Last week, in a significant Federal Court decision (TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747), the Court found that Myer breached its continuous disclosure obligations by failing to promptly correct an overly optimistic profit forecast once it was clear that the profit target would not be achieved. In doing so, the Court has recognised a new test for causation in class actions involving a breach of continuous disclosure obligations, which may make it easier for affected shareholders to claim damages.
The case is a landmark decision primarily by reason that the Court recognised the concept of market-based causation as a way of determining loss suffered by shareholders.
Market-based causation will likely simplify the process for shareholders to successfully prosecute claims based on breaches of continuous disclosure obligations. This is because shareholders no longer need to prove that they relied on a particular misrepresentation in buying their shares (leading to the loss). Rather, the shareholders can prove that they suffered loss because they bought shares at an artificially inflated price (i.e. that the share price would have been lower if the market were properly informed).
Justice Beach found that Myer had misled shareholders by failing to take action to correct an overoptimistic profit forecast promptly once it became aware that it was unlikely that the target would be achieved. However, his Honour did not award damages to the shareholders as he was not satisfied that the market believed or relied on the misleading profit forecast (i.e. the Myer share price was not artificially inflated by the misleading profit forecast).
The applicant, TPT Patrol Pty Ltd (TPT), brought representative proceedings for itself and on behalf of shareholders of Myer Holdings Limited (Myer or the Company) who purchased shares in the Company between September 2014 and March 2015. The applicant alleged that Myer had contravened section 674 and 1041H of the Corporations Act 2001 (Cth) (Act), which concerns non-disclosure to the Australian Stock Exchange (ASX) of price sensitive information as well as misleading or deceptive conduct.
In September 2014, Myer represented to the market that it would have higher net profits than the previous financial year (Representation). Myer made a series of further announcements from November 2014 onwards that did not give any indication that the Representation was incorrect (despite Myer having reason to doubt that it would exceed the FY14 profit figure at the time of those further announcements). Finally, in March 2015, Myer informed the market that, contrary to the Representation, its net profit for FY15 would be significantly down on FY14. The announcement led to a significant decline in the Myer share price.
Continuous Disclosure Obligations
As a publicly listed company, Myer is subject to continuous disclosure obligations pursuant to section 674 of the Act and ASX Listing Rule 3.1. Listing Rule 3.1 requires listed entities to immediately notify the ASX once it becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of its securities.
A company is “aware” of information as soon as an officer of the company “has, or ought reasonably to have, come into possession of the information in the course of the performance of their duties”.
In this context, “information” is broader than hard facts and can include opinions, matters of supposition and other matters that are insufficiently definite to warrant disclosure to the market and matters relating to the intentions or likely intentions of a person.
TPT claimed that shareholders had suffered loss as Myer had:
(a) made the Representation to the market when it did not have reasonable grounds to do so; and
(b) failed to subsequently disclose (before March 2015) that Myer had come to the realisation that the profit target would not be met.
Justice Beach was not prepared to find that Myer had misled the market by making the Representation at the time that it was made in September 2014. However, his Honour was satisfied that Myer had misled shareholders from November 2014 onwards by failing to make an announcement correcting the Representation once it was on notice that it was likely that the profit target would not be achieved as previously asserted.
Although Myer was found to have engaged in misleading and deceptive conduct, his Honour was not satisfied that shareholders had suffered any loss as a result of the Representation due to the prevalence of analyst skepticism in relation to Myer’s profit forecasts. In other words, his Honour did not consider that the market believed in and had actually relied on the Representation.
The case is a landmark decision given it is the first time a shareholder class action has proceeded to judgment. Additionally, the case represents an increased risk to defendants, as Justice Beach endorsed the theory of market-based causation.
The issue of how to prove causation in Australian securities class actions has been the subject of debate. Courts have traditionally held that, where a misleading representation has been made, a plaintiff must demonstrate that they relied on the misrepresentation in purchasing shares in order to establish that it has suffered a loss.
Market-based causation is a different concept in that it is not based on the shareholder establishing that they specifically relying on a particular misrepresentation. Rather, the shareholder can prove it suffered loss because it purchased shares at an artificially inflated price (i.e. that, but for the misleading or deceptive conduct, the market would have been fully informed and the share price would have been lower at the time of purchase).
The judicial acceptance of market-based causation will likely increase the risk to companies and will require ongoing vigilance to ensure that continuous disclosure obligations are met.
This case note was co-authored by Director, Mark Farquhar, Senior Associate, Peter Clay and Law Graduate, Millie Clayton.