GUNNS will defend a shareholder class action over a large profit drop in 2009 by pointing to market volatility caused by the global financial crisis and to forecasts by stockbroking analysts of "a material decrease" in earnings.
In a formal defence document filed in the Federal Court, the company denied it contravened the continuous disclosure regime or misled investors about the performance of its woodchip export business.
It conceded foreseeing "short-term" difficulties and beginning, but not concluding, work on a profit forecast at the time.
The continuous disclosure law allows companies to withhold information which is "insufficiently definite" or "incomplete".
A class action run by solicitors Maurice Blackburn and funded by IMF (Australia) was filed against Gunns in April. Its members claim they suffered losses because the company failed to alert them early enough to problems with its exports of woodchips to Japan, China, Korea, Taiwan and Indonesia.
On February 22 last year Gunns reported a net profit for the six months to December 2009 of $400,000, a 99 per cent drop from its profit for the December 2008 half of $33.6 million and a 98 per cent drop from its profit for the June 2009 half of $22.6 million. The share price fell 35 per cent in the week after the negligible earnings were announced.
The class action claims that Gunns knew from August 31, 2009, when it reported its June results and announced a $145 million capital-raising, that its next results were likely to be significantly worse.
The statement of claim refers to a company statement that day that "significant uncertainty remains but Gunns is optimistic that 'bottom of cycle' has been reached".
The defence said that in early November 2009 the company "formed the view there was a difficult short-term outlook for its main wood fibre business" but the extent of the impact and the likely performance of other parts of the business was "not at that time sufficiently clear".
"Following a board meeting of [Gunns] on 11 November 2009, [Gunns] took steps to prepare a forecast for its 1H10 results but that process was not completed prior to the announcement to the ASX of the first-half results on 22 February 2010," the defence said.
It said the global financial crisis affected exchange rates, consumer demand and the availability of credit in Australia and in its export markets, all of which was "known to the market at all material times".
Research published by equities analysts had predicted "a material decrease" in its profit for the December 2009 half, it said.
These included net profit forecasts of $7.2 million by Bell Potter Securities, $10.8 million by UBS Securities Australia, $10.5 million by Macquarie Securities and $18.2 million by RBS Morgans.
The class action says the consensus market forecast was $12.3 million and Gunns failed to disclose there was likely to be "a material variation" between this estimate and its actual results.
The trial is not expected to begin until next year.
Frequently Asked Questions about this Article…
What is the Gunns shareholder class action about?
The class action alleges Gunns failed to alert investors early enough about problems with its woodchip export business, causing shareholder losses after a large profit drop. It was filed in April by solicitors Maurice Blackburn and is funded by IMF (Australia).
How large was Gunns' profit drop in 2009 and how did the market react?
Gunns reported a net profit of $400,000 for the six months to December 2009 — a 99% drop from the December 2008 half-year profit of $33.6 million and a 98% drop from the June 2009 half of $22.6 million. The company's share price fell about 35% in the week after the results were announced on 22 February.
What is Gunns' defence against the class action claims?
Gunns has formally denied contravening continuous disclosure rules or misleading investors. In its Federal Court defence it points to market volatility from the global financial crisis, analyst forecasts predicting a material profit decrease, and the legal allowance to withhold information that is "insufficiently definite" or "incomplete." It also says it only formed the view of a difficult short-term outlook in early November 2009 and had not completed a forecast before the 22 February announcement.
Which analyst profit forecasts for Gunns were cited in the case?
The defence noted analyst research predicting a material decrease in profit, including net profit forecasts of $7.2 million (Bell Potter Securities), $10.8 million (UBS Securities Australia), $10.5 million (Macquarie Securities) and $18.2 million (RBS Morgans). The stated consensus market forecast was $12.3 million.
How does Australia's continuous disclosure law factor into the Gunns case?
The continuous disclosure regime allows companies to withhold information that is "insufficiently definite" or "incomplete." Gunns says this principle applies, arguing that the full extent of the downturn and the likely impact across its business were not sufficiently clear at the time to require earlier disclosure.
Which Gunns business segments and export markets are at the centre of the lawsuit?
The case focuses on Gunns' woodchip export business and claims relate to exports to Japan, China, Korea, Taiwan and Indonesia. The defence specifically referenced a difficult short-term outlook for its main wood fibre business.
What internal timeline and steps did Gunns say it followed before the profit announcement?
Gunns says it formed the view of a difficult short-term outlook in early November 2009. After a board meeting on 11 November 2009 the company took steps to prepare a forecast for its first-half 2010 results, but that forecasting process was not completed before the ASX announcement of the half-year results on 22 February 2010.
When is the Gunns class action trial expected to start?
According to the report, the trial is not expected to begin until next year.
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