Five key takeaways from a landmark shareholder class action

The Myer case is the first decision to be handed down involving a shareholder class action in Australia. This significant case is important because, typically, shareholder class actions have settled before trial – denying the bench the opportunity to exposit on firmly held, but as yet untested, arguments concerning market-based causation of loss, and the operation of Australia’s continuous disclosure laws. Boards and litigation funders alike have waited for a decision like this to come along and provide some long-awaited confirmation about the class actions landscape in Australia. 

The Facts

• On 11 September 2014, Myer’s CEO at the time, Bernie Brookes, represented that Myer’s FY15 profit (NPAT) would exceed its FY14 profit of $98.5 million.
• On 19 March 2015, Myer announced that its expected FY15 profit would be between $75 million to $85 million, well below its profit result for FY14.
• Following the corrective announcement on 19 March 2015, Myer's share price fell by approximately 10 percent.

On 29 December 2016, a class action was brought by the applicant on behalf of shareholders who purchased Myer shares between 11 September 2014 to 19 March 2015, based on the 11 September 2014 announcement. The Applicant argued that Myer’s anticipated profit growth was misleading or deceptive, and a breach of Myer's continuous disclosure obligations under the Corporations Act 2001 (Cth) and ASX Listing Rules.

The Decision

The Court found that Myer contravened its continuous disclosure obligations for part (but not all) of the relevant period and engaged in misleading or deceptive conduct. By 21 November 2014, the Court found that Myer had sufficient information about its inability to meet its anticipated FY15 profit target that it should have issued a corrective announcement..

Five Takeaways

1. Market consensus regarding the share price is an essential factor

The Court found that even though the share price fell when Myer made its corrective announcement, there was no evidence that the share price had been artificially inflated. Why?

• The market had already twigged that Myer’s view on its profitability was too “rosy” and downgraded its consensus outlook which was factored into the share price at the time.
• The real reason for the share price drop, on 19 March 2015, was that Myer’s profit downgrade was lower than what the market expected it to be.

The absence of an inflated share price meant that the Court found that group members did not suffer a loss when they purchased Myer shares during the relevant period. The impact of this aspect of the decision on other shareholder class actions remains to be seen, however, it is important to understand that Myer turns on its facts. Companies will still need to update their earnings guidance even in circumstances where market makers have already shifted their consensus.

2. Applying market-based causation to establish loss is valid

Is this new? Not really, the concept of indirect market-based causation has been part of the Australian class actions landscape since the shareholder class action against Aristocrat Leisure Limited in 2004. The difference is that we now have judicial guidance on the subject with the conclusion that each individual shareholder does not need to prove that they relied on the representation, so long as they can prove it inflated the share price in an efficient market.

3. Event study experts will still be in demand

The Court accepted that an event study could be used to calculate the amount of inflation of a share price. That said, whether it will be accepted in future cases will always depend on how the event study is carried out by the chosen expert(s) and the underlying assumptions that underpin the methodology.

4. “De facto earnings guidance” is still guidance

Mr Brooks made the representations in an informal setting in presentations and Q&A sessions with equity analysts and financial journalists. The Court found that these representations constituted earnings guidance.

5. The exception in ASX Listing Rule 3.1A has limits

Internal documents may not be required to be disclosed, however, in circumstances where the company has provided “de facto earnings guidance”, the ultimate test is whether a reasonable person would expect the information to be disclosed, notwithstanding the confidential nature of such internal documents.