Crowley v Worley – is a company liable for not disclosing information it doesn't know?

ASX Listing Rule 3.1 requires a listed company to disclose information that it should know that could impact its share price, whether or not the company actually knows it. Under the Corporations Act 2001 (Cth), a company can be liable for damages and could also commit an offence if the company does not disclose information that the company "has" which Listing Rule 3.1 requires the company to disclose. 

Does the information that the company "has" include information that the Listing Rules say the company should know, even if it doesn’t actually know it? This note discusses the outcome of the long-running Crowley v Worley continuous disclosure litigation and how that question might be answered.

The Crowley v Worley saga

After more than 10 years since the event in question and eight years of litigation, Worley Limited ultimately succeeded in defending the class action brought by lead plaintiff shareholder Larry Crowley over Worley’s NPAT forecast downgrade in November 2013.

To recap, Worley made an announcement in August 2013 that it expected increased earnings in FY14. Worley’s FY13 NPAT was $322 million, so the earnings statement indicated that Worley expected to do better than that in FY14. The earnings statement was based on an internal budget prepared by management that forecasted FY14 NPAT of $352 million. Worley repeated this statement several times in October 2013. But in November 2023, Worley announced that it expected its FY14 NPAT to be in the range $260 million to $300 million. The share price fell by around 25 per cent.

The CFO was primarily responsible for preparing the FY14 budget. After Worley announced its downgrade in November 2013, the CFO undertook a review of the budget process to identify what went wrong. He interviewed a number of the executives who had input into the budget and produced a memorandum in early December which highlighted a number of defects in the budgeting process. The general conclusion in the memorandum was that the budget was overly optimistic – while the budget was achievable, it could not be said that there was at least a 50 per cent probability that it would be achieved – it was not a so-called "P50" budget.^[1]

Crowley lodged a statement of claim in October 2015. The claim was that Worley’s FY14 earnings statement was misleading and deceptive (M&D) under s 1041H of the Corporations Act (and corresponding provisions in the ASIC Act and the Australian Consumer Law^[2]) because Worley did not have reasonable grounds for making it, and that Worley breached its continuous disclosure (CD) obligation under s674 by failing to disclose that it did not have reasonable grounds.

The primary judge, Justice Jaqueline Gleeson, found in favour of Worley.^[3] Crowley appealed, and the Full Federal Court^[4] found that Justice Gleeson’s decision was wrong in the way it addressed the M&D and CD claims, including that her Honour considered the state of knowledge just of the board (who did not know that the budget was not P50), rather than the knowledge of Worley the company, which could include the knowledge of executives. The Full Court remitted the case back to a single judge for reconsideration of the evidence in light of the decision of the Full Court. Worley applied for special leave to appeal the Full Court decision to the High Court (to which Justice Gleeson had since been elevated) but that was refused. So the case was then heard on remitter by Justice Ian Jackman, who handed down his decision just before Christmas last year.

Justice Jackman found in favour of Crowley on the M&D and CD claims.^[5] But his Honour held that Crowley was not entitled to damages because while Crowley had proved that Worley’s FY14 forecast was not based on reasonable grounds (so M&D) and Worley should have said so (so in breach of CD), he was not able to prove what Worley’s FY14 NPAT forecast should have been, and therefore what the share price would have been if a "correct" forecast had been given by Worley in August 2013.

So in the result, Justice Gleeson’s decision in favour of Worley stood, but on a different basis.

Full Court decision – a company “has information” which it should have had

The Full Court’s decision substantially lowered the bar for determining when it can be said that a company “has information” which s 674(2)(b) the Corporations Act (not just ASX Listing Rule 3.1) requires to be disclosed, particularly when the “information” concerns an opinion derived from a set of facts – here, that the earnings statement was based on the FY14 budget which was overly optimistic. The Full Court held that whether a company “has information” should be determined by the definition of “aware” in the Listing Rules – that is, the information that an officer of the company either has or ought reasonably to have.^[6] An opinion (here, that the FY14 earnings statement was not based on reasonable grounds) is “information”. The question was whether the fact that there were not reasonable grounds for it was information of which an officer of the company ought reasonably to have been aware. The Full Court then went further:^[7]

"If the evidence shows that: (a) the information in fact existed, (b) reasonable information systems or management procedures ought to have brought the information to the attention of a relevant company officer, and (c) acting reasonably the company officer ought to have discerned the significance of the information, then s674 and the Listing Rules deem the company to have had the information."

In short, if an employee has facts that should be reported to a company officer (director or senior executive), and those facts should result in the officer forming a certain opinion, the company is effectively deemed to have that opinion whether or not anyone in the company has actually formed that opinion.

Justice Jackman did not need to go that far

As it turned out though, Justice Jackman did not need the Full Court’s expansive deeming of when a company “has information” to find in favour of Crowley on the CD claim.

His Honour first dealt with the M&D claim and inferred that the CFO would have been aware of the issues identified in his December memorandum at the time the budget was presented to the board in August. Worley did not call the CFO to give evidence, and Justice Jackman drew a Jones v Dunkel inference that the CFO would have said that he did not think the budget was P50. Justice Jackman said that in his view: “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.”^[8]

It was held that the CFO’s inferred knowledge, and the knowledge of other senior executives who had input into the budget and who were referred to in the CFO’s December memorandum, could be attributed to the company. So Worley did not (and via the CFO it knew that it did not) have reasonable grounds for its earnings statement.

Justice Jackman also went through (in turgid detail) individual defects in the FY14 budget, but his Honour was clear that the M&D claim could have been decided on the basis of the CFO’s actual (albeit inferred) knowledge that the budget was not P50. It was not a matter of what the CFO (or anyone else within Worley) ought to have known. 

Justice Jackman then addressed the CD claim and said that it followed from his reasoning on the M&D claim that the CFO (and other senior executives) not only knew the facts on which they ought to have formed the opinion that the earnings statement did not have a reasonable basis, they had actually formed that opinion themselves^.[9]

Where does this leave us?

In the upshot then, the Crowley v Worley litigation has left us with an expansive deeming of when a company “has information” under s 674(2)(b), but that was ultimately not used to find against Worley on the CD claim. The case was decided by Justice Jackman on Worley’s actual knowledge, being the knowledge attributed to Worley via the CFO (and other senior executives) under orthodox corporate law principles for the attribution of knowledge to a company.

The Full Court rationalised its expansive view on the interpretation “has information” in s674(2)(b) as follows:^[10] 

"… [Worley’s] approach would effectively reward a publicly listed company for having such poor information systems and management procedures that the company does not come into possession of important, market-sensitive information and does not form an opinion based on known facts, which it reasonably should have formed. It would also reward a company for its officers holding back from the board an opinion they had formed about such matters."

Possibly – but it is difficult to envisage company officers intentionally breaching their duties to the company in this way: each of the examples given suggest a failure by officers to comply with their duty of care and diligence under s180.

Does this expansive deeming apply under s674A?

Crowley v Worley involved s 674 before the amendments in 2020 that introduced s 674A, which now provides what may be characterised as a fault element for civil liability (compensation) for breach of the CD obligation. Section 674A(2)(d) provides that a company is liable only if the company knows, or is reckless or negligent with respect to whether, the information that the company “has” would, if generally known, have a material effect on the price or value of the company’s shares. Section 674 remains as an offence provision, and requires only that a reasonable person would expect that the information would, if generally known, have a material price or value effect.

There are at least two possible readings of s 674A arising from the Full Court’s expansive deeming of when a company “has information”.

The first possibility is that if (a) the company “has information” (under the Full Court’s expansive deeming) because an employee did not report facts to an officer which the employee should have done and/or no officer formed an opinion on those facts when the officer should have done, and (b) the company did not consider whether the information would have a price or value effect (because the company didn’t have actual knowledge of the information), then (c) the company is at least negligent – the employee who had the responsibility to report facts was negligent and/or an officer who should have formed an opinion on those facts (but didn’t) was negligent.

The explanatory memorandum for the Treasury Laws Amendment (2021 Measures No.1) Bill 2021 which introduced s 674A noted its purpose “to ensure that, in determining whether a listed disclosing entity contravenes its existing continuous disclosure obligations, its state of mind is taken into account”.^[11]  It would sit oddly with this intention to treat the state of mind of the company as including what its state of mind should have been, but wasn’t.

The second possibility therefore is that s 674A(2)(b) focusses on the state of mind of the company in considering whether the information that the company “has” will have a material share price or value effect if generally known – it is not just that the company “has” the information, the question is: does the company know, or is it reckless or negligent as to whether, that information will have that effect? On this reading, the company would need to have actual knowledge of the information – it could not be enough that the Full Court would deem the company to have the information. If the claimed information is an opinion, the company could not have actual knowledge of that opinion if no officer has formed that opinion.

It seems open to go further, that s 674A(2)(b) requires that the fault is by the organ of the company that is responsible for ASX disclosure – the “directing mind and will” as it relates to the responsibility for ASX disclosure decisions. As said in Ford, Austin & Ramsay’s Principles of Corporations Law:^[12]

“…the directing mind and will of a company may be different people in relation to different matters. A person may be treated as the directing mind and will of a company if they have been granted authority to act on behalf of the company in relation to a transaction, or the person has been vested with “autonomy, control, discretion or a significant degree of responsibility in relation to the transaction (or similar transactions)”: The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 70 ACSR 1; [2008] WASC 239 at [6144].”

While the second possibility seems the more cogent, it leaves open the Full Court’s objection quoted above – that it would “reward” a company for having poor information systems etc. It remains to be seen whether the Courts accept that a company is now not liable under s674A if an employee fails to report facts or an officer fails to form an opinion on those facts.

Misleading & deceptive conduct relief

Turning back briefly to M&D conduct. Crowley v Worley was, like all claims against companies for forecast downgrades, based on M&D conduct as well as the CD breach.  

When s674A was introduced, amendments were also made to the M&D provisions in the Corporations Act and the ASIC Act (s1041H and s12DA respectively) with the intent that a company is not liable for M&D if it wouldn’t be liable for breach of CD under s674A – since typically, claims against companies for forecast downgrades or other predictions of the future which do not come to pass are based on M&D conduct as well as the CD breach. (The drafting is awkward but the intent is clear.)

Conclusion

Crowley v Worley would not have been decided differently under s674A and the M&D provisions in the Corporations Act and the ASIC Act. However it is fair to posit, albeit with some hesitation, that a company will not be liable for damages for a failure to disclose information that it does not actually know, or opinions that it has not actually formed.

The new s674A is under review (by Dr Kevin Lewis, formerly of the ASX), but essentially to report on whether it is working as intended and should continue in force. While the uncertainty about an issue as fundamental as when a company “has information” for the purposes of s674A is unsatisfactory and ought be addressed, a general review of s674A was not within the review’s remit.

Practical considerations

Directors should, of course, ensure that their company has robust reporting systems in place. There could be no suggestion that directors would in any way be personally liable for involvement in their company’s CD breach or M&D conduct if the board is not told the facts. But there could potentially be a claim of breach of the s180 duty of care and diligence.

Even if directors are not personally liable, there could be at least a reputational impact. The Worley case provides an example. Worley sought to overcome the inference that the CFO did not think the budget was P50 by submitting that the CFO would not have put up a budget which he did not regard as having a reasonable basis – a fair point. But Justice Jackman said that “this must be seen in the context of the substantial pressure on [the CFO] and other senior management of [Worley], as recorded in the [CFO’s December memorandum] and elsewhere, to present a budget which showed year-on-year growth ... I do not regard it as being at all incongruous that a CFO who was under that kind of pressure would present a budget showing an increase in NPAT over the previous financial year which he regarded as having a realistic chance of being reached, but not one which he reasonably believed had at least a 50 per cent probability of being achieved”. Boards can and should pressure management to produce an acceptable (but achievable) budget on which they can rely to give guidance to the market, by requiring management to identify cost reductions and revenue generation initiatives. The risk is, though, that the CFO or CEO will succumb to that pressure by producing a budget without at least a 50 per cent probability of being achieved. That is what Justice Jackman considered happened here – it was the board’s fault that the CFO produced an unreliable budget which he knew would be relied on by the board for the earnings statement.

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