The Federal Court of Australia recently published the first judgment by an Australian Court in a securities class action in TPT Patrol Pty Ltd v Myer Holdings Limited 1.
Whilst the Court held that the class suffered no loss even though defendant had contravened its continuous disclosure obligations, the judgment highlights the need for listed entities to comply with continuous disclosure obligations.
More significantly, the decision demonstrates the significance of expert evidence and event studies in class actions, and that Courts may apply market-based causation, albeit with a twist that means that there remains the possibility that class members will need to demonstrate direct causation.
On 11 September 2014, Myer's CEO forecasted that Myer's net profit after tax (NPAT) for the 2015 financial year (FY15) would exceed the $98.5 million net profit achieved in the 2014 financial year.
On 19 March 2015, in an ASX announcement, Myer revised its FY15 NPAT forecast to be $75 – $80 million.
In bringing proceedings in the Federal Court of Australia, the shareholder class alleged that Myer had contravened its continuous disclosure obligations and engaged in misleading and deceptive conduct under the ASX Listing Rules and the Corporations Act 2001 (Cth) by failing to make any corrective disclosure prior to 19 March 2015.
Contravention but no loss
Justice Beach found that Myer had the opportunity to correct its original FY15 forecast before its corrective announcement on 19 March 2015, but failed to do so in breach of the Corporations Act and ASX Listing Rule 3.1.
Myer had asserted the information to be disclosed was not material and excepted from disclosure obligations under ASX Listing Rule 3.1A. His Honour rejected Myer's position and held that, contrary to Listing Rule 3.1A exception requirements, a reasonable person would have expected the information to have been disclosed.
However, his Honour went on to find that Myer's contraventions did not cause the class any loss because the 'hard-edged scepticism of market analysts and market makers at the time of the contraventions' had already factored into the price of Myer shares an NPAT that was well below the $98.5 million figure originally represented by Myer's CEO.
Therefore, any corrective statement Myer made before 19 March 2015 would likely have had no, or no material, effect on Myer's share price.
Market- based causation
Perhaps, most significantly, his Honour endorsed market-based causation theory. The endorsement will be seen as a major victory for litigation funders and class applicants as it supports the notion that class members need not individually demonstrate that they relied on any misleading representations.
Curiously, however, his Honour then went on to suggest that it may still be necessary for an individual class member to give evidence that, but for the contravention by an entity, they would not have purchased the shares or purchased them, but not for the price paid. His Honour suggested establishing this may be done by way of a statutory declaration or 'ticking boxes in a verified questionnaire post judgment on the common issues'.
This seems to leave the door ajar for arguments on the need for some element of direct causation/reliance evidence, meaning the position on market-based causation far from certain.
Expert Evidence and Event Study Analysis
The acceptance of event study evidence from experts has been considered fundamental in class actions in assessing materiality, loss and causation. This judgment may influence how experts will be briefed in future class actions.
His Honour noted the value of avoiding unnecessary delegation of issues to a referee and instead having event study experts give evidence concurrently to address any queries a judge may have to achieve a competent understanding of technical issues.
Here, his Honour found the concurrent expert evidence valuable in assessing materiality and share price inflation, noting that each event study expert assessed share price inflation on bases that did not entirely align with the findings made by his Honour himself.
As the class relied only on an inflation-based measure of loss (as is commonly the case) and given that his Honour found no share price inflation, he found that no compensable loss had been demonstrated.
Given this is the first judgment in an Australian securities class action, it has not unexpectedly given further guidance on a range of elements, including:
- how a listed entity's disclosure obligations will be assessed, particularly on how the materiality of information will be assessed and limitations around ASX Listing Rule exceptions;
- the amenability of Courts to accept market- based causation in class actions, albeit qualified to some degree by his Honour's further comments that individual class members may still need to satisfy an onus to give direction causation evidence; and
- how a Court may assess and utilise expert event study evidence and the implications on how event study experts ought to be briefed.
The decision will be seen as a victory for litigation funders and class action litigants. The finding that Myer breached its continuous disclosure obligations and that market-based causation is on the table will put companies on notice of the very real prospect of adverse findings against boards and companies in shareholder class actions.
Further, while the 'no loss' decision was favourable to Myer in this instance, the implications of the decision are unlikely to make an already difficult D&O insurance market any easier for businesses, particularly in relation to side C cover.
His Honour has indicated that he is willing to hear further from the parties on a range of matters and it is of course open to the parties to appeal his Honour's decision. We will provide a further update on any significant developments.
1 TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747
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