On 11 March 2022, the first appeal on a judgment in a shareholder class action was decided: Larry Crowley v Worley Limited  FCAFC 33 (the Worley proceeding). The Full Court of the Federal Court of Australia unanimously allowed an appeal brought by Larry Crowley, the lead plaintiff, against a first instance decision which had dismissed his claim.
So far, there have been three first instance decisions in shareholder class actions: the Myer shareholder class action decision in October 2019 (where Clayton Utz acted), the first instance decision in the Worley proceeding in October 2020 and the Iluka Resources shareholder class action decision in February 2022. In all three, the claimants lost. The appeal decision in the Worley proceeding is significant for two reasons.
First, the appeal decision has given claimants a win (of sorts) in a shareholder class action, although it cannot yet be said if it will lead to a victory. The Full Court set aside the first instance decision and remitted the matter back to a single judge of the Federal Court to determine the matter in light of the Full Court's decision. What might happen now? There are several possibilities. The respondent (Worley) could seek special leave to appeal the Full Court's decision to the High Court; the parties could reach a settlement; or a single judge could determine the matter in favour of the claimants or Worley.
Second, the Full Court made an important decision on principle about the disclosure of opinions under the continuous disclosure laws. This decision, which we discuss below, is important to any entity that is subject to the continuous disclosure laws. It will have added weight because it is made by an appeals court rather than a single judge at first instance.
What was the Worley proceeding about?
Worley is a well-known ASX listed provider of professional project and asset services in the energy, chemicals and resources sectors. On 14 August 2013, it stated via the ASX in a written announcement that it expected its net profit after tax (NPAT) in FY2014 to exceed that of FY2013, which was $322 million. More specifically, the announcement included the statement, "While recognizing the uncertainties in world markets, we expect our geographic and sector diversification to provide a solid foundation to deliver increased earnings in FY2014." On 20 November 2013, Worley announced that it expected its NPAT to be $260 to $300 million for FY2014, which was 7% to 17% less than its NPAT in FY2013. This caused Worley's share price to fall approximately 26%.
Mr Crowley acted as lead plaintiff. He represented all persons who purchased Worley shares in the period of 14 August to 20 November 2013 and who allegedly suffered loss due to Worley breaching its continuous disclosure obligations and engaging in misleading or deceptive conduct.
Worley's statement on 14 August 2013 of expected NPAT growth was based on a budget, which had been prepared by Worley, but not released to the public. A draft of this budget dated 27 May 2013 forecast NPAT of $252 million for FY2014. The final budget forecast NPAT of $352.1 million.
Mr Crowley alleged that Worley engaged in misleading or deceptive conduct by representing on 13 August 2013 that it expected its NPAT to grow in FY2014 (i.e. be more than $322 million). This representation was in relation to a future matter and therefore was misleading or deceptive unless it was based on reasonable grounds. Worley argued that its budget, which forecast NPAT of $352.1 million, and the preparation of that budget constituted reasonable grounds. Worley did not present any other basis for reasonable grounds. So, Worley's budget became central to the case. Mr Crowley also alleged that Worley represented on 13 August 2013 that it had reasonable grounds for its expectation of NPAT growth and that this representation was misleading.
Mr Crowley also alleged Worley contravened its continuous disclosure obligations on 14 August, 21 September, 9 October and 15 October 2013 by not disclosing that:
What did the Full Court say on appeal?
The Full Court focused on whether the budget and its preparation provided reasonable grounds for the representation on 14 August 2013 that Worley expected its NPAT to increase. In particular, the Full Court focussed on Justice Gleeson's reasoning process for concluding that it provided reasonable grounds. The Full Court concluded that her Honour's reasoning process miscarried, but that it was not appropriate for the Full Court to decide whether the FY2014 budget did in fact provide reasonable grounds. That question needed to be reconsidered with the whole of the evidence and so had to be remitted to a single judge. That said, the Full Court noted there was "no apparent reason why it would be necessary for the further hearing to involve anything other than submissions as required, having regard to the reasons of the Full Court in this matter".
The Full Court's reasons for concluding that her Honour's reasoning process miscarried are detailed and very specific to the facts of the case. Still, at a high level, four points are of note.
First, the Full Court concluded that Justice Gleeson erroneously focussed on whether Worley's Board acted reasonably when it approved the FY2014 budget and the statement made on 14 August 2013. The real question was whether Worley had reasonable grounds for the representation of increased NPAT in FY2014 and not whether the Board acted reasonably.
Second, Justice Gleeson searched for a level of detail in the evidence which would permit her Honour to identify an expected NPAT for FY14, which would have a reasonable basis, when this was unnecessary to conclude that a representation of NPAT growth (i.e. more than $322 million) lacked reasonable grounds. The Full Court said a "budget and earnings forecast might be proved unreasonable by a line-by-line analysis or by demonstrating that the reasonable range was materially lower than the forecast NPAT, but these are not the only methods by which a forecast might be proved to have lacked reasonable grounds when made". The Full Court noted that each of the following facts (which had been proven by Mr Crowley) might, in and of themselves, prove that the budget did not provide reasonable grounds: (i) the budget was not a "P50" budget, which is a budget that had a 50% chance of being achieved and (ii) a draft of the FY2014 budget dated 27 May 2013 was considered "ambitious" even thought it forecast NPAT of $252 million compared to the final version which forecast $352.1 million.
Third, the Full Court concluded that her Honour did not bring together several important facts to consider whether they negated the reasonable grounds for the representation of increased NPAT. Instead, her Honour focused on each fact and why it, in and of itself, did not support the negation of reasonable grounds. These important facts included that
- the FY2014 budget was not a "P50" budget;
- Worley had materially underperformed against its budgets from FY2009 to FY2013 (except in FY12);
- Worley's officers were sceptical about the FY2014 budget and raised an issue about systemic forecasting problems;
- the FY2014 budget process was not materially different from the process in previous years;
- Worley’s markets were not growing or were deteriorating when the FY2014 budget was set;
- a draft of the FY2014 budget dated 27 May 2013 was considered "ambitious" despite forecasting an NPAT of only $252 million; and
- a review of the budget process prepared by Worley's CFO immediately after the downgrade on 20 November 2013 concluded that the budget-setting process was "affected by a culture of optimism" and did not make "sufficient allowance for potential downsides".
Fourth, the Full Court repeatedly noted that the CFO and others, who reported directly to the CFO, were not called to give evidence by Worley at trial. Not calling these witnesses was relevant to whether Justice Gleeson should have drawn inferences that their evidence would not have assisted Worley's case. These individuals "were key participants in the budget process which caused the forecast NPAT to be increased from $252 million to $352.1 million" and "expressed significant concerns about the FY14 budget before it was adopted".
The existence of reasonable grounds was a central issue in Mr Crowley's claim of misleading or deceptive conduct. The miscarriage in Justice Gleeson's reasoning on that issue meant her Honour's dismissal of the claim had to be overturned and remitted to a single judge. Mr Crowley also relied on the absence of reasonable grounds for his claim that Worley contravened the continuous disclosure laws. This meant that her Honour's dismissal of that claim also had to be overturned and remitted.
The continuous disclosure laws and opinions
A vexed issue in continuous disclosure law has been (i) whether the laws only apply to an opinion if that opinion is actually held by officers of the listed entity or (ii) whether they also apply to an opinion that an officer of a disclosing entity should have reasonably formed based on information that was available to them even if they did not actually form that opinion. The recent decision in the Iluka shareholder class action said that the laws apply to the second scenario as well as the first. The Full Court's decision in the Worley proceeding is to the same effect. Of note, Justice Jagot was the judge in the Iluka case as well as one of the members of the Full Court in the Worley proceeding. The Full Court said the continuous disclosure laws are engaged "where the directors of a company (or its officers) should have, but did not, realise the implications of information of which they were aware" and also where "an officer or employee under a duty to inform an officer knew facts from which they reasonably ought to have formed an opinion or drawn an inference". This interpretation of the continuous disclosure laws expands their reach and is a departure from previous authorities. In this regard, Justice Perram, another member of the Full Court, said that he now considers that observations made by him in an earlier case, Grant-Taylor v Babcock & Brown Limited (In Liq)  FCA 149; 322 ALR 723, to the effect that an opinion that was not actually held by officers of the listed entity is not information of which the entity is aware and therefore does not need to be disclosed, are wrong.
More to come
As noted above, the decision of the Full Court is not the end of the matter for the Worley proceeding. Also, the first instance decision in the Iluka Resources shareholder class action, which might still be appealed. At the time of writing, the deadline for filing an appeal had not yet passed and will expire on 1 April 2022.
Whatever happens in the Worley proceeding, there will be more developments to come in the shareholder class action space. One of the most interesting will be the courts' approach to applying the new fault element that was recently introduced to the continuous disclosure laws. The changes made in August 2021 introduced a fault element to the continuous disclosure provisions where that fault element applies to ASIC penalty proceedings and shareholder class actions. The amended continuous disclosure provisions were not considered in the Worley proceeding as the facts in that case pre-dated the introduction of the amendments. At the time of writing, no judgment has considered the amended provisions.