Kirby v Centro Properties Limited [2012] FCA 323 | Case summary

REASONS FOR JUDGMENT 1 On 29 March 2012, an application by Centro Properties Limited and CPT Manager Limited (collectively CNP) supported by Centro Retail Limited, Centro MCS Manager Limited and Centro Corporate Services Pty Limited (collectively CER) for a limitation order under s 136 of the Evidence Act 1995 (Cth) (the Evidence Act) in respect of certain parts of a number of "analyst reports" was dismissed. These are the reasons for that decision. 2 CNP and CER sought an order under s 136 of the Evidence Act that statements in identified analyst reports sought to be tendered by the Kirby / Stott Applicants were admissible only as evidence of the fact that previous representations set out in those reports were made and for no other purpose. The analyst reports are set out in Annexure A to these reasons for decision. 3 A number of matters should be noted at the outset. First, there was no dispute that the analyst reports were relevant. That is unsurprising. They are, at the very least, relevant to the state of knowledge of the market about the Centro Group at the time these reports were issued. Indeed, one of the analyst reports was not the subject of any objection. 4 Secondly, during the course of argument it became apparent for the first time that CNP's application under s 136 of the Evidence Act was limited to a phrase or two in each analyst report. The phrase or phrases the subject of the application are identified in bold in the extracted paragraphs set out in Annexure A (the disputed passages). 5 As will be self evident, the disputed passages are, broadly speaking, unfavourable statements of opinion regarding CNP and / or CER. For example, "poor disclosure", "failed to flag these risks", "murky disclosure", "lack of transparency", "opaque disclosure", "lack of meaningful disclosure" and the like. 6 The disputed passages are evidence of what market analysts thought and said about the Centro Group at the relevant time. That evidence is relevant to a question the Court must decide - what was known in the market. Indeed, CNP accepted that the analyst reports may be relevant for a purpose other than proof of an asserted fact; that is, the making and publication of the analyst reports may be relevant to whether the "material information" which it is alleged CNP was required to disclose to the market was "generally available" and / or was known to the market (and therefore was not material). If that is correct (and I accept that it is), then CNP are not entitled to pick and choose which material the Court should consider. If it is relevant, then it is admissible unless excluded by one of the exclusion rules. In the present application, the only basis of exclusion upon which CNP sought to rely was s 136 of the Evidence Act. 7 Section 136 of the Evidence Act entitled "General discretion to limit use of evidence" provides: The court may limit the use to be made of evidence if there is a danger that a particular use of the evidence might: (a) be unfairly prejudicial to a party; or (b) be misleading or confusing. 8 CNP had to demonstrate that there was a danger that the particular use of the disputed passages would be "unfairly prejudicial" to one or both of CNP and CER and further or alternatively that the particular use of the disputed passages was "misleading or confusing". A central question to be asked and answered is what is the purpose or purposes of the Kirby / Stott Applicants seeking to tender the analyst reports? The Kirby / Stott Applicants submitted that they sought to tender the analyst reports as evidence of what the relevant analyst thought (not just what they said). In that context, it is important to recall the hearsay rule and the opinion rule. Section 59(1) of the Evidence Act identifies the hearsay rule as follows: Evidence of a previous representation made by a person is not admissible to prove the existence of a fact that it can reasonably be supposed that the person intended to assert by the representation. That rule does not apply "to evidence of a previous representation that is admitted because it is relevant for a purpose other than proof of an asserted fact": s 60(1) of the Evidence Act. 9 Section 76(1) of the Evidence Act identifies the opinion rule as follows: Evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed. That rule does not apply "to evidence of an opinion that is admitted because it is relevant for a purpose other than proof of the existence of a fact about the existence of which the opinion was expressed": s 77 of the Evidence Act. 10 Contrary to CNP's submission, the Kirby / Stott Applicants do not seek to rely on the disputed passages as evidence of the truth of, or in support of, asserted facts referred to in the disputed passages; for example, that there had been, in fact, inadequate or "murky" disclosure. That would plainly infringe the hearsay and / or opinion rules. 11 As stated in Kirby v Centro Properties Limited (No 2) [2012] FCA 221 at [29], once evidence is tendered, however, it is in for all purposes (subject to a limitation order under s 136 of the Evidence Act): Hughes v National Trustees, Executors and Agency Company Limited (1978) 143 CLR 134 at 153. That is, all purposes for which it is led. It does not follow that evidence not sought to be led as evidence of the truth of the facts stated within it becomes admissible for that purpose unless a s 136 limitation order is made. It is the duty of the Court to reach a decision on evidence that is legally admissible and to put evidence only to those uses which the law allows: Hughes at 153. As the Court noted in Ritz Hotel Ltd v Charles of the Ritz Ltd (1988) 15 NSWLR 158 at 170 in the context of evidence tendered without objection, where evidence is tendered on the basis that it is relevant to an issue in the proceedings, then it is not possible to infer, either from the tender or the absence of objection, a waiver of the operation of the hearsay rule. That view is supported by Jones v Sutherland Shire Council [1979] 2 NSWLR 206 in which Samuels JA stated at 219 that: If evidence, admitted without objection, is legally admissible in proof of some issue in the case, its evidentiary use should be confined to that purpose … Suppose a hearsay document is tendered. It is not legally admissible to prove the truth of the assertions it contains, which are, however, relevant to an issue in the case. It might none the less be legally admissible as original evidence of the making of those assertions. 12 As noted above, the analyst reports are plainly relevant and are admissible for the purposes described. They are not being led for a hearsay purpose and there is no need to "test" the truth of the representations contained in the analyst reports. In that context, it is important to note that the analyst who prepared each report is named and provides a certification along the following lines: I, [NAMED INDIVIDUAL], hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. Accordingly, there is no prejudice to CNP by reason of the maker of the representations being unable to be cross-examined: cf Papakosmas v R (1999) 196 CLR 297 at [98]. 13 There are additional reasons why a s 136 limitation order is inappropriate. CNP's defence includes allegations that certain things were known to the market at a particular time: see, by way of example, paras 32(e) and 39(d) of the First and Second Respondents' Defence to the Applicant's Fifth Further Amended Statement of Claim filed in VID 326 of 2008 and paras 35(b)(ii), 45(b)(iii) and 49(b)(B) of the Amended Defence of the First and Second Respondents to the Fourth Further Amended Statement of Claim filed in VID 327 of 2008. CNP has filed expert reports about these issues and those experts are apparently to be called to give evidence. Indeed, regarding analyst reports, CNP's loss expert Dr O'Brien has opined in his Expert Report dated 10 December 2011 at [67]: Investment firm research analysts are a subset of informed investors. These analysts play an important role in the process of obtaining new information and disseminating it to the market by regularly publishing reports about stocks. Based on my experience in studying financial markets and evaluating the role of analysts in these markets, it is my opinion that the information in analyst reports provides a reasonable benchmark of what is known by informed investors about the expected future cash flows and risks of a stock and, therefore, what information has already been incorporated into the stock price. My review of information in this case indicates that investment firm analysts play the same role in Australian financial markets as they do in the U.S. (Emphasis added.) 14 There is no rule of evidence that supports a contention that evidence (in this case, the disputed passages), which may be inconsistent with a view expressed by one or more of the experts to be called by a party to a proceeding, is unfairly prejudicial to that party given the use to which the evidence is to be put or is otherwise misleading or confusing. Dr O'Brien apparently does not consider the analyst reports to be misleading or confusing. As the above extract records, he considers they provide "a reasonable benchmark". CNP and CER's experts can deal with the analyst reports. Indeed they have already done so. 15 As is self evident, the analyst reports have probative value. The Kirby / Stott Applicants are entitled to tender the analyst reports for the purpose of proving market knowledge and to seek to refute the basis of the respondents' expert evidence: see James Hardie Industries NV v Australian Securities and Investments Commission [2009] NSWCA 18. In exercising the discretion whether the disputed passages should not be admitted, the probative value of the evidence (meaning "the extent to which the evidence could rationally affect the assessment of the probability of the existence of the fact in issue": Evidence Act, Dictionary) is not "substantially outweighed" by any of the identified danger(s). For the reasons given, it is in fact difficult to identify the existence of, or possibility of, any of the identified dangers in s 136 of the Evidence Act in relation to the tender of the disputed passages. 16 Finally, something further should be said about James Hardie. Counsel for CNP sought to distinguish the decision on the basis that: In James Hardie, the analysts' reports were admitted to show the market perception in relation to the circumstances existing at the time when James Hardie Industries was alleged to have not disclosed certain information. So it was the perception of the market, the knowledge of the marketplace, at the time of the alleged nondisclosure. This is different, your Honour, in a material respect. This is the reaction of some selected analysts to a corrective disclosure being made by CNP and it is the reaction which has the means of being highly prejudicial because these analysts had a motive for saying what they were saying. They had egg on face. They were aware, we say, of the joint venture debt, they were aware of the refinancing risk, but when the risk was realised, they were surprised, as was Centro surprised. They seek to recharacterise that by saying in their reports there was inadequate disclosure, murky disclosure. There is a real difference in terms of the nature of the analysts' reports here and the purpose for which they are sought to be used than the James Hardie case and in this particular case, there is real potential for prejudice, unless we can test those opinions from the analysts in respect to their methodology for gathering information and to test their motives for the reactions that they made in their analysts' reports after the corrective disclosure. 17 For the reasons stated above, I reject the submission that there is a "real potential for prejudice". The critical factor, as in James Hardie, is that the analyst reports, being plainly relevant, should not be the subject of discretionary exclusion or limitation because they may refute the assumptions upon which CNP and CER's experts have proceeded in this case; namely, that there was a particular relevant perception in the market of certain matters: see, for example, the Expert Report of Dr O'Brien dated 10 December 2011 at [33]. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Associate: Dated: 2 April 2012 ANNEXURE A Doc ID Date Description Passage(s) subject of application in bold CNP.300.060.0026 13.12.07 Merrill Lynch Investor Analyst Report entitled "Downgrading to Sell; questions mounting" (8 pages) We are downgrading Centro to Sell from Neutral, as we have lost confidence in the company's ability to execute its business model after a series of market events (US consumer, credit and REIT markets) and company-specific issues (e.g. CSF-CER merger, high gearing, poor disclosure). … (page 1) Given the company reiterated guidance just 2 months ago with credit spreads not vastly different from where they were today, we think credibility may be questioned by investors. Moreover, management has consistently stated the company was 100% hedged and over the long term. While we cannot fault the company for the huge change in credit spreads, we think the company should have communicated this risk more effectively. Finally, CNP's financial statements give no clarity in terms of debt maturity schedule with a vast amount of debt off of the books. … (page 5) CNP.300.060.0091 17.12.07 Merrill Lynch Investor Analyst Report entitled "Searching for a white knight; Maintain Sell" (10 pages) CNP announced it had extended $2.7B of near-term financing to mid Feb. with a further $1.2B due within 12 mos. Investors were surprised by the magnitude of the refinancing risk given CNP's disclosure to date. … (page 1) Centro had been under the impression that it would be able to refinance its current debt maturities, but in our view failed to flag these risks to its various stakeholders and the analyst community. Investors, based on company presentations, had thought that the refinancing risks had been mitigated and / or hedged (see "Downgrading to Sell; questions mounting" from 13/13/01). … (page 3) Centro's stated NTA as of fiscal year end was $2.29 / share or $1.9B, but given poor disclosure it is unclear as to how that value is derived and / or if it should be relied upon. Given the disclosure as to what's left on Centro's balance sheet, it appears that the preponderance of assets are US based with a portion of any potential equity wiped out … (page 5) CNP.300.061.0080 17.12.07 Merrill Lynch Investor Analyst Report entitled "Black eye for the LPT Industry" (9 pages) Painful and embarrassing, but black eyes do heal Today's bombshell announcement by Centro Properties is truly a black eye for the industry - painful, conspicuous, and highly embarrassing - but like most black eyes, we believe it will heal over time. Centro announced it was going into a strategic review, suspending its 2008 dividend and potentially going into liquidation mode, resulting in the second worst day (-11.4%) in LPT history. Five characteristics that made CNP an aberration We believe Centro had a number of unfavourable characteristics that in aggregate caused its liquidity crisis in this environment: 1.) Near-term debt maturing; 2.) Highly geared balance sheet; 3.) Poor asset quality; 4.) Fund redemption risk; and 5.) Murky disclosure. However, as summarized in our "ML LPT Risk Grid," only one company shares as much as three of these characteristics: Macquarie DDR Trust (Sell rated). Therefore, we view CNP as an aberration. (Page 1) Five key unfavourable Centro characteristics We believe Centro had a number of characteristics that in aggregate are unique to the company - although there are other companies that share some similarities. While individually these are all negative, in our view, they tend to feed off each other, creating a snowball effect, which resulted in the Centro bombshell. We list these characteristics below: … 5. Murky disclosure. Centro's disclosure, particularly its debt, is one of the murkiest in the REIT industry, [sic] This compounds the problem for investors because risks cannot be well known. (page 3) CNP.300.057.0001 17.12.07 Goldman Sachs JB Were Analyst Report entitled "Centro Properties Group - Only The Brave Need Apply" (8 Pages) A lack of transparency regarding the strategic review make it difficult to draw definitive conclusions, however one might reasonably wonder whether CNP's lenders have become nervous about the value of CNP's assets (particularly the services business valuation, and its sustainability in light of declining asset values), and that CNP now needs to sell assets or source an alternative source of capital quickly. (page 1) In the case of CNP, a lack of transparency regarding the strategic review makes it difficult to draw definitive conclusions, however one might reasonably wonder whether CNP's lenders have become nervous about the value of CNP's assets (particularly the services business valuation, and moreover its sustainability in light of declining asset values), and that CNP now needs to sell assets, or source an alternative source of capital quickly, in order to secure debt at what will be less favourable rates. Whether the latter constitutes a stopgap, or the model is in fact broken remains the ultimate valuation question. (page 4) CNP.300.065.0080 17.12.07 UBS Analyst Report entitled "Centro Properties Group - Rating / Price Target under review" (16 pages) • A going concern? We have previously raised questions of the short-term headwinds facing this vehicle particularly in light of opaque disclosure. However, we had assumed these could be overcome and valued the vehicle as a going concern. With the $3.9bn Feb 08 refinancing now in doubt, we have re-visited this assumption, and with our numbers under review, so too is our price target & rating. (page 1) CNP.300.063.0095 18.12.07 Credit Suisse Analyst Report entitled "Centro Properties" (12 pages) Event: Centro announcement - you must be kidding me. On Monday, Centro announced it would report FY08 distributable earnings of only 40.6cpu 15% below our prior estimate, and suspend its dividend, primarily due to increased interest costs. (page 1) We believe the documentation given to investors at the time of this analysis was, at the least incomplete. A near-term refinancing would have been a particularly critical issue given US CMBS spreads were already beginning to widen when the merger was consummated (see Figure 3 and our CER note from today with additional commentary). (page 5) CNP.407.002.0113 18.12.07 Credit Suisse Analyst Report entitled "Centro Retail Group" (10 pages) Rights available to CER - We believe that, at the least, insufficient debt rollover disclosure (we provide disclosure examples in Figure 2 below) was provided to CER (and CSF) unitholders in the course of the October merger between CER and CSF. We believe it is appropriate for investors in CER, CSF, the Direct Property Fund (DPF) and Direct Property Fund International (DPFI) to explore what responsibilities Centro had in representing the CER/CSF merger to investors. (page 1) CNP.300.058.0084 18.12.07 JPMorgan Analyst Report entitled "Centro Properties Group - Massacre. NTA now the share price, and no value for services business" (14 pages) In hindsight the disclosure on the debt that funded the NXL acquisition has been and remains unacceptably low. Confidence in management guidance is reduced, and the two standard questions need to be asked after an unexpected downgrade: 1) 'what else don't we know?'; and 2) 'when is the second downgrade coming?' We are now 8% below CNP's new guidance of $343m in NPAT for FY08. Inclusive of the planned $40m 'debt restructure' charge our forecast for FY08 is now $277m. Between FY07 and FY12 our EPS forecast now shows a negative CAGR of -0.5%. (page 2) CNP.300.065.0051 15.01.08 UBS Analyst Report entitled "Centro Properties Group - CEO exits, newsflow risk remains negative" (7 pages) Retain short term sell Volatility will remain at heightened levels for so long as there continues to be a lack of meaningful disclosure. The appointment of Glen Rufrano as CEO points to a presumably bank driven focus on ensuring the ongoing viability of the US business - with liquidation of domestic assets the preferred option to meet lender requirements. Foregoing domestic mgt earnings is clearly being considered … (page 1) CNP.300.058.0033 15.01.08 JPMorgan Analyst Report entitled "Centro Properties Group - A new CEO, and another lender seeking to join the queue" (13 pages) No objections.

Kirby v Centro Properties Limited

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (23 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (5)