In the annals of Australian commercial law, the Myer class action judgment handed down this week was about as landmark as it gets. It was the first class action brought by shareholders in a listed company in this country to go to judgment.
The first not to be settled by a rattled company convinced that when push came to shove the court would find their alleged misdeeds came with a hefty price.
So it is little wonder that on Thursday all eyes in corporate Australia and in legal circles were on the findings of Justice Jonathan Beach in the Federal Court.
Myer was sued by its shareholders who alleged the now frail grand dame of department stores misled investors in 2014 when then boss Bernie Brookes told investors in November that year that Myer’s full-year profit result for 2015 would be higher than its 2014 profit of $98.5 million, only for the company to reduce that forecast five months later on March 19 to between $75 million and $80 million a few weeks after Brookes’ resignation.
The class action was funded by former Minter Ellison partner Mark Elliott and run by leading barrister, Norman O’Bryan, QC.
Myer shares fell 10 per cent following its profit downgrade. The shareholders had claimed this loss was caused by the company’s earlier deception.
One can’t underestimate the impact of the judgment on the vast majority of Australians. We all directly or indirectly own shares in listed companies through our superannuation accounts.
And through this ownership we all participate, indirectly, in a range of class actions that are lawsuits brought by one investor or consumer on behalf of a wider group.
So who won? Myer or the shareholders?
Well, the answer -unfortunately – is not that simple as things often are at the pointy end of the law. You could argue neither side won, or alternatively, you could argue that both did.
In a 386-page judgment, Beach found that Myer did mislead and deceive its investors and breached its obligations to keep investors informed of movements in its stated forecasts.
But in a shock decision for shareholders and the plaintiff law firms that bring these cases before the courts, Beach also found there was no proof that the deception resulted in shareholder loss because the consensus of analysts covering Myer was that Brookes’ rosy outlook was not to be taken seriously and that doubt had been factored into Myer’s share price.
Further, the judge took into account that Myer’s share price did not fall when Myer confirmed its profit was in line with consensus, which was of course, at $92 million below Brookes’ forecasts in November.
“No loss? Really? You bloody ripper!” exclaimed one chairman of an ASX top 100 listed company following the judgment. “That is such a relief,” the director, who is also a commercial lawyer, said on Thursday afternoon.
But the director’s off the cuff remark might be a bit premature.
Beach left the door open for the plaintiff law firm in the Myer class action to come back and argue that some cohorts of investors – most notably retail investors – relied purely on Brookes’ statements and did not have easy access to the consensus statistics institutional investors are able to access through a Bloomberg terminal – a terminal that costs $30,000 a year to rent.
Not all observers were so certain it was good news for corporate Australia, as fears spread that Beach’s decision could spark a flurry of class actions because there was now case law upholding the idea of market-based causation – the idea that share prices are inflated by a company’s misleading statements.
Yet Andrew Watson, the principal of class action at Maurice Blackburn, says he’s not doing cartwheels in excitement that the decision will spark a flurry in class actions.
“Since 2006 in the Aristocrat [class action] we’ve argued that the proper approach was one that involved market-based causation,” he says.
“Cases have been issued for 13 years on the assumption that that was going to be made good.”
Watson appears to be not that worried about the “no loss” finding, saying Myer’s circumstances were unusual compared with cases brought against other companies.
“In the end the no loss finding is going to be relatively case-specific and that’s because the fact that you’ve got market consensus trending downwards and in effect disbelieving the company is a relatively unusual circumstance.”
That’s a similar sentiment to that expressed by one of the top defendant class action lawyers in the country, Moira Saville a partner at King & Wood Mallesons.
Saville says the notion of market causation has been upheld in the Australian courts in other judgments in recent years.
“Certainly I think they [plaintiff law firms] will regard it as something that makes their cases easier, but it’s not a lay down misere”.
Saville says a recent judgment in the Federal Court by Justice Lindsay Foster relating to claims made by certain groups of investors in Babcock and Brown against the liquidator to the collapsed investment bank expressed concerns about market-based causation.
“The judge said it can be available but it does come down to the facts and the circumstances.”
“First of all you have to establish that in fact there is an efficient market in relation to the particular shares and in Myer Justice Beach found that there was, but in Babcock, Justice Foster found on the basis of the expert evidence that there wasn’t. He said the share price did not react to earnings guidance in relation to Babcock.”
It’s with this in mind that Monash University Department of Business Law and Taxation senior lecturer Michael Duffy, whose research was cited in Beach’s judgment, says future cases will continue to turn on their facts.
“Even though market-based causation is clearly good for plaintiffs, the outcomes were not good for plaintiffs,” says Duffy, who is also director of the Corporate Law, Organisation and Litigation Research Group at Monash.
Tim Finney, principal of class action specialist law firm Phi Finney McDonald (a firm created by three top class action lawyers from Slater and Gordon), said the judgment clarified some key points of law.
“The judgment is incredibly helpful on quite a few issues of liability,” he says.
“One straightforward example of that is Justice Beach’s finding that once Myer had given guidance that was a continuing representation that it was obliged to correct.
“You could frame the outcome in a number of different ways, some very positive for Myer and for listed companies and some very negative and some somewhere in the middle. Justice Beach likes to include something for everyone in his judgments.
“This will assist to hopefully cut down on a number of unnecessary arguments between parties, but I don’t think it will have an explosive or a chilling effect on this particular space.”
So no cartwheels on either side of the class action space.
But there is a lesson for corporates in Myer choosing not to blink first and settling the matter before it goes to trial, according to Saville.
“It may be that the plaintiff lawyers and the funders look at it a bit more carefully [before launching a case] because they can’t just depend on there being a settlement any more.”
No doubt, time will tell.