The Full Court of the Federal Court of Australia (FCAFC) allowed an appeal from Australia's second shareholder class action, Crowley v Worley Limited  FCAFC 33, and remitted the case back to a single judge for determination, which may give rise to the first order for damages in a shareholder's class action in Australia.
The decision is a noteworthy authority for misleading and deceptive conduct by future representations and contraventions of the continuous disclosure regime in the Corporations Act 2001 (Cth).
Worley Limited (Worley) is an ASX listed engineering company.
Worley published an earnings guidance statement (Earnings Guidance). The Earnings Guidance stated that Worley expected increased earnings (NPAT) in the financial year (FY) 2014 of $322M.
Worley published revised earnings guidance with forecast NPAT between $260M to $300M. Following the revised guidance, Worley's shares dropped by about 26%.
Worley's CFO, Simon Holt, prepared an internal memorandum reflecting on the problems that gave rise to the Earnings Guidance (Holt Memorandum). The Holt Memorandum indicated that, amongst other problems, the Earnings Guidance was subject to over-optimistic forecasts.
Mr Crowley, as lead plaintiff, brought proceedings in the Federal Court, alleging that Worley engaged in misleading or deceptive conduct and contravened its continuous disclosure obligations under the Corporations Act 2001 (Cth) and ASX Listing Rules, giving rise to loss.
First instance decision
In October 2020, the first instance judgment was delivered by Justice Gleeson, dismissing the claims against Worley. Her Honour found that Worley did not:
- engage in misleading or deceptive conduct; and
- breach its obligations under Australia's continuous disclosure regime.
Misleading and Deceptive Conduct
Where representations as to future matters (such as the Earnings Guidance) are concerned, the corporation must have reasonable grounds for making the representation to avoid a finding of misleading and deceptive conduct.
The FCAFC concluded that the knowledge base from which one determines whether there was a reasonable basis for making a representation is "what employees knew or must be inferred to have known" because "it formed the basis for the evaluation of the proper attribution of knowledge to [Worley / the corporation] as the representor". The knowledge imputed to the corporation is not limited to the actual knowledge of the board members. The FCAFC found that any other position is "untenable", as it would mean that a person might withhold information relevant to assessing reasonable grounds from the board, and because the board was unaware of that information, the corporation would then "succeed in defending itself from a claim of misleading and deceptive conduct merely because the board itself had no reason to know".
Consequently, the FCAFC found that the primary judge should have drawn certain inferences against Worley, given that senior executives who were involved in the budget process had expressed significant concerns about the FY2014 budget/Earnings Guidance, and had not given evidence. However, the FCAFC did not have all of the evidence before it to consider the issue in full, and accordingly, allowed the appeal and remitted the matter back to the FCA for a single judge to determine.
Where the Corporation Act's continuous disclosure regime in section 674 is concerned, information should be disclosed if the information is something a reasonable person would expect to have a material effect on the price of shares. It is the presence of the relevant "information" that triggers the obligation to disclose.
The practical effect of this is that there will be an obligation to disclose information where evidence shows that:
- the information existed;
- reasonable information systems or management procedures ought to have brought the information to the attention of a relevant company officer; and
- acting reasonably, the company officer ought to have discerned the significance of the information.
That means that, even if a person did not in fact know, but the circumstances are such that they ought to have known of the information and its import, then there may be a breach of the continuous disclosure rules if the information is not disclosed. The rationale for this approach was that to hold a contrary view and require actual knowledge or an opinion that might impact the price of shares would be to reward a publicly listed company for having poor information management procedures and reward a company for its officers holding back from the board an opinion they had formed about such matters.
Given that the FCAFC did not have all the evidence before it, and in similar vein to its views with respect to the misleading and deceptive conduct claim, the FCAFC remitted the claim on continuous disclosure back before a single judge.
When corporations defend a claim for misleading and deceptive conduct based on future representations, they are required to demonstrate that the impugned representation had a reasonable basis.
Whether there was a reasonable basis for the representation may be assessed by the knowledge of the corporation's relevant employees, rather than just the members of its board. Practically, this means the corporation may need to adduce evidence from all relevant employees.
Otherwise, the decision effects an interesting turn for claims for breaches of the continuous disclosure regime. Given that the trigger for contravention of continuous disclosure laws is the existence of information of which a company officer ought to have discerned the significance, those company officers and corporations may need to consider whether there are other means by which the information might have been construed, and consider disclosing a position/opinion that they themselves have not in fact formed.
Potentially limited impact
The decision as it applies to continuous disclosure may be limited to alleged breaches of the continuous disclosure rules in place prior to the now permanent amendments to sections 674, 674A and 675 first introduced in May 2020.
That is, the effect of those changes was to introduce elements of knowledge, recklessness or negligence to prove a breach of the continuous disclosure regime by failure to disclose information to the market that would have a material impact on a corporation's share price (market relevant information).
The introduction of elements of knowledge and recklessness for the purpose of proving breach of the continuous disclosure regime renders it more difficult for plaintiffs to make out a claim for breach of continuous disclosure obligations.
However, it is less clear whether negligence raises a similar hurdle to plaintiffs given that establishing negligence requires establishing a failure to take reasonable care, and failing to arrive at a certain opinion in respect of market relevant information and disclose that opinion/information, may be painted by plaintiffs as a failure to take reasonable care in disclosing market relevant information.
Further changes to the continuous disclosure regime and appeal to the High Court
Otherwise, the continuous disclosure regime may change further, given that:
- the newly elected Labor government has publicly stated that it intends to amend the changes made to the continuous disclosure regime in May 2020. At the time of this article, it is unclear what the nature and extent of the changes will be; and
- on 8 April 2022, Worley filed an application for special leave with the High Court of Australia. The High Court is yet to hear Worley's application for special leave.
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