A win for directors because a breach of continuous disclosure obligations did not cause shareholder losses22 November 2019 | Directors' & Officers' Liability
This decision is the first Court decision arising out of a shareholder class action in Australia.
The basic background facts are that on 11 September 2014, Myer’s chief executive officer represented that, in his opinion, for the 2015 financial year, Myer would likely have a net profit after tax (NPAT) in excess of its 2014 NPAT of $98.5million. However, on 19 March 2015, Myer announced that it expected the 2015 NPAT to be between $75 million to $80 million.
The applicant, TPT Patrol Pty Ltd, brought a representative proceeding for itself and on behalf of Myer’s shareholders who acquired ordinary fully paid shares on or after 11 September 2014 and still held them at the commencement of trading on 19 March 2015.
The applicant argued that Myer engaged in misleading or deceptive conduct in contravention of s1041H of the Corporations Act Cth (2001) (the Act) because Myer had no reasonable grounds to make the 11 September 2014 representation.
The Court found that the applicant failed to prove that Myer did not have reasonable grounds for making the representation at the time it was made.
Further, the Court held that Myer’s failure to promptly disclose that the 11 September 2014 representation was wrong (Myer became aware that its predicted NPAT was inaccurate in the course of preparing its draft FY15 budgets in November 2014):
- Constituted a breach of Myer’s continuous disclosure obligations under s674 of the Act and listing rule 3.1 of the ASX listing rules; and
- Amounted to misleading or deceptive conduct in contravention of s 1041H of the Act.
However, critically, the Court held the breaches had not caused the group members to suffer any loss or damage because the market price for Myer shares at the time of the contraventions had already factored in a NPAT well below the 11 September 2014 representation. Any statement correcting the 11 September 2014 representation was therefore likely to have had no material effect on the market price of the shares. In other words, the applicant failed ot establish causation between the breaches and the alleged losses.
Implications for you
While the Court dismissed the class action because the shareholders were unable to prove loss or damage, his Honour accepted the 'indirect causation theory' or 'market-based' causation theory.
Therefore, while conduct which is said to be misleading or deceptive must relevantly be relied on or constitute an inducement to an action or inaction causing loss, this is not a necessary condition in continuous disclosure cases. Instead, there is a 'reduced causation chain' which requires (1) non-disclosure of material information by the company to the market, (2) the listed price for the securities being inflated by such non-disclosure; and (3) investors purchasing the securities 'on the market' at the inflated price. However, the applicant failed to establish such a chain in the present situation.