Crowley v Worley Ltd

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This judgment arose following a remitter from the Full Court. In summary:

• On 14 August 2013 the respondent (Worley) published its results for the year ended 30 June 2013 (FY13), reporting a net profit after tax (NPAT) of $322 million. On the same day, Worley gave earnings guidance for FY14 – although it did not identify a specific figure or range, it stated that it expected “increased earnings” in FY14 (i.e. greater than the $322 million NPAT reported for FY13). That guidance was based on Worley’s internal budget for FY14, which forecast NPAT for FY14 of $352 million.
• Worley subsequently reaffirmed that guidance in ASX announcements which it issued on 9, 10 and 15 October 2013.
• However, on 20 November 2013 Worley withdrew the guidance, and gave revised guidance for FY14 NPAT of $260-$300 million, citing various reasons for the downgrade.

At the initial trial of the proceeding, the primary judge (Gleeson J) dismissed the applicant’s claims (Crowley v Worley Ltd [2020] FCA 1522). Her Honour found that the applicant had failed to establish that Worley lacked a reasonable basis for the earnings guidance at the time it was given, or when it was subsequently reaffirmed. Consequently, her Honour did not need to address any issues relating to causation and loss.

On appeal, the Full Court overturned the primary judge’s decision, and remitted the proceeding to a single judge for redetermination (Crowley v Worley Ltd (2022) 293 FCR 438; [2022] FCAFC 33). The remitted proceeding came before Jackman J.

In relation to questions of liability, the applicant chose not to lead expert evidence regarding (or otherwise seek to pinpoint) the earnings guidance that Worley, acting reasonably, should have issued on 14 August 2013. Instead, because Worley’s sole justification for the earnings guidance which it gave on that date was its internal budget for FY14 and the process by which that budget was prepared, the applicant’s attack was, for the most part, confined to a qualitative (rather than quantitative) attack on that process, and the various assumptions which underpinned the budget (which the Full Court held the applicant was entitled to do).

Due to the nature of a remitter, Jackman J considered that he was bound by, and was not at liberty to disturb, any findings of fact or law made by:

• the Full Court; and
• the original primary judge (to the extent those findings had not been disturbed by the Full Court),

notwithstanding that his Honour did have reservations about the veracity of some of those findings.

Based on those findings, and certain additional findings of his own arising from a review of the evidence led at the initial trial, his Honour determined that the applicant had succeeded in establishing that Worley lacked a reasonable basis for the earnings guidance at the time it was first given, and when it was subsequently reaffirmed, for reasons which included:

• Worley had a history of poor budgeting – in five of the past six years Worley had achieved earnings that were more than 10% below its initial budget;
• Worley’s budget for FY14 included a large (and excessive) amount of ‘blue sky’ revenue from as yet unidentified projects, and made insufficient allowance for potential downsides – in other words, it assumed everything would go right, when it knew that some things would go wrong; and
• Worley’s budget for FY14 was not a ‘P50 Budget’ (being one where there is an equal chance of exceeding the budget as there is of falling short of it) – in that regard, his Honour said (at [68]):

… it is self-evident that a budget which is not broadly in line with the parameters for a P50 Budget does not provide a reasonable basis for earnings guidance announced to the market. A reasonably based budget requires that the relevant company has reasonable grounds to think that, in broad terms but not necessarily with the precision of a bookmaker, the company is at least as likely to exceed its estimate as it is to perform below it.

Thus, the applicant succeeded in establishing misleading or deceptive conduct by Worley and a contravention by Worley of its continuous disclosure obligations.

His Honour then turned to consider questions of causation and loss. His Honour had no hesitation in accepting that an event study was a valid method of establishing causation and loss in a shareholder class action, and rejected Worley’s submission to the contrary. However, for the purposes of the event study analysis (which was the only basis on which the applicant had sought to prove loss, having chosen not to lead evidence as to the fundamental value of Worley shares), it was necessary for the applicant to establish, on the balance of probabilities, what the appropriate counterfactual was (i.e. the earnings guidance that Worley, acting reasonably, should have issued on 14 August 2013, it not being contended by the applicant that Worley would not have issued any earnings guidance at all on that date). Because of the approach adopted by the applicant to questions of liability as noted above (i.e. not attempting to pinpoint the earnings guidance that Worley, acting reasonably, should have issued on 14 August 2013) the identification and proof of the appropriate counterfactual was far from straightforward. The applicant posited three alternative counterfactuals:

• Earnings guidance in the same terms as was ultimately given by Worley on 20 November 2013 (i.e. NPAT of $260-$300 million) (Counterfactual 1): The applicant sought to justify this on the basis that the qualitative reasons given by Worley for the earnings downgrade on 20 November 2013 already existed as at and prior to 14 August 2013. However, his Honour rejected that argument, on the basis that the downgrade on 20 November 2013 was, to a large extent, based on Worley’s actual results from the first four months of trading, which was obviously not something that was known to Worley (or to anyone) as at 14 August 2013. Further, even if the qualitative reasons cited for the downgrade on 20 November 2013 already existed in some form as at 14 August 2013, it did not follow that they would have had the same quantitative impact as at the earlier date. Thus, the applicant failed to establish, on the balance of probabilities, that Counterfactual 1 was the appropriate counterfactual.
  
  
• Earnings guidance of $289 million (Counterfactual 2): His Honour stated that there was no basis in the evidence for that figure, which appeared to be a figure that was chosen on the basis that it was materially (i.e. 10%) less than the FY13 NPAT of $322 million. Thus, his Honour rejected Counterfactual 2 as the appropriate counterfactual.
  
  
• Earnings guidance of $284 million (Counterfactual 3): That figure was based on the forecast NPAT contained in an earlier draft of Worley’s budget, which the applicant accepted was reasonable (prior to a series of ‘management adjustments’ which increased the forecast to the ultimate figure of $352 million). However, his Honour noted that the applicant had not challenged the reasonableness of at least some of those ‘management adjustments’. Once those unchallenged ‘management adjustments’ were included, the appropriate counterfactual was $317 million (not $284 million). However, his Honour considered that there was no evidence to establish, and it was not otherwise self-evident, that if Worley had given earnings guidance of $317 million as at 14 August 2013 (as opposed to $284 million), there would have been any impact on Worley’s share price, and the applicant’s loss expert had not addressed a counterfactual in those terms. Further: (i) even if there would have been some impact on the share price, because the applicant’s expert evidence had not addressed such a counterfactual, the applicant had failed to prove what the quantum of that impact was (and therefore what his loss was); and (ii) even if earnings guidance of $284 million had been the appropriate counterfactual, there was a lack of economic equivalence because the reasons given by Worley for the downgrade on 20 November 2013 would not have been the same as at 14 August 2013.

His Honour also considered that this was not a case where the applicant was unable to adduce precise evidence of his loss (such that the Court must do the best it can to estimate loss); instead, it was a case where he was able to do so, but had simply failed to do so.

In the end result, therefore, his Honour found that the applicant had failed to prove that he had suffered any loss as a result of Worley’s contraventions, or what the amount of that loss was. Consequently, his Honour dismissed the applicant’s and class members’ claims.

_{(1) In a subsequent judgment (Crowley v Worley Ltd (Costs) [2024] FCA 211 Jackman J ordered the applicant to pay Worley’s costs of the proceeding (including the costs of the initial trial before Gleeson J). In doing so, his Honour rejected the applicant’s argument that those costs should be reduced on account of the applicant having succeeded on the question of liability – his Honour indicated that, in circumstances where the claim was, in substance, one for the recovery of compensation, the applicant’s claim had wholly failed, and his success on some questions relating to liability was merely a “Pyrrhic victory” which did not warrant a different order as to costs.}

_{(2) On 7 February 2024 the applicant filed an appeal from Jackman J’s decision.}

Crowley v Worley Ltd (No 2) [2023] FCA 1613

Federal Court of Australia, Jackman J,
19 December 2023

Applicant’s Solicitors: Shine Lawyers
Respondent’s Solicitors: Herbert Smith Freehills
Applicant’s Funder: N/A

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