Article by: FTI Consulting experts Alok Khare and Dawna Wright
In late 2019, the first superior court judgment in a shareholder class action in Australia was handed down by Justice Beach of the Federal Court of Australia in TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited.1
The seminal decision (a win for Myer) clarifies several important questions that had been ‘known unknowns’ until this point, offering important lessons to economists, solicitors, and in-house counsel.
This article explores in two parts the decision’s implications from a forensic, economic, and accounting perspective – and touches on the unsolved mysteries that may be resolved in the next Australian judgment.
In part I, we discuss key learnings from the Myer decision regarding disclosures and implications for the solicitors and in-house counsel.
In part II, (to be published in the next edition of Inside In-house), we discuss key learnings from the Myer decision regarding economic and forensic analyses.
The Myer decision confirms the importance of meeting continuous disclosure obligations as well disseminating information through analyst interactions. The decision also underscores the importance for in-house counsel of ‘taking stock’ during rapid decision making to create detailed disclosure chains that will survive a forensic audit. This is particularly important in a market environment impacted by a global pandemic, as companies are forced to make sudden decisions, change business plans following unusual market conditions, and revise forecasts.
The Myer Case: Background
Myer is one of Australia’s largest department store groups, operating 60 stores across Australia. On 11 September 2014, in a session with analysts and financial journalists, Myer’s Chief Executive Officer, Bernie Brooks, disclosed that he expected Myer’s FY2015 NPAT to be higher than FY2014 NPAT, which was announced that day to be $98.5m.
On 2 March 2015, Myer told analysts the company was assessing its continuous disclosure obligations with reference to analyst NPAT consensus.
On 19 March 2015, Myer announced that the company expected its NPAT to be between $75 million and $80 million, excluding one-time costs. Following this announcement, the Myer share price declined by more than 10%. Finally, on 1 September 2015, Myer reported FY15 NPAT of $77.5 million.
The applicant claimed that Myer’s representations caused losses to its shareholders by artificially inflating the Myer stock price between 11 September 2014 and 19 March 2015. Shareholders also claimed that Myer should have instead made a series of counterfactual disclosures.2
The Court’s decision: Continuous disclosure breach – but no loss
The Court concluded that, while Myer did breach its continuous disclosure obligation, the applicant failed to prove that the shareholders suffered any recoverable loss due to the breach.3
The decision means companies cannot walk away from their disclosure obligations simply because they think that the information at issue was already public, as they can still be found to have breached the continuous disclosure rules. However, it also matters for applicants considering filing class actions. If the impact of the counterfactual disclosure is already factored into the share price on the date it should have been issued, the applicants won’t be able to recover any damages under an inflation-based measure for estimating shareholder losses.
Assessing loss per share
In the Myer matter, the applicant only offered an inflation-based measure for its loss analysis, and the court accepted that. There are other ‘loss per share’ measures that the applicant could have offered. The Myer Decision articulates four different methodologies for assessing loss per share.4
| Measure | Actual scenario | Hypothetical scenario | |
| 1 | True value | Price at which shareholder acquired interest | True value of that interest |
| 2 | Inflation-based | Price at which shareholder acquired interest | Market price that would have prevailed but for the contraventions |
| 3 | Left in hand | Price paid for shares | Whatever is left in hand upon a sale of the shares |
| 4 | No transaction | Position the shareholder is in at the date of the trial as a result of acquiring the shares | Position he would have been in if he had not acquired the shares |
The Court did not express a preferred method. So that will be one of the issues left for another judgment. But at least now we have greater clarity on the methods that will be considered by the Court, as we are dealing with a set of ‘known unknowns’ rather than ‘unknown unknowns’.
In our view, the most significant implication of the decision is the confirmation that, for all potential loss per share measures, the loss per share for a shareholder depends on the ‘price paid’ when the shareholder acquired his interests.
For an inflation-based measure, experts in Australian shareholder matters can estimate losses per share as the inflation at the time of purchase (i.e. the cash outflow that would not have occurred but for the misconduct) taking into account any offsetting gains if shares are sold at an inflated price.
As the Myer decision confirms, the inflation would depend not just on the company disclosures but also on all other relevant public information disclosed (including analyst reports and company conference calls)
Learnings for in-house Counsel
Continuous disclosure obligations in complex organisations have always been very challenging. The current need to respond rapidly to volatile market conditions makes it even harder for in-house counsel to manage this issue. However, the Myer case underscores the importance of “pressing pause” during rapid decision making to create detailed disclosure chains that will survive a forensic audit.
In reaching its decision, the Court undertook a very detailed and forensic analysis of ‘who knew what when’. Weekly and daily financial information was examined, looking at how that information was factored into the company’s financial forecasts as well as what, when and how it was presented to the Board.
The Court looked not only at the official minutes of the Board meetings, but also at the communications before and after the meetings. It even considered the recollections of Directors about the context of the discussions.
In-house counsel need to ensure the organisation can balance the competing priorities between supporting the disclosure audit trail and practicing good ‘information governance’. On the one hand, the need to retain support for their disclosure audit trails means ensuring that the necessary data is retained. On the other hand, good information governance means a data retention and disposal policy that retains only what is necessary. Counsel needs to know what data is held, why it is held, and where it is held.
Because the damages a company may have to pay critically depend upon all public information related to the alleged breach, it is important to provide as many details to analysts as the company reasonably can about the expected future cash flows, including potential risks, limitations to future forecasts, and any potential business strategy changes being planned.
Learnings for solicitors
The Myer case is also a good example of the difficulties solicitors face in instructing experts on issues of quantum before the Court has decided the question of liability.
In our experience, one of the most difficult aspects of assessing loss (in any type of litigation) is articulating an appropriate counterfactual scenario and quantifying the related damages. The Myer case makes clear that instructing solicitors need to take care to ask the right questions from their experts.
With respect to the ‘how’ to instruct experts, the Myer decision emphasises that the assumptions need to be grounded in commercial reality. The Court went to great lengths to establish, in detail, the typical trading cycles and reporting patterns of the company. Instructing solicitors and their experts should examine whether the inflation analysis for the proposed counterfactual disclosure requires several assumptions (some of which may depend on other assumptions). The presence of excessive assumptions may be an indication that the counterfactual is ‘too hypothetical’ and not grounded in reality, and there is a risk that if one set of assumptions doesn’t hold, the rest can come down like a house of cards.
As to the ‘when’ to instruct experts, often a court’s decision on liability is required in order to identify the appropriate counterfactual scenario to quantify. This is sometimes addressed by having experts model multiple scenarios from the beginning, by bifurcating a hearing between questions of liability and quantum, by referring the issue of quantum to a special referee, or by having experts undertake further work on quantification after a decision has been handed down. In the Myer judgment, his Honour has stated a clear preference for having two opposing experts as opposed to one Court-appointed expert or special referee. However, this case also provides a good example of a scenario whereby a court’s decision on the correct counterfactual analysis had a direct impact on the appropriate analysis of quantum by the experts. It is, therefore, an example of the benefit of post-hearing expert analysis.
We will discuss the learnings from the Myer decision for expert analysis in the next part. The Myer decision provides important insight on the acceptable approaches for damage calculations and ways in which a defendant’s expert might rebut them.
About the authors:
Dr. Alok Khare is a Senior Managing Director and co-leader of FTI Consulting’s Securities, Accounting, and Regulatory Enforcement Practice. He is based in San Francisco, USA. Dr. Khare is an economist who provides economic, financial, and statistical analyses to evaluate causation and damages in shareholder claims, antitrust claims, and other litigations. He also specialises in the analysis of transfer pricing. He has been retained as an expert to evaluate loss causation and damages claims.
T: +1 805 259 5797
alok.khare@fticonsulting.com
Dawna Wright is a Senior Managing Director and Leader of the Australian Forensic Accounting and Advisory practice of FTI Consulting. She is based in Melbourne, Australia. Dawna has over 20 years of experience in auditing and forensic accounting, including several years as a Partner leading the Victorian Forensic practice at Deloitte, and five years as a Forensic partner at an independent boutique advisory firm. Dawna has led a wide range of matters as an independent expert witness, a consulting expert and an expert determiner. Her experience includes pre-litigation dispute consulting, expert testimony, class action litigation, corporate investigations, financial statement restatements, post-acquisition disputes, and anti-bribery and corruption reviews.
T: +61 3 9604 0604
dawna.wright@fticonsulting.com
Erica Rose is a Senior Director at FTI Consulting and is based in Seattle. She has nearly 20 years of experience applying financial and statistical modeling to assist clients in securities and other litigation settings. Ms. Rose has supported experts in dozens of shareholder litigations. Her work typically includes designing, running, and describing detailed analyses such as stock price event studies and inflation analyses. She also has performed analyses relating to market efficiency and price impact.
T: +1 206 689 4479
erica.rose@fticonsulting.com
FTI Consulting professionals can provide consulting advice and expert testimony in shareholder claims on issues such as market efficiency, causation, materiality, and damages.
The views expressed herein are those of the authors and do not necessarily represent the views of FTI Consulting, Inc., or its other professionals. FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.
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1 TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747
2 The Federal Court of Australia decision in the “TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747” dated 24 October 2019 (“Myer Decision”), ¶16.
3 Myer Decision, ¶19.
4 Myer Decision ¶1502-1505.
