Myer and the market-based causation decision
Shareholder class action – Whether respondent had reasonable basis for earnings guidance – Availability of market-based causation
This is, of course, an enormous judgment (some 1,721 paragraphs) which does warrant reading in full. What follows is only a brief overview of some of the key points.
The basic facts of the case were that:
- on 11 September 2014, at the time of announcing its full year results for FY14, the respondent (Myer) made some broad and general statements about the outlook for the year ahead, but specifically did not give earnings guidance (because the board had decided the previous day that it would not do so);
- however, at a series of investor and media briefings on the same day Myer’s CEO made statements to the effect that the company was expecting to achieve earnings for the current year that were in excess of the previous year (which was consistent with Myer’s budget, which showed that earnings were expected to increase by about 8%);
- despite those statements, most of the analysts were forecasting that Myer’s earnings would not in fact be in excess of the previous year’s earnings;
- throughout the course of the year, Myer’s financial performance was well below budget, but because its revised internal forecasts were still in line with analyst consensus, it considered that it did not need to make any corrective announcements;
- however, on 19 March 2015 Myer announced that its earnings were now expected to be between $75 and $80 million, which was below analyst consensus, leading to a substantial fall in the share price.
In summary, Beach J found that:
- there were reasonable grounds for the representations made by the CEO on 11 September 2014, based on Myer’s existing budget;
- however, Myer’s continuous disclosure obligations were triggered when, at various later points in time, Myer became aware that its earnings would be materially different to the CEO’s representation;
- specifically, from 21 November 2014 until 19 March 2015 Myer breached its continuous disclosure obligations and engaged in misleading or deceptive conduct by failing to correct the 11 September 2014 representations as at various dates;
- Myer’s expectation as to its earnings during the period prior to 19 March 2015 was either above or not materially different from the Bloomberg consensus figure – thus, as the market had already factored in a lower earnings outlook anyway, there was no evidence that the company’s breaches caused any loss to shareholders; and
- although on 19 March 2015 the market price for Myer securities fell, that was not because the company revealed that it would not meet the earnings guidance given by the CEO on 11 September 2014 (which the market had already figured out for itself), but because the new guidance was below analyst consensus, and that latter fact had only become known the day before – his Honour accepted the theory of market-based causation, but despite that, the evidence did not establish that the price of Myer’s shares was ever inflated by reason of the company’s breaches.
His Honour found that once the ‘de facto’ earnings guidance had been given by the CEO on 11 September 2014, it was that guidance which needed to be monitored to ensure that Myer’s continuous disclosure obligations were not breached – the fact that Myer’s internal forecasts were in line with analyst consensus up until 18 March 2015 did not alter that position, and Myer should have updated its guidance from 21 November 2014. In other words, notwithstanding that the board had not intended to provide guidance at the time of the FY14 results, and notwithstanding Myer’s practice of monitoring consensus, once guidance had been provided by the CEO (even if it was only verbal), that guidance became the benchmark. It did not matter that the guidance was not given formally via an ASX announcement – indeed, because the CEO’s comments were published in newspaper articles, it was more likely to come to the attention of retail investors than if it had only been published in a formal ASX announcement; and nor did it matter that the CEO’s statements were in general terms which did not identify a firm number or a specific range.
The applicant alleged that there were no reasonable grounds for the guidance at the time it was given, because the budget on which it was based was unrealistic, and that events after the budget was created and before 11 September 2014 showed that it could not be achieved. However, his Honour found that the budget was the result of a “comprehensive and thorough process” and thus there were reasonable grounds for the guidance at the time it was given. He also found that Myer continued to have reasonable grounds for the guidance up until 21 November 2014, despite some poor trading results and also despite the fact that there had been several forecasts before that date indicating that Myer was unlikely to achieve the guidance – his Honour held that those forecasts were too preliminary and too uncertain to require disclosure.
However, by the time of the AGM on 21 November 2014 it had become sufficiently likely that Myer’s earnings would be materially different from the guidance, such that disclosure was required at that point. In particular:
- on 21 November 2014 Myer should have disclosed to the market that its likely FY15 earnings would, contrary to the CEO’s earlier statement, not be materially above FY14 earnings; and
- on various dates after that, Myer should have disclosed to the market its expected FY15 earnings based on internal forecasts.
His Honour also gave some important guidance on how the continuous disclosure regime applies to information in the nature of opinions – specifically, that a company’s earnings expectation is an opinion about the future, and a person can’t be found to be in breach of Listing Rule 3.1 if they fail to disclose an opinion which they never actually held (even if they ought to have formed that opinion).
His Honour also found that the information in question was material, even though he later found that it was unlikely to affect the share price because it was no different to the existing analyst consensus as at each date – that was because the test of materiality was said to be less stringent than the test for establishing loss, and also because analysts do not represent all investors – thus, regardless of what the analyst consensus may have been, there was still an obligation to issue a corrective statement. In other words, analyst consensus was not the benchmark against which to assess materiality in circumstances where the 11 September 2014 statements had been made, particularly as Myer has a large retail shareholder base and many retail investors may be completely unaware of analyst consensus figures.
In relation to the misleading or deceptive conduct claim, his Honour said that the applicant had the burden of proving that Myer did not have reasonable grounds for making the statement in question, and that:
- in determining whether a person had reasonable grounds for a representation of opinion, the relevant inquiry is whether the facts the person possessed were capable of supporting the opinion;
- a person will have reasonable grounds for making a representation with respect to a future matter if there are facts sufficient to induce that state of mind in a reasonable person; and
- the question whether there were reasonable grounds for the making of a profit forecast is to be resolved by looking at whether the director or officer had made a genuine assessment as to the appropriateness of the forecast – if a genuine assessment had been made, there would be reasonable grounds to support the making of the forecast.
The applicant relied on a series of matters to establish an absence of reasonable grounds on and from 11 September 2014, including:
- first, the board’s recognition of the inherent unpredictability of Myer’s business and earnings;
- second, Myer’s underperformance against budget in recent years;
- third, Myer’s budget being explicitly formulated so as to satisfy market expectations and achieve various targets rather than to reflect the realistically achievable performance of the business;
- fourth, the existence of adverse economic conditions and low consumer confidence; and
- fifth, Myer’s poor start to the FY15 year.
However, his Honour found that none of those matters, either alone or in combination, was enough to establish a lack of reasonable grounds, and that the FY15 budget and the manner in which it was prepared was a more than adequate foundation to establish reasonable grounds at the time of the making of the CEO’s statements; but that those reasonable grounds had ceased to exist on and from 21 November 2014 based on Myer’s own internal forecasts.
In the end result, therefore, his Honour found that Myer had breached its continuous disclosure obligations, and engaged in misleading or deceptive conduct, on and from 21 November 2014 by not correcting the CEO’s 11 September 2014 statements.
On the issue of causation, the applicant relied solely on market-based causation, and did not plead any case of actual reliance. The judgment contains a lengthy discussion on this topic, but the end result was that his Honour accepted that market-based causation is a legitimate theory of causation.
The key aspect of the decision, though, was on loss. The applicant only advanced an inflation-based measure of loss, being the difference between the price paid for the shares and the market price that would have prevailed but for the contraventions – it did not seek to advance any other measure of loss, such as ‘true value’, ‘price paid less price sold’ or a ‘no transaction’ case.
Both parties called evidence from loss experts, and the judgment contains a detailed and helpful discussion about the science of event studies. There were a number of differences between the two experts, but in summary:
- the Court adopted the so-called ‘Cammer’ factors from US cases in determining whether the semi-strong version of the efficient capital market hypothesis applied to the trading in Myer shares;
- his Honour also discussed the distinction between the constant dollar approach and the constant percentage approach to estimating inflation, and said that which one should be applied in any given case depends upon the nature of the announcement that is being assessed – thus, the constant dollar method should be applied in circumstances where a disclosure on earnings has a one-off effect on cash flows or reduces cash flows by a constant amount each year but does not otherwise materially alter perceptions as to the risk associated with future cash flows, and the constant percentage method should be applied in circumstances where a disclosure does affect the market’s expectations as to the growth and/or risk of future earnings (and in this case the constant percentage method was appropriate); and
- thirdly, there were differences in the market model which had been adopted by the two experts: the two experts had used a different industry index – the applicant’s expert using a broad based industry index, and Myer’s expert using a bespoke index made up of Myer’s direct competitors; and also the applicant’s expert had used an estimation window for 12 months immediately preceding the share price drop, whilst Myer’s expert had used an estimation window spanning six months either side of the share price drop – on both issues, his Honour preferred the model adopted by the applicant’s expert.
There were other differences between the two experts, but his Honour did not need to dwell on them, because the fundamental difficulty for the applicant was that:
- firstly, the disclosure which the applicant alleged should have been made, and which the applicant’s expert was instructed to assume for his event study analysis, was not the same as the disclosure which his Honour ultimately found should have been made; and
- secondly, whilst that issue may not have been fatal (as the applicant’s expert could have been given the opportunity of revising his calculations by reference to the correct counter-factual), the issue that was fatal was that the disclosure which his Honour found should have been made was actually no different from the existing analyst consensus as at each relevant date anyway, which meant that it had already been factored into the share price – in other words, there was no inflation in the share price throughout the relevant period because the information that should have been disclosed had effectively already been anticipated by the market.
Whether any loss could have been established had one of the other loss methods been deployed is not really touched upon in the judgment.
In summary, although the applicant was successful in establishing many of the elements of its case, including:
- that there were continuous disclosure and misleading or deceptive conduct contraventions on and from 21 November 2014 up until 18 March 2015; and
- that market-based causation, in principle, is a valid theory of causation.
Its case failed essentially for two reasons:
- that the counter-factual which its event study expert had been instructed to assume, in terms of what Myer ought to have disclosed, was not the same as what his Honour found it ought to have disclosed; and
- more importantly, there was no inflation in the share price during the relevant period because the counter-factual news had already been assumed by the market and factored into the share price.
TPT Patrol Pty Ltd v Myer Holdings Ltd  FCA 1747
- Federal Court of Australia, Beach J, 24 October 2019
- Applicant’s Solicitors: Portfolio Law;
- Respondent’s Solicitors: Clayton Utz;
- Applicant’s Funder: N/A
Read more about this case on Austlii: TPT Patrol Pty Ltd v Myer Holdings Ltd  FCA 1747
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