Introduction
Listed Australian companies have an obligation to keep the market continuously informed, subject to certain limitations, about any information that a reasonable person would expect to have a material effect on the price or value of their securities. Failure to do so may put the company in contravention of section 674(2) of the Corporations Act 2001 (Cth) (Corporations Act).
Also a director may be in breach of their duties under section 180 of the Corporations Act to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
- were a director of a company in the company's circumstances; and
- occupied the office held by, and had the same responsibilities within the company as, the relevant director.
Two recent cases provide some guidance on the application of section 674 of the Corporations Act, but also illustrate some of the practical difficulties for directors in making a decision whether or not to disclose information.
The James Hardie case
The NSW Court of Appeal in James Hardie Industries NV v ASIC1 held that James Hardie Industries NV (JHINV) was in breach of the continuous disclosure obligations in section 674 of the Corporations Act by not disclosing to the ASX from 25 March 2003 to 30 June 2003, information about the separation of James Hardie Industries Limited (JHIL) from the James Hardie Group.
At a joint board meeting of JHIL and JHINV on 25 March 2003, the partly paid shares issued to JHINV two years earlier were cancelled and ownership of JHIL was transferred to a foundation, which was independent of JHINV. A deed was executed under which JHIL (now renamed ABN 60 Pty Ltd) indemnified JHINV against asbestos claims. The separation of JHINV from JHIL was completed by 14 April 2003. JHINV was of the view that announcing the transaction would affect neither the price of its shares nor any decision by persons who commonly invest whether or not to buy them. JHINV had initially received legal advice from its solicitors that the separation arrangement should be disclosed. A second advice indicated that, if the company's view was correct, no disclosure was required. On 15 May 2003, JHINV disclosed that it no longer owned shares in JHIL. At that time, no reference was made to the indemnity obligation held under the deed by JHIL to JHINV. The complete separation arrangements were not disclosed until the release of JHINV's annual report on 30 June 2003.
In this case, the Court of Appeal held that the test under section 674 of the Corporations Act is an objective one. The views of a company's senior management or its directors cannot determine whether disclosure of any given information is required, though they may be relevant. The Court also said that:
"Even if there were no other evidence apart from the company's own deliberations, it remains for the trial judge to evaluate whether information is material so as to require disclosure under section 674."2
The Fortescue Metals case
Fortescue Metals Group (FMG) entered into negotiations with three Chinese companies in relation to the construction of a mine in the Pilbara region, a port at Port Hedland and a railway connecting the mine to the port.
Between early August and late October 2004, FMG entered into framework agreements with the three Chinese companies. In August and November 2004, FMG provided information to the ASX in the form of letters and media releases stating that it had entered into binding agreements with the three Chinese companies to build, finance and transfer the mine, port and railway. FMG and Andrew Forrest, the Chairman of FMG, conveyed this information through a press conference, a television interview and other reports and presentations.
In March 2005, an article was published in the Australian Financial Review asserting that the agreements only bound the companies to further negotiations, and not to the construction of the infrastructure.
After investigating the matter, in March 2006, ASIC brought proceedings against FMG alleging:
- FMG had engaged in misleading and deceptive conduct in breach of section 1041H of the Corporations Act; and
- FMG breached its obligation of continuous disclosure under section 674(2) of the Corporations Act because of one or more of the following:
-
- its failure to disclose the terms or true meaning of the framework agreements;
- its initial statements as to the legal effect of the framework agreements as binding the Chinese contractors to build, finance and transfer products relating to the project failed to comply with section 674(2) because the disclosure was inaccurate; and/or
- its failure to correct its earlier misstatements to the market as to the terms of the framework agreements.
ASIC's case were rejected at first instance by Mr Justice Gilmour3 and ASIC appealed to the Full Federal Court.4
In relation to the continuous disclosure matter, the Full Federal Court concluded that, once FMG became aware that its earlier statements about the framework agreements were misleading, FMG was under an immediate obligation to correct the position.
Connection between company's contravention and director's liability
In relation to Mr Forrest, the Full Federal Court held that Mr Forrest was involved in FMG's contravention of section 674 of the Corporations Act, by virtue of section 674(2A) of the Corporations Act, and Mr Forrest was unable to avoid being held liable for contravening section 674 of the Corporations Act because he was unable to point to any steps he had taken to ensure FMG's compliance with its disclosure obligations and his communications were inconsistent with a belief that FMG had entered into binding agreements to build, finance and transfer the project's infrastructure.
The Full Federal Court also held that Mr Forrest, in failing to protect FMG from civil penalties, breached his director's duty under section 180(1) of the Corporations Act. In coming to this decision, the Court held that for this case, a director or other officer may breach his duties by allowing the company to contravene a provision of the Corporations Act if that contravention is likely to result in jeopardy to the interests of the company.
The High Court has granted FMG leave to appeal the decision of the Full Federal Court. It therefore remains to be seen whether ASIC's case will be upheld.
Establishing procedure to ensure compliance
The above cases highlight the importance for directors of a listed company take positive steps to ensure that the company establishes, maintains and implements a robust continuous disclosure compliance program.
A compliance program should:
- clearly define who is responsible for overseeing what information is disclosed and to whom;
- establish clear reporting channels so that if a staff member becomes aware of potentially disclosable information, that member should appreciate that fact and immediately report it to a nominated senior manager;
- have a procedure for making analyst presentations and media briefings to ensure price sensitive information is not inadvertently disclosed;
- monitor media reports or speculation;
- identify risk areas and establish broad guidelines to assist in determining materiality;
- document decisions not to disclose information;
- educate directors and key employees (including follow-up and refresher training); and
- monitor compliance and update procedures from time to time.
Importantly, companies should foster a 'culture of compliance'. As Mr Justice French commented in ASIC v Chemeq:
"Compliance policies and procedures will not be effective unless there is, within the corporation, a degree of awareness and sensitivity to the need to consider regulatory obligations as a routine incident of corporate decision-making. This kind of general sensitivity to the issues underpins what is sometimes called a 'culture of compliance'. It does not require a risk averse mentality in the conduct of the company's business, but rather a kind of inbuilt mental check list as a background to decision-making."5
Footnotes
1 (2010) 274 ALR 85.
2 James hardie Industries NV v ASIC above at [527].
3 ASIC v Fortescue Metals Group Ltd (no 5) [2009] FCA 1586.
4 ASIC v Fortescue Metals Group Ltd [2001] FCAFC 19.
5 [2006] FCA 936 at [86].
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