Court debates whether continuous disclosure laws extend to opinions which ought to have been held

_{< Go back to Class Actions Landscape Australia}

This was a class action on behalf of persons who acquired shares in the respondent (Worley) between 14 August 2013 and 20 November 2013. On the former date, Worley published its financial results for FY13, which disclosed NPAT of $322 million, and stated: “While recognising the uncertainties in world markets, we expect our geographic and sector diversification to provide a solid foundation to deliver increased earnings in FY2014”. Thus, although the announcement did not specify a precise figure or range for expected FY14 NPAT, it indicated that FY14 NPAT would be greater than the FY13 NPAT of $322 million. That guidance was repeated on several occasions in October 2013. However, on 20 November 2013 Worley announced that it “now expects underlying NPAT in the range of $260 million to $300 million with first half underlying NPAT in the range of $90 million to $110 million”. Following that announcement, the price of Worley’s shares declined by approximately 26%.

The applicant contended, in substance, that Worley:

• a) did not have a reasonable basis for the FY14 earnings guidance which it gave to the market (and which it subsequently reaffirmed on multiple occasions), and thereby engaged in misleading or deceptive conduct; and

• b) contravened its continuous disclosure obligations by failing to disclose that it lacked a reasonable basis for its FY14 earnings guidance.

At first instance, the primary judge (Gleeson J) dismissed the applicant’s claims. In this decision, the Full Court upheld the applicant’s appeal, overturned the primary judge’s decision, and remitted the matter to a single judge for further determination.

The Full Court stated that the applicant did not seek to, and did not need to, disturb many of the primary findings of fact that were made by the primary judge. Instead, the primary judge had erred, in essence, in not drawing obvious inferences from those primary facts, particularly in circumstances where Worley had made a deliberate forensic choice not to call evidence from most of its senior personnel who were intimately involved in setting the FY14 budget (and the FY14 earnings guidance which flowed out of it), including members of the board and, crucially, its Chief Financial Officer (Mr Holt). 

Following Worley’s guidance downgrade on 20 November 2013, FY14 became the fifth out of the last six years (since FY09) that Worley had missed its budgeted NPAT by 10% or more. In response, Mr Holt conducted interviews with senior management and other personnel, and produced a memorandum to Worley’s Audit & Risk Committee dated 5 December 2013, which became a significant document in the proceeding (Holt Memorandum). In short compass, the Holt Memorandum was highly critical of Worley’s budget processes and concluded, inter alia, that:

• expectations of growth at senior management level (driven in part to meet market expectations) were too optimistic and were not consistent with the ‘bottom up’ budgets prepared by Worley’s underlying businesses;

• in order to meet senior management’s expectations, Worley would direct its businesses to include ‘blue sky’ revenue in the second half of their budget period in the hope that work would materialise, rather than any real expectation that it would; and

• there was insufficient allowance made in the budget process for potential downsides (whether known or unknown).

Misleading or Deceptive Conduct Claim

The Court’s reasons for setting aside the primary judge’s conclusion in relation to the misleading or deceptive conduct claim are lengthy, but they include the following key points:

• although Worley’s stated intention was that the budget should be a ‘P50’ budget (being a budget where there was a 50% chance of exceeding the budget and, by definition, a 50% chance of falling short of the budget), the actual FY14 budget which it adopted was more akin to a ‘P25’ budget, due to the significant ‘stretch’ and ‘blue sky’ revenue applied to it;

• the initial ‘bottom up’ budget (which forecast NPAT for FY14 of only $252 million (or $284 million after foreign exchange adjustments)) was itself described within Worley as being ‘aggressive’ and ‘ambitious’ even before the significant management adjustments which increased the forecast NPAT to $352.1 million;

• leading into FY14, Worley’s major markets were either not growing or were deteriorating, but notwithstanding that, the budget forecast significant growth, and included significant ‘blue sky’ revenue (even though ‘blue sky’ revenue was a function of a buoyant market) – further, the revised earnings guidance issued in November 2013 was largely the result of reducing that ‘blue sky’ revenue by around $100 million; and

• as noted above, Worley had a track record of missing its budgets, and twice in FY13 had issued guidance downgrades, but despite that, no material change had been made to its budget processes.

Despite the primary judge having found the above facts, she had “focused on each piece of evidence explaining why, in and of itself, that piece of evidence did not support the [applicant’s] rebuttal” (at [77]) but, in effect, failed to consider the evidence as a whole and, most importantly, failed to draw the inferences that were reasonably open, particularly in light of Worley’s failure to call evidence from key witnesses who were intimately involved in the budget process.

Further, her Honour had focussed on the wrong question. Although the earnings guidance was issued following a resolution of the board, it constituted a representation made by Worley itself, not by the board of Worley – as such, the relevant question was not whether the board of Worley acted reasonably or unreasonably given the information made available to it (albeit that was relevant, but was not determinative) – instead, the relevant question was whether Worley as a company had reasonable grounds for the guidance.

As Worley had relied on the FY14 budget as constituting its reasonable grounds for the FY14 guidance, and by reason of the matters set out above the FY14 budget did not provide such reasonable grounds, it was not necessary for the applicant to go further and, in effect, identify what would have been a reasonable NPAT forecast for Worley in FY14. In other words, the applicant had successfully rebutted the only ‘reasonable grounds’ which Worley had put forward to justify its earnings guidance, by demonstrating, as a whole, that the FY14 budget was not reasonable – it was not incumbent on the applicant, in the circumstances, to go further by conducting a line-by-line analysis of the FY14 budget.

Continuous Disclosure Claims

The Court’s reasons regarding the applicant’s continuous disclosure claims were less extensive. Importantly, however, the Court unanimously rejected the respondent’s submission that a company is only required to disclose information said to be constituted by an opinion if the company actually held or possessed that opinion, and is not required to disclose opinions it ought to have, but did not, actually hold. The Court held that a company will be ‘aware’ of information in the requisite sense in circumstances where it should have, but did not, form an opinion or draw an inference based on the facts known to it. In doing so, the Court said that statements made to the contrary by Beach J in TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Ltd (2019) 140 ACSR 38; [2019] FCA 1747 and Perram J in Grant-Taylor v Babcock & Brown Ltd (in liq) (2015) 322 ALR 723; [2015] FCA 149 were wrong.

The Court also clarified that, in a case in which the ‘information’ amounts to an opinion with respect to the achievability of an earnings forecast, the company will be ‘aware’ of information if the evidence shows that: (a) the information (that there was not reasonable grounds for the forecast) in fact existed; (b) reasonable information systems or management procedures ought to have brought the information to the attention of a company officer; and (c) acting reasonably the officer ought to have discerned the significance of the information.

_{(It was reported in Lawyerly on 12 April 2022 that Worley has filed an application for special leave to appeal to the High Court.)}

Crowley v Worley Ltd [2022] FCAFC 33

Federal Court of Australia, Perram, Jagot and Murphy JJ,
11 March 2022

Appellant’s Solicitors: ACA Lawyers (Shine Lawyers);
Respondent’s Solicitors: Herbert Smith Freehills;
Appellant’s Funder: N/A

Austlii Link: Available here

_{< Go back to Class Actions Landscape Australia}