On 24 October 2019, Justice Beach of the Federal Court handed down the first judgment in a shareholder class action in Australian history: TPT Patrol Pty Ltd v Myer Holdings Limited (Clayton Utz acts for Myer in the proceeding). The TPT judgment is 381-pages long and brimming with esoteric matters like "cumulative abnormal return t-statistics", R-squared's and β coefficients. QED? Well, no. A lot of this may seem like Greek to you. In fact, β is Greek! This article will cut through the complexity to the main points that you need to be aware of.
Market-based causation
Does a shareholder need to have been aware of a misrepresentation and acted upon it to recover loss? This question raises the much-debated issue of whether "market-based" causation is a valid basis for establishing loss in Australia. This important question has been unanswered in the context of a shareholder class action until now. The TPT judgment accepts that market-based causation is valid.
The endorsement of market-based causation will be a relief to plaintiff law firms and litigation funders, but will not comfort listed entities who have been able to rely on the uncertainty around this issue to leverage settlements. But it isn't all one way. The TPT judgment acknowledges that individual shareholders may still need to prove that they would not have purchased shares even if they knew the price-sensitive information or that the misrepresentation was untrue. This would detract from one of the appealing aspects of shareholder class actions for litigation funders: it's simple to calculate loss for thousands of shareholders because it involves little evidence from them. That said, this downside is unlikely to be a major impediment since the TPT judgment says a shareholder could give the necessary information "by a simple statutory declaration or ticking boxes in a verified questionnaire".
A judgment of the High Court is necessary to conclusively endorse market-based causation, so the TPT judgment may not be the end of the matter. Also, Justice Beach's judgment on this point is obiter and therefore not binding because he didn't strictly need to address it.[2] Still, there is little doubt that its endorsement in the TPT judgment is likely to give the shareholder class action industry greater impetus and make litigation funders less willing to settle. How much more impetus? It's difficult to say. It is worth noting though that for some time, many in the shareholder class action industry have been working on the assumption that market-based causation is valid. For them, the TPT judgment will only be confirmation that they should keep doing what they're doing.
Price sensitive information doesn't need to be precise sensitive…What?!
A listed entity is only required by section 674 of the Corporations Act and ASX Listing Rule 3.1 (the Continuous Disclosure Laws) to disclosure information if it "is information that a reasonable person would expect … to have a material effect on the price or value of [the] … securities of the entity". This requirement is often called "materiality" or "price-sensitivity". In the TPT judgment, the information that Myer did not disclose was found to be material but not have an effect on Myer's share price. How could that be? Justice Beach acknowledged that this was somewhat counter-intuitive, but relied on section 677, which makes the requirement of materiality "looser and lower" than it might first seem and not necessarily dependent on a change in price of the listed entity's securities. Section 677 effectively deems information to be material "if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the … [entity's] securities". In the TPT judgment, the applicant could not establish that the impugned information would have affected Myer's share price but still established that it was material in light of this provision.
On this analysis, a "material effect on price" does not necessarily require a material effect on price due to section 677. If a listed entity does not disclose information that falls within section 677, it may be exposed to regulatory action or a shareholder class action that does not establish loss, even if that information would not have had an actual effect on its share price.
Can the law of misleading or deceptive conduct trump the continuous disclosure obligations?
Section 1041H of the Corporations Act prohibits misleading or deceptive conduct. This includes conduct through silence. The Continuous Disclosure Laws require a company to disclose price-sensitive information. Both section 1041H and the Continuous Disclosure Laws are usually relied on when a listed entity is accused of failing to disclose price-sensitive information. The Continuous Disclosure Laws are far more detailed than section 1041H and therefore give a listed entity greater guidance about what it does and does not need to disclose. But that's not much help if an entity can comply with the Continuous Disclosure Laws and then be found to have contravened section 1041H for exactly the same conduct through engaging in misleading or deceptive conduct by silence! The TPT judgment gives support for the view that if an entity has complied with the Continuous Disclosure Laws by deciding not to disclose information, it will not have breached section 1041H. This is good news for listed entities.
You just keep repeating yourself!
If a listed entity makes a representation to the market on (say) 1 July, does the law treat that representation as being repeated each and every day until it's withdrawn, contradicted or passes its expiry date, even if it was not actually repeated? If it does, when does it pass its expiry date? These are important issues, particularly if the representation is made about a future matter. If it's a future-looking representation, it's deemed to be misleading or deceptive unless there are reasonable grounds for it at the time it was made. If it's treated as continuously repeating, reasonable grounds will need to exist on each and every day. This could create an obligation for an entity to continually monitor whether it has reasonable grounds for a future-looking representation from the day it's first made until it's withdrawn or contradicted.
The TPT judgment does not resolve this issue. It's therefore possible that a future-looking statement could be treated as continuously remade until it is withdrawn or contradicted. At the least, someone could allege that it should be treated in this way and use that as a basis for a claim. Good practice is to:
- take extra care when making future-looking representations;
- consider whether the representation has a date by which it will obviously cease to be operative; and
- consider whether reasonable grounds continue to exist for making the statement after it's made.
Do I need an opinion on that?
Do the Continuous Disclosure Laws require a listed entity to form an opinion on an issue and then tell the market about that opinion? The TPT judgment says they don't: "The officers are not required to form an opinion based upon information they know or ought to know of and then disclose that information to the market." This is significant for a listed entity's obligations to update the market about expected future earnings since an expectation about future earnings is an opinion. It is also significant to a raft of other matters that litigation funders could claim a listed entity should have formed an opinion about.
If an opinion is formed, it may be sufficient for the Continuous Disclosure Laws that only one member of senior management holds it. Justice Beach said, "I do not consider that … an opinion needs to be held by a majority of Myer's board of directors. An opinion held by senior management who were officers … may be sufficient to constitute the opinion of Myer … But there may be difficult cases. For example, if the CFO held the opinion …, but the CEO held the contrary opinion …"
Previous authority had suggested that the "opinion of a single director would rarely be the correct information to assess from a disclosure perspective".[1]
ASX Guidance Note 8
ASX Guidance Note 8 is widely used as a guide for a listed-company's disclosure obligations. The TPT judgment refers to it extensively. Justice Beach does not criticise any part of the Guidance Note but does say that "in some respects [it] is a reliable description" of a listed entity's obligations under the Continuous Disclosure Laws and section 1041H. This is an important reminder that the Guidance Note is not the law and just guidance which is "in some respects … reliable". It is important to remember that in a proceeding brought by ASIC or a shareholder class action, a listed entity's conduct will be measured against the provisions of the Corporations Act and the ASX Listing Rules; not the Guidance Note.
That said, the Guidance Note is certainly important. This is because it expresses the ASX's views on the ASX Listing Rule and the ASX may use its enforcement powers if it believes an entity has not complied with the Listing Rules. These powers include suspension and censure.
One aspect of the Guidance Note that is often referred to by advisers is the yardstick it suggests for whether a listed entity's actual or projected earnings diverge sufficiently from previous guidance to warrant disclosure. At the time of the TPT judgment, the Guidance Note recommended that a listed entity "consider[s] updating its published earnings guidance for the current reporting period if and when it expects there to be a material difference between its actual or projected earnings for the period and the guidance it has given to the market". It then suggests the following yardstick for a "material" difference:
- for "[s]maller entities or those that have relatively variable earnings", a divergence of equal to or greater than 10%; and
- for "[v]ery large entities or those that normally have very stable or predictable earnings", "closer to 5%" or more.
For Myer, Justice Beach found that "equal to or greater than 5% is and should have been the relevant standard in the present context." That context was that:
- Myer had variable earnings not only from year to year but within each year; and
- it was "of average to slightly above average size" for an entity listed on the ASX, not "very large".
Another important piece of context was that Myer was found to have given earnings guidance that its earnings would increase materially on the previous year. That was a factor in finding that a material decrease on the previous year's earnings was 5% or more. Had Myer simply said its earnings would be unchanged from the previous year, a material decrease on the previous year might have been closer to 10%.
It is very important to note that the section in ASX Guidance Note 8 concerning the 5-10% yardstick was amended on 28 February 2020 in light of the TPT judgment. Our analysis of this amendment and other changes to the Guidance Note is here.
ASX Listing Rule 3.1A
ASX Listing Rule 3.1A provides a carve-out for the disclosure requirement in Listing Rule 3.1. The information, which a listed entity is considering whether to disclose, must fulfil several requirements to fall within Listing Rule 3.1A. One of these is that a "reasonable person would not expect the information to be disclosed". Justice Beach found that where earnings guidance has been given, this requirement will not be fulfilled in relation to information about a material divergence from that guidance.
If you have any questions, please don't hesitate to contact us.
[1] Explaining why Justice Beach did not strictly need to address market-based causation is beyond the scope of this article. For present purposes, it is enough to say that the lead plaintiff did not establish that any of Myer's conduct inflated its share price. For that reason, none of the group members could ever have suffered loss. Back to article
[2] Grant-Taylor v Babcock & Brown Ltd (in liq) (2015) 322 ALR 723. Justice Perram's remarks were obiter: "This case does not raise any issue about the position of minority opinions and it is not necessary to express any concluded view on that matter, however."Back to article
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