Another successful defence of an Australian shareholder class action

Only the third judgement in a shareholder class action in Australia [1] was handed down on 7 February 2022. The defendant company (Iluka Resources) was successful on all counts and the judgment follows the other recent successes in the WorleyParsons [2] class action (where WorleyParsons was similarly successful on all counts) and the Myer[3] class action (where Myer lost on liability but was successful on causation). The judgment provides firstly, assurance to companies and their D&O insurers that shareholder class actions are not necessarily merely a cheque writing exercise and that robust defences will be accepted by the courts; and secondly it provides useful analysis of the factors that are required for a successful defence of a shareholder class action in Australia, including the importance of limitations and caveats on any forecasts that are made.

Patrick Boardman acted for the lead primary D&O insurer of Iluka and considers the case in further detail. Clyde & Co are very pleased to say that they have now acted for the lead insurer on the only two entirely successful shareholder class actions defences, with Clyde & Co partner, Christopher Smith acting for the primary D&O insurer in WorleyParsons. 

Background

Iluka Resources Ltd (Iluka) is a large mining and global supplier of mineral sands products (zircon, rutile and synthetic rutile which are mainly used in the manufacture of ceramic tiles and paint). The proceedings involved four ASX announcements regarding production/sales forecasts:

1. the original yearly forecast on 23 February 2012 which was based on Iluka’s budget;
2. On 12 April when it maintained its forecast and 8 May when Iluka slightly changed that original forecast; and
3. On 9 July 2012 when Iluka significantly reduced its forecasted sales, at which time Iluka’s share price fell 25%.

The proceedings were filed in 2018 and alleged that Iluka had contravened its continuous disclosure obligations under the Corporations Act and the misleading or deceptive conduct provisions of the Corporations Act, ASIC Act and the Australian Consumer Law in relation to its production and sales forecasts. The Applicant effectively alleged that Iluka should have disclosed the ‘true’ sales forecasts earlier or at least announced that the previous forecasts would not be met, which would have caused the share price to fall. This meant that shareholders who purchased in the relevant intervening period purchased at an inflated price.

Issues in the Case

Two essential issues in the case were:

1. whether Iluka had reasonable grounds for the sales guidance provided between April and July 2012 and;
2. whether Iluka was "aware" that its likely sales in 2012 would be materially less than the guidance provided during the relevant period being 12 April 2012 to 9 July 2012.

The Applicant alleged that Iluka knew that it:

• did not have reasonable grounds to make either the April or May forecast representations;
• had information which created a material risk that both the April and May forecast representations were no longer reliable;
• was no longer able to provide reliable forecasts of future revenue, or
• did not have a reasonable basis for providing point estimates of sales for mineral sands products rather than a broad range going forward.

Whether representations were made at all?

An interesting element to the case was whether the representations alleged by the Applicant had actually been made by Iluka. Iluka specifically denied that it had made any forecast representations in their announcements. The statements made were referable to sales, not expected pricing, revenue or profit, and importantly, were heavily caveated with limitations and disclaimers, including that:

1. there were material risks that the sales guidance would not be achieved, including identified;
2. there were a number of reasons why it had to qualify its 2012 sales guidance saying it could not be relied on as a predictor of future performance and
3. its sales guidance was the best guidance it could provide at the time but was subject to all its qualifications in its original February announcement including:

(a) they were based on its current knowledge and understanding and in good faith;

(b) they were all expressed to be an indicative guide only;

(c) they should not be relied upon as a predictor of future performance;

(d) they were for the purpose of assisting sophisticated investors with the modelling of the company; and

(e) they wouldn’t be liable for the correctness and/or accuracy of the information nor any differences between the information provided and actual outcomes

The Judge held that the representations alleged by the Applicant were not made by Iluka as the meaning prescribed to them by the Applicant could not be maintained, particularly in light of the stated limitations.

The Judge distinguished Myer which held that “a reasonable person would not regard a standard form disclaimer as gutting the opinion or forecast of meaningful content or that disclaimers could negate the representations made.” In Iluka the disclaimers were not proforma, had been made in the context of identified difficulty in predicting the global economic position on which sales were dependent, were a prominent part of the documents and were said to be directed to sophisticated investors for modelling purposes. Further, the Judge determined that even if the representations were made, the Applicant did not rely on them. Instead, he relied on alternate analysis and research, such that the misleading and deceptive conduct case failed.

What are "Reasonable" Grounds for Representations

Notwithstanding the finding that the representations were not made, the Judge provided useful guidance on the evidence a company will be required to adduce to support a reasonable basis for any representations made[4].

In making an assessment about whether there was a reasonable basis, the Judge rejected Iluka’s proposition that a determination of reasonableness only required the Judge to ask “did Iluka apply a reasonable process, taking into account relevant information, to arrive at the conclusions that it did?” The Judge said that in answering the relevant question of whether or not there were reasonable grounds for the representations, the issue was one of substance, not merely process.

This meant that while the process on which a statement has been formulated is relevant, it is not determinative of the issue and there needs to be additional evidence before the court about how that process was considered and implemented. In Myer, Beach J referred to the directors’ ‘genuine assessment’ which supported the Judge’s finding that there needed to be a question of substance.

In Iluka the Judge held that:

“The evidence has not exposed any issue which Iluka failed to consider in formulating its public statements between February and July 2012. It has not exposed any lack of a genuine assessment of the relevance of the issue having regard to the circumstances as they existed at the time. It has not exposed any material for which in should be inferred that Iluka was unreasonably ignoring information that did not suit it. Rather, the evidence has exposed that the relevant Iluka personnel were highly experienced in the markets in which Iluka operated, and were careful, diligent and continuously exerted themselves to ensure that the information that Iluka gave to the market was accurate and timely.

This is not mere evidence of a “process” … Iluka’s evidence, however, goes well beyond that of a mere robust process (although the evidence does establish that its processes were robust).”

Iluka’s evidenced showed that its witnesses were: (a) all highly experienced in the industry; (b) the key personnel were well informed about all relevant issues and were careful and considered in their approaches; (c) had taken to account all issues of relevance and had the objective of being as accurate as possible in their guidance.

Continuous Disclosure – Whether a company needs to disclose an opinion it doesn't have

The judge also rejected the Applicant's claim for breach of continuous disclosure obligations on the basis that at the time of making the April and May representations, Iluka had reasonable grounds to make those statements and could not have been aware of contrary information that those forecasts were no longer reliable.

However, the Judge rejected Iluka's submissions that the continuous disclosure requirements "only require an opinion to be disclosed if the opinion is actually held by the directors or if the opinion is held by someone else and should have become known to the directors"

This important limitation on continuous disclosure arose from the previous decision in Myer and has been utilised extensively by Defendants since. However, the Judge considered those comments to be obiter and not binding on her. She held that if an officer had possessed information from which they reasonably ought to have formed a conclusion requiring disclosure, then a failure to disclose that opinion would contravene the continuous disclosure laws.

Causation – What does Short Selling of a Stock Indicate

Her Honour also found that the class members would have failed to establish causation on the basis that the event study the class members relied on was based on faulty expert evidence.

An interesting observation made by the judge was that if a particular stock is being short sold it does not necessarily provide an inference that a company's sales guidance is unreasonable (i.e. it does not support the notion that all information must not have been disclosed).

Analysis and Commentary

This successful defence by Iluka, together with the successful defences in the Worley Parsons and Myer class actions provides companies, their directors, and insurers with confidence that shareholder class actions are not merely a cheque book writing exercise and that a court will take account of well prepared and relevant defences, with well-prepared witnesses, even about events 9 years earlier. It also provides an outline of how such cases can be avoided or limited by careful and considered limitations and restrictions on any forecasts provided.

Previously some Judges have been flippant enough to question whether shareholder class actions required directions for service of liability evidence, and whether all that was required was quantum evidence, given that all shareholder class actions had previously settled. Clearly that notion has been dispelled by recent judgments.

The judgment:

1. emphasises that a company should have both clear and proper processes in place in respect of any forecast provided to the market, and a record of its detailed and considered assessment of all relevant information by appropriately qualified and experienced directors/officers. It was the evidence of the latter, aligned with the former, which was critical in the successful defence of the claim. Further, to rebut that proposition requires clear and specific evidence by the Applicant.
2. demonstrates the importance of providing appropriate qualifications and limitations to any market guidance, including: any difficulties and uncertainties in providing the forecast; emphasising it being an indicative guide only and not a predictor of future performance; providing any limitation on its intended audience and purpose. These qualifications are an area in which companies and their D&O insurers could work together in seeking to limit the risks of class actions arising and also potentially limit the nature and extent of forecasts which insurers may be prepared to cover.

The successful defence also highlighted the importance of a good working relationship and involvement between the company, its defence team and its D&O insurers.