Budget forecasts are not the place for unfounded optimism – key takeaways from Crowley v Worley Ltd
This article discusses the relevance of company knowledge (not just knowledge of the board) in misleading or deceptive conduct cases, the breadth of information that should be disclosed by a listed entity to comply with continuous disclosure obligations and the importance of implementing comprehensive internal information sharing systems.
Background
Worley Ltd (Worley) is a large ASX listed engineering company.
In 2013, it reported net profit after tax (NPAT) of $322 million. In its 2014 budget, it forecasted NPAT of $352.1 million. Based on this forecast, in August 2013 it announced to the market that it could expect earnings in excess of $322 million (August Statement). Larry Crowley subsequently purchased shares in Worley valued at $10,046.59.
In October 2013, Worley announced that its first half year results would be lower than expected, but affirmed the August Statement. However, in November 2013, Worley indicated that it expected NPAT of only $260 to $300 million, with NPAT for the first half of the year of $90 to $100 million. This caused Worley’s share price to plummet, wiping more than $1 billion off its market value.
Worley’s CFO was tasked with identifying what had gone so wrong in preparing the 2014 budget. His findings revealed a history of underperformance by the company, resulting in profit downgrades. This was caused by practical and cultural issues identified in the budgeting process, including overly optimistic growth expectations.
In the end, Worley’s NPAT for the 2014 financial year was 18% lower than the expectation announced by the August Statement. Mr Crowley eventually sold his shares for $2,755.70, resulting in a $7,290.89 loss.
The proceedings
In 2015, Mr Crowley commenced Federal Court representative proceedings on behalf of all shareholders who had purchased Worley shares between August and November 2013. His case alleged contraventions of Worley’s continuous disclosure obligations and misleading or deceptive conduct.
Essentially, Mr Crowley alleged that Worley was required to notify the ASX that it did not have a reasonable basis for making the August Statement and that its 2014 financial year earnings would likely fall materially short of expectations. He also alleged that by making, repeating and maintaining the August Statement, Worley had represented (without a reasonable basis) that it expected to achieve NPAT of over $322 million in the 2014 financial year, and that it had reasonable grounds for this expectation.
At first instance, the Federal Court found in Worley’s favour. However, on appeal, the Full Court set aside the trial judge’s orders and found that Worley may not have had reasonable grounds for its forecasts and representations[1]. The matter was remitted to a single judge for determination so that this question could be determined having regard to the evidence as a whole.
Key takeaways
Although the outcome of the proceedings remains to be seen, there are some important lessons to be learnt from the Full Court’s judgment.
First, it clarified that in misleading or deceptive conduct cases, the reasonableness and knowledge of a company’s board alone is not the relevant enquiry. Rather, subject to the circumstances, it is the company’s knowledge which is relevant, capturing a broader group including officers and those in senior management positions. This is because in this case, Worley made the earnings representations, not its board.
Second, it clarified that for the purposes of complying with continuous disclosure obligations, an opinion about certain facts and their implications (if it would reasonably affect the listing price of shares or other securities) can amount to information that should be disclosed to the market. This is so even if the opinion has not yet been formed, but ought to have reasonably been formed.
Finally, this decision demonstrates the importance of implementing comprehensive internal information sharing systems. The Full Court expressed the view that listed companies should not be rewarded for having poor systems and management procedures which result in the board not coming into possession of market-sensitive information and therefore not forming opinions, based on facts, which should have reasonably been formed. Had Worley’s board been in possession of the relevant information, its earnings statements and/or budgets may have changed.
[1] Crowley v Worley Ltd [2022] FCAFC 33.
Author: Annabel Nettle
Position: Associate
Practice: Disputes
This article provides general commentary only. It is not legal advice. Before acting on the basis of any material contained in this article, seek professional advice.