Analysis
107 We would reject the appellants' non-disclosure case concerning the Larkin memorandum. But before we proceed further, it is worth setting out some aspects of the Larkin memorandum.
108 At the outset it was stated:
This paper provides an analysis of issues effecting BNB Group FY08 guidance, sensitivity analysis around the range of potential outcomes, a recommendation for the guidance to be provided to the market and recommendations as to the specific actions to meet guidance.
109 Then there was a discussion of the most recent guidance that BBL had given to the market. Mr Larkin then said:
The issue with the most recent guidance provided to the market is that [it] does not provide a floor for FY08 earnings.
110 It was then said:
As noted to the Board sub-committee on 6 August 2008, FY08 guidance will be impacted by:
1. Kallista outcomes
2. Completing transactions in accordance with the forecast, particularly in Real Estate and Infrastructure
3. Any decline in real estate values and other provisions required in addition to forecast
4. Loss on exit of investments not in forecast, in particular in Corporate & Structured Finance or non-strategic assets
5. Restructure provision, including the impact of BDR's
The analyst current view updated for our most recent announcement (excluding non-updated outliers) is:
111 It was then said:
On the specific matters noted in the presentation to the Sub-Committee on 6 August 2008:
Kallista
An overview provided by Toto Lo Bianco to the Board sub-committee on 7 August 2008, outlining the status of the Kallista sale process, is attached as Appendix A. B&B European Infrastructure will be focused on approaching those major bidders who either withdrew from the sale process or did not participate, with a view to having them reengage in the process, especially those key bidders who have completed due diligence i.e. [Suez] and Gas Natural and other major companies including, RWE, ENEL, EON.
Real Estate/Infrastructure
The real estate and infrastructure groups have recently reforecast revenue for 2008. A summary of transactions to achieve these forecasts are included as Appendix B. In current market conditions (notwithstanding the probability weighting/analysis of each group) there is a clear risk that forecast transactions will either not occur at forecast values or be deferred.
…
Sale of US 09 Wind
The US 09 wind assets are in late stages of development and could be sold prior to December 2008. A detailed note on the potential for a sale prior to 31 December 2008 from Mike Garland is attached in Appendix C.
112 Then it was said:
SENSITIVITY ANALYSIS FULL YEAR 2008 GUIDANCE
Base Case Profitability of $750m assumes:
i) Kallista completes in full
ii) Remuneration rate is 45%
iii) Current forecasts are met
iv) No restructure provision is required
v) No additional losses arise from Real Estate or legacy assets
In the context of the uncertainty in providing FY08 guidance around the existing issues we have undertaken a probability weighted assessment of our 2008 guidance:
If we adjust for the probability weighted outcome and apply +/. $100m factor, this allows earnings of between $400 - $600 NPAT for the year. The guidance is subject to (a) market conditions; and (b) outcomes from the sale of European wind assets, as well as achievement of each of the initiatives noted above.
113 Clearly this was a sensitivity analysis and not a forecast.
114 Mr Larkin then recommended:
Guidance Recommended
In light of the above we recommend that we retain our most recent guidance, in that we do not expect 2008 profit to be above the 2007 Group NPAT of $643 million. Our result will be dependent on a number of things including:
• the timing and outcome of our 2008 asset sale program
• whether there is a requirement for further provisions against impairment
• Progress in relation to restructuring and cost reduction program
Further guidance to the market would be provided when we have more clarity on some of these issues.
Clearly this does not address the issue of a "floor" on our FY08 earnings, however given that the market has been informed of our current position and given the uncertainty of the potential outcomes including what may be a reasonable view of a floor of our guidance. We are consulting with our advisers and this will provide the meeting with an update of their advice on this matter.
115 Further, in an appendix to the memorandum there was a detailed discussion of the Kallista project. A fair reading of the detail, which we do not need to set out in full, realistically portrays the scene that the sale of part or all of the assets could be completed before the end of the 2008 financial year.
116 It was said in section 2 "Current Status" of the appendix that:
Following the withdrawal of bidders discussed above, in any event, a total of 8 bids have been received for Spain, Portugal, France and Germany. The Greek bids in relation to the Arkadia projects are due Friday the 8th.
Negotiations are currently underway in relation to the possible finalisation of a transaction for Spain, the second largest of the Kallista businesses. If they are concluded on the anticipated terms it would provide a compelling benchmark and message to the market, and would provide momentum for the whole process. The objective is to conclude these discussions in the coming 7 days or immediately following the mid-August break. In relation to Greece, we will receive the bids shortly and look to engage on them accordingly.
In France we have received one offer, from Singapore-based industrial Keppel Holdings, and are awaiting another one from ENEL, who was a late entrant into the process and who will require additional time to complete their work and have indicated they could do so and provide a binding bid by the 15th of September. With both Gas Natural and Suez withdrawing from the process for external reasons days before final bid submission, Portugal has been hardest hit. Iberdrola submitted an offer, but- as with ENEL- they still have work to complete. Also, as expected, Iberdrola has tried to take advantage of the withdrawal of the other bidders. Two offers were received for Germany, one from a consortium of two local utilities and another from a Danish investor.
The French, Portuguese and German offers received thus far are not currently at levels we would accept or that we believe are representative of fair value, even in the current challenging market conditions.
117 Indeed, some of these assets were sold in that time-frame, for example, the Spain and Portugal assets. By 29 October 2008 the Spanish assets had been sold with regulatory approval for the sale obtained. The Portuguese assets were sold on or around 17 November 2008.
118 Further, it was said in section 3 "Next Steps" of the appendix that:
We spent a lot of time with a lot of bidders and everyone agrees we have great assets and unfortunate timing! In addition to the compelling asset quality, all of the documentation, all the sale materials and all the necessary corporate restructurings have been completed so that a revised approach to the process can move forward. In addition to working through the Greek and French offers, it is proposed that in late August, immediately after the holidays, we move forward as follows:
• Continue to look to re-engage Suez, and possibly Gas Natural (who have both completed full due diligence and are ready to bid). If we manage to bring them back, at the very least we can better leverage Iberdrola to push up their price and move towards close.
• Bring in select, qualified bidders who didn't participate originally, often due to conflicts. International Power, who have previously expressed their interest, is one such example. RWE and ENEL (in respect of other countries) are other examples. A number of these parties have been indirectly approaching us in the last 48 hours, including EON, Taqa, and some other cash-rich financial investors. With these parties a direct, less formal dialogue is likely to get a better result.
• Explore a range of potential options including full sale, partnership, the sale of stakes to passive investors and other financing alternatives.
• Present infrastructure investors the opportunity to acquire only the operating assets, and possibly also to enter into a framework agreement with us for the projects in development. This model could be applied in France and Germany to the existing bidders as well. Subject to related party concerns, BBEIF might also now participate in the process.
These options will run in parallel, and will require flexibility and creativity. We are particularly encouraged by the very recent, unsolicited approaches we have received from bidders wishing to engage. A sale of the Spanish assets would also add further positive momentum.
119 We would begin by making several points.
120 First, the Larkin memorandum and its analysis was not a forecast or a revised forecast. Rather, it was a sensitivity analysis or a "probability weighted assessment of our 2008 guidance", as Mr Larkin described it.
121 Mr Larkin's purpose was to identify the different sources of uncertainty and their impacts to assess whether BBL had sufficient certainty about 2008 NPAT to give further revised earnings guidance in circumstances where, as Mr Larkin put it, "[t]he issue with the most recent guidance provided to the market is that it does not provide a floor for FY08 earnings".
122 Viewed as a whole the Larkin memorandum had the character of a briefing paper bringing to the attention of the reader both analysis and information available at the time that might be used to make an assessment as to likely earnings. It did so in circumstances where the likely earnings depended upon lumpy events, being asset sales, rather than the more usual context in which the pattern of sales in the ordinary course of trading might be assessed and presented, in effect, as themselves stating a likely forecast. The matters in the Larkin memorandum called for the reader to make a judgment as to likely NPAT and offered a provisional personal view. Viewed objectively, its content and form was not to state a conclusion or to express a forecast. Rather, it invited discussion and the formation of an opinion by others based on its content concerning likely NPAT.
123 Mr Larkin started with the figure of $750 million rather than building it up, and identified various positive or negative potential impacts. Moreover, many of the impacts were assumptions or identified in a provisional manner. So, for example, the major negative potential impact, apart from the Kallista project not completing in full, which was assigned a 50% probability, was a reduction in future revenues in respect of which Mr Larkin stated "assume 20% decline".
124 Mr Larkin assigned probabilities between 50% and 100% to the various positive and negative impacts.
125 Mr Larkin's sensitivity analysis showed that, assuming that the Kallista project realised only $350 million in 2008 rather than $700 million, 2008 NPAT could still vary substantially. Indeed, if all of the identified negative and positive impacts came about, 2008 NPAT would be $700 million, which was higher than the actual 2007 NPAT.
126 Mr Larkin also applied what he described as a "+/- $100m factor". This was a notional figure, apparently adopted to emphasise that the sensitivity analysis was itself uncertain.
127 Mr Larkin concluded that BBL "retain our most recent guidance" even though it did not address "the issue of a 'floor' on our FY08 earnings" given that the market had been "informed of our current position" and the "uncertainty of the potential outcomes".
128 In summary, the exercise was not a forecast or revised forecast for NPAT, let alone one adopted by the board. It is difficult to see how the memorandum or the analysis contained therein was material information in a relevant sense requiring disclosure.
129 Second, the revised earnings guidance that had been given on 11 August 2008, from an estimate of $750 million to a statement that earnings were not expected to exceed $643 million, did not result from a re-evaluation of whether the sale of European wind farm assets (the Kallista project) would complete in full in the 2008 financial year.
130 Now the Kallista project was announced in February 2008 and was expected to account for up to $800 million of estimated NPAT for the 2008 financial year. It was being undertaken by a global competitive bid process.
131 By early August offers had been received for some of the assets. Further, offers continued to be received and considered during October. Moreover, on 29 October 2008 it was announced that the Spanish assets had been sold for $1.42 billion, resulting in an estimated profit of $266 million.
132 Now at all relevant times there was material before the board indicating that there were real prospects of selling the relevant wind assets so that the revenue could be brought to account in 2008. But there was uncertainty as to prices.
133 Now the appellants say that if one looks at the table used to produce the guidance in the Larkin memorandum, it is apparent that the impact of real estate re-valuation ($70 million) is dwarfed by the impact of the Kallista project ($350 million). And they say that it is evident from his approach in the Larkin memorandum that Mr Larkin did not consider that he could base any forecast upon the assumption that the Kallista project would complete in full, as otherwise the forecast would have been $750 million in accordance with the previous guidance. Further, they say that even if one removes Mr Larkin's adjustment for real estate re-valuation in the table in the Larkin memorandum ($70 million), the forecast would be $680 million, still well above the revised forecast of "not above $643 million".
134 Further, as to the contention that Mr Larkin's computation is not a forecast but a sensitivity analysis, the appellants say that this is an exercise in semantics. And they say that uncertainty is present in any forecast or guidance, and the guidance arrived at will no doubt always be the product of an assessment of the likelihood (or not) of particular events in the future occurring.
135 But in our view the appellants' points go nowhere. Clearly the Larkin exercise was not a forecast, let alone a forecast adopted by the board. Both BBL and the primary judge have accurately characterised it for what it is.
136 Third, the appellants submitted that the Larkin memorandum contained a forecast of "$500 million and/or a range of between $400 - $600 million" which was below "the market's expectations of earnings in a significant way" as reflected in the Bloomberg consensus. But that wrongly treats the provisional sensitivity analysis in the Larkin memorandum as a forecast and wrongly equates the Bloomberg consensus with the market's expectation as to 2008 NPAT without engaging with the primary judge's findings on this issue.
137 Fourth, the appellants refer to the average of analyst forecasts before 14 August 2008 used by Mr Potter, being $577 million. But as is apparent from Mr Potter's evidence more generally, he did not put the $577 million average of analyst forecasts forward as something that could be equated with market-expected 2008 NPAT as at 13 August 2008. Further, every analyst report included in it set a value or target price materially above BBL's closing market price on 11 August 2008, and even further above its closing market price on 13 or 14 August 2008. Further, the two analyst reports received on 12 August 2008, which were the closest analyst reports in date to the Larkin memorandum, contained 2008 NPAT forecasts of $524 million (Aegis) and $422 million (Credit Suisse), giving an average below the $500 million figure it is alleged was required to be announced.
138 Generally, there is no reason to think that BBL's market price on 14 August 2008, when the Larkin memorandum was discussed with the board, reflected or instantiated an expectation of 2008 NPAT that was the same as the 2008 NPAT forecasts given by analysts on 11 August 2008, who valued BBL at substantially higher prices than the market did.
139 Fifth, the appellants take issue with the primary judge's finding at [86], where his Honour found that the objective material which his Honour had summarised in [76] to [85] "made it unlikely that there were any expectations in the market from the middle of 2008 to the end of December 2008 of positive earnings being achieved by BBL for the full Financial Year ending 31 December 2008". But his Honour's finding concerned likely market expectations given the objective circumstances. The finding preceded a detailed consideration of the expert analysis of the same issue. It was not categorical.
140 Sixth, the appellants further submit that the sensitivity analysis in the Larkin memorandum was material because it was "radically lower" than the $643 million "ceiling" referred to in the 11 August 2008 announcement. Similarly, they refer to Myer and submit that a company which has given earnings guidance is generally required to announce to the market any "corrections thereto" (at [1304]). But the sensitivity analysis in the Larkin memorandum was not radically lower than the earnings guidance given on 11 August 2008. It was consistent with it, insofar as it supported the view that in the circumstances in which BBL found itself no better guidance could be offered than that already given.
141 In summary, we reject the appellants' arguments concerning materiality.
142 We should now say something about the listing rule exceptions, upon which BBL bore the onus to establish.
143 His Honour's reasons do not expressly discuss the operation of listing rules 3.1A.1 and 3.1A.2 in their application to the first non-disclosure case, or indeed the other non-disclosure cases.
144 But assessing the matter for ourselves, on the evidence there is little doubt that the confidentiality condition of listing rule 3.1A.2 was satisfied concerning the information said not to have been disclosed in each non-disclosure case. Indeed, the obviousness of that conclusion given the form, content and intended audience for the Larkin memorandum may explain the failure to address the matter expressly in the reasons.
145 As for the condition in listing rule 3.1A.1, this is more complicated. But again, assessing the matter for ourselves, we would say this was satisfied concerning the information said not to have been disclosed in the first, second and third non-disclosure cases.
146 Now the appellants say that the primary judge did not make any finding on the requirements of listing rule 3.1A.1. And the burden in this regard is on the party seeking to establish the exception. The appellants say that as a consequence of the absence of such a finding, there is no basis to conclude that the exceptions in listing rule 3.1A are made out at all. We agree with the first and second propositions, but not the third. We can and have assessed that for ourselves. As we have said, the requisite elements of listing rule 3.1A have been made out concerning the alleged first, second and third non-disclosure cases. Further, there is no substance to the appellants' complaint concerning his Honour's finding as regards listing rule 3.1A.3.
147 Finally, in our view, even if the information in the Larkin memorandum was required to be disclosed, that is no basis for overturning the primary judge's findings on causation and loss.
148 After 11 August 2008, BBL's share price fell rapidly even without the additional earnings guidance it is alleged was required. It more than halved in value within 10 days.
149 Further, even if one accepts analyst forecasts of 2008 NPAT as indicative of the market's expectation, by 21 to 22 August 2008, after BBL had confirmed its 11 August 2008 earnings guidance on 21 August 2008, the average 2008 NPAT expectation given in analyst reports was about $421.5 million.
150 Accordingly, in our view there is no basis to find that, had the $500 million figure in the Larkin memorandum been disclosed, BBL's share price would have fallen more steeply than it actually did.
151 We will return to questions of causation and loss later.
152 In summary, despite some imperfections in the primary judge's analysis concerning the first alleged non-disclosure case, there is no substantive error in his Honour's ultimate conclusions.
153 Finally, in terms of the appellants' criticisms concerning the delay in giving judgment and the related complaint concerning the asserted inadequacies in the reasoning, even if such complaints had substance they would not justify over-turning the primary judge's conclusions given that we have been able to assess for ourselves the evidence that the parties drew our attention to. Moreover, in the challenges that have been made before us no substantial credit issue was identified in terms of the evidence led at trial.