10 December 2019
Much has been said and written about the Myer securities class action since Justice Beach’s judgment was published on 24 October 2019. This is understandable, given the case is the first shareholder class action to go to a final judgment in Australia.
Some have speculated that the decision will open the floodgates to shareholder class actions, see a spike in D&O insurance premia and engender confusion amongst boards across corporate Australia. Such apprehension is understandable, but the implications of the case are more nuanced. In the words of the ubiquitous British Government World War II motivational poster, should we simply ‘Keep Calm and Carry On’?
In order to understand the implications of the case, some familiarity with the facts is helpful. For those who have not pored over the 381-page judgment, here is a short summary of the key facts.
Myer announced a net profit after tax for the 2014 financial year of A$98.5 million. Although Myer’s Board had resolved not to provide earnings guidance, in a post-release interview on 11 September the CEO told analysts and the media that Myer would likely have a profit exceeding its 2014 financial year profit in the 2015 financial year.
On 19 March 2015, Myer announced that its expected financial year profit was going to be between A$75 to A$80 million. Following that announcement, Myer's share price fell by around 10%.
It was alleged that the CEO’s statement was misleading or deceptive and a breach of Myer’s continuous disclosure obligations. The class action was for shareholders who acquired their shares on or after 11 September 2014 and held them through to 19 March 2015. The theory was that they had paid an inflated price.
The Court found that Myer’s CEO had a reasonable basis for making the statements he made in September 2014, but that, by 21 November 2014, Myer needed to correct those statements. By failing to do so, the Court found that Myer had breached its continuous disclosure obligations and engaged in misleading or deceptive conduct. In an interesting twist, however, the Court also held that Myer’s misconduct may not have caused the shareholders any loss, as it did not give rise to any meaningful share price inflation. Justice Beach found that, by 21 November 2014, “the hard-edged scepticism of market analysts and market makers” had already deflated the CEO’s “inflated views”.
From a legal perspective, the case is interesting on two fronts. First, it offers some useful commentary on continuous disclosure obligations. The Court found that, even though Myer’s historical practice was not to provide guidance (but rather to monitor whether its internal forecasts were out of line with the consensus position of analysts), and even though Myer’s Board had resolved not to provide earnings guidance for the 2014 financial year, the CEO’s commentary to analysts constituted guidance.
The decision therefore makes it clear that listed companies must update their guidance even where consensus has shifted to a more negative outlook, and even if consensus aligns with the company’s own forecasts. But those propositions are unlikely to be revelatory. They are, as the Court found, consistent with ASX Guidance Note 8.
Second, the Court accepted the theory that ‘market-based causation’ is sufficient in shareholder class actions. In essence, this means it is not necessary for each shareholder to prove – individually – that they relied upon Myer’s misinformation. It is good enough to show that they had purchased securities at a time when the price for the securities was inflated by Myer’s failure to comply with its continuous disclosure obligations.
While this may be the first judgment in Australia to accept market-based causation, it is important to note that there is nothing new about the theory. To the contrary, it has been an important component of nearly every shareholder class action claim since 2004.
True, the theory had not been tested by a judgment until now but that fact alone had not deterred those who stand behind shareholder class actions from pursuing them. Now that the Court has accepted the theory, not much is going to change.
Funders and plaintiffs may take a more robust stance in settlement negotiations, but as the Myer case demonstrates well, just because market-based causation is an accepted in theory, it doesn’t follow that shareholders will succeed. Each case will turn on its own facts.
So while the Myer case is without doubt a watershed judgment for class action lawyers in Australia, we may all still be able to take heed of the Royal advice and ‘keep calm’.
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