Insurance & Reinsurance
The judgment in this securities class action was notable for being only the second to go to trial in Australia following the Myer decision and for being the first in which the Court found in favour of the defendant company.
The case involved Worley Limited, formerly WorleyParsons Limited (Worley), a company listed on the Australian Securities Exchange (ASX) and which provides professional services to customers in the resources, energy and infrastructure sectors.
On 14 August 2013, Worley issued an announcement to the market that it expected its net profit after tax (NPAT) for the year ended 30 June 2014 (FY14) to exceed that of the previous year, FY13, in which it had achieved NPAT of AUD322 million. Subsequently, on 20 November 2013, Worley issued revised guidance, informing the market that it expected NPAT for FY14 in the range of AUD260 million to AUD300 million, with first half underlying NPAT in the range of AUD90 million to AUD100 million. Following this downgrade, Worley’s share price fell by AUD5.59 per share or 25.89% from its closing price the previous day.
The class action was brought by Larry Crowley as applicant on behalf of group members who had purchased Worley shares between 14 August 2013 and 20 November 2013 and who had allegedly suffered loss as a result of Worley’s conduct. The applicant alleged that:
The applicant alleged that on these grounds, Worley had breached its continuous disclosure obligations under s.674 of the Corporations Act 2001 and Rule 3.1 of the ASX Listing Rules, and had engaged in misleading or deceptive conduct.
The Court found that Worley had a reasonable basis for its FY14 earnings guidance. More specifically, the Court found that at all material times the Board of directors and the CEO had reasonable grounds for making the FY14 guidance representation based on its FY14 budget and the monitoring of monthly financial performance and budget reforecast processes. The Court considered that the process by which the FY14 budget was developed by Worley was reasonable, and that the evidence did not demonstrate that particular integers or portions of the FY14 budget were overstated or understated so as to be unreasonable or unjustifiable. The Court was not persuaded that the Board was insufficiently sceptical or inquisitive when releasing its earnings guidance. As a result, the budget case and the performance case failed.
As to the consensus case, the Court found there was no consensus expectation held by professional market analysts that Worley would deliver between approximately AUD354 million and AUD368 million in NPAT for FY14. The Court held that even if there was such a consensus expectation, there was no evidence that any director or officer of Worley knew or believed its FY14 earnings would fall materially short (that is, at least 5% lower) of the consensus range. Accordingly, the consensus case also failed.
This decision involved findings based on its own unique facts. Nonetheless, there are some general observations that can be drawn from the judgment.
First, the decision suggests that an allegation of no reasonable grounds for making an earnings guidance statement requires clear and specific evidence. It indicates that Courts will be reluctant to question earnings guidance statements made to the market – or to second-guess the processes (including Board deliberations) underpinning such statements – without a clear basis for doing so. That said, the decision suggests that companies are more likely to succeed in defending shareholder class actions if they can establish that budgets and forecasts were set following a comprehensive, robust and detailed budgeting process. Because Worley relied on credible evidence demonstrating this, the onus of proof shifted to the applicant to prove the unreasonableness of the FY14 budget. In the event, it was not able to do so. The Court rejected the applicant’s interpretation of the facts, noting that the evidence that supported his case was mostly hindsight and not supported by detail that might contradict the evidence of Worley’s witnesses.
Secondly, the case suggests that miscalculations or erroneous assumptions discovered in hindsight do not necessarily undermine the reasonable basis of forward-looking representations at the time they were made. An internal review carried out by senior management following Worley's earnings downgrade contained a number of observations about a 'culture of optimism' within Worley and an insufficient allowance for downside risk. The Court accepted that while those observations were candid and genuine, it did not automatically follow that the FY14 budget underpinning the forecast lacked a reasonable basis.
Thirdly, because the Court did not find that a consensus expectation was held by professional market analysts, it remains unclear whether directors or senior management of listed companies should have regard to market views about the expected performance of their company and be required to make a corrective disclosure if they become aware of information that is materially different to those market views.
Fourthly, and as a result of Worley succeeding on liability, the Court did not need to express any views on the appropriate method for proving and measuring loss in a shareholder class action. This leaves the Myer decision, which accepted an inflation-based loss measure and the use of event study analysis to prove loss, as the only judgment in Australia providing any guidance in this respect.
Finally, the decision (combined with the Myer decision in which there was no award of damages) may have a general impact insofar as it may discourage plaintiff firms and litigation funders from bringing shareholder class actions, or at least running them all the way to trial. Conversely, it may encourage defendant companies facing such claims to be more willing to take them to trial.
It should be noted that the decision is under appeal.
1. Crowley v Worley Limited  FCA 1522, 22 October 2020.
2. TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747, 24 October 2019 (Myer decision).