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What you need to know
- Publicly listed companies and their directors have an ongoing obligation to give continuous disclosure of market sensitive information.
- A recent Federal Court decision underscores the consequences that can arise from a failure to comply with that obligation, with two executive directors having been fined and banned from managing corporations for three years.
- With the Court having described the directors' conduct as "a serious departure from the standards expected of directors of a public company in a like situation", it is critical for companies and their directors to ensure market announcements are not misleading and contain all material information.
The Federal Court has recently banned and fined Gary Stokes and Terence Quinn, two executive directors of listed mining company Padbury Mining Limited (Padbury Mining), for breaches of Padbury Mining's continuous disclosure obligations. The decision followed civil penalty proceedings brought by the corporate regulator, ASIC, after a series of events in 2014.
The Court's recent decision is a salient reminder for directors about the importance of fully understanding and observing the ongoing obligation of continuous disclosure.
Continuous disclosure – a quick look back at the basics
Listed entities must comply with the continuous disclosure requirements enshrined in Listing Rule 3.1. This listing rule requires market sensitive information to be disclosed to ASX 'immediately' upon the entity becoming aware of the information, unless it falls within a carve-out from disclosure in Listing Rule 3.1A. A matter does not require disclosure where:
- one of the following applies:
- it would be a breach of a law to disclose the information;
- it concerns an incomplete proposal or negotiation;
- it is a matter of supposition or is not sufficiently definite to merit disclosure;
- the information is generated for the internal management purposes of the listed entity; or
- the information is a trade secret; and
- the information is confidential and ASX has not formed the view that the information has ceased to be confidential; and
- a reasonable person would not expect the information to be disclosed.
In other cases disclosure is required, and serious consequences can flow from a failure to disclose in a timely manner. For corporations, it is both a criminal offence (punishable by a fine of up to 1,000 penalty units or $170,000) and a civil penalty provision (punishable by a penalty of up to $1,000,000). Where ASIC has reasonable grounds to suspect a breach, it may issue an infringement notice imposing a penalty of up to $100,000 on an entity without the need to go to court.
Individual directors involved in a continuous disclosure breach can receive a civil penalty for up to $34,000 and may also be in breach of their directors' duties under the Corporations Act 2001 (Cth), which can result in a director being banned. Where the breach is criminal, directors can receive a personal penalty between $33,000 and $100,000 (depending on the market capitalisation of the company).
Additionally, if a person suffers loss or damage as a result of the continuous disclosure breach, they may recover that amount from the entity responsible for the breach. ASIC can also bring representative proceedings on behalf of the person or persons aggrieved, requiring the entity to establish a compensation fund to meet prospective claims.
Where did things go wrong for Padbury Mining?
Mr Stokes and Mr Quinn authorised the release of an ASX announcement advising that Padbury Mining had secured funding of $6 billion to construct a deep water port and associated rail network at Oakajee in Western Australia (Funding Announcement). On 10 April 2014the Funding Announcement was released under the title 'Oakajee Funding Secured' and it contained the following terms:
- "Padbury Mining (ASX:PDY) is pleased to announce that it has secured the funding necessary to construct a $6 billion deep water port and associated rail network at Oakajee";
- "The funding is to be provided by private Australian equity investors and is contained within an executed Shareholders Agreement between the parties";
- "The Oakajee project will be developed by Midwest Infrastructure Pty Ltd (MWI), a fully owned subsidiary of Padbury Mining...Funding negotiated for the project will be 100% equity funded";
- "Padbury has been engaged with the Western Australian Government for some time and the securing of this funding will enable MWI to significantly increase that engagement";
However, the funding agreement was conditional on Padbury Mining satisfying a number of conditions precedent that it was not in a position to satisfy. Those conditions included the procurement of bank guarantees in favour of the proposed financer totalling almost $1.3 billion.
The directors, and as a result, Padbury Mining, knew that the funding agreement contained those conditions. Despite this, the Funding Announcement did not state that the funding was highly conditional. It also did not name the financier.
Two days before the Funding Announcement was made, ASX, at Padbury Mining's request, placed a halt on the trading of Padbury Mining's shares. At that time, the shares were trading at the price of $0.02 per share. After the announcement, the shares in Padbury Mining recommenced trading at $0.045 a share (within a range of $0.032 and $0.052 across the day). ASX granted Padbury Mining a further trading halt at 2:15 pm, pending a further announcement disclosing material terms of the shareholders' agreement, including the identity of the financier.
During the period between the making of the Funding Announcement and the second trading halt, more than 200 million shares in Padbury Mining were traded.
On 30 April 2014, Padbury Mining released an announcement titled 'Deed of Termination and Release' which disclosed the termination of the shareholders' agreement supporting the funding.
Federal Court findings
The Court found that:
- Padbury Mining contravened the misleading and deceptive provisions of the Corporations Act 2001 (Cth) by issuing the Funding Announcement;
- Padbury Mining breached its continuous disclosure obligations by failing to disclose the existence of the conditions precedent to the funding and by failing to disclose the identity of the financier;
- each of Gary Stokes and Terence Quinn breached their continuous disclosure obligations by not notifying ASX in the period between the release of the Funding Announcement and 2:15 pm of the conditions precedent to the funding and the identity of the financier;
- each of the directors had failed to discharge his duties to Padbury Mining with the degree of care and diligence expected of him by authorising the release of the Funding Announcement and causing or permitting Padbury Mining to make the misleading representations.
The Court fined the directors $25,000 each, ordered them to pay ASIC's costs of $200,000 and disqualified them both from managing a corporation for three years.
Lessons from the Padbury Mining case
The regulators are watching. The Padbury Mining case is a clear demonstration of ASIC's willingness to take action against companies and directors for failure to comply with their continuing disclosure obligations and directors' duties more generally.
Following the Federal Court's decision about Padbury Mining, ASIC Commissioner John Price has highlighted that company directors must "ensure announcements made by their companies are not misleading, and contain all material information relevant to investors' assessment of deals being announced".1
In a regulatory update issued on 25 July 20162, ASX reminded companies that if a transaction is sufficiently material to warrant disclosure under Listing Rule 3.1, the identity of the other party or parties will generally itself be material information that must also be disclosed under that rule. This is regardless of any confidentiality arrangements between the parties. In other words, there are no excuses for withholding the identity of a counterparty.
It is critical for companies and their directors to ensure full and proper compliance with the continuous disclosure obligation, particularly in light of the potential penalties for failure to comply. On the heels of the Padbury Mining case, it is prudent for companies to review their disclosure policies and brush up on the obligations of Listing Rule 3.1. If an announcement is required, it must include all material information.
2 The regulatory update is accessible at http://www.asx.com.au/resources/newsletters/listed_at_asx/listed-at-asx-20160725_0716.html
This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories