The latest word on continuous disclosure

Bonham v Iluka Resources [2022] FCA 71

On 7 February 2022, the Federal Court handed down the latest Australian first instance decision on continuous disclosure, this time dealing with production guidance provided by Iluka in 2012 – some ten years ago.

The decision was a decisive and overwhelming victory for ASX listed company Iluka. The Court (Justice Jagot) conducted a painstaking analysis of the facts – as is the norm for continuous disclosure cases – but essentially found that Iluka had acted reasonably when giving heavily qualified guidance about production of minerals.  Importantly, the case did not concern financial forecasts as such, but rather production guidance without any indication of the expected sales price to be realised.[1]

The decision

The Court’s reasons are factually dense. In simple terms, Iluka gave production guidance in February 2012, issued a quarterly production report in April 2012 and updated the guidance in May 2012.  By the end of June 2012 it became apparent that global economic conditions were worsening, and in early July 2012, Iluka gave further updated and negative guidance.

The class action plaintiff’s claim was, in essence, that Iluka had made representations about its forecast production in February, April and May 2012 but had no reasonable grounds. Rather, it was alleged, Iluka had, or should have had, information that the guidance was not achievable and should have disclosed that information.

The Court, however, held that Iluka had not made representations of the nature claimed. The language by way of disclaimer in the February 2012 announcement qualified the statements made, and by their own terms, it was clear that the statements were not intended to be definitive forecasts as such, but rather tentative guidance for the purpose of sophisticated investors who would do their own modelling. Importantly, the Court stated that an appropriate disclaimer (in terms of language, relevance and position) could help to qualify and contextualise guidance statements. Justice Jagot adopted the approach of the High Court in ACCC v TPG Internet Pty Ltd [2013] HCA 54 that the “dominant message” of the statement was of crucial importance.

Moreover, the Court found that Iluka did indeed have reasonable grounds for the statements made.

The Court rejected one of the plaintiff’s expert witnesses entirely on the basis of lack of expertise and gave little weight to the other, while commenting on the form of the pleadings and the extent to which the plaintiff’s claim seemed to rest on hindsight and selective reliance on parts of documents, while ignoring evidence to the contrary.

The Court also observed that the lead plaintiff did not take reasonable care for his own interests, in particular by misunderstanding the nature of the guidance. This suggests – for guidance at least – the audience should be assumed to exercise some degree of care for their own interests. In our view, some level of sophistication, or if not sophistication at least due care, should be assumed of the investor audience.[2]

Although strictly obiter dictum and therefore not binding, Justice Jagot clarified that having reasonable grounds for a representation was not just a matter of process, as argued by Iluka, although process may be important. The question of reasonable grounds is a matter of substance, not merely process, although in this case Iluka had the necessary substantive reasonable grounds.

The Court made it clear that documents emanating from within Iluka that indicated that individuals may have held views more pessimistic than the guidance actually adopted were not determinative. Rather, Justice Jagot looked to the overall process and expertise of the individuals responsible for the guidance - there was no indication that they had ignored relevant information or had a bias towards “favourable” information.

Justice Jagot confirmed that hindsight does not rule – the fact that Iluka might have been wrong about a rebound in demand in the second half of 2012 did not of itself establish that it lacked reasonable grounds. This is clearly correct – and it is vital that judicial officers recognise the danger of the hindsight cognitive bias in continuous disclosure cases.

An opinion not formed

Despite Bonham v Iluka Resources being one of the better recent judicial expositions and applications of the law concerning guidance by ASX listed companies, there is one observation that we must make. Justice Jagot, echoing some recent comments in ASIC v GetSwift [2021] FCA 1384 at [1081] to [1085], opined, obiter dictum, that the continuous disclosure provisions (now sections 674 and 674A) may require disclosure of an opinion or conclusion that has not been formed.[3] With respect, this cannot be correct as a matter of principle, as well as being contrary to previous authority. The Court’s reasoning is, it appears, based on adopting the provisions of the ASX Listing Rules dealing with when the entity becomes “aware” of information, which may include constructive knowledge (see [702]). This is not warranted – section 674 and now section 674A only use the term “has” – the entity has information – and there is no statutory warrant for interpolating the “deeming” provision of the ASX Listing Rules in relation to awareness, any more than there is a warrant for adopting the ASX Listing Rules’ definition of “information” to construe the Corporations Act. On the contrary, compliance (or not) with the ASX Listing Rules is a logically separate and preliminary question to the application of section 674 or section 674A, and there is no basis to use the ASX Listing Rules to change the operation of the Corporations Act. 

Key takeaways

So, what do we draw from Bonham v Iluka Resources? Four key points.

First, the Court correctly analysed the facts without having formed a preliminary conclusion, contrary to the approach that appeared to have informed the plaintiff’s case theory. Avoiding both the hindsight bias and the confirmation bias are central to the role of a judicial officer, and it is comforting to see a clearly objective judicial analysis of a complex factual matrix, not coloured by hindsight. However, the case underscores that directors and management need to appreciate that disclosure conduct and the written and electronic record may be analysed many years after the event in microscopic detail, in contrast to the real life need to make disclosure decisions in real time using judgement based on necessarily imperfect information and imperfect models of the real world.

Second, disclaimers can have real work to do, rather than just being standard text that is included without thought. A properly prominent and relevant disclaimer was apt to qualify the terms of what might otherwise be understood as a forecast. That said, in this case, there were other qualifications and the overall picture was that the statements should not be relied on as “more probable than not” forecasts – but the point is still valid: disclaimers can have real work to do.

Third, some level of sophistication or reasonable care for an investor’s own interests should be assumed, for the purpose of figuring out what a statement by an ASX listed entity is taken to mean. Indeed, we would argue that some level of sophistication or if not reasonableness at least rationality should be assumed of the audience when seeking to determine materiality for continuous disclosure purposes, thankfully not a matter really at issue in the Iluka case.

Fourth, in our view the result of the case would have been no different under section 674A, in operation since August 2021[4], that imposes a fault requirement for civil liability or civil penalty liability for continuous disclosure. Our high-level analysis is that no decided continuous disclosure case would have produced a different result under the new provisions,[5] but in Iluka, the need to prove fault would have been an additional and insurmountable hurdle (on the evidence). One could speculate that a case like Iluka might not have been run in the first place if the plaintiff had had to prove fault. While it may be hindsight speaking, that would be no bad thing, given the ultimate result, and the time it took to get there.

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