Masters v Lombe in the Full Court: the final chapter?
Masters v Lombe (liquidator); Re Babcock & Brown Ltd (in liq)  FCAFC 161
The Full Court of the Federal Court (Middleton, Beach and Colvin JJ) has dismissed an appeal against the decision of Foster J rejecting the appellants’ claims for compensation for alleged breaches by Babcock & Brown Limited (BBL) of its continuous disclosure obligations (a note of which can be found here). Whilst the Full Court held that his Honour was in error to the extent that he did not accept two of the five contraventions of s 674 of the Corporations Act 2001 (Cth) alleged by the appellants, the Full Court upheld his Honour’s findings that the appellants had not established causation or loss: Masters v Lombe, re Babcock & Brown Ltd  FCAFC 161.
Readers will recall that the period during which it was alleged BBL was obliged to, but did not, make a corrective disclosure (between 12 August 2008 and 12 March 2009, the Relevant Period) fell within the global financial crisis, and had as one of its bookends an announcement by BBL on 11 August 2008 that its net profit after tax (NPAT) for the year ending 2008 was then not expected to exceed 2007 group net profit of $643m. It was alleged that BBL failed to disclose on five separate occasions that its expected NPAT was in fact lower than $643m (and increasingly so across the Relevant Period), which was alleged to be material information that ought to have been disclosed. Those five non-disclosures were alleged as separate contraventions.
As to the first alleged contravention (based on a 13 August 2008 memorandum by the CFO), the Full Court in substance agreed with Foster J that it did not comprise information that a reasonable person would expect to have a material effect on the price or value of BBL shares: . Their Honours also held that the ASX LR 3.1A exception to the disclosure obligation would have applied in any event: .
As to the second alleged non-disclosure (based on the CFO’s 20 August 2008 email to the Deputy Chair), again, the Full Court saw no error in his Honour’s finding of a lack of materiality: . The Full Court further held that the LR 3.1A exception would have applied: .
The third alleged non-disclosure was alleged to have taken place on 8 October 2008, being the date on which a board meeting was held. There was some uncertainty as to what was tabled at the board meeting, which is perhaps unsurprising, given that no lay witnesses were called at trial. The Full Court concluded that there were various conflicting forecasts before the board, including a forecast NPAT for the full year of $243m, a forecast loss of $64.78m, and figures in higher forecasts referred to by Foster J. On this occasion, their Honours were inclined to the view that one or more of the forecasts constituted material information but, “[w]ith some hesitancy” were prepared to conclude that the LR 3.1A exception applied: . However, in any event, the Full Court held that the appellants had failed to establish causation and loss in terms of this alleged non-disclosure (further discussed below).
As to the fourth alleged contravention, the Court accepted that on 8 November 2008 the BBL board was presented with a document that contained a then current forecast for 2008 group NPAT of $58.2m. The Court found that the information was material and the liquidator could not make out a condition to the application of the LR 3.1A exception to the disclosure obligation (that a reasonable person would not expect disclosure: LR 3.1A.1). Therefore, it ought to have been disclosed: -.
Similarly, as to the fifth alleged contravention, the Full Court appears to have accepted the appellants’ contention that as at the date of a further board meeting (8 December 2008), BBL was forecasting a loss of $352.8m before impairments and $2.017 billion after impairments. Their Honours held that the relevant information was material, and the liquidators could not have satisfied the ‘no reasonable expectation of disclosure’ condition of the exception (which finding seems implicitly to overturn the trial judge’s finding that the information was insufficiently definite to warrant disclosure): -.
However, their Honours held that the difficulty for the appellants was in showing causation and loss. As recounted in the note of the first instance decision, the appellants’ materiality, causation and loss expert witness was an accountant, whose primary approach to determining the effect of the alleged contravening conduct was based on the price-earnings ratio. There were two essential steps in the expert’s approach: first, to ascertain the market’s expectation of 2008 NPAT as at the date of the alleged contravention (that is, the 2008 NPAT that was hypothesised to be factored into the market price). Secondly, to derive a new market price by substituting the 2008 NPAT figure it was alleged was required to be disclosed in place of the market’s expectation of 2008 NPAT (on the assumption that the ratio between share price and forecast NPAT was constant). Justice Foster found that both of those steps were apt to produce false results, and therefore held that the appellants had not discharged their onus. The Full Court held that there was no error, particularly insofar as the rejection of the first step was concerned: .
As to this, the Full Court had earlier expressed the view, by reference to reports published in August 2008, “that the market did not take BBL’s forecasts seriously” (), and could find no error in the trial judge’s acceptance of the respondent’s expert’s evidence that from mid-September 2008 BBL’s share price reflected speculation that it might survive the global financial crisis, and its share price would recover, not any view about 2008 NPAT: . The usual premise that the share price reflected market expectations concerning NPAT forecasts and associated uncertainties and contingencies likely to affect the business of the relevant company did not hold: a different kind of analysis was required when considering the circumstances of BBL at the relevant time: .
The Full Court returned to some of these themes in upholding the trial judge’s rejection of the appellant’s expert accountant’s analysis: , . Their Honours concluded that there was a disconnect between the market price and the Bloomberg consensus, and that something other than forecast NPAT was driving the share price. The appellants had advanced no foundation other than the analysis of the expert accountant in support of a conclusion that had the disclosure contended for occurred, there would have been a reduction in the share price. Therefore, the appellants were found to have no evidentiary foundation for a case on causation: in the absence of evidence, it was open to conclude that the release of revised NPAT information would have had no effect: .
Unfortunately, given the Full Court’s principal findings rejecting the appellants’ other grounds of appeal, the Full Court found it unnecessary to express its own views on the topic of marketbased causation, about which Foster J had expressed misgivings. Given that Beach J was a member of the Full Court and his Honour had upheld the availability of market-based causation in obiter in TPT Patrol Pty Ltd v Myer Holdings Ltd (2019) 140 ACSR 38 (which addressed some of the issues with the theory that Foster J had identified), it is perhaps surprising that the Full Court did not take the opportunity to resolve some of the uncertainty in the area. That said, any resolution in favour of the theory would necessarily have been obiter, given their Honours’ disposition of the appeal. In any event, it remains the case that in the absence of appellate authority, applicants can continue to spruik Myer Holdings and Re HIH Insurance Ltd, and respondents, the reservations about the theory expressed by Foster J at first instance in Masters.