Friday, 11 November 2016

Continuous disclosure obligations - Who is continuously obliged?

If your company breaks the law, that’s not your problem, is it?  And surely if your client breaks the law, you’re in the clear?

Unfortunately it is not that simple.  This article will consider who is potentially liable for a breach of continuous disclosure obligations.

Why do I have to keep disclosing?
Listed entities are required to continuously disclose certain types of information to the market.

Entities listed on the ASX are subject to the ASX Listing Rules. Rule 3.1 requires that:
Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.  
It’s important to remember that not all information has to be disclosed.  There are certain ‘carve outs’ in paragraph 3.1A.1 of the Listing Rules, including:
  • if the disclosure would break the law
  • the information is an incomplete proposal or negotiation
  • the information is supposition or insufficiently definite to warrant disclosure
  • the information is generated for internal management purposes, or
  • the information is a trade secret.
What if my company breaches continuous disclosure obligations?
The continuous disclosure obligation in the Listing Rules isn’t just a guideline; it is given force of law by section 674(2) of the Corporations Act 2001 (Cth).

Both civil and criminal consequences can flow from a company’s failure to comply with continuous disclosure requirements.  Civil consequences can take the form of infringement notices, declarations of breach, or compensation or other monetary orders (see Parts 9.4AA and 9.4B of the Corporations Act).  The criminal penalties for a company breaching section 674(2) can be as high as A$180,000 for each breach.  Of course, breaches of continuous disclosure obligations can also potentially found shareholder litigation, including class actions.

People involved with the company can be liable as well
Section 674(2A) of the Corporations Act in effect mandates that individuals (and other corporations) must not be involved in a listed entity’s contravention of continuous disclosure requirements.

While breach of section 674(2A) is not a criminal offence, section 674(2A) is identified in the Corporations Act as a civil penalty provision.  Accordingly, an individual’s breach of section 674(2A) can lead to pecuniary penalty orders or compensation orders being made against the individual.

Similarly, individuals can also be criminally liable for aiding and abetting a listed company’s criminal act in not complying with its continuous disclosure obligations.

So if a company does not keep up with its disclosure obligations, both the company and the people involved can be punished.

But what does involved mean?
Surely only executives and directors can be involved in a company’s breach of the law, because they control the company, right?


‘Involved’ and similar terms have been interpreted extremely widely in the past.

So, for example, in Sutton v AJ Thompson Pty Ltd (in liq), a company’s accountant was held to be ‘knowingly concerned’ (for the purposes of the Trade Practices Act 1974 (Cth)) in misleading statements made by someone else, because the accountant did not correct the statements when he knew the truth.

Even more remotely, the Court has been willing to entertain the idea that third parties could be liable in relation to a company’s breach.  Thus, while in Heydon v NRMA Ltd the Court found that a company did not mislead by making certain statements in a prospectus, the Court did say that if they had found that misleading conduct had occurred, the lawyers who advised on the prospectus would have been ‘involved’ too!

Staying outside a company is not enough to insulate a person against involvement in a breach of the law.

Applying these concepts to continuous disclosure
In 2015 in Australian Securities and Investments Commission v Planet Platinum Ltd, the Victorian Supreme Court found that Planet Platinum failed to inform the ASX that a loan had been extended, that a mortgage was discharged, and that rent had not been collected, thus breaching continuous disclosure requirements.  The Court found the company’s directors involved in those breaches of continuous disclosure requirements, and so breached section 674(2A).

More recently, Benjamin Kirkpatrick, the chief executive officer of Waratah Resources Limited (Waratah), pleaded guilty to aiding and abetting Waratah’s breach of its continuous disclosure obligations.  Between 14 and 25 October 2013, Waratah failed to correct an incorrect market announcement concerning a financing deal with an international bank.   He is due to be sentenced on 2 December 2016.

The bottom line
Corporation laws do not just apply to corporations, and do not just apply to officers of corporations.  Anyone ‘involved’ in a contravention of continuous disclosure obligations is potentially liable, including accountants, advisors and lawyers.  And with continuous disclosure, of course, there is a continuous risk of breaking the law.

Daniel MacKenzie
Senior Associate
+61 7 3233 8864

1 comment:

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