Continuous Disclosure Part 2

Continued from part 1

Leighton Holdings (ASIC Release 12-53)

The alleged continuous disclosure breaches related to information concerning Leighton’s Airport Link project, its Victorian Desalination project and its investment in the Al Habtoor Leighton Group that, ASIC asserted, were known to Leighton on 18 March 2011 as a result of internal investigations. The infringement notices were issued because Leighton had announced that there would be a write down of $907 million to its profit forecast only on 11 April 2011, rather than ‘immediately.’

Leighton paid the three penalties of $100,000 each in compliance with the infringement notices. Leighton also gave an enforceable undertaking to engage an independent consultant to review and recommend changes to its continuous disclosure procedures, and to implement those recommendations.

BC Iron (ASIC Release 11-168)

In 2011, BC Iron Limited (BC Iron) entered into a scheme implementation agreement with Regent Pacific Group Limited (Regent). The agreement provided that Regent could terminate the agreement

(a) if the Regent Pacific Board has determined in good faith, having received a specific written opinion from Senior Counsel on the matter, that ‘its fiduciary and statutory duties to Regent Pacific (including having regard to the best interests of holders of Regent Pacific Shares) require it do so’; or

(b) if the Regent Pacific Board publicly changes or withdraws its recommendation about the scheme.

BC Iron did not reveal the full particulars of the agreement (including the termination provisions), relying upon the fact that the agreement was confidential. When BC Iron publicly announced that it had reached an agreement with Regent Pacific, it failed to indicate the agreement was subject to the clauses mentioned above. According to ASIC, the above terms were no longer confidential upon BC Iron making an announcement to ASX regarding the proposed scheme of arrangement and setting out a summary of the Scheme Implementation Agreement. BC Iron was required to notify ASX of the information immediately on it ceasing to be confidential. BC Iron agreed to comply with the infringement notice.

Personal Liability

The provisions of Companies Act s. 674(2A) provides accessorial liability for individuals, by providing:

A person who is involved in a listed entity’s contravention of subsection (2) [its continuous disclosure obligation] contravenes this section.

In addition to this provision, ASIC has developed a new regulatory response in recent cases: finding directors in breach of their duties under Corporations Act s. 180(1) for allowing their company to breach its continuous disclosure obligations and/or for misleading and deceptive conduct in failing to comply adequately. This strategy appears to be limited to more serious failures (I am aware of no attempt by ASIC to seek orders against a company director under se. 180(1) as a result of a company complying with an infringement notice). Returning to Corporations Act s. 1317DAF(5), that section indicates that:

…no proceedings (whether criminal or civil) may be started or continued against the disclosing entity in relation to:

(a) the alleged contravention of the provisions specified in the infringement notice; or

(b) an offence constituted by the same conduct that constituted the alleged contravention.

It would appear to be inconsistent with the characterisation of the failures to which infringement notices apply (that is ‘minor breaches’) to use the infringement notice provision as a ‘stepping stone’ to pursue company directors. Because the section provides no direct protection for directors of companies that comply with infringement notices, however, one cannot completely discount that possibility.

In relation to failures which are more significant than those which could be satisfactorily dealt with by infringement notices, it is now clear that ASIC will consider not only specific accessorial liability, but also use of the directors’ duties provisions. As Fortescue Metals and James Hardie indicate, the use of such ‘stepping stones’17 to found director liability is already well accepted for continuous disclosure failures which are more serious than those dealt with by infringement notices.

From the cases considered, it is clear that such failures may have prejudicial consequences beyond the fine or penalty imposed upon the company. In consequence, directors should put in place systems to comply with the continuous disclosure obligations of their company not only to protect the company, but also to protect themselves.

Continuous Disclosure – Internal Control Systems

It would be obvious to most, that the best way to avoid falling afoul of the continuous disclosure provisions is to put in place systems which assure that when matters occur which require disclosure, that adequate disclosure is made in a timely fashion. Even where there has been a failure by a company to make appropriate disclosure to the market, the existence of internal systems will be a relevant consideration to ASIC in determining the appropriate regulatory response, as indicated in ASIC’s Regulatory Guide 73, Continuous disclosure obligations: infringement notices (updated June 2012):

The adequacy of the entity’s internal controls, and whether they were complied with, may be a relevant consideration. The conduct of the entity before the alleged breach (including whether the entity sought and followed professional advice in relation to disclosure) and after the alleged breach (for example whether the entity took immediate steps to correct the failed disclosure) will be considered by ASIC in most cases. RG 173.10.

Further, the legislative provisions also provide assistance even where there have been failures to disclose:

The civil penalty provision (Corporations Act s. 1317E) is subject to Corporations Act 1317S. This provision enables the Court to relieve a person from liability wholly or partly if the person has acted honestly and, having regard to all of the circumstances, the person ought fairly be excused.

The continuous disclosure provisions for both listed and unlisted entities (ss. 674 and 675) each provide ‘due diligence’ defences for persons involved in an entity’s continuous disclosure contravention if they:

(a) took all steps that were reasonable in the circumstances to ensure the disclosing entity complied with its obligations; and

(b) after doing so, believed on reasonable grounds that the disclosing entity was in compliance with its obligations.

The legislative provisions and ASIC regulatory guidance make clear that systems to assure compliance are important not only to assure that compliance occurs, but also to mitigate the consequences for those who have failed despite reasonable steps to ensure compliance. Systems should, as a result, both instigate consideration of disclosure when necessary and provide evidence that consideration was given to those obligations.

In Regulatory Guide 62, Better disclosure for investors, ASIC provided information about what it might consider appropriate for complying with continuous disclosure obligations. In addition to establishing written policies and procedures and the use of current technologies for investors (so as to prevent selective disclosure) and advice as to managing the briefing of analysts,18 ASIC indicated that disclosing entities should develop disclosure procedures in the following way:

Overseeing and coordinating disclosure

Nominate a senior officer to have responsibility for:

(a) making sure that your company complies with continuous disclosure requirements;

(b) overseeing and coordinating disclosure of information to the stock exchange, analysts, brokers, shareholders, the media and the public; and

(c) educating directors and staff on the company’s disclosure policies and procedures and raising awareness of the principles underlying continuous disclosure.

In smaller companies, this person is likely to be the company secretary.

Authorising company spokespersons

Keep to a minimum the number of directors and staff authorised to speak on your company’s behalf. Make sure that these persons know they can clarify information that the company has released publicly through the stock exchange, but they should avoid commenting on other price sensitive matters. The senior officer responsible for disclosure should outline the company’s disclosure history to these persons before they brief anyone outside the company. This will safeguard against inadvertent disclosure of price sensitive information.

Monitoring disclosures

The senior officer responsible for disclosure should be aware of information disclosures in advance, including information to be presented at private briefings. This will minimise the risk of breaching the continuous disclosure requirements.

Releasing company information

Price sensitive information must be publicly released through the stock exchange before disclosing it to analysts or others outside the company. Further dissemination to investors is desirable following release through the stock exchange. Posting information on your company’s web site immediately after the stock exchange confirms an announcement has been made is one method of making it accessible to the widest audience. Investor information should be posted in a separate area of your web site from promotional material about the company or its products.

Handling rumours, leaks and inadvertent disclosures

Develop procedures for responding to market rumours, leaks and inadvertent disclosures. Even if leaked or inadvertently disclosed information is not considered price sensitive, give investors equal access by posting it on the company web site.

It is perhaps interesting that the most recent continuous disclosure issue did not concern a failure to disclose information in a timely manner, but the disclosure of information which eventually proved to be baseless. As most will remember, a private equity firm from the UK made inquiries in the last days of June to the Board of David Jones Limited (David Jones) about a possible takeover. David Jones made this information known to ASX, and this resulted in a jump in David Jones’ share price on June 30. The following Monday, July 2, it became known that the private equity firm was not proceeding.

The questions which the David Jones example raises are threefold:

(a) when does a confidential approach lose its confidentiality;

(b) when rumours about confidential items are spread, must a listed entity respond in a timely fashion; and

(c) how much due diligence does a company need to exercise before making information known.

Many say that a trading halt is the friend of management in complying with its continuous disclosure obligations. In the case of David Jones, some response to the rumours (blogs, tweets?) was necessary, but perhaps the response was not vigorous enough in its reporting of the possible limitations on the offer received (no knowledge of the offerer, no indication of its ability to fulfil any takeover offer, etc.). This situation shows the importance of responding and providing equal information, but it also is a prime example of how the markets may respond somewhat irrationally despite the best intentions of the disclosing entity.

Perhaps more importantly, ASIC’s view of the trading halt or suspension seems to indicate that it is not a complete panacea to continuous disclosure. The Law Council’s submission to the ASX in February, 2012 indicated its understanding of ASIC’s position in the following way:

The draft regulatory guide released in December 2009 as part of ASIC Consultation Paper 128 ‘Handling Confidential Information’ included the following:

“A company must comply with its continuous disclosure obligations even if the quotation of the company’s shares is suspended or subject to a trading halt (see Listing Rule 18.6). Companies and their directors should be cognisant that trading can occur on markets other than ASX and through over-the-counter (OTC) markets (such as the CFD markets), and the trading halt will not extend to those markets. Companies should also recognise the fact that a transaction in its securities may affect the trading of the company’s peers and competitors.”

Despite this apparent stance by ASIC that continuous disclosure obligations persist even while trading in an entity’s securities is not occurring, the use of trading halts does have the benefit of limiting civil liability as a result of an entity’s failure to adequately disclose information.

Consequently, it is clear that ASIC’s advice about systems to deal with continuous disclosure issues is quite important. The way in which entities comply with their continuous disclosure obligations may vary, but most need to address the major difficulties:

(a) identifying any event which may be likely to require disclosure;

(b) assessing whether disclosure is required; and

(c) informing the market in the most positive way possible without being misleading or deceptive.

A recent study of continuous disclosure systems of a number of Australian disclosing entities19 indicates that most are concerned with these critical points. With a permanent contact point (either a member of management or of the board — or both), the organisation attempts to anticipate disclosing events which arise as a result of activity within its control. Further, best practice appears to show that all employees are trained so as to identify what unanticipated events may require disclosure to be referred to the person(s) charged with managing continuous disclosure. One issue identified is the reluctance of staff to identify readily news which might negatively impact their employment circumstances. Clearly, any system for dealing with continuous disclosure obligations should plan for all eventualities, including the absence of particular members of management or of the board of directors.

Once a matter goes to the person or persons charged with managing continuous disclosure (general practice appears to place such obligation on a member of management who may liaise with a board contact), then that person makes a decision about disclosure or causes the matter to be deliberated upon by the board. In making a determination, the study found that entities primarily rely upon the terms of ASX Listing rule 3.1 and ASX guidance note 8 (for example the 10-15% materiality guidance). If the matter is complex, it will normally require board consideration. Often external experts are consulted.

Since the most significant liability issues concerning failure to disclose adequately involved misleading descriptions (such as in Hardie and Fortescue), the process by which ASX disclosures are formulated is a key matter of concern. One possible practical suggestion is to treat the preparation of the announcement in a similar way to preparation of any other disclosure document, with a rigorous due diligence process to assure accuracy and completeness, particularly for events which are not spontaneous or unplanned.

Finally, the timing and the articulation of the disclosure must be considered. The practice revealed in the study indicates that many factors combine to determine how ‘immediate’ the term immediately is interpreted. While assuring that information to be revealed takes time, it is also clear that disclosure timing may also be impacted by tactical considerations to some extent. In formulating the actual disclosure, it appears that ‘balanced disclosure’ (adequate but prudent) is desired. Thus both the timing of disclosure and its formulation are influenced to some extent by commercial considerations (this should be no surprise).

Conclusion

As this paper indicates, continuous disclosure obligations continue to provide significant risk for both disclosing entities and their management. The high profile cases concerning James Hardie and Fortescue Minerals, in particular, provide adequate illustrations of the caution which should be taken to comply with continuous disclosure obligations along examples of the severe consequences of non-compliance. It is noteworthy that in both of those cases, the need to make disclosure was understood, but it was the failure in the execution which brought the participants into difficulty.

One must acknowledge that continuous disclosure provides some leeway to a listed entity to ‘spin’ the disclosure as favourably as possible. What clearly is not acceptable is to provide information in such a positive way that so undermines the clarity of the message which is required that the disclosure itself is misleading (for example, that a fund is ‘fully funded’ based only upon questionable assumptions or that agreements are ‘binding’ only without regard to the limitations of that concept under foreign law). Deficiencies in disclosure will continue to be with us simply becausethose who are required to disclose news will be likely to do so in a way which puts them in the best light possible.

More difficult, perhaps, is identification of unplanned events which require disclosure. As indicated above, the issues surrounding the need for disclosure should be clarified further when ASX releases its revised guidance note 8, expected after the High Court makes its decision in Fortescue. Until then, care should be taken concerning the likely impact of any development upon the investing public and the likely materiality of the event upon the value or price of the relevant securities. Having determined that disclosure is required, the speed with which disclosure should be made becomes critical. For these reasons, best practice would indicate that systems for assessing and responding to events requiring disclosure should be in place to deal both with expected and planned events but also unplanned and spontaneous matters. Assuring that continuous disclosure obligations are dealt with quickly and efficiently through appropriately designed systems will improve the likelihood that a disclosing entity will be compliant with its obligations. Where disclosure failures do occur, such arrangements will help to mitigate the consequences.

Diana Lohrisch

Footnotes

1. It is asserted that increased investment will result from fulfilling the informational needs of investors. W Suphap, ‘Survey: Getting it Right vs Getting it Quick: The Quality-Timeliness Tradeoff in Corporate Disclosure’ [2003] Columbia Business L Rev 661.

2. M Blair, ‘The Debate over Mandatory Disclosure Rules’ (1992) 15 UNSWLJ 177.

3. CASAC, Report on an Enhanced Statutory Disclosure System, 1991 (CASAC (1991)).

4. Corporations Act s. 1001A(3). Negligent failing was still a contravention subject to civil remedies.

5. The Explanatory Memorandum to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 para 4.218

6. The Explanatory Memorandum to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 para 4.219.

7. The Explanatory Memorandum to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 para 5.458.

8. The Explanatory Memorandum to the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 para 5.255.

9. Submission of the Law Council of Australia to the ASX, dated 16 December 2011.

10. (2011) 39 ABLR 260.

11. Id at 267.

12. Id at 268.

13. Id at 269.

14. Id at 272.

15. [2012] HCA 17.

16. (2011) 190 FCR 364.

17. See Abe Herzberg and Helen Anderson ‘Stepping stones — From corporate fault to directors’ personal civil liability’ forthcoming in the Federal Law Review.

18. ASIC provides three recommendations in relation to analyst briefings: –

• Have a procedure for reviewing briefings and discussions with analysts afterwards to check whether any price sensitive information has been inadvertently disclosed. If so, give investors access to it by announcing it immediately through the stock exchange, then posting it on the company web site. Slides and presentations used in briefings should be given to the stock exchange for immediate release to the market and posted on the company web site.
• Be particularly careful when dealing with analysts’ questions that raise issues outside the intended scope of discussion. Some useful ground rules are:
• only discuss information that has been publicly released through the stock exchange;
• if a question can only be answered by disclosing price sensitive information, decline to answer or take it on notice. Then announce the information through the stock exchange before responding.
• Confine your comments on market analysts’ financial projections to errors in factual information and underlying assumptions. Seek to avoid any response which may suggest that the company’s, or the market’s, current projections are incorrect. The way to manage expectations is by using the continuous disclosure regime to establish a range within which earnings are likely to fall. Publicly announce any change in expectations before commenting to anyone outside the company. 

19. Dr Diane Mayorga of the University of New South Wales examined the continuous disclosure practice and systems of a number of Australian disclosing entities. Dr Mayorga kindly agreed to allow me to mention her observations which are found in her working paper,’The Art of Managing Continuous Disclosure: Australian Evidence’ which is derived from her PhD studies and is currently in the process of submission to journals for publication.