Myer Holdings – Part 2: Liability
TPT Patrol Pty Ltd v Myer Holdings Ltd [2019] FCA 1747
Were the 11 September Representations misleading or deceptive when made?
The applicant alleged that Myer had no reasonable grounds for making the representation that Myer would have an NPAT in excess of the previous financial year of $98.5m (the 11 September Representations), and accordingly the representations were taken to be misleading or deceptive by operation of s 769C(1) of the Corporations Act, which relates to representations as to future matters (which is to similar effect as s 4 of the Australian Consumer Law, but unlike that provision does not impose an evidential burden on a respondent).[1]
A peculiarity of this case was that the 11 September Representations were made by Mr Brookes without the board’s imprimatur. In fact, in the board meeting the day before the question and answer sessions during which Mr Brookes made the representations, the board discussed a draft ASX release which had two alternatives: one without any reference to an improvement in NPAT, and the other expressing the following expectation: “assuming no significant change in market conditions, FY2015 NPAT growth in the vicinity of 5 percent”. The release omitted any reference to a forecast improvement in FY15 NPAT. All of the directors except Mr Brookes gave evidence that the board had resolved not to give any explicit profit guidance in the form suggested.[2]
However, this mattered little, because Myer’s senior management and each of its directors was of the view that its FY15 NPAT would be greater than $98.5m, based on the FY15 budget that had been presented to and approved by the board at its 16 July 2014 meeting, which contained an NPAT figure of $107m: [257].
Myer adduced compelling evidence as to the purpose of the budget and how it was formulated, which led to his Honour concluding that Myer’s expectation as to FY15 NPAT was based on reasonable grounds: [257], [1414], [1441], [1445]. For respondents, this emphasises the importance of addressing in lay witnesses’ evidence the process the company undertook to formulate its budget (with a view to demonstrating rigour and diligence), and the purposes that a budget serves from their perspectives, including the implications that setting an unrealistic budget would have for the company and its employees.
The applicant’s reliance on Myer’s underperformance against budget in the immediately preceding years did not avail it, as Myer’s directors and senior executives were aware of and considered this as part of the process of satisfying themselves that the FY15 budget was realistic: [1415], [1419].
As will be apparent, there was a delay between the board’s approval of the budget on 16 July and the 11 September Representations. That is not uncommon, as budgets are typically approved before or at the start of the financial year, and guidance given at the time of the release of audited results for the preceding year. The applicant relied on the fact that the business was tracking behind budget throughout that period, essentially contending that by the time Mr Brookes made the 11 September Representations, Myer no longer had reasonable grounds for the representations (assuming the budget to have been reasonable earlier): [33], [226]. However, his Honour found that none of the directors had formed the view by 11 September that the budget would not be achieved or that NPAT in FY15 would not be greater than $98.5m, and nor should they have: [258]-[259], [1157], [1451].[3] This was essentially because the months of August and September were relatively insignificant to Myer’s full year results compared to the key trading season of Christmas/New Year: [242]-[243].
Continuous disclosure contraventions/misleading or deceptive conduct by a failure to correct
However, as the financial year progressed, Myer’s fortunes did not improve, and this was reflected in internal documents, which ultimately led his Honour to find that by no later than 21 November 2014 (which happened to be the date of Myer’s AGM), Myer ought to have corrected the 11 September Representations by stating that its NPAT for FY15 was not likely to be above the FY14 NPAT: [484]-[486]. By this stage, a draft profit and loss document had been produced on 20 November 2014, which included a forecast NPAT of $90m: [482]. Whilst it appears that his Honour accepted (or at least did not reject) Myer’s submission that documents prepared shortly after mid-November demonstrated that it was not the case that prior to mid-November Myer had concluded or formed the view that its NPAT would be materially less than $98.5m,[4] his Honour was prepared to draw an inference that, as at 21 November 2014, Myer formed an opinion (his Honour does not say by which natural person) that FY15 NPAT was not likely to be materially above the FY14 NPAT: [491]. Thus, Myer had breached its continuous disclosure obligations ([491]) and had also engaged in misleading or deceptive conduct in failing to correct the 11 September Representations: [489].
It was not until “conveniently after” Myer’s AGM that the first reforecast of NPAT was completed and on 9 December 2014 presented to the board: [492]. That forecast NPAT was $92m. On this basis, his Honour concluded that Myer’s view was that the NPAT was likely to be $92m: [514]. Again, his Honour did not attribute that view to any particular natural person.
His Honour considered the implications of his findings for the applicant’s continuous disclosure case.
Under s 674(2)(c)(ii) of the Corporations Act, generally speaking a listed company must disclose information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the securities of the entity. Under s 677, such information includes information that would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities. ASX Listing Rule 3.1 provided “Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.”
Justice Beach concluded that the difference between Myer’s forecast as at 9 December 2014 ($92m) and $98.5m (a 6.5% difference) was material as it was greater than 5%: [505].[5] His Honour explained later in his judgment why he had settled upon 5% or more as being the threshold for materiality by reference to the ASX’s Guidance Note 8. He settled upon this amount notwithstanding that Myer’s earnings were relatively variable (which would normally militate in favour of a threshold closer to 10%) and that Myer was not a very large listed entity (for which a threshold closer to 5% is more likely to be appropriate), largely because the 11 September Representations were to the effect that Myer expected higher NPAT for FY15 (implicitly, materially higher). Further, a decline of 5% or more would have confirmed an overall trend of declining NPAT that had been experienced in Myer for some years: [1282]-[1283].
Amongst other things, Myer submitted that consensus at 9 December 2014 was not materially different from the view that, his Honour found, Myer had formed by that date (likely NPAT of $92m). To this, his Honour bluntly replied “So what?”: [504].[6] Amongst other things, his Honour observed that while ASX LR 3.1 and ss 674 and 677 speak of a ‘reasonable person’, consensus is a median or mean of a small set of analysts and their expectations, which is narrower, and there may even be different figures for ‘consensus’: [1203], [1247]. The company’s own expectation of future earnings is likely to influence market participants in forming their own views on its future earnings, irrespective of consensus prevailing at the time: [1203], [1209]. Further, the forecasts that make up the consensus are likely to be based, at least in part, on the earlier expectation expressed by the company that, in the premises, the company no longer holds: [1208]. For this reason, the applicant’s expert’s acceptance that, in this case, to demonstrate share price inflation, Myer would have had to disclose an expected FY15 NPAT of less than consensus, will not necessarily be true of all (or even many) cases.
Anticipating a perceived inconsistency between his finding on materiality and the doubts that he expressed whether the applicant had suffered loss (the paradox referred to in the Part 1 note), his Honour indicated that the reconciliation was relatively straight-forward: the test for materiality was “looser and lower”; and the doubts that he expressed as to loss were really a product of the way the applicant had run its case on loss, “such that it rose or fell on consensus and changes thereto”: [1211], see also at [1237].
In the context of the applicant’s continuous disclosure case, Myer invoked the defence under ASX LR 3.1A, which excludes ASX LR 3.1 from applying to particular information in circumstances in which, relevantly:
- the information comprises matters of supposition; is insufficiently definite to warrant disclosure; or is generated for the internal management purposes of the entity;
- the information is confidential; and
- a reasonable person would not expect the information to be disclosed.
His Honour held that the first two limbs were established ([1298]-[1300]), but that the third was not, because Myer had made the 11 September Representations: [1303], [1308]-[1309].
Thus, the applicant had established that Myer had breached its continuous disclosure obligations.
From his Honour’s analysis of the continuous disclosure case, the following points can be made:
- First, although the continuous disclosure obligations (and in particular the definition of ‘aware’) contemplate ‘constructive knowledge’ of matters of which officers ought to have been aware, the obligations do not require disclosure of opinions that officers should have formed based on information known to them, but which they did not form in fact: [1136], [1174].
- Secondly, whether an entity is ‘aware’ of an opinion held by one of its officers depends on the circumstances. Whilst it is not necessary for a majority of directors to hold the opinion for the entity to be aware of it, and an opinion held by senior management may need to be disclosed, an opinion held by one officer that is not shared by others may not: [1138]. The answer will necessarily depend on the circumstances. In this regard, it is worth noting that there may be some tension here with Justice Perram’s dicta in Grant-Taylor v Babcock & Brown Ltd (in liq) that ordinarily, the relevant views from a disclosure perspective are those of a board majority.[7] As Beach J observed at [1173], Justice Perram’s analysis and findings on the issue of awareness were affirmed on appeal (notably, by a Full Court of which Beach J himself was a member).
- Thirdly, the mere fact that documents are drafts does not deprive them of significance. Justice Beach accepted Myer’s submissions that information in some documents relied upon by the applicant was insufficiently definite in itself to warrant disclosure for the purposes of the LR 3.1A continuous disclosure exception (at [1297]-[1299]). However, and critically, his Honour had earlier found (based on an inference that his Honour drew) that Myer had formed an opinion after the relevant documents came into existence that FY15 NPAT was not likely to be materially above the FY14 NPAT: [491]. To that extent, the opinion (as distinct from the draft reports from the existence of which Beach J inferred that Myer had formed the opinion) was not immaterial or insufficiently definite to warrant disclosure. Rather, Myer’s views had “crystallised” by this time, notwithstanding that they were not expressly recorded in any document: [490].
- Finally and relatedly, in circumstances in which guidance has been given, if an opinion is formed and the other criteria for its disclosure are made out, a reasonable person would expect the information to be disclosed and the ASX LR 3.1A exception will not apply: [1303]-[1308]. Again, the fact that the opinion is based (wholly or in part) on information in draft documents which is, in itself, insufficiently definite to warrant disclosure, does not relieve an entity from an obligation that otherwise arises to disclose the opinion.
Justice Beach also considered the implications of his conclusions for the applicant’s misleading or deceptive conduct case.
His Honour rejected the applicant’s case that Myer had no reasonable grounds for making the 11 September Representations. In the course of doing so, his Honour rejected a submission that Myer appeared to have made that what Mr Brookes had said was a personal representation made on his own account, rather than a representation made by Myer itself: [1363]ff.
Further, his Honour held that the 11 September Representations were representations as to future matters in respect of which reasonable grounds were required, and were not merely representations as to Myer’s opinions: [1375]. In this regard, his Honour concluded that the 11 September Representations conveyed (implicitly) that they were based on rational grounds: [1437]. However, as noted earlier, his Honour found that Myer’s FY15 budget provided reasonable grounds for the 11 September Representations: [1436], [1441].
Separately, the applicant alleged that the 11 September Representations were continuing representations, or that in failing to correct those representations, Myer engaged in misleading or deceptive conduct. His Honour dealt with this aspect of the case by reference to the principles that apply to a ‘failure to speak’ case, in which the issue whether silence is misleading is assessed by reference to whether the circumstances gave rise to a “reasonable expectation” that if some relevant fact exists, it would be disclosed: [1482].[8] The “relevant fact” here was the expectation of Myer as to its NPAT in FY15. His Honour found that that expectation did change, so, in circumstances in which it had made the 11 September Representations, Myer should have disclosed the change in its expectations. In failing to do so, Myer engaged in misleading or deceptive conduct contrary to s 1041H: [1485], [1487].
His Honour stated that he “tend[ed] to agree” with Myer’s submission that in the context of a listed company, a reasonable person would not expect Myer to disclose information that does not need to be disclosed under s 674, but that this did not avail Myer because of the breaches of s 674 that his Honour found to have occurred: [1488]. Thus, in this case at least, the s 1041H/continuing representation case did not add anything to the applicant’s continuous disclosure case.
The result in Myer Holdings stands in stark contrast with those in Masters v Lombe[9] and Crowley v Worley Ltd,[10] in which the applicants’ respective liability cases were roundly dismissed at trial. It will be interesting to see what, if anything, the Full Court has to say about Justice Beach’s approach and reasoning on the applicant’s liability case when it comes to determine the appeal in Crowley v Worley Ltd.
Daniel Lorbeer is a barrister at the Victorian Bar practising in commercial law, including in class actions.
Liability limited by a scheme approved under professional standards legislation.
[1] It is worth noting that, unlike in Myer Holdings, shareholders in Crowley v Worley Ltd [2020] FCA 1522 also alleged breaches of s 18 of the Australian Consumer Law, invoking the s 4 aid to proof: [624], [634]. However, Gleeson J found that even this did not avail shareholders in that case: [643]-[645].
[2] See also at [1376]ff.
[3] See also at [1394]ff.
[4] See at [465].
[5] Both his Honour and the parties treated a material deviation in earnings as information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities.
[6] See to similar effect at [541], [548], [608], [621].
[7] Grant-Taylor v Babcock & Brown Ltd (in liq) (2015) 322 ALR 723, [156] (Perram J), quoted by Beach J at [1170].
[8] Quoting Gummow J in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 41 and also referring to Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357, [17]-[19] (French CJ and Kiefel J).
[9] Masters v Lombe (liquidator); Re Babcock & Brown Ltd (in liq) [2019] FCA 1720 (Foster J), a note of which can be found here.
[10] Crowley v Worley Ltd [2020] FCA 1522 (Gleeson J).
