Australia: Seven corporate governance lessons from David Jones

HG Corporate Advisory and Governance Alert: 28 February 2014

The recent case concerning the purchase of shares in David Jones by two of its directors in close proximity to receipt of a merger proposal and release of a quarterly sales update has raised a number of important legal and corporate governance considerations that companies and directors need to be reminded and aware of. Even though ASIC dropped its investigation and issued a "No Further Action" letter, the David Jones matter is a cautionary tale that the public perception of the conduct is paramount and can have reputational, business and personal repercussions that are as severe as any legal prosecution.

In this Alert, Partner Michael Hansel and Associate Katherine Hammond set out seven key lessons for companies, directors, market participants and investors about corporate governance matters arising from the issues associated with the David Jones matter.

David Jones – the facts

One day after David Jones Limited (David Jones) received an initial confidential $3 billion scrip merger of equals proposal from Myer (Merger Proposal) and three days before David Jones released a quarterly sales update which saw its shares increase by 15 percent, David Jones directors Leigh Clapham and Steve Vamos purchased 20,000 and 12,500 David Jones shares respectively (Share Purchase).

The Share Purchase was within a permitted trading window in the David Jones trading policy (Trading Policy), and the Chairman Peter Mason was reportedly given prior notification of the proposed Share Purchase in accordance with the Trading Policy.

ASIC launched a two month investigation of David Jones over insider trading concerns arising from the Share Purchase, but has decided to take no further action at this stage, issuing a 'No Further Action Letter'.

ASIC was reportedly unable to gather enough admissible evidence to establish that the Merger Proposal was "Market Sensitive Information", which is a necessary element for a successful insider trading prosecution.

ASIC's decision has sparked public criticism of ASIC's enforcement procedures and David Jones' corporate governance practices, and serves as a timely reminder about the operation of the insider trading laws and their interaction with a company's trading policy.

In the wake of the controversy and on the back of shareholder agitation, on 10 February 2014 David Jones announced a "Board renewal process"; Mr Clapham and Mr Mason have notified David Jones of their intention to resign within the next three months and Mr Vamos notified of his immediate resignation.

While David Jones and its Directors have avoided legal prosecution, the matter has not left the Company or the directors unscathed or immune from further impeachment.

Why David Jones is relevant to you

The David Jones matter serves as a valuable lesson that whether or not a company or its directors have complied with the law, public perception is paramount and can have reputational, business and personal repercussions that are as severe as any legal prosecution.

It also provides a warning to directors thinking about buying company shares where they may have undisclosed market sensitive information, and raises important corporate governance matters relating to the trading policy requirements for listed companies, disclosure obligations and directors' duties.

Seven key lessons from the David Jones matter

ASIC No Further Action Letter

Lesson 1: A No Action Letter from ASIC does not exonerate the Company or its directors.

ASIC has issued a "No Further Action" letter to David Jones in relation to its insider trading investigation. However, the no further action letter is not an exoneration, but rather an acknowledgment that at this point in time there is insufficient evidence to take the matter further, while reserving ASIC's rights to re-open the matter if new evidence comes to light.

Insider Trading

Lesson 2: Directors must not trade financial products with, procure trading with or communicate for the purpose of a person trading with, undisclosed Market Sensitive Information. Directors must also be mindful of the market perception and associated potential repercussions of any share trade notwithstanding that they may not in fact be in possession of undisclosed Market Sensitive Information.


The insider trading laws in Australia provide that, a person who has "inside information" must not:

  • trade or procure a person to trade in financial products of a company; or
  • communicate the inside information where it may be used to trade in financial products1.

Inside information is essentially information which is not generally available and which, if generally available, would reasonably be expected to have a material effect on the price or value of securities (Market Sensitive Information).

David Jones Investigation

In the David Jones matter, ASIC reportedly discontinued the investigation of the David Jones directors because it could not establish enough admissible evidence to establish that any information that the directors were in possession of was Market Sensitive Information.

To establish that the directors did not acquire the shares when in possession of inside information, David Jones Chairman Peter Mason claimed that it was immediately obvious that the Merger Proposal "was just not going to fly". David Jones did not, however, formally reject the Merger Proposal for approximately a month.

If there was indeed no prospect that the Merger Proposal would be pursued by David Jones, then it is certainly arguable that there was no information with the requisite materiality to be Market Sensitive Information.

Whether or not the directors were in possession of undisclosed Market Sensitive Information, the David Jones fallout serves as a warning to directors that they need to be mindful of the market perception of any share trade, notwithstanding that it may be within the law.

Trading Policy

Lesson 3: Directors cannot hide behind the company's trading policy.

Trading Policy Obligation

Listed companies must have a trading policy under the ASX Listing Rules, and directors (and other key management personnel (KMP)2) are still exposed to the insider trading laws even if the share trade was during a permitted period under the trading policy and even if the trade has been sanctioned by the board.

David Jones Trading Policy

The David Jones directors made the Share Purchases during the six week period after the company's annual results were released which was a "trading window", when directors were permitted to trade shares, under the David Jones trading policy.

The directors justified the purchases by saying that it was to demonstrate confidence at the AGM after chief executive Paul Zahra announced his intention to resign a month earlier.

Notwithstanding that the Share Purchases were made during a permitted period under the trading policy, if the Directors were in possession of inside information, they may still have breached and be liable under the insider trading laws. Compliance with a trading policy does not absolve directors of liability for insider trading.

A trading policy should therefore explain the prohibition on insider trading under the Corporations Act and note that under the insider trading laws a person who possesses inside information may be prohibited from trading even where the trading occurs within a permitted trading window or outside a black out or other prohibited period, or in circumstances that are excluded from the trading policy.

Indeed, the David Jones trading policy specifically prohibited trading if directors possess unpublished price sensitive information.

ASIC Monitoring of Insider Trading and Market Manipulation

Lesson 4: ASIC is watching.

In October 2013, ASIC's real time market surveillance system, the "Flexible Advanced Surveillance Technologies" (FAST) system, went live and has been generating an average of 120 insider trading and market manipulation alerts each day.

The $18.5 million FAST system tracks markets in real time and is designed to pick up insider trading, market manipulation and possible breaches of the market integrity rules.

Since 2009, ASIC has prosecuted 32 insider trading matters and of those 23 have been successful, with a number still before the courts. Six matters have been unsuccessful, including one conviction that was quashed on appeal and one matter that was discontinued.

Suspicious Activity Reporting

Lesson 5: Market Participants must tell ASIC about suspicious trading.

Since 1 November 2012, under Rule 5.11 of the ASIC Market Integrity Rules (ASX Market) 2010, a market participant (such as brokers) must notify ASIC if it has reasonable grounds to suspect that a person has placed an order or entered into a transaction while in possession of inside information, or which has the effect of creating or maintaining an artificial price or a false or misleading appearance in the market or price for trading in financial products. The penalty for failing to comply is $20,000.

Continuous Disclosure

Lesson 6: Companies may need to disclose inside information to the market.

Questions were also raised about whether David Jones should have disclosed the Merger Proposal earlier in accordance with its continuous disclosure obligations.

Under the continuous disclosure regime in ASX Listing Rule 3.1 and the Corporations Act 2001 (Cth), a listed entity must immediately disclose to the ASX any 'Market Sensitive Information' - that is, information in relation to the entity that a reasonable person would expect to have a material effect on the price or value of the entity's securities.

There are very limited exceptions to this rule, which are contained in Listing Rule 3.1A including, relevantly, where the information is confidential and:

  • concerns an incomplete proposal of negotiation; or
  • comprises matters of supposition or is insufficiently definite to warrant disclosure.

David Jones did not make any disclosure about the Merger Proposal when it was made.

Chairman Peter Mason, claimed that it was immediately obvious that the merger proposal "was just not going to fly", suggesting that the information was not Market Sensitive Information. However, David Jones did not formally reject the Merger Proposal until almost a month later.

Whether or not the Merger Proposal was in fact Market Sensitive Information, David Jones is likely to be justified in not disclosing the Merger Proposal when it was made on the basis that it was confidential and it concerned an incomplete proposal or negotiation, comprised matters of supposition or was insufficiently definite to warrant disclosure, and therefore fell within the exceptions noted above.

Directors' Duties

Lesson 7: Directors' must always be mindful of their directors' duties, whether or not they are otherwise complying with the law.

If the Board immediately dismissed the Merger Proposal (as the David Jones chairman has reportedly claimed), questions are likely to arise about whether the Board members have fulfilled their directors' duties. On 20 February 2013, Myer sent a letter to David Jones reiterating its interest in a merger between the two companies. David Jones announced that it was considering the letter and would consider any proposal that is on terms that are in the best interests of shareholders. This response clearly suggests that David Jones is mindful of its duties.


1"Division 3 financial product", as defined in section 1042A of the Corporations Act.
2As defined in Accounting Standard AASB 124 Related Party Disclosure.

© HopgoodGanim Lawyers

Award-winning law firm HopgoodGanim offers commercially-focused advice, coupled with reliable and responsive service, to clients throughout Australia and across international borders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Katherine Hammond
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions