Shareholders one step away from Australia’s first successful securities class action

On 11 March 2022, the Full Court of the Federal Court of Australia allowed an appeal from Australia’s second securities class action: Crowley v Worley Limited [2022] FCAFC 33. The Full Court set aside the orders made by the trial judge dismissing the shareholders claim and remitted the matter to the Federal Court for further hearing.

Our previous article dealing with the first instance decision (available here) reported that the decision at trial marked a significant step back for claimant shareholders.

The Full Court’s judgment may result in Australia’s first successful shareholder class action. The Full Court’s decision significantly lowers the evidentiary burden for shareholders in securities actions. The decision will likely encourage similar securities actions against ASX-listed companies backed by litigation funders.

In this update we discuss three issues ASX-listed companies ought to consider as a result of the decision.

Background

Our previous article provides an overview of the underlying facts. In brief, in August 2013, Worley Limited (Worley) released earnings guidance that estimated net profit after tax (NPAT) in excess of $322 million in the financial year ending 30 June 2014. Revised earnings guidance was published in November 2013 with forecast NPAT between $260-300 million, leading to a 26% reduction in the Worley share price.

The lead applicant alleged that Worley:

• engaged in misleading and deceptive conduct by representing that it expected to achieve NPAT in excess of $322 million in the financial year ending 30 June 2014; and
• breached its continuous disclosure obligations by not notifying the ASX that (1) Worley did not have a reasonable basis for its 2013 earnings guidance and/or (2) Worley’s earnings were likely to fall materially short of the consensus expectation of professional analysts.

Key takeaways

Knowledge of the corporation, not just the board

Where a representation has been made by a corporation with respect to a future matter (for example, about future profit expectations), the corporation must have knowledge of facts that provide a reasonable basis for making the representation.

Importantly, if a company makes a representation, which turns out to be misleading, and the board had a reasonable basis for concluding the matters the subject of the representation that may still be insufficient to avoid liability if senior officers within the company had knowledge of facts that contradicted the board’s conclusion.

Ultimately, it is the knowledge imputed to the corporation as a whole (and not just that of the board) which is relevant when assessing a corporation’s alleged misleading and deceptive conduct.

As we discuss below, this will have significant implications for companies defending these types of actions when considering who ought to be a witness.

Information that company officers ought reasonably to have had must be disclosed

For the purposes of continuous disclosure obligations under the ASX listing rules and s 674 of the Corporations Act 2001 (Cth), an opinion about certain facts and their implications (if this would reasonably affect the listing price of shares or other securities) can constitute “information” that should be disclosed.

However, it is not just opinions that are actually held which need to be disclosed. Where a company’s officers had or ought reasonably to have had information that would affect the listing price of shares or securities, they may be in breach of their continuous disclosure obligations, if it is not disclosed.

The Full Court expressed the view that publicly listed companies should not be rewarded for having poor information systems and management procedures which result in the board not coming into possession of important, market-sensitive information.

Adverse inferences where company officers are not called to give evidence

Securities class actions typically involve information asymmetry between the parties, where much of the evidence about what was known by whom within the corporation is solely in the possession of the defendant company.

In those circumstances, the Full Court indicated that a proper application of principle requires trial judges to draw adverse inferences against defendant companies when they do not call officers, directors or employees who were involved in the alleged misleading or deceptive conduct or breach of continuous disclosure obligations. The adverse inference a court may draw is that, if the witness had been called, the witness would have given evidence that was unfavourable to the defendant company.

The Full Court also emphasised that trial judges must consider the totality of the available evidence and cautioned against adopting an unduly narrow approach that involves a very close consideration of individual pieces of evidence to determine whether specific allegations are made out.

Watch this space

When considering the Full Court’s decision from the perspective of a director, it is consistent with Middleton J’s decision in ASIC v Healey [2011] FCA 717 at [175], namely that directors should not rely too much on others, including experts such as auditors and accountants, when carrying out their obligations as directors.

The Full Court’s decision ought to prompt ASX listed companies to review their policies and procedures with respect to two key areas:

1. The sharing of information held by senior company staff and their direct reports (particularly the CFO and their staff) within the corporation.
2. The degree to which the board scrutinises and seeks out material information, like financial data, including the methodologies used to produce it.

The decision will no doubt impact litigation strategy for both claimants and defendants in securities class actions and highlights the importance of having officers, directors and employees who were involved in the alleged contraventions available to give evidence.

The matter has been remitted to a single judge to be re-determined according to the Full Court’s decision. As the original judge, Gleeson J, has been appointed to the High Court of Australia, the matter will be allocated to a new trial judge. But before the matter is heard by a single judge, Worley may seek special leave to appeal the Full Court’s decision to the High Court.

For now, watch this space.

This article was co-authored with Shaun Buckton.