Plaintiff v Defendant

2 Treasury is a publicly listed company. It is involved in winemaking. It markets, sells and distributes wine in Australia and overseas, including in the United States of America. The claim that MCI seeks to bring on its own behalf and on behalf of the group members may broadly be described as one for damages consequent upon the alleged failure of Treasury to disclose what are described as 'US inventory matters' to the market immediately upon becoming aware of them. The inventory is wine. MCI claims that this constituted a breach of the disclosure provision, s 674(2) of the Corporations Act 2001 (Cth), and that Treasury's conduct was misleading or deceptive in breach of s 1041H of the Corporations Act. MCI claims that it and the group members suffered loss because they bought their shares in an inflated market such that they overpaid for the shares. The quantum of loss is said to be the difference between the price paid and what the price would have been if Treasury had disclosed the US inventory matters at the time it allegedly should have made disclosure.

3 Treasury had applied to strike out MCI's Further Amended Statement of Claim. That pleading has been overtaken by events. MCI wishes to rely upon a proposed Second Further Amended Statement of Claim dated 28 March 2014 ('PSFASOC'), which it contends accommodates the criticisms that Treasury had made of the earlier pleading. These reasons concern the PSFASOC. The parties are at odds as to whether MCI needs leave to file the PSFASOC, or whether it may do so as of right such that the application should be characterised as one by Treasury to strike out the PSFASOC. If leave is required, then it would not be granted if the pleading would be liable to be struck out. Consequently, for present purposes, nothing of substance turns on the distinction between leave being granted or the pleading being struck out. It may, however, have some bearing when it comes to the question of costs. I will consider that if and when any application for costs is made.

4 For the reasons which follow, I have determined that the PSFASOC should be permitted to go forward in its current form.

5 The rules of pleading are well known. A pleading must contain, in summary form, a statement of all the material facts on which the party relies.[1] The pleading must contain proper particulars,[2] including particulars of knowledge.[3]

6 A pleading in proper form facilitates fairness in the conduct of the proceeding. The party's opponent and the Court know what the case is that is to be met and will not be taken by surprise. Further, a proper pleading discloses whether the party has a claim or defence (whichever may be the case) which is known to law. Finally, a proper pleading aids the efficient conduct and resolution of the dispute. The pleadings assist in setting the scope of discovery and the evidence that may be led and tested. The pleadings should also elucidate the real issues in dispute between the parties.

7 As I have said, in the normal course, leave to amend a pleading will not be granted where the pleading would be liable to be struck out. Consequently, for example, leave to amend a statement of claim is unlikely to be granted where the proposed pleading does not disclose a cause of action, or may prejudice, embarrass or delay the fair trial of the proceeding.[4] In approaching the task, the Court assumes that the matters alleged will be proven.

8 As I have said, the proceeding is brought by MCI on its own behalf and on behalf of all persons who acquired ordinary shares in Treasury on or after 17 August 2012 and who held shares at the commencement of trading on 15 July 2013. The PSFASOC alleges that:

(a) Treasury had internal reporting systems that ensured adequate and timely reporting of all material or significant developments concerning Treasury's performance that a reasonable person would expect to have a material effect on the price or value of its securities;

(b) A 22 October 2010 presentation given by Treasury described the techniques that Treasury would use to improve its market position in the USA;

(c) In 2011, Treasury disclosed that the first stage of one of those techniques was complete and that the techniques would be extended more widely in the USA;

(d) On 17 August 2012, Treasury disclosed to the market that reducing its inventory levels in the USA was a key challenge in the 2012-2013 financial year and that it would seek to reduce its inventory by matching wine shipped to the USA with depletions from its inventory;

(e) Treasury did not disclose on that date that reducing its USA inventory would adversely affect its financial performance;

(f) Treasury's half year results for the 2012-2013 financial year (released on 28 February 2013) implied that Treasury was successfully following the strategy described in (d) above;

(g) On 15 July 2013, Treasury issued a release to the ASX[5] which disclosed that it:

1. still had excess commercial wine[6] in its USA distribution network which it expected to manage by destroying old and obsolete commercial wine, shipping less commercial wine to the USA and providing discounts and rebates to assist its USA distributors to sell excess inventory; and
2. expected that reducing its commercial wine inventory in the USA would materially affect Treasury's financial performance.

(h) The 15 July 2013 release advised the market that:

1. Treasury had been unable to reduce its inventory of commercial wine in its USA distribution network to sustainable levels in the ordinary course of its business;
2. in order to reduce its inventory of commercial wine in its USA distribution network, Treasury would have to take a number of steps, including to destroy a substantial quantity of wine, ship materially less wine to the USA in future and provide material discounts and rebates to sell existing inventory; and

1. Treasury's financial performance and position would be materially and adversely affected by taking those steps.

9 The PSFASOC goes on to allege that information about the US inventory matters was not made generally available to the market before 15 July 2013 and that a reasonable person would have expected those matters to have a material effect on the price or value of Treasury's shares if information about them was made generally available.

10 Paragraph 18 of the PSFASOC (which is the focus of Treasury's pleading complaints) then reads:

On a date that the plaintiff is unable to specify prior to discovery of documents from the defendant's internal reporting systems (as alleged ... above), but which was not later than 17 August 2012, the defendant was aware of the US inventory matters.

Particulars

It is reasonable to infer that the defendant was aware of the US inventory matters on or before 17 August 2012 because:

1. Pursuant to the defendant's Board Charter, the defendant's board was inter alia required to:

1. oversee the Company, including its controls and accountability systems; 2. adopt an annual budget for the financial performance of the defendant and monitor performance against it;

1. monitor the Company's financial position and its ability to meet its debts and other obligations as they fall due; and

1. ensure that the defendant's accounts comply with relevant accounting standards and present a true and fair view,

all of which required board oversight of the performance of the defendant's United States operations, a matter that was highly probably regularly considered by the defendant's board during 2011, 2012 and 2013 having regard to the matters alleged in paragraphs 8-14 above (and the particulars thereto);

1. The defendant has and at all material times had in place internal reporting systems, as alleged in paragraph 8 above, which systems would have informed the defendant at all relevant times how much commercial wine it and its distributors held in the United States;
2. The defendant publicly announced in 2010 and 2011 the existence of the financial analysis, systems, tools and capabilities which formed part of the defendant's USA distributor realignment program alleged in paragraph 9 above, all of which, according to the market releases alleged in paragraph 10, were substantially implemented by 29 April 2011, and these systems would have informed the defendant at all relevant times how much commercial wine was held in its USA distribution network;
3. The defendant has disclosed to the market that it had knowledge of the gradual emergence and development of the US inventory matters, lending further support to the inferences alleged in particulars (i), (ii) and (iii) above:

1. The market was advised on 22 August 2013 in a presentation titled "Treasury Wine Estates Full Year Results" (22 August 2013 presentation) that the defendant had approximately 5 to 6 weeks' of inventory in excess of the defendant's target being held by distributors in the United States of America at the time of the demerger in 2011; 2. The market was advised in the 22 August 2013 presentation that on 30 June 2013, the defendant had approximately 10 to 11 weeks' worth of inventory held by distributors in the United States of America; and

1. The market was advised in the 22 August 2013 presentation that the defendant had shipped approximately 300,000 fewer cases of wine to the United States of America each year,

and it therefore appears that the defendant knew that its inventory of commercial wine was too high at all times from the demerger;

1. The defendant's previous approach to managing its US commercial wine inventory, as advised to the market in the defendant's "F12 Media Release" on 17 August 2012, was a "strategy to match shipments with depletions excluding new product". The implementation and management of this strategy required a detailed knowledge at all relevant times of how much commercial wine the defendant and its distributors held in the United States;
2. Because it is reasonable to infer that the defendant was aware of the performance of its commercial wine sales operations in the United States, the failure of its August 2012 announced strategy of matching shipments with depletions, and the need to sell commercial wine before it aged or deteriorated, it is reasonable to infer that the defendant was aware on 17 August 2012 of the existence of the US inventory matters because on that day it released its "TWE 2012 Annual Results" presentation, as alleged in paragraph 11 above, in which it said that:
   1. Reducing its inventory levels in the United States was a key challenge in the 2012-2013 financial year; and
   2. One of the defendant's three challenges in fiscal 2013 was "in the US we are working with our distributor partners to reduce inventory levels";
3. The "TWE 2012 Annual Results" presentation and "F12 Media Release" were published at the same time as the defendant's 2012 Annual Report;
4. The work necessary to prepare and internally review the defendant's 2012 Annual Report and the importance of that document from the legal, accounting and corporate governance perspectives, further support the inference that all of its contents, and the matters set out in the accompanying "TWE 2012 Annual Results" presentation and "F12 Media Release", must have been known to the defendant for some time prior to 17 August 2012; and
5. The defendant's Disclosure Policy, referred to in the particulars to paragraph 8 above, requires at clause 3.2 that "[i]f the information requiring disclosure to the ASX will, or is likely to, have a significant impact on Treasury Wine Estates business or operations, the Board expects that management (through the Company Secretary, having consulted with the Chief Executive Officer in advance and liaising with the Chief Financial Officer as appropriate) will refer the matter to the Board for consideration and approval" and it therefore appears likely that the matters disclosed in the "TWE 2012 Annual Results" presentation and "F12 Media Release" on 17 August 2012 were considered with care and approved by the defendant's board prior to their publication.

11 The PSFASOC proceeds to allege that once Treasury became aware of the US inventory matters, it did not immediately release information to the ASX about them and that its failure to do so constituted a breach of s 674(2) of the Corporations Act.[7] It is also alleged that Treasury's publication of the 17 August 2012 and 28 February 2013 ASX releases was conduct by Treasury that was misleading or deceptive, or was likely to mislead or deceive in breach of s 1041H of the Corporations Act,[8] because neither ASX release disclosed any information about the US inventory matters.

12 As I have said above, the PSFASOC alleges that MCI and the group members have suffered loss and damage because they purchased their shares in an inflated market.

Does paragraph 18 of the PSFASOC disclose a cause of action?

13 The principal complaint that Treasury makes about the PSFASOC is in respect of paragraph 18. To recap, MCI alleges that on a date no later than 17 August 2012, Treasury was aware of the US inventory matters. Treasury contends that the particulars to that paragraph do not support the allegation. In this regard, it says that paragraph 18 fails to comply with the pleading requirement to provide particulars of knowledge. Treasury argued that the failure arises because the particulars do not provide a proper basis for the making of the reasonable inference that by 17 August 2012, Treasury was aware of the US inventory matters.

14 Treasury developed its argument in the following way. In order for the particulars to support and sustain the allegation that Treasury was aware of the alleged US inventory matters by and prior to 17 August 2012, the particulars need to establish a reasonable basis for inferring that:

(a) the US inventory matters were in existence by and prior to that date; and (if they were)

(b) Treasury was aware of them by and prior to that date.

15 Treasury submitted that the particulars do not address (a) at all, and they do not bear upon (and therefore cannot support or sustain) the allegation that the US inventory matters were in existence by or prior to 17 August 2012. In addition, Treasury is of the view that no other allegations (or particulars) in the PSFASOC support, or are capable of supporting, any inference that the US inventory matters were in existence prior to 17 August 2012.

16 I do not agree. The whole tenor of the pleading is that the US inventory matters were in existence by 17 August 2012. Whilst there may be no express pleading of this, it is implicit in what is pleaded. In this regard, it is worth bearing in mind that the US inventory matters concern the need to take steps to reduce Treasury's inventory of commercial wine in its USA distribution network and, if they were taken, those steps would adversely affect Treasury's financial performance and position. The PSFASOC pleads matters which go to the development of difficulties with Treasury's USA arm of its business over time, starting with the 22 October 2010 presentation. It culminates in the allegations that Treasury did not disclose the US inventory matters at the time that it should have. A person cannot be aware of something that does not exist. It follows that the only way that paragraph 18 can make sense, is if the US inventory matters were in existence no later than 17 August 2012. This is not a pleading issue for Treasury. It knows that that is the claim it has to meet. If its case is that the US inventory matters did not exist at that date, then it can plead this in its defence.

17 As I have outlined above, the next complaint by Treasury is that the particulars to paragraph 18 do not give rise to the reasonable inference that Treasury was aware of the US inventory matters on or before 17 August 2012. Treasury urged the Court to determine that that inference does not arise. It submitted that whether the inference is properly or reasonably drawn could be determined on this application based on the allegations as particularised. In my opinion, that is not the proper approach. That is akin to what the trial judge would do. At trial, however, the judge will have the benefit of all of the evidence, not just a summary of the material facts by way of a pleading and the particulars. The present task is not of that nature. Rather, the Court should approach the task on the basis that if the inference alleged cannot be said to have no real prospect of success, the claim in the form pleaded should be permitted to go forward.

18 Treasury submitted that, at best, the particulars would only support an inference that 'the gradual emergence and development of the US inventory matters' was material information which ought to have been disclosed by Treasury to the ASX. However, it notes that this is not the allegation made, nor is it alleged that the failure to disclose that gradual emergence constituted a contravention of s 674(2) of the Corporations Act.

19 In my opinion, if the matters set out in the paragraph 18 particulars are proven, it would be open to the Court to draw the inference that is alleged - that is, that Treasury was aware of the US inventory matters by 17 August 2012. That is not to say that a trial judge would do that. Rather, it is simply an observation that the inference may be drawn on the balance of probabilities. Among other things, the Court would be asked to take into account that the Board had oversight of Treasury's performance in the USA; Treasury had internal reporting and other systems that would have disclosed the levels of commercial wine in the USA at all relevant times; Treasury had knowledge of the gradual emergence of the US inventory matters from 2011; in 2011, Treasury had five to six weeks of inventory in excess of its target; it had shipped approximately 300,000 fewer cases each year; and on 17 August 2012, Treasury recognised that reducing its inventory levels in the USA was a key challenge going forward. In my opinion, it cannot be said that the inference that the Court would be asked to draw is so devoid of merit as to have no reasonable prospect of success.

20 The PSFASOC should be permitted to proceed. Treasury can then plead to the allegations made against it. If, as it contended, the issue that was disclosed was an emerging matter only reaching the point of materiality at a certain point, then it can plead that.

21 I would add that Treasury also complained about the description of the group members. Its arguments in this regard rested on the success or failure of its arguments against paragraph 18. Consequently, it is not necessary to consider that issue.

22 MCI is entitled to file and serve the PSFASOC. I will hear the parties on the question of costs.

[1] Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 13.02(1)(a).

[6] The commercial wine is alleged to be wine sold in the USA, at a price of US$10 per bottle or less.

1. [7] The relevant parts of s 674 of the Corporations Act provide:
   • (1) Subsection (2) applies to a listed disclosing entity if provisions of the listing rules of a listing market in relation to that entity require the entity to notify the market operator of information about specified events or matters as they arise for the purpose of the operator making that information available to participants in the market.
   • (2) If:
     • (a) this subsection applies to a listed disclosing entity; and
     • (b) the entity has information that those provisions require the entity to notify to the market operator; and
     • (c) that information:
       • (i) is not generally available; and
       • (ii) is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity;

the entity must notify the market operator of that information in accordance with those provisions.

(1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.