Australia: Corporate Update

Last Updated: 7 March 2007

Contents

  • Continuous disclosure obligations – damages implications
  • ASX's Corporate Governance Consultation Paper
  • Ranking of shareholder claims upgraded... or are they? : Sons of Gwalia Ltd v Margaretic [2007] HCA 1
  • Third Line Forcing Changes: Relief for Franchisors

Continous Disclosure Obligations - Damages Implications

Continuous disclosure obligations apply to listed companies and some unlisted companies.

In broad terms, the obligation is that the company discloses information which is not generally available and is such that a reasonable person would expect to have a material effect on the price of the company’s shares.

A recent decision of the Western Australia Supreme Court awarded damages to a shareholder against a company where the company failed to comply with its obligations of continuous disclosure.

Jubilee Mines ("Jubilee") was an explorer of gold with limited cash resources. Mr Riley, the Managing Director, was allotted a significant number of shares. Mr Riley resigned from his position of Managing Director in 1993, however he maintained ownership of his shares until selling them in 1995.

In the meantime, in 1994, Jubilee received a letter from Western Mining Corporation informing them that nickel had been found in land covered by one of their mining tenements. This information became a central issue in this case. It was argued that this information was market sensitive in nature. As a result, it would substantially affect Jubilee’s share price upon its release.

It was not until 1996 that Jubilee announced the results of this discovery. In 1997, there was a further announcement that Jubilee had received "spectacular results from the mining" of nickel deposits. As a result, the share price substantially increased.

Mr Riley's claim as a shareholder of Jubilee was framed as a contravention by the Directors of Jubilee in failing to release the information contained in the Western Mining Corporation letter to the ASX. As a result, Mr Riley, as a shareholder and someone who commonly invests in shares, suffered damage when he sold his shares for a price that was considerably less than it would have been had the information been released.

It was held that Jubilee negligently failed to notify the ASX of the information contained in the letter from Western Mining Corporation, which had a material effect on the price of its shares. It was further held that the information was ‘likely’ to have influenced investment and share prices and as a result, should have been disclosed.

The damages that Mr Riley sought were calculated as the difference between the price of the shares after the material announcements were made to the market, and the price of the shares when Mr Riley sold his shares.

The court held that Mr Riley suffered a foreseeable loss as a result. Damages were awarded to Mr Riley in the amount of $1.856 million.

Implications

Mr Riley’s success is likely to encourage shareholders to bring claims to similar effect under the current provisions of the Corporations Act. Companies may be liable to shareholders where they do not disclose information relevant to the price of shares. The possible implications of this case should be read in light of the recent High Court decision in Fostif, where the High Court endorsed the practice of litigation funding in jurisdictions where the torts of maintenance and champerty had been abolished.

The case is also a reminder about the obligations of publicly-listed companies under the continuous disclosure rules to release price-sensitive information promptly to the market.
By Alan Eden or Michael Owens.

ASX's Corporate Governance Consultation Paper

In November 2006, ASX’s Corporate Governance Council released its proposed changes to the Guidelines in the shape of its Explanatory Paper and Consultation Paper on Good Corporate Governance and Best Practice Recommendations. There are several drivers for change, including legislative changes to company law triggered by CLERP 9 and practical experience suggesting changes to the Guidelines were necessary.

Particular areas that are targeted for review are as follows:

  • Recasting ethical and responsible decision-making.
  • Amending the concept of material business (or non-financial) risk.
  • Strengthening the audit committee functions and composition.
  • The role of the Corporate Governance Council concerning sustainability and corporate responsibility.

The consultation review period ended during February 2007. The revised guidelines are intended to come into operation on 1 July 2007.

For more information, contact Alan Eden or Prins Ralston.

Ranking of shareholder claims upgraded... or are they? : Sons of Gwalia Ltd v Margaretic [2007] HCA 1

Section 563A of the Corporations Act 2001 states a very simple priority rule when it comes to competing claims by creditors and shareholders against companies: shareholders come last. This provision does not, however, operate in a vacuum. Australian law gives people various rights to sue for misleading and deceptive conduct, including one contained under section 1041H of the Corporations Act 2001. Alongside section 563A, section 553 allows all debts payable by, and all claims against, a company subject to a winding up to be admissible to proof against the company.

The Sons of Gwalia decision

In the Sons of Gwalia case, the High Court has confirmed that some claims by a shareholder are not postponed to those of unsecured creditors in the winding up of a company. In this case, a shareholder of Sons of Gwalia Ltd claimed that he suffered financial loss and damage by reason of buying shares in the company on the ASX because the company breached its continuous disclosure duties by not disclosing its true financial position and prospects to the market and this breach (by omission) was misleading and deceptive. The shareholder was not a foundation or subscriber shareholder. As a result of this failure to adhere to the continuous disclosure rules, the shareholder lost all of his money because the shares he purchased were valueless.

Six of the seven Justices of the High Court of Australia ruled that the shareholder’s claims for misleading or deceptive conduct by the company (as well as a claim based on the wrong of deceit) were independent of section 563A. Two results followed. First, the shareholder's claim was not ranked last. Secondly, the shareholder’s misleading or deceptive conduct claim and deceit claim were admissible to proof on the winding up of the company.

Implications of the decision

Sons of Gwalia Ltd v Margaretic will mean different things to different members of the commercial community. Shareholders will draw comfort from the decision as reinforcing their position in a winding up where they can establish claims for misleading and deceptive conduct against the company (and if necessary, directors and senior managers). Insolvency administrators and liquidators may consider that this decision complicates the administration of winding up. For directors and senior managers, the decision emphasises the need for prompt release of market-sensitive information in accordance with the continuous disclosure regime. For the finance industry, it is suggested that companies may experience difficulties in attracting investment or finance, especially from those overseas markets (such as US) where shareholder claims are always subordinated to those of creditors. The UK experience (where shareholders with similar claims may rank equally with creditors) does not appear to support those claims.

Watch this space

As a postscript, readers might be interested to know that since this decision came down, there have been calls from business and finance community for legislative intervention to introduce US- and Canada-type provisions into Australian law. In the US and Canada, specific legislation prevents shareholders from ranking equally with ordinary creditors for damages claims for losses arising in respect of the acquisition of their shares. The Parliamentary Secretary to the Treasurer has requested that the Corporations and Markets Advisory Committee (CAMAC) examine three issues raised by this case:

  1. Should shareholders who acquired shares as a result of misleading conduct by a company prior to its insolvency be able to participate in an insolvency proceeding as an unsecured creditor for any debt that may arise out of that misleading conduct?
  2. If so, are there any reforms to the statutory scheme that would facilitate the efficient administration of insolvency proceedings in the presence of such claims?
  3. If not, are there any reforms to the statutory scheme that would better protect shareholders from the risk that they may acquire shares on the basis of misleading information?

Readers should keep watching this space for any relevant updates which Gadens Lawyers will bring you as they happen.

Readers may also be interested in our other article concerning the successful shareholder’s claim in the Jubilee case in Western Australia. Taken together, both cases have given an impetus to shareholder claims and excited the interest of litigation funders.
By Alan Eden or Michael Owens.

Third Line Forcing Changes: Relief For Franchisors

Franchisors have long been concerned by the impact of section 47 of the Trade Practices Act 1974, which prohibits certain forms of what is known as "exclusive dealing". Basically, exclusive dealing takes place when a supplier (whether a corporation or an individual) of goods and services supplies those things to its customers on the condition that the customer also buyers other goods and services from the same supplier (second line forcing) or an affiliate of it (in which case the exclusive dealing is third line forcing). Many franchisors use related companies to supply different products to the franchisee, which in combination are integral to the successful working of a franchise. This takes place often for reasons such as economies of scale and enhanced purchasing power.

In December 2006, section 47 of the Trade Practices Act 1974 was amended by carving out from third line forcing under sections 47(6) and 47(7) any third line forcing practised on a person by related corporations. While this amendment is not confined to franchisors, franchisors will welcome this change because it reduces the risk of exposure of liability to a pecuniary penalty of up to $10,000,000 (or even higher, depending on the circumstances) for any exclusive dealing conduct. What is a related corporation depends on the application of standard rules and the Corporations Act 2001.

Previously one way of obtaining protection from prosecution for third line forcing conduct was by notification of such conduct to the Australian Competition and Consumer Commission ("ACCC"). Notification of third line forcing by related corporations is no longer required.

Franchisors should consider the amendments in review of commercial sourcing and downstream supply arrangements (including their franchise agreements) to see how they can take advantage of the liberated third line forcing provisions in the Trade Practices Act 1974.
By Michael Owens.

Brisbane

Alan Eden

t (07) 3114 0229

e aeden@qld.gadens.com.au

Michael Owens

t (07) 3114 0146

e mowens@qld.gadens.com.au

Sarah Toohey

t (07) 3114 0124

e stoohey@qld.gadens.com.au

Prins Ralston

t (07) 3231 1621

e pralston@qld.gadens.com.au

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 Mondaq.com.

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

 
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”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 by clicking here .

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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