Shareholder class action – Downgrade of sales volume guidance – Whether respondent had reasonable grounds for initial guidance – Whether respondent breached continuous disclosure obligations – Whether continuous disclosure obligations extend only to opinions which a company actually holds, or include opinions which it ought reasonably to hold.
This was a shareholder class action arising out of a downgrade by the respondent (Iluka) of its sales forecasts for the year ending 31 December 2012. The facts, in short compass, were as follows:
- Iluka was a miner and global supplier of mineral sands products (including zircon, rutile and synthetic rutile) which had several uses, but were predominantly used in the manufacture of ceramic tiles (in the case of zircon) and pigments for paints (in the case of rutile and synthetic rutile).
- On 23 February 2012 Iluka issued an ASX announcement in which it provided guidance as to its predicted sales volumes for the 2012 calendar year (but deliberately did not provide any guidance as to expected sales prices, and therefore its expected sales revenue) – that guidance was based on demand (and therefore sales) in the first half of the year being soft, but with an expected ramp-up in the second half of the year as economic conditions improved (albeit the exact outlook for the second half would not become clear until later).
- The guidance that Iluka gave was heavily qualified by specific disclaimers, and included the following express statement:
The information is provided to assist sophisticated investors with the modelling of the company, but should not be relied upon as a predictor of future performance.
- As the year progressed, and as the expected recovery in demand did not eventuate, Iluka issued revised sales volume guidance in May 2012, and again on 9 July 2012 (following which its share price declined by approximately 25%).
The applicant did not allege that the original sales volume guidance contained in the 23 February 2012 announcement lacked a reasonable basis, but did allege, in substance, that Iluka’s guidance (and subsequently revised guidance) lacked a reasonable basis on and from 12 April 2012 until 9 July 2012.
Justice Jagot dismissed the applicant’s claims, concluding, in essence, that Iluka had reasonable grounds for the guidance which it gave, that the actions which it took to revise its guidance were, in the circumstances, reasonable and timely, and the fact that, with hindsight, Iluka was ultimately wrong about the timing or the fact of a second-half rebound in demand for its products did not establish a lack of reasonable grounds. Her Honour’s judgment is lengthy (comprising 723 paragraphs, and in excess of 200 pages), but the vast majority of the judgment is directed to a close analysis of the facts and the evidence, for reasons which her Honour explained:
 I have concluded that [the applicant’s] propositions are largely based on a combination of hindsight, a determination to focus only on information which might support [the applicant’s] propositions, and a general theme of Iluka being allegedly concerned to ensure that the market was not informed of its real sales prospects in 2012. To that end, [the applicant’s] submissions include: (a) an extensive day-by-day account of Iluka’s activities throughout the relevant period, including irrelevant and marginally relevant material and allegations outside of the pleaded case, (b) a marked tendency to focus on selected parts of documents which might be thought to support [the applicant’s] case and to ignore other parts which do not appear to do so, and (d) [sic] a determined effort to force every event or statement into a pre-conceived framework consistent with the general theme of Iluka being allegedly focused on ensuring that the market was not informed about its real sales prospects in 2012.
 As a result, a document by document, witness by witness and expert by expert analysis is required in order to deal with [the applicant’s] submissions.
Having regard to the length of her Honour’s reasons, it is impossible to provide a comprehensive summary here, but some of the key points which emerge from her Honour’s reasons for dismissing the applicant’s claims were:
- The particular market in which Iluka operated made it difficult to forecast future sales with any degree of confidence. Her Honour described that market (at ) as “global, fragmented, opaque and complex”. Many of the end users of Iluka’s products were also based in China, which meant that demand for its products was to some extent dependent on the Chinese housing market and, in turn, the economic policies of the Chinese Communist Party. Further, Iluka’s customers were, for the most part, not the end users of its products, but rather intermediaries who converted Iluka’s products into other products which were then sold to end users – as such, Iluka had limited contact with the ultimate end users of its products, and limited insight into their future demands. On top of that, uncertain economic conditions at the time made forecasting particularly difficult, and Iluka had done its best in the circumstances (and its forecasts were not inconsistent with the views of the leading market analyst as to overall global demand at that time).
- It was important to examine closely the precise terms of the actual ASX announcements which Iluka issued. Because of the difficulties in preparing an accurate forecast, the 23 February 2012 announcement was heavily qualified by specific disclaimers. Her Honour emphasised that those disclaimers were not general (or ‘boilerplate’) disclaimers that often appear in ‘fine print’ at the end of documents, but were specific disclaimers that were given prominence in the body of the announcement. Indeed, by expressly stating that the “information [was] provided to assist sophisticated investors with the modelling of the company, but should not be relied upon as a predictor of future performance”, it effectively signalled that the information was not even directed to ordinary investors such as the applicant (who was not a ‘sophisticated investor’).
- Her Honour accepted the evidence given by the respondent’s directors and senior executives, and rejected the evidence of the applicant’s industry ‘expert’ (Mr Murray), whom she found was not in fact an ‘expert’ at all. Mr Murray had no direct experience in the mineral sands industry, and his only experience was as an investor and analyst in that industry who had, for a short period prior to 2012, written analyst reports on various companies in that industry, including Iluka (and had written a report on 28 March 2012 which predicted, more accurately as it turned out than many other participants in the industry, the decline in the market which occurred in 2012 and which ultimately led to Iluka’s revised sales volume guidance). That experience, however, did not qualify him to give expert evidence. Her Honour said (at ):
I do not doubt that Mr Murray was in 2012 (and is) an intelligent listener and reader and a resourceful investigator, capable of effectively gleaning relevant information about companies and markets for the purpose of [his company’s] analysis and to prepare his evidence for this case. This does not make him a person with specialised knowledge about the companies and markets the subject of his analysis or his evidence. It makes him a better informed person insofar as the zircon market in China in 2012 is concerned than a person who had not heard and read the same information as Mr Murray and an intelligent commentator, but not an expert as required by s 79 of the Evidence Act. Mr Murray (not unreasonably) struggled with the concept of who was and was not an expert as required by s 79. He considered himself an expert in numerous diverse fields but, again, I would characterise Mr Murray as an intelligent and well-informed commentator in those fields rather than an expert.
- Iluka’s sales were historically heavily weighted towards the second half of the calendar year, such that soft sales in the first half of the year did not necessarily translate to soft sales for the entire year, and thus gave no real practical insight as to what the second half of the year (and thus the full year) might bring.
- The forecast sales volume figures contained in the 23 February 2012 announcement were materially below both: (i) Iluka’s sales volumes for the previous year; and (ii) Iluka’s budgeted sales volumes (which, her Honour considered, directly contradicted the applicant’s case theory that Iluka was reluctant to disclose negative news to the market).
As noted above, the vast majority of her Honour’s reasons were devoted to a close analysis of the facts and the evidence, and there was comparatively little discussion of the applicable legal principles, or other matters of more general application. Importantly, however, her Honour did address the following points:
- Her Honour rejected the contention that, provided a reasonable process is undertaken prior to making relevant statements to the market, the statements themselves will have a ‘reasonable basis’. Thus, her Honour said (at - (see also )):
 … The issue is ultimately one of substance, not merely process.
 As a matter of substance, a statement made as a result of a reasonable process, may be one made without reasonable grounds. Equally, as a matter of substance, a statement made as a result of an unreasonable process, may be one made with reasonable grounds. However, I accept that the character of the process by which a statement has been formulated as reasonable or not will be relevant to the drawing of inferences about the character of the statement as reasonable or not, but it is not determinative of that issue. In short, if the evidence establishes that a reasonable process has been implemented by well-qualified, informed and experienced people who must be inferred to have been doing their best at the time to provide accurate information, then there needs to be something in the evidence before it would be concluded that those people had all reached conclusions lacking reasonable grounds.
- Her Honour also rejected the views of Beach J in TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Ltd (2019) 140 ACSR 38;  FCA 1747 that the continuous disclosure laws only require an opinion to be disclosed (such as an opinion as to future forecast earnings or sales) if the opinion is actually held by relevant persons. Instead, her Honour considered that an opinion must be disclosed if the opinion ought reasonably to have been held (even if it is not actually held). Thus, her Honour said (at ):
… if an officer possesses information from which the officer ought reasonably have drawn a particular conclusion, the entity has become “aware” of the information represented by that conclusion… Accordingly, if I had concluded that at any relevant time Iluka had become aware of information in the form of a conclusion that, acting reasonably, it ought to have formed which required disclosure, then I would have accepted that Iluka contravened its continuous disclosure requirements. Further, in that regard, I would have considered that Iluka could become so “aware” either by its directors or an officer … possessing information for which they reasonably ought to have formed the conclusion requiring disclosure.
- Her Honour also stated (at ) that an “optimistic forecast is not an unreasonable forecast” (and therefore that some level of ‘stretch’ in a forecast does not necessarily render it unreasonable).
- Lastly, her Honour also indicated that where a party wishes to contend that another party’s ‘expert’ witness is not appropriately qualified to give expert evidence (as occurred in this case with the evidence of Mr Murray), any such contention should not be left until the trial of the proceeding, but should be raised early so that the Court can rule on it in advance of the trial (and preferably before the experts embark on the preparation of joint reports) (see -).