Putting the brakes on shareholder class action claims

What you need to know

• There have been two further significant shareholder class action judgments in favour of defendants. Shareholders have failed to secure an award for damages in all four shareholder class actions that have gone to judgment in Australia.

• While the decision in Myer removed some uncertainty for plaintiffs by confirming the availability of market based causation (see our earlier article here), recent judgments have raised significant questions about how causation, loss and damage can be established by plaintiffs. The courts have made it clear that they will not find that information was material to investor decisions unless that makes commercial common sense, and will not make findings of causation and loss without sufficient expert evidence.

• An event study is only useful to the Court if the appropriate counterfactual question is asked and if experts isolate the effect of components of alleged material information on a company's share price – both difficult tasks. It is particularly difficult when the actual "corrective disclosure" is not the same as what should reasonably have been disclosed in the first place, as is often the case with earnings guidance vs actual earnings.
• It takes considerable time and resources to run a shareholder class action. We may see a decreased appetite for funders and law firms to pursue these claims (with a renewed focus in consumer claims).

Case against IOOF

What was the case about?

The class action alleged that IOOF failed to disclose to the market material information and engaged in misleading or deceptive conduct (including by silence).

The Alleged Material Information had a number of components, including historical information about various incidents dating back to 2009, a number of allegations made by a staff member about IOOF's research team, and problems with the implementation of IOOF's growth model. The information is said to have been disclosed publicly to the market via a series of Fairfax media articles in June 2015 and statements by the managing director of IOOF to a Senate Committee in July 2015.

What did the Court find?

The Court found that there was information which was true and had not been disclosed (including alleged wrongdoing by certain employees). It was also established that IOOF was "aware" within the meaning of Listing Rule 3.1 of those wrongdoings.

However, the court found that none of information – individually or cumulatively – constituted material information under the Listing Rules. None of it was likely to influence the decision of investors, acting rationally, to buy or sell shares in IOOF.

In coming to that finding, his Honour considered the nature of the Alleged Material Information and whether – applying commercial common sense - an investor would have regarded it as having a material effect on the future earnings, or the price or value, of IOOF shares at that time. He also considered whether the applicant had led sufficient evidence to support a conclusion that components of the Alleged Material Information were material to the share price. As the answer in each case was "no", IOOF neither contravened continuous disclosure laws nor engaged in misleading or deceptive conduct.

While it was unnecessary for His Honour to consider the questions of causation, loss and damage, he made a number of pertinent comments:

1. The applicant's expert evidence was an "all or nothing" event study. Even if the Court found that a subset of the pleaded Alleged Material Information should have been disclosed, the event study made no attempt to identify the separate components of inflation that related to those particular pieces of information. The Court could not undertake that assessment without the assistance of expert evidence.
2. Further, the event study was invalid to prove indirect market based causation because the pleaded allegations and the disclosure in the Fairfax articles were not materially aligned.
3. The Court could not infer that the fall in IOOF's share price was attributable specifically to the disclosure of those components of the Alleged Material Information that were established to be true. IOOF did not advance an alternative positive defence and was not required to do so.
4. The applicant had not led evidence to establish the extent to which the Alleged Material Information would have affected IOOF's reputation, or how that reputational impact would affect the price of IOOF shares.

The case is McFarlane as Trustee for the S McFarlane Superannuation Fund v Insignia Financial Ltd [2023] FCA 2628

Case against Worley

What was the case about?

The class action against Worley commenced eight years ago. It alleged that Worley breached its continuous disclosure obligations and engaged in misleading or deceptive conduct when it released its FY14 earnings guidance in August 2013, forecasting NPAT in excess of $322 million. Worley then downgraded that forecast to $260-$300 million in November 2013. Its share price dropped 26% after that announcement. At first instance, the case was dismissed. On appeal, the Full Court remitted the case to a single judge for determination.

What did the Court find?

On remittance, the Court found that the FY14 earnings guidance was misleading and made without a reasonable basis. The fact that the guidance was made without a reasonable basis was material information of which Worley was aware and should have been disclosed.

However, the contraventions did not result in shareholders recovering any loss because:

1. The expert evidence relied on by the class included a primary counterfactual that the announcement Worley should have made in August 2013 was in similar terms to the corrective disclosure in November 2013. That is – that the guidance in August 2013 should have been in the range of $260-$300 million ultimately given in November. That was flawed because it relied on hindsight analysis. There was no evidence that Worley should have been aware of what it knew in November 2013 some three months earlier.
2. From the available evidence and concessions made by the parties, the appropriate counterfactual was that the guidance in August 2013 should have been $317 million (ie as opposed to guidance of "in excess of $322 million" actually given at that time). There was insufficient evidence for his Honour to conclude that the counterfactual would have had an adverse effect on Worley's shares – none of the evidence considered a range above a guidance of $300 million.
3. Even if his Honour could have inferred an adverse impact by guidance of $317 million instead of $322 million, the evidence did not allow him to quantify loss caused by that counterfactual guidance.

His Honour noted that an event study analysis is not the only available approach to the issue of finding the true value of shares – fundamental valuation evidence (including discounted cashflow methodology or a capitalisation of maintainable earnings methodology) could be adopted.

The case is Crowley v Worley Limited (No 2) [2023] FCA 1613. Shareholders have filed another appeal, which may allow the Court to provide further guidance on how to prove loss in shareholder claims.

Authors: Ian Bolster, Partner; John Pavlakis, Partner; Sally-Anne Stewart, Senior Associate; and Andrew Westcott, Expertise Counsel.