Worley action alleging baseless budget and earnings guidance fails
Court finds the applicant failed to establish that Worley lacked a reasonable basis for its budget and earnings guidance
This was a class action on behalf of persons who acquired shares in the respondent (Worley) between 14 August 2013 and 20 November 2013. On the former date, Worley issued an announcement which stated that it expected its “geographic and sector diversification to provide a solid foundation to deliver increased earnings in FY2014”. Thus, although the earnings guidance did not specify a figure (or even a range), it did indicate that earnings in FY14 would be greater than in FY13 (in which Worley generated earnings of $322 million). That guidance was repeated on several occasions in October 2013. However, on 20 November 2013 Worley announced that it “now expects underlying NPAT in the range of $260 million to $300 million with first half underlying NPAT in the range of $90 million to $110 million”. That announcement caused a significant fall in Worley’s share price from $21.59 to $16.00 (approximately 26%).
The applicant alleged that Worley did not have a reasonable basis for the earnings guidance at the time it was given; or alternatively, if it did, as at various dates during the relevant period, it had ceased to have a reasonable basis for maintaining the earnings guidance.
Although the judgment runs to some 700 paragraphs (171 pages), it contains very little by way of analysis of the relevant legal principles. Instead, the judgment is heavily focussed on the particular facts of the case. Nevertheless, at , Gleeson J did say that the “allegation that a publicly listed company did not have reasonable grounds for its earnings guidance is a relatively serious one”, which thereby attracts the principle stated in Briginshaw v Briginshaw (1938) 60 CLR 336.
Her Honour undertook a detailed analysis of the evidence relating to the preparation of the budget on which Worley’s earnings guidance was based, and ultimately concluded that the applicant had failed to establish that the budget lacked a reasonable basis (and therefore that the earnings guidance lacked a reasonable basis), either at the time the earnings guidance was first given, or at any time subsequently up until 20 November 2013 when it was withdrawn. Accordingly, the applicant’s claims failed in their entirety.
Whilst her Honour’s decision was obviously based on the facts and evidence in this particular case, the decision (if correct) is somewhat concerning for other earnings guidance cases in circumstances where the evidence indicated, inter alia, that:
- the budget on which the earnings guidance was based was, following a series of ‘management adjustments’, significantly greater (by some $100 million (or 40%) at the EBIT level) than the aggregate of the original business unit budgets that had been prepared by each of the individual business units and transmitted to head office; further, a large part of those ‘management adjustments’ represented ‘blue sky’ revenue from as yet unidentified projects / sources, and there was evidence which indicated that at least some of the individual business units felt compelled by senior management to provide budgets which they did not actually believe were realistic;
- Worley had a fairly consistent track record, over several years, of overestimating its revenue and profit and, thus, not meeting its budgets / forecasts (such that it had, in the previous financial year, been required to issue two earnings downgrades), and notwithstanding that history, there had been no material changes to its budgeting process;
- there were several contemporaneous internal documents authored by Worley’s Chief Financial Officer that were highly critical of Worley’s budgeting process, one of which concluded:
... in many cases, the bottom up build that the locations submit does not match the expectations of growth from senior management. In order to meet these expectations, the most common response is for locations to simply include a greater level of “blue sky” revenue in the second half of their budget period. In essence, locations are ending up budgeting on the hope that work will materialise, rather than any real expectation that it will. Therefore, the probability that the budget will be met decreases… This is supported by the fact that we have missed budget five out of the last six years.
… our budget assumes that everything will go right in a world where we know things will go wrong.
- at a relatively early stage in the financial year Worley’s financial performance was such that the H1:H2 earnings split had shifted from approximately 45:55 to approximately 38:62 (i.e. by early in the financial year, and well before 20 November 2013, Worley’s H1 performance was significantly behind budget, such that substantial improvement would be required in H2 in order for the budget / earnings guidance to be achieved).
As indicated above, notwithstanding those facts, her Honour found that the applicant had failed to establish that Worley lacked a reasonable basis for its budget and earnings guidance.
(Postscript: Perhaps not surprisingly, on 19 November 2020 the applicant filed a Notice of Appeal from her Honour’s judgment.)
Crowley v Worley Ltd  FCA 1522
Federal Court of Australia, Gleeson J, 22 October 2020
Applicant’s Solicitors: ACA Lawyers (Shine Lawyers);
Respondent’s Solicitors: Herbert Smith Freehills;
Applicant’s Funder: N/A
Austlii link: http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2020/1522.html?context=1;query=%20FCA%201522;mask_path=
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