securities had not been inflated by the non disclosure, and the purchasers or securities were unaffected by the misleading or deceptive conduct and disclosure failures.

Practical guidance for company officers

The decision provides helpful practical guidance concerning the continuous disclosure requirements of ASX listed companies.

Materiality threshold

ASX listing rule 3.1 provides an obligation for ASX listed companies to disclose information concerning the company that a reasonable person would expect to have a material effect on the value of the company’s securities.

Materiality is not defined in the Corporations Act or the ASX listing rules. As discussed by Justice Beach, the ASX’s view is that ’smaller listed entities’ or those that have ‘relatively variable earnings’ may consider 10% to be the appropriate materiality threshold while ‘very large listed entities’ or those that have ‘very stable or predictable earnings’ may consider that a materiality threshold that is closer to 5% is appropriate.

Ultimately, the Court considered the ongoing decline in Myer’s profit performance and found that a decline of 5% or more would have been material to the market.

Though materiality needs to be considered on a case by case basis, a variance of even 5% to guidance may be sufficiently material to warrant disclosure. Given the increased risk of shareholder class action following from the adoption market-based causation theory, it may be prudent to err on the side of caution with respect to disclosure obligations.

Understanding continuous disclosure requirements

ASX listed companies should ensure that company officers understand the circumstance in which disclosure is required under the ASX Listing Rules.

On 11 September 2014, in presentations and in question and answer sessions with equity analysists and journalists, Mr Brookes represented that Myer’s outlook in 2015FY included anticipated sales and profit growth in excess of Myer’s NPAT in the previous financial year. Several of Myer’s directors gave evidence that they did not consider Mr Brookes’ statements to be profit forecasts, because it was not done by way of formal written ASX release by Myer. However, as the representations regarding the NPAT were made by Mr Brookes as the CEO, Myer was bound to correct the representations if Myer later formed a view of a likely NPAT that differed.

The Myer decision demonstrates that Myer company officers did not understand Myer’s continuous disclosure obligations. The ASX Listing Rules – Guidance Note 8: Example F provides useful guidance to assist ASX listed companies in these circumstances.

What information is generally available?

Section 674 of the Corporations Act provides an obligation for ASX listed companies to disclose in accordance with the listing rules. The section further provides that information that is generally available is not subject to continuous disclosure obligations.

Given that the majority of analysts forecasted that Myer’s NPAT in FY15 would be below its NPAT in FY14, Myer sought to argue that it had no obligation to disclose corrections to the Representations. After all, this information was generally available.

The Court rejected this argument on the basis that analysts’ forecasts are themselves predictions and are therefore inherently speculative. It was therefore not feasible for Myer’s expectations regarding future earnings to be generally available via analysts.

The importance of a company continuous disclosure policy

The decision reinforces the importance of listed companies implementing and abiding by a continuous disclosure policy.

At all relevant times, Myer maintained a comprehensive continuous disclosure policy that specifically addressed verbal comments, financial market communications and issues concerning authorised spokespersons. While it was not ultimately relevant to the outcome of the case, the Court found that in every instance Myer had breached its own continuous disclosure policy.

The effect of disclaimers

Myer, like most prudent ASX listed companies, included a disclaimer on their release and presentation material. The disclaimer provided:

All numbers are unaudited … This release may contain “forward-looking statements” … Forward-looking statements are not guarantees of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are outside the control of Myer. Actual results, performance or achievements may vary materially from any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which are current only as at the date of this release. Subject to law, Myer assumes no obligation to update such information.

The Court found that a reasonable person would not regard the disclaimer as removing the opinion or forecast of the meaningful content. Specifically, Justice Beach noted ‘the prospect that the printed disclaimers could effectively negate the representations or relieve Myer from its obligations to have reasonable grounds is problematic to say the least’.

Though the decision reinforces that disclaimers are not a panacea, prudent ASX listed companies should continue to include disclaimers in investor material.

Conclusion

The Myer decision reinforces the importance of maintaining a culture of continuous disclosure of material information to the market. Justice Beach’s adoption of market-based causation theory means that future class actions may not need to establish direct reliance when a company fails to disclose material information to the market. This risk dovetails with the increased role of litigation funding in Australia to expose boards to an increased risk of class actions from shareholders.

Cooper Grace Ward has experience in advising companies regarding their obligations under the ASX listing rules. If you require assistance, please contact our corporate advisory team.