The Federal Court of Australia has handed down its first judgment in a shareholder class action. As well as providing clarity on some areas of Australian law, the decision in TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747 is potentially applicable to securities litigation cases in other jurisdictions with its approval of market-based causation.

The significance of the court accepting market-based causation is that it was not necessary to show that a company’s misleading disclosures or omissions had induced a shareholder to purchase shares at an inflated price. Rather it was sufficient to show that the misleading disclosures or omissions had caused the market to trade the shares at an inflated price and that a shareholder who had acquired shares would not have done so at that price but for the market’s reaction to the misleading disclosures or omissions. The court held that Myer had breached its continuous disclosure obligations, but that the shareholders had failed to show through their experts’ methodology that there was any loss suffered by the shareholders.

Background

Myer Holdings Limited operates 61 department stores across Australia. On 11 September 2014, Myer issued an Australian Stock Exchange (“ASX”) and media release dealing with its full-year results for the year ending 26 July 2014 (FY14). The release contained no mention of future net profit after tax (NPAT). However, in presentations and questions and answer sessions with equity analysts and financial journalists following the release, Myer’s chief executive officer (CEO) represented that, in his opinion, in the financial year ending 26 July 2015 (FY15) Myer would likely have an NPAT in excess of its NPAT in FY14 of A$98.5m. The implication was that the NPAT in FY15 would be materially above A$98.5m.

On 2 March 2015, Myer conducted a conference call with analysts to announce that it had appointed a new CEO, who was taking over from the CEO who had served for the previous nine years. During that call, the chairman of Myer stated to equity analysts that with regards to Myer’s continuous disclosure obligations, Myer paid regard to the Bloomberg consensus in deciding whether disclosure was required. At that time, the Bloomberg consensus for FY15 NPAT for Myer was circa A$90m, significantly below the FY14 NPAT.

On the 19 March 2015, Myer announced its first half results to the ASX and media and as part of that announcement stated: “The Company now expects FY2015 NPAT to be between A$75-80m (excluding one-off costs).” Immediately after the announcement on the 19 March 2015, Myer’s share price declined by A$0.16. Correspondingly, its market capitalisation declined by A$90.8m.

Disclosure claims

Australia and the ASX, like almost all major countries and stock exchanges, have enacted continuous disclosure obligations for listed companies. During the relevant period, Myer was subject to continuous disclosure obligations pursuant to the Corporations Act and the ASX listing rules. Failure to comply with those obligations potentially gives rise to a claim under the Corporations Act. It is necessary for any claim under s674 of the Corporations Act to identify with precision the information which the claimant alleges the company should have disclosed, as under the statutory regime:

1. it must be shown that the company “has” that specific “information”;
2. the company through one or more of its officers must be “aware of” that specific “information”;
3. the identified “information” must not be “generally available”;
4. it must be shown that if the identified “information” were generally available, it would have a material effect on price; and
5. it is “that information” which the company must disclose to the ASX.

In order to recover damages, shareholders are required to show a causal link between the contravention of the continuous disclosure rules and the loss suffered. The legal causation test under the statutory language requires the damages to have “resulted from” the contravention. This causation language is similar to the English statutory language of “as a result of” in claims under s90 and s90A of the Financial Services and Markets Act 2000.

Shareholder claim

Myer shareholders who purchased shares on or after 11 September 2014 and still held their shares on 19 March 2015 made a number of claims. At its core, the applicant, on behalf of the class, claimed for losses caused by Myer:

1. making the representation on the 11 September 2014 that its NPAT in FY15 would be higher than FY14 NPAT, when Myer did not have reasonable grounds for making that representation; and/or
2. failing to disclose at any time after 11 September 2014 and prior to 19 March 2015 that Myer did not have reasonable grounds for making the 11 September 2014 representation or that the 11 September 2014 representation of increased FY15 NPAT was wrong.

Court findings

11 September 2014 representation was de facto earnings guidance

Several Myer directors, (but significantly, not the CEO), gave evidence that they did not consider that what the CEO had said was a profit forecast, because it was not done by way of a formal written ASX release by Myer. The chairman of Myer did not think it had the formality of a binding commitment. The court disagreed, saying that the directors had misunderstood the law and that the CEO had made a “de facto” earnings guidance representation on 11 September 2014. As a result, if Myer later formed a view of an NPAT different from that representation, then it was bound to correct it.

Reasonable belief for CEO’s representation on 11 September 2014

The court found on the evidence that the board of Myer did believe on 11 September 2014 that Myer’s NPAT in FY15 would exceed the NPAT FY14 number. Therefore, the claims that Myer had no reasonable ground to make the representation failed.

Myer’s understanding of its continuous disclosure obligations was mistaken

The judge criticised Myer’s understanding of its continuous disclosure obligations and stated: “If a company perceives there to be a material discrepancy between a company’s own forecast and market consensus, then it should give some consideration to making a disclosure. But that is quite a different thing from saying that a company should define materiality only or principally in terms of divergence. Neither the legislation nor Myer’s own policy justified such a course.”

The judge commented that Myer’s course of conduct could produce absurd results and additionally that the Bloomberg consensus is a median or mean of a small set of analysts and their expectations. It is narrower than the “reasonable person” perspective for determining whether the information would have a material effect as many investors (eg retail investors) would not be aware of the Bloomberg consensus, and those investors would likely have been influenced by a disclosure of an expected NPAT of less than A$98.5m.

Contravention: the board knew by 21 November 2014 that FY15 NPAT would be lower than FY14 NPAT

The judge found that Myer had breached its continuous disclosure obligations and that by the time of its annual general meeting on 21 November 2014 the court found that Myer knew or ought to have known that its NPAT for FY15 would not exceed its NPAT for FY14 and, therefore, it should have disclosed that fact.

Counterfactual Disclosure

The court disagreed with the applicant’s expert on the information that Myer should have disclosed to the market and instead decided that the information that Myer should have disclosed to the market (the “Counterfactual Disclosure”) was:

1. 1. by no later than the 21 November 2014 that its likely NPAT for FY15 would not be materially above the FY14 NPAT;
   2. by no later than 9 December 2014 that its likely NPAT for FY15 was around A$92m;
   3. by no later than 22 December 2014 that its likely NPAT for FY15 was in the range of A$89 to 90m;
   4. by no later than 5 January 2015 that its likely NPAT for FY15 was around A$90m;
   5. by no later than 21 January 2015 that its likely NPAT for FY15 was in the vicinity of A$90m;
   6. by no later than 9 February 2015 that its likely NPAT for FY15 was in the vicinity of A$90m; and
   7. by no later than 27 February 2015 that its likely NPAT for FY15 was in the range of A$87 to 91m, depending upon the costs of the strategic review.

The judge stated that the above were cascading possibilities because making any one disclosure may have removed the need for any later disclosure in the sequence.

Equity analysts were aware by 2 March 2015 that Myer’s expectations for FY15 NPAT was A$90m

On 2 March 2015, in a conference call with equity analysts announcing the new CEO, a series of exchanges took place between the chairman of Myer and the equity analysts on the call. The result of those exchanges resulted in the equity analysts on the call understanding that Myer would only issue NPAT guidance if it deviated significantly from the Bloomberg consensus and that as at 2 March 2015, Myer’s expectations for its NPAT for FY15 was in line with, or around, the Bloomberg consensus figure of A$90m.

The court confirmed the availability of market-based causation for claimants

In order to prove a causal link between the contravention of the continuous disclosure obligation and the losses suffered, the applicant, on behalf of the class, advanced a market-based causation theory, namely that:

1. Myer’s disclosure failures caused the actions of intermediaries, namely, the buyers and sellers in the market, to inflate the trading price of Myer shares above the price which a properly informed market would have set;
2. the applicant acquired its shares, that is, it was active not passive in that inflated market; and
3. the applicant would not have acquired those shares, at that price, but for the market’s reaction to Myer’s misleading or deceptive conduct and disclosure failures.

The judge noted that this is different from the US “fraud on the market” theory as that recognises that reliance must be proved. The need for the US doctrine’s creation was an artefact of both the requirement to show reliance under s10(b) of the Securities Exchange Act 1934 and rule 10b-5, and the restrictions placed upon the commencement of class actions under r23(b)(3) of the US Federal Rules of Civil Procedure. In contrast, the statutory language in Australia does not require reliance.

The judge went further and commented that it would in his opinion have been conceptually incoherent to have the statutory language include reliance given that one is dealing with the non-disclosure of material information. He stated: “Philosophers might ponder about the concept of relying upon or being induced by nothing. No doubt this could make sense for a half truth. But where the entirety of the contravening conduct is a nothing in one sense, that is, a pure failure to disclose, common sense ends and philosophising begins by trying to link with a pure omission the idea of reliance or inducement.”

He also said that “in the new millennium of algorithmic machine trades, even such nebulous notions of reliance become wholly unrealistic”. In addition, the judge asked in his judgment: “How can a shareholder be said to rely upon unaware undisclosed information?”

The judge then noted that there are various well-established mechanisms for causation in misleading or deceptive conduct cases:

1. 1. direct causation – the mechanism by which misleading acts or omissions by the respondent might directly cause loss to the applicant is almost invariably by inducing the applicant to some course of action. This inducing requires proof that the applicant relied upon some impression created by the respondent’s misleading act or omission.
   2. indirect or intermediary causation:

1. 1. 1. active indirect causation – this is the scenario where a respondent’s misleading conduct induces some reaction in X, and the applicant would have acted differently but for that reaction by X;
      2. passive indirect causation – this is the scenario where the respondent’s misleading conduct induces some reaction in X, and that reaction by X itself causes loss to the applicant without any requirement for a reaction by the applicant;

 iii. invoking the US fraud on the market causation theory.

The judge viewed market-based causation as an example of active indirect causation.

The judge commented that the main purpose of the legislation was to achieve a well-informed market, leading to greater investor confidence with the objective of enhancing the integrity and efficiency of capital markets by requiring timely disclosure of price or market sensitive information. One of the justifications for introducing the continuous disclosure regime was to “minimise the opportunities for perpetrating insider trading”. The judge stated that requiring reliance or inducement would not have served the statutory purpose.

The judge noted that with regards to market-based causation a factual requirement may be to show that the particular market conforms with the “semi-strong” version of the efficient capital market hypothesis. The semi-strong version holds that at any particular time, the market price of the share incorporates all publicly available information. In this case, the judge held: “There is little doubt in my mind that it is a robust assumption to make… that the semi-strong version of the efficient capital market hypothesis applied to the trading of [Myer] securities at all relevant times.” If for any particular case the semi-strong version of efficient capital market hypothesis is a bad assumption, then factually market-based causation and the “inflation-based measure” of loss in that case may fail.

The judge accepted market-based causation and stated it complied with the text and purpose of the statute and held that it was available in this case given his finding that the trading in Myer shares conformed with the semi-strong version of the efficient capital market hypothesis.

Shareholder loss

The applicant initially advanced two measures of loss: the true value and the inflation-based measure. However, by the date of the trial, it only advanced the inflation-based measure. That is, the measure of loss was the difference between the price at which the shareholder acquired his interest in the share and the market price of the share but for the alleged contraventions of the continuing disclosure obligations.

In order to measure the inflation at each point in time during the relevant period, 11 September 2014 to 19 March 2015, both the applicant, on behalf of the class, and the defendants engaged experts to undertake event studies.

The applicant’s expert methodology for calculating share price inflation was premised on a relationship between the Bloomberg consensus and the price of Myer’s shares, such that share price inflation would only have been demonstrated and measurable if any Counterfactual Disclosure by Myer would have resulted in the Bloomberg consensus moving downward. However, in order for the Bloomberg consensus to move downward, on the applicant’s expert’s evidence, Myer needed to make an announcement of NPAT of less than the current consensus.

The problem for the applicant, and therefore the class, was that from the beginning the equity analysts were sceptical of Myer’s claim of higher NPAT for FY15 given that Myer had not achieved its budgets in each of the past four years. Immediately following the 11 September 2014 representation by the Myer CEO that the 2015 NPAT would exceed the FY14 NPAT of A$98.5m, the Bloomberg consensus for Myer NPAT was below the FY14 number at A$96.85m. The judge found that at all times between 11 September 2014 and 2 March 2015 the Bloomberg consensus was tracking the Counterfactual Disclosure, so if such disclosure had been made, then under the applicant’s expert methodology, the market price would likely not have changed. The judge stated that the applicant’s expert’s assumption that the Bloomberg consensus was an appropriate proxy was a questionable assumption.

Further, the applicant’s expert evidence was that the announcement on 2 March 2015 to the effect that Myer was in line with the Bloomberg consensus did not cause the Bloomberg consensus to move. At that stage, the consensus was A$90m, which was below the FY14 NPAT. The applicant’s expert further agreed that on 19 March 2015 the new information that caused the consensus to move down must have been the announcement of a forecast below the consensus and not the fact that FY15 NPAT would be below FY14 NPAT, as that information had already been disclosed on 2 March 2015.

The judge accepted that Myer confirming a consensus estimate on a particular day and saying that it was accurate could move the market, however, that was not the applicant’s expert methodology.

The judge held that taking and applying the applicant’s expert methodology and evidence, no share price inflation had been demonstrated. Therefore, the applicant had not proved that any loss had resulted from the contravention of the continuous disclosure obligations.

Conclusion

The court’s judgment that market based causation can be used to show causation between a shareholder’s loss and defects in a company’s disclosure to the market, rather than requiring the shareholder to show that the misleading disclosure directly induced the shareholder to undertake loss making transactions, is helpful for shareholders in the world of modern trading systems and methodologies. However, careful thought must be given to how the measure of any loss is pleaded and evidenced by experts.