Another win for listed companies 6 min read
Australia's second shareholder class action judgment has been widely anticipated. On Thursday, Justice Gleeson of the Federal Court handed down her decision in Crowley v Worley Limited  FCA 1522.
The case failed, with the court finding that Worley:
- did not engage in misleading or deceptive conduct; and
- did not breach its obligations under Australia's continuous disclosure regime.
Justice Gleeson found that Worley's FY14 budget and the process by which it was developed were not deficient and the Board had a reasonable basis for making its August 2013 earnings guidance statement to the market. This was despite her Honour accepting that Worley's budget-setting process was affected by a culture of optimism and that insufficient allowance was made for potential downsides.
The court also found that evidence criticising Worley's budgeting process did not support a conclusion that the FY14 budget lacked a reasonable basis, or that the FY14 budget did not provide reasonable grounds for earnings guidance statements made by the company.
Of significance is the court's recognition that an allegation of no reasonable grounds for an earnings guidance statement is a serious allegation requiring clear and specific evidence. It suggests that courts will be reticent to second guess the processes underpinning statements made to the market without a clear and verifiable basis for doing so. Ultimately, the Applicant did not discharge that burden in this case.
- Australia's first (Myer) and second (Worley) shareholder class action judgments highlight the significant risk that applicants, and the litigation funders that support them, take when pursuing such claims to trial. Neither judgment sounded in any award of damages for shareholders.
- The court's insistence on clear and verifiable evidence to support a finding of no reasonable grounds for a company's earnings guidance suggests that courts will be reticent to second guess a company's processes (and board deliberations about those processes) underpinning earnings guidance statements to the market.
- Because the Applicant failed to establish that Worley had engaged in unlawful conduct, the court did not consider the appropriate method for proving and measuring loss in a shareholder class action. There are a number of methods of calculating loss and, while the Myer decision accepted an inflation-based loss measure and the use of event study analysis to prove such loss, the availability of other measures for calculating loss remains a question to be determined by the courts.
- The failure of both the Worley and Myer cases (the only shareholder class actions to proceed to judgment) may cause plaintiff firms (and the funders that support them) to think twice about bringing shareholder class actions based on alleged misleading earnings guidance. It may also cause defendants facing such claims to be more willing to take them to trial.
- The failure of these cases may not, however, deter other forms of shareholder class action claims, including claims focussed on disclosures regarding alleged corporate misconduct or accounting issues – where quite different factors are relevant to assessing whether a company has engaged in misleading or deceptive conduct or failed to comply with its continuous disclosure obligations.
On 14 August 2013, Worley published earnings guidance that said: '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.' That was NPAT in excess of $322 million.
On 9 October 2013, Worley announced to the market that its first-half result would be lower than in FY2013, but affirmed the August 2013 earnings guidance statement.
On 10 and 15 October 2013, Worley repeated its August 2013 earnings guidance statement.
On 20 November 2013, Worley published the following revised earnings guidance: 'On current indications the company now expects to report underlying NPAT for FY2014 in the range of $260 million to $300 million with first half underlying NPAT in the range of $90 million to $100 million.' Worley's shares fell approximately 26%.
The Applicant alleged that Worley:
- contravened its continuous disclosure obligations pursuant to s674 of the Corporations Act 2001 (Cth) (Corporations Act) and r3.1 of the ASX Listing Rules;
- engaged in misleading or deceptive conduct in contravention of s1041H of the Corporations Act, s12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and/or s18 of the Australian Consumer Law (being Schedule 2 of the Competition and Consumer Act 2010 (Cth)).
The Applicant argued that Worley did not have a reasonable basis for its August earnings guidance and put its case on three bases:
- The 'budget case': Worley did not have a reasonable basis for its earnings guidance statement on 14 August 2013 (the Material Information) and Worley's FY14 earnings were likely to fall materially short of analysts' consensus expectation that Worley would deliver between approximately $354 and $368 million in NPAT for FY14 (Earnings Expectation Material Information);
- The 'performance case': From 14 August 2013 and, on 9, 10 or 15 October 2013, Worley lacked a reasonable basis for maintaining the FY14 guidance representation and, by failing to correct the August 2013 earning guidance statement (or the 9 October 2013 announcement), Worley engaged in conduct that was misleading or deceptive or likely to mislead or deceive; and
- The 'consensus case': Worley was aware of a consensus expectation, being the Earnings Expectation Material Information, and ought to have known its earnings were likely to fall materially short of the consensus expectation from 14 August 2013.
In support of these claims, the Applicant alleged that Worley's budget, and the process by which it was developed, were deficient; that the budget was stretched; and an alleged track record of under-performance showed that budgets would not be met. The Applicant also placed reliance on the 'Holt report', an ex post facto review of Worley's budgeting process to support these contentions.
In dismissing each of the Applicant's claims and holding that Worley did not contravene any of the continuous disclosure or misleading and deceptive conduct statutory provisions (including the ASX Listing Rules), the court found that:
- Worley had reasonable grounds for its August 2013 earnings guidance statement, that Worley's FY14 budget process was not deficient and the Board had a reasonable basis for relying on it.
- Worley had a reasonable basis to maintain its earning guidance on the key dates the Applicant alleged Worley had no such reasonable basis.
- At all relevant times, the Board of Worley and Andrew Wood (Chief Executive Officer), individually, had reasonable grounds for the FY14 guidance representation - that reasonable basis being the FY14 budget.
- The process by which the FY14 budget was developed was reasonable, contrary to the Applicant's contention, and although there was some evidence (particularly in the Holt Memo) that senior management may have applied unreasonable pressure to regional business units to grow revenue, grow earnings and reduce overheads, the evidence did not show that particular integers or portions of the FY14 budget were overstated or understated so as to be unreasonable or unjustifiable.
- The evidence did not demonstrate that the Board was not duly sceptical in its consideration of the Worley budget. Nor did it demonstrate that a more sceptical approach would probably have led the Board to conclude that the FY14 budget should not be approved.
- The position did not change materially for Worley’s Board between 14 August 2013 and 20 November 2013. There was no circumstance in that period that led the Board to lack a reasonable basis for maintaining or reiterating the FY14 guidance representation.
- The 'consensus case' failed because it required the Applicant to demonstrate that, while the so-called consensus expectation existed, Worley knew or ought to have known that its FY14 earnings would fall materially short of the predicted range. The court was not satisfied that any relevant officer of Worley, whose state of mind was to be attributed to Worley, had or ought to have had that knowledge or belief at any relevant time.