Introduction

The D&O insurance market previously welcomed a string of losses for Australian shareholder class action plaintiffs. While some of those decisions held that there had been contravening conduct, the lead plaintiffs had failed to establish that any loss flowed from such conduct. These developments coincided with a steady decline in the rate of new filings and an increased willingness on large corporates to defend such claims over recent years.

The recent intermediate appellate decision in Crowley v Worley [2026] FCAFC 78 has arguably swung the pendulum back in favour of the plaintiff’s camp. In that decision, the Full Court of the Federal Court of Australia found in favour of the lead plaintiff on liability, causation and loss. This also follows the recent adverse outcome in the Brambles shareholder class action, although that decision was handed down by a first instance judge and does not carry the same binding precedential value as the recent Worley decision.

The main takeaway from Worley is that the bar to establish causation and loss has been lowered such that a lead plaintiff can rely on assumptions and inferences to make out these critical integers of their case. These integers had previously been fatal stumbling blocks for plaintiffs in shareholder class actions before Brambles and Worley.

However, this story is far from over. Brambles has been appealed and Worley has filed an application for special leave to the High Court of Australia. Further and perhaps most importantly, the D&O market awaits the High Court’s much-anticipated judgment in the CBA shareholder class action, which should be delivered within the next 6–12 months, and which should authoritatively address some of the key legal issues with which this space has grappled. Therefore, the law remains somewhat in a state of flux and may change again once the High Court weighs in on those issues. The outcome of the High Court litigation is likely to have a major impact on the D&O market including the management and settlement of securities claims as well as capacity and pricing considerations.

Brief overview

Worley is a publicly listed company that provides services in the resources, energy and infrastructure sectors. It was the subject of a class action brought by its shareholders who acquired Worley’s shares between 14 August 2013 and 19 November 2013, and who allegedly suffered loss by reason of Worley’s alleged continuous disclosure contraventions and alleged misleading and deceptive conduct.

The shareholders impugned Worley’s announcements concerning its FY14 earnings guidance and in particular, whether such guidance was reasonably based.

The progress of the litigation was lengthy and tortuous, and we focus only on the recent Worley decision.

Judgment

The Full Court (constituted by Markovic, Halley and Owens JJ) unanimously dismissed Worley’s cross appeal on liability, and allowed the lead plaintiff’s appeal on causation and loss. The judgment is lengthy and set out below are some of the key points determined by their Honours:

A) Attribution of knowledge of the D&Os to a company

The Full Court stated that the question of attribution is not one of ranking and reconciling conflicting knowledge of a company’s directors and officers; rather, the knowledge of each is attributed to the company and it is sufficient to establish lack of reasonable grounds if at least one of those persons knew of facts and circumstances which were inconsistent with the reasonableness of the representation, even if another person was not aware of those same facts and circumstances.

What this means is that the knowledge of one of the company’s D&Os can be sufficient to attach his or her awareness of information to the listed entity.

B) Availability of market-based causation

The Full Court accepted the availability of market-based causation theory. This principle is anchored to the proposition that the market price of a listed entity’s securities reflects the available information and assumes that:

• a listed entity’s disclosure failures have caused its share price to trade at inflated values above the price which a properly informed market would have set;
• the plaintiff acquired its securities – that is, it was active (and not passive) in the inflated market; and
• the plaintiff would not have acquired those securities at that inflated price, but for the market’s reaction to the entity’s disclosure failures.

The Full Court relevantly reasoned:

‘The market price of a security that is traded in a semi-strong, informationally efficient, market is an acceptable proxy for its true value. That is because in such a market all publicly available information is taken to be fully reflected in current prices. 

The [continuous disclosure regime] is unconcerned with the value of securities, save to the extent it is concerned that investors ought to be able to make their own decisions about value on a fully informed basis. If trading does not occur on such a basis, then it is possible that the securities will trade at a price different from that which they would have traded in a fully informed market. If they do, then that difference in price is properly regarded as being produced by the company’s breach, whether or not the breach has caused the securities in question to trade at a price different to their (howsoever it might be determined) “correct” value…’

The practical consequence of market-based causation is that a lead plaintiff in a shareholder class action does not need to adduce any evidence of personal or direct reliance on a defendant’s contravening conduct for the purpose of proving causation. Rather, it is enough, in terms of causation, that the plaintiff unknowingly acted by acquiring its securities at the prevailing market price during the period of inflation.

It is not surprising that the Full Court accepted the availability of market-based causation theory given that previous judgments had also accepted its availability – indeed, their Honours stated that this reflected its ‘fundamental orthodoxy’. However, Worley intends to challenge this finding as part of its special leave application.

C) Proof of some loss and its quantification

The lead plaintiff challenged the primary judge’s failure to find that Worley’s contraventions caused him some loss or damage. This point was directed to the fact of loss rather than the quantification of it, which are separate issues.

In considering the ‘fact of loss’ issue, the Full Court commented that the plaintiff must prove:

• that, on the balance of probabilities, he or she has sustained some loss or damage with loss or damage, in this sense, being “detrimental difference”; and
• that Worley’s contraventions probably, and not merely possibly, caused the plaintiff to suffer some detriment constituting loss or damage, although it should be borne in mind that the general standard of proof required by the common law and applied to causation is “relatively low”, and “admits of some uncertainty”.

The Full Court accepted the lead plaintiff’s submission that the existence of some loss could be inferred on a more general basis and found that he did establish some loss. In doing so, their Honours had regard to the purpose and context of the continuous disclosure regime, which were remedial and protective in nature, given the importance of promoting a well-informed market.

Of note, the Full Court stated that the plaintiff should have the benefit of a number of inferences that naturally arise in connection with a material misstatement of a company’s guidance in relation to future earnings. Specifically, their Honours stated that:

• the analysis of the question of loss should have commenced with the fact that the relevant contraventions had been established – namely, Worley published to the market information about its future financial performance that was misleading or deceptive, and for which there was not a reasonable basis;
• the subject matter of the information that had been so published was squarely relevant to the market’s assessment of the value of Worley’s shares and if nothing else, that conclusion was inherent in the finding that Worley had contravened the continuous disclosure regime; and
• it is a reasonable and logical hypothesis that the ordinary and natural consequence of an overstatement to the market of a listed company’s financial performance would be to inflate its share price.

Overall, the Full Court stated that the evidence sustained an inference that the price of Worley’s shares was higher by reason of the contraventions without needing to identify and isolate the precise contours of what a world without the contraventions in question would have looked like, and that the inference that those contraventions would have caused the price of Worley’s shares to be inflated to some extent at least is ‘irresistible’.

Turning to the ‘quantification of loss’ issue, the Full Court stated that to require an applicant to prove that it is more likely than not that, had a particular hypothetical disclosure been made, at a particular point in time, Worley’s shares would have traded at some particular price, was to demand the impossible. They also stated that when it comes to the assessment of damages, courts will proceed by reference to the probabilities or possibilities of what would have happened.

Accordingly, the Full Court applied the so-called ‘facilitation’ (or ‘fair wind’) principle in this case. This principle generally favours plaintiffs who may have difficulty proving loss by reason of the defendant’s conduct because it ‘facilitates’ the discharge of a plaintiff’s legal onus of proof of loss in circumstances where the defendant’s wrongdoing has resulted in uncertainty regarding the quantum of loss – it is underpinned by fairness. In doing so, the Full Court commented that there can be a degree of speculation and guesswork involved given the fundamentally imponderable nature of that which was required to be determined.

Part of this contest considered the level of precision required to prove the quantification of loss by reference to the alleged counterfactual disclosure. In previous cases, the standard had been set quite high in terms of establishing the economic equivalence – namely, a lead plaintiff was required to establish that the market reaction to the counterfactual disclosure would have been the same or substantially the same as the market reaction to the actual curative disclosure. The Full Court took the view that such precise exactness was not required.

Against this backdrop, their Honours took a broad-brush approach, so as to reflect the lack of precise economic equivalence and considered it was appropriate to apply a discount of 15% to the losses that would otherwise have been indicated by the plaintiff’s event study expert’s analysis. That analysis identified a linear relationship between the counterfactual NPAT guidance and the attributable excess return it would produce.

What next?

Until the High Court has its say (and consistent with the general drop in the rate of new filings), we think that the plaintiff law firms and the litigation funders will take a wait-and-see approach before they invest their resources and capital in investigating and prosecuting future shareholder class actions. Having said that, the commencement of a shareholder class action against James Hardie was recently announced by Maurice Blackburn impugning the reasonableness of its profit guidance.

Otherwise, we think Worley will encourage shareholder class actions to focus more closely on a listed entity’s announcements concerning its financial performance and outlook given that such matters are naturally influential on the share price. In other words, we expect to see:

• a shift away from cases complaining about a listed entity’s risk management and systems deficiencies; and
• an increased focus on lead plaintiffs simplifying their case theories to avoid complications with pleading a myriad of alternative and confusing counterfactual scenarios.

However, it is doubtful that the High Court will overrule the fair wind principle from a public policy perspective; rather, we expect that the High Court will seek to clarify its application in shareholder class actions, which will have broader implications for other cases as well. The High Court will also consider materiality issues and whether, as a “threshold” requirement, claimants must plead information in a complete and non-misleading form, including contextual matters. These issues may also move the dial somewhat.

Further information / assistance regarding the issues raised in this article is available from the authors, Michael Polorotoff, Partner, or your usual contact at Moray & Agnew.