Continuous Disclosure: Court Urges Junior Explorers To Err On The Side Of Caution

In a decision handed down last month, the Supreme Court of Western Australia sent a message of caution to ASX-listed companies, particularly junior explorers, regarding the importance of the timely release of market-sensitive information.  The decision demonstrates that not only does the failure to disclose market-sensitive information mean a breach of the ASX Listing Rules and the Corporations Act, but that non-disclosure may lead to a finding of negligence and an order to pay damages.

On 6 September 2006, Master Sanderson of the Supreme Court of Australia awarded approximately $1.8 million in damages to a former shareholder and managing director of Jubilee Mines NL (Jubilee) for its failure to comply with continuous disclosure requirements of the Corporations Law in force in 1994.

The action was brought by Kim Riley, a former shareholder and managing director of Jubilee.  Mr Riley resigned from Jubilee in 1993 and sold his Jubilee shares between September 1994 and July 1995.  In 1994, WMC accidentally drilled into a tenement held by Jubilee and provided the drill results to Jubilee, which indicated the presence of nickel deposits.  Jubilee did not release information about the drilling results until 1996.  Jubilee's share price increased significantly on the release of this information.  Mr Riley had already sold his Jubilee shares by the time the information was released.

Mr Riley alleged that Jubilee was negligent in its failure to release the information and claimed that he suffered loss and damage as a consequence of that failure.  The Court held that Jubilee was negligent in its failure to release the information to the market on time and that Mr Riley suffered foreseeable loss as a consequence.

Master Sanderson commented that in the junior explorer market, where drill results "are the lifeblood of speculative mining companies" and where rumour "plays a big part in share price fluctuations", the release of market-sensitive information as soon as reasonably practical after it is received is paramount.

What is interesting is that in this case, the drill results were not commissioned by Jubilee but were unsolicited drill results provided to it by WMC.  Jubilee may not therefore have been in a position to determine the accuracy of the results or the methods by which those results were achieved.  In this case, perhaps surprisingly, the Court found that the information should have been disclosed and that the failure to release the information was negligent. 

ASX, in its guidance note on continuous disclosure, states that the purpose of the listing rule is "to elicit disclosure of the highest quality which is of benefit to the market".  With this in mind, given that Jubilee would have had to determine the accuracy of the unsolicited drilling results in order to determine whether the information ought to be released to the market, the decision appears to suggest that listed junior explorers may need to spend significant time and money obtaining advice as to whether or not information ought to be released to the market.  Despite this, Master Sanderson stated that this was "not the thrust of this decision". 

In a postscript to his decision, Master Sanderson acknowledged the difficulties faced by under-resourced junior explorers in determining whether information should be disclosed to the market in their day-to-day operations.  However, he stressed that junior explorers "ought to err on the side of caution and make the release" if there is any doubt as to whether information is material. 

Jubilee has since announced that it is considering an appeal to the decision.

While the decision was based upon the continuous disclosure requirements of the Corporations Law in force in 1994, similar claims may be brought by shareholders in respect of breach of the current continuous disclosure provisions under Chapter 6CA of the Corporations Act 2001.  This is important because:

1. For a breach to be found under the Corporations Act 2001, there is no longer a requirement that the failure to release the information be intentional, reckless or negligent
2. Chapter 6CA extends civil liability to any individual (including but not limited to directors and executives of listed companies and advisers) who are "involved in a contravention" of the requirement to release information to the market.  There are penalties of up to $200,000 for individuals.

Despite the mixed message sent by the decision on the lengths that junior explorers should go to in determining whether drilling information should be released to the market, the decision serves as a reminder to all listed companies:

• that the ASX Listing Rules require notice to be given to ASX immediately once an entity becomes aware of any information that a reasonable person would expect to have a material effect on the price or value of the entity's securities.  An exception to the rule is available for confidential information that meets certain criteria.
• for a listed company that has failed to make disclosure in accordance with the ASX Listing Rules, the company not only faces possible action by ASIC and ASX but also the possibility of being found negligent at common law and being required to pay damages as a result.
• to ensure there is an audit trail of disclosure policy compliance, so there is justification available if material, for whatever appropriate reason, is not disclosed.

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