The Federal Court has now handed down the second judgment in a shareholder class action, Crowley v Worley Limited [2020] FCA 1522.
The first judgment of course was the seminal judgment in TPT v Myer a year ago, in which Clayton Utz acted for Myer, which dealt with several important aspects of the law of continuous disclosure, including:
- whether information can be treated as information that a reasonable person would expect to have a material effect on share price for the purposes of section 674 of the Corporations Act even though it did not actually have a material effect on the share price;
- how the phrase "persons who commonly invest in securities" is applied for the purposes of section 677 of the Corporations Act; and
- the status of ASX Guidance Note 8, which comprehensively sets out the approach taken by ASX to the continuous disclosure laws.
More importantly, TPT v Myer presented a detailed analysis of the most common method for establishing loss in a shareholder class action (called event studies) and was the first, and so far only, decision to endorse market-based causation in the context of a shareholder class action. Both event studies and market-based causation are critical to the viability of shareholder class actions.
In TPT v Myer, the court held that while contraventions were established, no loss was suffered. In the result, the proceeding was discontinued with no order as to cost.
On 22 October 2020, almost exactly one year after the judgment in TPT v Myer, the judgment in Crowley v Worley was delivered. The result of the case is undoubtedly significant, if for no other reason than the claim was dismissed. Out of the proliferation of shareholder class actions in recent years, two have now gone to judgment, and in both the plaintiffs failed – not exactly an encouraging track record for class action plaintiffs. Apart from the practical example afforded by the result in Crowley v Worley, it is very much a case that turns on its own facts and there are limited points of principle to draw from it.
What happened in Crowley v Worley?
Worley Limited is a well-known provider of professional project and asset services in the energy, chemicals and resources sectors. It's listed on the ASX. On 14 August 2013, it stated via the ASX in a written announcement that it expected its net profit after tax (or 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 in Crowley v Worley. 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 failing to comply with the laws of continuous disclosure and 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. Central to much of Mr Crowley's case was that this budget did not provide reasonable grounds for an expectation of NPAT growth. He alleged that a reasonable budget would have forecast NPAT of $260 to $300 million for FY2014, which was less than the FY2013's NPAT of $322 million.
Mr Crowley alleged Worley contravened the continuous disclosure laws on 14 August, 21 September, 9 October and 15 October 2013 by not disclosing that:
- it did not have a reasonable basis for making the announcement on 14 August 2013; and
- its NPAT for FY2014 would be materially less than the consensus expectation of analysts covering Worley's shares. Mr Crowley alleged that this consensus expectation was that Worley would achieve an NPAT of $354 to $368 million in FY2014.
Mr Crowley alleged the second limb of his case could succeed even if the first failed. This was because even if Worley had reasonable grounds for expecting its NPAT to grow in FY2014 (ie. be more than $322 million), its NPAT could still be materially less than consensus expectations (i.e. materially less than $354 to $368 million).
Mr Crowley's case wasn't limited to the continuous disclosure laws. As with many shareholder class actions, he also alleged that Worley contravened the laws of misleading or deceptive conduct by representing on 13 August 2013 that it expected its NPAT to grow in FY2014 and that it had reasonable grounds for this expectation.
So, did Mr Crowley succeed? Not at all. His case failed for two primary reasons.
- First, the Court concluded that, on 14 August 2013 and all other relevant times, Worley did have a reasonable basis for stating that it expected its NPAT to grow in FY2014. On this point, an important finding of the Court was that the budget for FY2014 and its preparation were reasonable.
- Second, there was not a consensus expectation of analysts covering Worley's shares that it would deliver an NPAT of $354 to $368 million in FY2014 and to the extent there was a consensus, Worley's expectations of NPAT for FY2014 did not fall materially short of it.
Two key takeaway points on continuous disclosure
As already noted, Crowley v Worley is a case that turns on its own facts and is therefore short on points of precedent. Two key points may nevertheless be taken from it.
The first point concerns the question of "materiality" for the purposes of earnings guidance and ASX Guidance Note 8.
In Guidance Note 8, the ASX says that a departure of 10% or more from published earnings guidance should be treated as material, a departure of 5% or less does not need to be treated as material, and a variance of between 5% and 10% requires the entity to form a judgment on materiality. Justice Beach considered this aspect of the Guidance Note in detail in TPT v Myer.
In Crowley v Worley, Justice Gleeson adopted the approach taken by Justice Beach in TPT v Myer on this point, treating 5% (the lower end of the 5% to 10% range), as "material". Care, however, needs to be taken before drawing a great deal from this conclusion. For present purposes, the simple point to bear in mind is that in TPT v Myer, Justice Beach treated a variance of 5% as material in a context where the relevant earnings guidance was that profit was likely to be materially higher than the prior year, such that an expected profit of 5% lower than the prior year was a material divergence from the prior earnings guidance. That equates to a divergence of more than 5%. It is not the same thing as saying there was a 5% divergence between the expected profit and the previous profit guidance. This issue, as it arose in TPT v Myer, is dealt with in more detail in our article on the decision.
The second point concerns misleading or deceptive conduct and representations about future matters. Misleading or deceptive conduct is prohibited by section 18 of the Australian Consumer Law (ACL), section 12DA of the ASIC Act and section 1041H of the Corporations Act. The ACL and ASIC Act both state that if a person makes a representation about a future matter and that person does not have reasonable grounds for the representation, the representation is taken to be misleading. The ACL and ASIC Act also state that a "person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary".
This presents several questions, but for present purposes, two are significant. First, does the person who made the representation need to have actually relied on the facts or circumstances which were "reasonable grounds for making the representation" to fulfil these requirements, or do the facts or circumstances only need to exist (ie. it does not matter whether they were relied on)? In Crowley v Worley it was held that the person needs to have actually relied on them.
Second, in a corporate context, who in the corporation needs to have relied on them? This will depend on the circumstances of the case, but in Crowley v Worley, the relevant people were Worley's board (collectively) and certain senior executives. Before finishing on misleading or deceptive conduct, it is worth noting that the onus on a person to adduce evidence to the contrary only exists in the ACL and the ASIC Act, not the Corporations Act.
In conclusion, while there are some useful points to draw from Crowley v Worley, it is a case that largely turns on its own facts and no important points of principle arise from it. TPT v Myer remains the leading authority on shareholder class actions in Australia.
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