MARKET DISCLOSURE OBLIGATIONS AND DIRECTORS DUTIES. Brahma Dharmananda*

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1 MARKET DISCLOSURE OBLIGATIONS AND DIRECTORS DUTIES by Brahma Dharmananda* Introduction 1. Chapter 3 of the ASX listing rules and chapter 6CA of the Corporations Act 2001 (Cth) are the principal sources of obligations on a public company to disclose material, price sensitive information about the company s shares. The listing rules and the Corporations Act work together, and dove-tail, in imposing market disclosure obligations on public companies. 2. A failure to comply with the obligations of continuous disclosure may result in the public company and its directors, if they are involved in the contravention or otherwise liable, being liable for, among other things, penalties or to pay compensation. If the directors breach their duties as directors, as part of their involvement in a breach of the market disclosure obligations, they could also face disqualification. This last point is somewhat controversial, needs elaboration, and will be discussed below. 3. Although the continuous disclosure regime has existed in Australia in its present form for some years, there have been only a handful of cases dealing, in any meaningful way, with the somewhat complex provisions of the regime. Many complicated or perhaps difficult issues as to the proper interpretation and effect and interplay of some of the provisions have not been fully explored by the case law. 4. Further, the problems of proof involved in running a case asserting a contravention of the continuous disclosure obligation, and the difficulties involved in pin-pointing the exact nature of an alleged failure to disclose material, price sensitive information, are perhaps only just being seen as real issues, in the use and enforcement of the market disclosure regime. 5. The purpose of this paper is, first, to explain the regulatory regime in the listing rules and the Corporations Act on mandatory continuous market disclosure; secondly, to identify the logic and rationale for the mandatory continuous market disclosure rules; * Barrister, Francis Burt Chambers. B Juris (Hons 1); LLB (Hons 1) (UWA); BCL (Oxon)

2 thirdly, to identify with precision some of the issues throw up by the regulatory regime and to refer, in some detail, to the leading case of Jubilee Mines NL v Riley [2009] WASCA 62; (2009) 226 FLR 201 where the WA Court of Appeal grappled with some of these issues; fourthly, to deal with directors duties, not in general, but as they relate to a public company s mandatory continuous market disclosure obligations; and finally, to draw some conclusions. 6. It is not proposed to deal with a company s general obligation not to engage in conduct that is misleading or deceptive or likely to be misleading or deceptive under, for example, s 1041H of the Corporations Act, even though, quite often, an allegation that public company breached its obligations of mandatory continuous disclosure is coupled with an allegation that the company also engaged in misleading or deceptive conduct. 7. In this regard, in ASIC v Narain [2008] FCAFC 120; (2008) 169 FCR 211, the Full Federal Court held that, on its proper construction, s 1041H proscribes misleading conduct that relates to a company s assets and undertakings and not just with respect to the company s shares because the words in relation to a financial product or a financial service in s 1041H have that width. Hence, the ambit of s 1041H is very wide and it is beyond the scope of this paper to deal with all of the principles relating to misleading or deceptive conduct. 8. Further, a company s mandatory periodic, as opposed to continuous, disclosure obligations are also not the subject of this paper. This paper concentrates on the primary obligation of continuous disclosure under listing rule 3.1 and under s 674(2) of the Corporations Act. The regulatory regime for continuous disclosure The listing rules, particularly rule Before 1994, the listing rules alone, rather than the Corporations Act together with the listing rules, required a public company to disclose material, price sensitive information. 10. On its introduction, chapter 6CA of the Corporations Act (or more precisely its previous equivalent), built on, and is parasitic to, chapter 3 of the listing rules. It is 2

3 thus necessary to consider chapter 3 of the listing rules first, in any description of the regulatory regime for continuos disclosure. 11. Listing rule 3.1 is described as the general rule and follows a helpful heading, Immediate Notice of Material Information, which pithily summates the requirement. 12. Listing rule 3.1 provides that, once an entity that is admitted to ASX s official list 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. To ensure that this material information is not released other than pursuant to listing rule 3.1, listing rule 15.7 provides that an entity must not release this information to anyone until ASX has released the information to the market. 13. The general rule in listing rule 3.1 operates when an entity becomes aware of material, price sensitive information. Listing rule gives meaning to the concept of aware. It provides that an entity becomes aware of information if a director or executive officer has, or ought reasonably to have, come into possession of the information in the course of the performance of their duties as a director or executive officer of that entity. Executive officer is not defined in either the listing rules or the Corporations Act. 14. That is to say, if a director has material information, or ought reasonably to have such information, the entity s obligation immediately to tell ASX arises under listing rule 3.1. Hence, listing rule applies to information not just within a director s knowledge but applies to information of which they should reasonably be aware. 15. The other pivotal idea in listing rule 3.1, namely as to a reasonable person s expectation that information would have a material effect on share price or value, is not further defined or elaborated in the listing rules. Instead, the note to the listing rules refers to s 677 of the Corporations Act and states that the section defines material effect on price or value. 16. The general rule in listing rule 3.1 has exceptions and they are contained in listing rule 3.1A. Listing rule 3.1A provides that the general rule does not apply to particular information if all of the following are satisfied: 3

4 (a) (b) (c) a reasonable person would not expect the information to be disclosed (listing rule 3.1A.1); the information is confidential and ASX has not formed the view that the information has ceased to be confidential (listing rule 3.1A.2); and one or more of the following applies (listing rule 3.1A.3), namely: (i) (ii) (iii) (iv) (v) it would be a breach of a law to disclose the information; the information concerns an incomplete proposal or negotiation; the information comprises matters of supposition or is insufficiently definite to warrant disclosure; the information is generated for internal management purposes; the information is a trade secret. 17. It has been suggested that there is a tension between the general rule in listing rule 3.1 and its exception in listing rule 3.1A.1 in that, on the one hand, listing rule 3.1 requires disclosure to ASX of information that a reasonable person would expect to have a material effect on share price or value and, on the other hand, listing rule 3.1A.1 provides that such disclosure is not required if a reasonable person would not expect disclosure. 18. That is, it has been suggested, a reasonable expectation of material effect on price or value coupled with a reasonable expectation that the information need not be disclosed makes it easy to avoid disclosure by taking a reasonable view that disclosure would not be expected: see A Kohler, Continuous Dysfunction, Business Spectator, 15 February 2008, at A Zandstra, J Harris and A Hargovan, Widening the Net: Accessorial Liability for Continuous Disclosure Contraventions (2008) 22 Australian Journal of Corporate Law 51 at 52, fn In truth, however, it is probably incorrect to suggest that the interplay between listing rule 3.1 and listing rule 3.1A makes continuous disclosure more or less optional (Kohler). This is because, first, listing rule 3.1 requires disclosure to ASX if a director becomes aware or ought reasonably to be aware of information that a reasonable 4

5 person would expect to have a material effect on price or value, whilst listing rule 3.1A only permits non-disclosure if a reasonable person would not expect disclosure. 20. It is incorrect to confuse and conflate the two different aspects of reasonable expectation. Listing rule 3.1A.1 permits non-disclosure only if it can be concluded, objectively, that a reasonable person would not expect disclosure, despite the information reasonably being viewed as price or value sensitive. The exception does not permit subjective views to be taken, thereby making listing rule 3.1 more or less optional. 21. Secondly, the exception in listing rule 3.1A only operates if each of the criterion or criteria in listing rules 3.1A.1-3.1A.3 are satisfied, such that listing rule 3.1A does not permit non-disclosure unless, for example, it would be a breach of law to disclose or the information concerns an incomplete proposal or negotiation, quite apart from the fact that a reasonable person would not expect disclosure. That is, the reasonable expectation of non-disclosure is only part of the exception. 22. Also, there is an issue about whether a reasonable person would expect disclosure, in terms of listing rule 3.1A.1. One commentator has suggested that the issue is not clear cut (see A Black, Australian Corporations Law, Principles and Practice, Vol 3, 101,246 [ ]): The issue of deciding whether or not it is reasonable to withhold information concerning negotiations prior to a concluded agreement is particularly difficult. However, US authority suggests that it is the materiality of the matter rather than the closing of the transaction itself which will determine whether or not the existence of negotiations is material. Therefore, while information concerning negotiations prior to concluding an agreement could be withheld in some circumstances, in other circumstances, the information as to the existence of any negotiations would be material and would have to be disclosed: see the discussion of Basic Inc v Levinson at [ ] note Further, there is a separate market disclosure obligation in listing rule 3.1B. Listing rule 3.1B provides that if ASX considers that there is or is likely to be a false market in an entity s securities and asks the entity to give it information to correct or prevent a false market, the entity must give ASX the information needed to correct or prevent the false market. The note to listing rule 3.1B states that the obligation to give information under listing rule 3.1B arises even if the exception under listing rule 3.1A applies. 5

6 24. The note to listing rule 3.1B makes it clear that ASX would consider that there is or is likely to be a false market if the entity has information that has not been released to the market (for example, because listing rule 3.1A applies) and there is reasonably specific rumour or media comment in relation to the entity that has not been confirmed or clarified by an announcement by the entity to the market; and there is evidence that the rumour or comment is having, or ASX forms the view that the rumour or comment is likely to have, an impact on the price of the entity s securities. 25. That is to say, the point of listing rule 3.1B is to ensure that there is no trading or dealing in a listed company s shares arising by reason of specific information being in the market place, generated by e.g. rumour, which has not been confirmed by the listed company. It is obvious that some people who trade or deal in the company s shares in those circumstances may stand to loose money by taking an incorrect view as to the true position. That is why listing rule 3.1B requires the correction of a false market. 26. Before turning to the Corporations Act, it is useful to note two other listing rules, which are relevant. 27. Listing rule 19.2 provides that an entity must comply with the listing rules as interpreted in accordance with their spirit, intention and purpose; by looking beyond form to substance; and in a way that best promotes the principles on which the listing rules are based. The idea behind the words as interpreted in listing rule 19.2 is somewhat opaque but, it appears, the object behind listing rule 19.2 is to ensure that the listing rules are interpreted broadly, in line with their purpose. 28. Listing rule 19.3 provides that expressions that are not specifically defined in the listing rules, but are given a particular meaning in the Corporations Act, have the same meaning in the listing rules. The point of listing rule 19.3 is clear, in that it simply makes clear that terms defined in the Corporations Act are to have the same meaning in the listing rules. However, there is an issue as to the width of listing rule 19.3 and there is an issue as to whether concepts, as opposed to particular terms or expressions, which are given a meaning or a deemed meaning in the Corporations Act are given a like meaning in the listing rules. 29. As already noted, the idea of material effect on share price or value is not defined in the listing rules but is given meaning by s 677 of the Corporations Act. In Jubilee 6

7 Mines NL v Riley [2009] WASCA 62; (2009) 226 FLR 201, the Court of Appeal (WA) considered a similar issue. Jubilee will be discussed in detail later. Continuous disclosure under the Corporations Act, particularly s 674(2) 30. The pivotal provision in chapter 6CA of the Corporations Act, which is entitled continuous disclosure, is s 674(2). 31. To understand fully the definition driven provisions of chapter 6CA, it is necessary to refer to a number of the defined concepts in part 1.2A of the Corporations Act, which contains definitions of disclosing entity (see s 111AC); ED securities (which is short for enhanced disclosure securities ) (see s 111AD); ED securities of a disclosing entity (see s 111AK); listed disclosing entity (see s 111AL(1)); quoted ED securities (see s 111AM); and unlisted disclosing entity (see s 111AL(2)). It is unnecessary, for present purposes, to go into the somewhat painful detail of each of these definitions. 32. In practical effect, the definitions lead to the conclusion that an entity on ASX s official list, which thereby has enhanced disclosure securities, is required to comply with the continuous disclosure regime. 33. By s 674(1), s 674(2), the pivotal provision, applies to a listed disclosing entity if provisions of the listing rules or a listing market in relation to that entity require the entity to notify the market operator of information about specified events or matters as they arise for the purpose of the operator making that information available to participants in the market. 34. Again, shorn of the definitional pain, the gist of s 674(1) is that it requires entities on ASX s official list to comply with s 674(1) because listing rule 3.1 requires them to disclose material information to ASX. 35. For the purposes of s 674(1), listing rule 3.1 appears to be a provision that requires an entity to notify ASX about specified events or matters. It is submitted the event or matter that is sufficiently specified is awareness of information that a reasonable person would expect to have the requisite material effect. Any argument that there is no listing rule that requires notification of specified events or matters because listing rule 3.1 is general in tenor is, it is submitted, unlikely to succeed, on a plain reading 7

8 of the provisions. Giving s 674 a purposive interpretation, the argument would fail, it is submitted. 36. Section 674(2) provides that if it applies to a listed disclosing entity because of s 674(1) (s 674(2)(a)) and the entity has information that those provisions [practically, the listing rules] require the entity to notify to the market operator (s 674(2)(b)) and that information: (i) (ii) is not generally available; and is information that a reasonable person would expect, if it were generally available to have a material effect on the price or value of ED securities of the entity (s 674(2)(c)), the entity must notify the market operator of that information in accordance with those provisions [practically, the listing rules]. 37. It is apparent that this pivotal provision is clearly parasitic on listing rule 3.1, in the sense that by s 674(2)(b), s 674(2) applies only if the provisions of the listing rules require the entity to notify ASX under, in particular, listing rule Section 674(2)(c) adds an extra dimension and an extra element in that it requires disclosure of information required to be disclosed by the listing rules only if that information is not generally available and only if it is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of the listed entity s shares. 39. There is thus one potential difference between listing rule 3.1 and s 674(2): whilst s 674(2) requires notification only if the information is not generally available (s 674(2)(c)(i)), listing rule 3.1 does not expressly excuse notification if the information is already generally available. The difference might not be real because information that is already generally available might not be reasonably expected to have a material effect on share price or value and, as such, listing rule 3.1 would not ordinarily apply to such information in any event. 40. However, at least one commentator has suggested that the requirement in s 674(2)(c)(i) that the information is not generally available may mean that the standard for disclosure is lower and different under s 674 (see e.g. M Duffy, Fraud 8

9 on the Market : Judicial Approaches to Causation and Loss from Securities Nondisclosure in the United States, Canada and Australia (2005) 29 Melbourne University Law Review 621 at 647; R Langley, Over 3 years on: Time for reconsideration of the Corporate cop s power to issue infringement notices for breaches of continuous disclosure (2007) 25 C&SLJ 439 at 443). This point is discussed further below when Jubilee Mines NL v Riley is considered. 41. Hence, the pivotal provision, is both parasitic on listing rule 3.1 (because of s 674(2)(b)) and, at the same time, may add an extra element or dimension (because of s 674(2)(c)) by requiring disclosure only if the information is not generally available and is, effectively, material information. 42. To add to the complexity, there is a third point. The idea in s 674(2)(c) that disclosure is required if the information is not generally available and is reasonably expected to be material information is an idea that is already encapsulated in listing rule 3.1 itself. That is to say, on its terms, listing rule 3.1 requires a listed entity to disclose to ASX information that is reasonably expected to have a material effect on the price or value of the entity s shares; and s 674(2)(c)(ii) covers the same ground by providing that information is required to be disclosed if it is information that would reasonably be expected to have a material effect on the price or value of the entity s shares. 43. Thus, the way in which listing rule 3.1 has been given statutory effect in s 674(2) is somewhat clumsy. Because of the Court of Appeal s analysis in Jubilee Mines, most probably, nothing turns on the clumsy drafting of s 674(2). However, as explained below when that case is analysed, the clumsy drafting exposes some difficult conceptual issues. 44. Before continuing with the analysis of the provisions of the Corporations Act, it is necessary to pause and appreciate exactly what the pivotal provision in s 674(2) targets, if a contravention of it is asserted. The section requires the disclosure of material, price sensitive information if that is required by the listing rules. If it was alleged that a public company contravened the section, what would be alleged is that the company failed or omitted to disclose material, price sensitive information. 45. To prove that the public company contravened s 674(2), it will be necessary to show that such omitted information was indeed material information. Hence, on its terms, s 674(2) requires the disclosure of material, price sensitive information and, to prove 9

10 a contravention of the section, what needs to be shown is that such material, price sensitive information was omitted. 46. Understood in this way, s 674(2) is not a provision that is to be interpreted as requiring the disclosure of accurate or non-misleading information. It is unnecessary to introduce ideas of that sort, which are not contained in the pivotal section or in listing rule 3.1. From an analytical view-point, it is submitted it is more correct and more in accord with the plain terms of s 674(2) to notice and appreciate that it requires the disclosure of material, price sensitive information; and that proof of the provisions contravention is shown by pointing to such information and showing that it was omitted from disclosure. 47. To introduce, as is sometimes done in this area, an idea that s 674(2) is contravened if information that was disclosed was misleading or inaccurate fails, it is submitted, to grapple with the real issue. The real point is that the information that was disclosed is argued to be misleading or inaccurate because of a failure to disclose some particular omitted information. It is better to focus on what was omitted from disclosure and show why the omitted information was material, price sensitive information. 48. Because the ideas here are complicated, an example may assist. Suppose that a mining company announced that it had discovered a significant gold deposit deep underground, and that this information would likely be material for that company. Suppose that mining company also had information that the gold deposit could not be mined profitably because it was probably very unsafe for the underground mining to be undertaken. 49. If a contravention of listing rule 3.1 and s 674(2) were alleged in this example, what would have to be proven is that the mining company s omission to disclose the facts about its inability to make a profit from the gold deposit because it was unsafe to mine the gold. It would distract attention and would not be a proper application of s 674(2) to assert simply that the mining company s announcement about its gold deposit discovery was misleading or inaccurate. 50. Hence, it is submitted that, properly understood, to show that s 674(2) was contravened, it is necessary to point to the information that was omitted from disclosure and to show how and why that information was material, price sensitive information. 10

11 51. Next, s 674(2A) provides that a person who is involved in a listed disclosing entity s contravention of s 674(2) contravenes s 674(2A). Section 79 of the Corporations Act defines when a person is involved and provides that a person is involved in a contravention if, and only if, the person: (a) (b) (c) (d) has aided, abetted, counselled or procured the contravention; or has induced, whether by threats or promises or otherwise, the contravention; or has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or has conspired with others to effect the contravention. 52. Then, s 674(2B) gives a defence to a person who is involved in a contravention of s 674(2). Section 674(2B) provides that a person is not involved in a contravention under s 674(2A) if the person proves that they took all steps (if any) that were reasonable in the circumstances to ensure that the listed disclosing entity complied with its obligations under s 674(2); and after doing so, believed on reasonable grounds that the listed disclosing entity was complying with its obligations under s 674(2). That is to say, it is a defence to an allegation that a person was involved in a listed entity s contravention for the person to show that they took reasonable steps to ensure compliance, and they reasonably believed the entity was complying. 53. In Re Chemeq Ltd; ASIC v Chemeq Ltd [2006] FCA 936; (2006) 234 ALR 511, in setting a penalty for Chemeq s admitted contravention of s 674(2) in failing to disclose cost increases in the construction of its major production facility and its failure to disclose the lack of commercial significance of the publicised grant of a patent in the United States, French J said that a relevant consideration was the existence, within the company, of compliance systems in relation to its disclosure obligations including provisions for and evidence of education and internal enforcement of such systems (at 534 [99]). French J also said that another relevant factor was whether the directors of the company were aware of the facts which ought to have been disclosed and, if not, what processes were in place at the time, or put in place after the contravention, to ensure their awareness of such facts in the future (at 534 [99]). 11

12 54. That is to say, it is apparent that there is a connection between the defence that a person allegedly involved in a contravention of s 674(2) might raise (namely, that he or she took reasonable steps to ensure compliance and reasonably believed that the company was complying) and some of the factors that the court will consider in setting penalties for a contravention of s 674(2). 55. Next, s 675 deals with the continuous disclosure obligations of other disclosing entities. It is unnecessary, for present purposes, to dwell on s 675. This is because 99% of disclosing entities are listed with ASX and, hence, practically, it is the pivotal s 674(2) which is most relevant in discussing a public company s continuous disclosure obligations: R Langley, Over 3 years on: Time for reconsideration of the Corporate cop s power to issue infringement notices for breaches of continuous disclosure (2007) 25 C&SLJ 439 at 442, fn Further, s 676 provides for when information is generally available for the purposes of, among other things, s 674(2). Section 676(2) provides that information is generally available if: (a) (b) it consists of readily observable matter; or without limiting the generality of (a) above, both of the following apply: (i) (ii) it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities of a kind whose price or value might be affected by the information; and since it was so made known, a reasonable period for it to be disseminated among such persons has elapsed. 57. Section 676(3) provides that information is also generally available if it consists of deductions, conclusions or inferences made or drawn from information that is readily observable and information made known in a manner that would, or would be likely, bring it to the attention of persons who commonly invest in securities of a kind whose price or value might be affected by the information and a reasonable period has elapsed after it was made known. 12

13 58. That is, in short, s 676 elaborates on when information is generally available, so that the disclosure obligation in s 674(2) about that information is not triggered. Information is generally available, in essence, if it is readily observable, has been publicised, and maybe deduced or inferred from such information. There is some case law on similar provisions. 59. In R v Firns [2001] NSWCCA 191; (2001) 51 NSWLR 548, in relation to a similar concept in s 1002B [part of the insider trading provisions] in dealing with what is readily observable, Mason P said: (a) (b) Section 1002B(2)(a) does not define the class of persons by whom the matter is to be 'readily observable'. They cannot be confined to existing shareholders or even existing traders of shares on ASX. In any event, the latter class is a very wide one since traders in Australian-listed shares are not confined to Australians, no matter how the latter term is defined (at 563 [70]). For the purposes of s 1002B(2)(a), it does not matter how many people actually observe the relevant information. Nor is s 1002B(2)(a) concerned with the time that is likely to elapse between the information becoming 'readily observable' and when it was in fact observed. Information may be readily observable even if no-one observed it (at 563 [77]). 60. However, it has been suggested that the analysis in R v Firns should not be adopted for the purposes of the continuous disclosure provisions because of the clearer policy background supporting investor confidence when compared to the policy behind the insider trading provisions: G Golding and N Kalfus, The continuous evolution of Australia s continuous disclosure laws (2004) 22 C & SLJ 385 at Finally, s 677 is, effectively, a deeming provision which gives content to the concept of materiality referred to in s 674(2)(c)(ii). 62. Section 677 provides that, for the purposes of ss 674 and 675, a reasonable person would be taken to expect information to have a material effect on the price or value of ED securities of a disclosing entity if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the ED securities. 13

14 63. That is, if information would or would likely, influence a common investor in shares in deciding whether to buy or sell the shares of a public company, s 677 provides that such information is, effectively, deemed to be information that would reasonably be expected to have a material effect on the price or value of the company s shares. 64. The idea behind s 677 is thus, in short, the proposition that if a person would or would likely be influenced in their decision to buy or sell shares by particular information then that information is material and is required to be disclosed. The way s 677 is drafted, there would appear to be no separate requirement that the information be independently material or, to put it another way, significant. Its significance arises by force of its potential impact on a common investor s decision making. The information s ability to influence makes it material, without more. 65. It has been suggested that s 677 is relevant for the purposes of listing rule 3.1 because listing rule 19.3 provides that expressions which are not specifically defined in the listing rules have the same meaning as given in the Corporations Act: A Black, Australian Corporations Law, Principles and Practice, Vol 3, 101,222 [ ]. This is arguably so, even though s 677 is not a definition provision but rather an interpretative or deeming provision. See the different views taken on the issue in Jubilee Mines NL v Riley [2009] WASCA 62 and by the commentators. 66. Further, as to the requirement of likely influence in s 677, it has been suggested that, The range of information which would affect the decision of a reasonable person whether to subscribe for, buy or sell securities is also not necessarily coincident with information which might affect the market value of those securities. The reference to likely to influence persons who invest in securities means probable not merely possible : R v Crabb (1985) 156 CLR 464; 58 ALR 417; BC ; Boughey v R (1986) 161 CLR 10; 65 ALR 609; BC ; Riley v Jubilee Mines NL (2006) 59 ACSR 252; [2006] WASC 199; BC at [286] : A Black, Australian Corporations Law, Principles and Practice, Vol 3, 101,223 [ ]. 67. The issue as to the proper construction of s 677 and its inter-relationship with the materiality requirement in listing rule 3.1 was considered in Jubilee Mines, which decision is analysed in detail below. 14

15 The sanctions for a contravention of the continuous disclosure regime 68. Before dealing with the logic and rationale for the above market disclosure rules and before considering Jubilee Mines, it is necessary to mention the range of penalties that are available for a contravention of the continuous disclosure provisions. 69. The penalties range from criminal to civil to administrative. 70. Starting from the bottom up, leaving aside ASIC s ability to persuade compliance by correspondence, ASIC has two types of administrative sanctions available to it. Since 1998, ASIC has been able to obtain enforceable undertakings. From 2004, ASIC has been able to issue infringement notices. 71. Under ss 93AA and 93A of the Australian Securities and Investments Commission Act 2001 (Cth), ASIC is able to obtain enforceable undertakings effectively to prevent a contravention of the law including a company s obligations of continuous disclosure, which can be enforced in court for breach. 72. Under part 9.4AA of the Corporations Act, ASIC is authorised to issue infringement notices for an alleged contravention of s 674(2), in response to which, the company can pay the penalty stated in the notice (which will range from $33,000 to $100,000 depending on the market capitalisation of the company) or decide to have the matter dealt with by the court. 73. It is fair to say that ASIC s entitlement to issue infringement notices has been the subject of much criticism. It has been argued that the mechanism does not have sufficient checks and balances, may be biased, and may well be unconstitutional: see, for example, R Baxt, The New Fining Power for the Australian and Investments Commission (2004a) 32 ABLR 61; R Langley, Over 3 years on: Time for reconsideration of the Corporate cop s power to issue infringement notices for breaches of continuous disclosure (2007) 25 C&SLJ 439 at fn Since March 2002, the civil penalty provisions in part 9.4B of the Corporations Act have applied to breaches of the continuous disclosure regime. The civil penalty provisions assist ASIC by applying the civil standard of proof, but bearing in mind the need for the court to be sufficiently satisfied in the light of Bringinshaw v Bringinshaw (1938) 60 CLR 336 at

16 75. Under part 9.4B of the Corporations Act, the court has broad powers to make orders including a power to make a declaration of contravention (s 1317E(ja)); a power to make a pecuniary penalty order of up to $1,000,000 for corporations (s 1317G(1A), a power to make a disqualification order (s 206C) and a power to order compensation to be paid (s 1317HA). 76. However, as to the court s ability to order disqualification, it is important to note that a contravention of s 674(2) or s 674(2A) is a contravention of a financial services civil penalty provision as defined in s 1317EA of the Corporations Act. Under s 206C of the Corporations Act, the court may disqualify a person from managing corporations if a declaration is made under s 1317E that the person has contravened a corporations/scheme civil penalty provision, and not a financial services civil penalty provision. 77. That is to say, a contravention of s 674(2) or s 674(2A) does not, of itself, enable the court to disqualify a person from managing corporations under s 206C. That was not Parliament s intention. However, as discussed further below, ASIC has sometimes invoked an argument that a director contravenes his or her obligations under s 180(1) or s 181(1) (which are each a corporations/scheme civil penalty provision ) by failing to ensure that the public company complies with s 674(2), and thereby, exposes himself or herself to disqualification under s 206C. It is far from clear that this circuitous route will ultimately result in a disqualification order, even if were accepted that Parliament intended such a consequence for a contravention of s 674(2) or s 674(2A). 78. However, under s 206E, the court may disqualify a person from managing corporations if, among other things, the person: (a) (b) has at least twice been an officer of a body corporate that has contravened the Corporations Act while they were an officer of the body corporate and each time they failed to take reasonable care to prevent the contravention; or has at least twice themselves contravened the Corporations Act, and the court is satisfied that the disqualification is justified. 16

17 79. Thus, if a director contravenes s 674(2A) twice or fails to take reasonable care to stop their company from contravening s 674(2) twice, the director may be disqualified from managing corporations in the court s discretion. 80. Also, the general civil liability sanctions under the various powers given to the court in part 9.5 of the Corporations Act apply to the continuous disclosure regime. This means that injunctive relief may be obtained under s 1324, corrective advertising orders may potentially be obtained under s 1324B, and compensation orders are available under s There are also criminal sanctions for a contravention of s 674(2). The Criminal Code Act 1995 (Cth) applies to a contravention of s 674(2) by force of s 678. For present purposes, it is unnecessary to consider the potential criminal penalties any further, bearing in mind that ASIC has usually relied on the civil penalty provisions. 82. Finally, shareholders can themselves take action against the public company for contravening its obligations of continuous disclosure. 83. In this regard, under s 50 of the ASIC Act, if, as a result of an investigation or from a record of an examination conducted by ASIC, it appears to ASIC to be in the public interest for proceedings to be commenced or carried on to recover damages for a breach of duty or other misconduct, ASIC may cause such a proceedings to be begun or carried on. That is, ASIC has the right to conduct proceedings for the benefit of shareholders to recover damages for their benefit for a contravention of the continuous disclosure regime if ASIC considers that this is in the public interest. 84. Therefore, there are a variety of sanctions available for a contravention of the continuous disclosure regime. The regime cannot be taken lightly. The logic and rationale for the continuous disclosure rules 85. There are two sets of policy considerations that assist to explain the logic and rationale for the continuous disclosure rules and the sanctions imposed for a contravention of the rules. The logic and rationale for the continuous disclosure rules is essentially based on the goal of ensuring transparency and a level playing ground so that the price or value of shares reflect their true worth; apart from that, the logic and rationale for the sanctions for a contravention of the continuous disclosure rules 17

18 is usually explained by reference to strategic regulation theory. It is necessary to deal with the two strands separately. 86. It has been succinctly said that, The four primary rationales for mandatory disclosure are unequal possession of information, reduction of social waste, monitoring of management and the public goods hypothesis : see T Poisel and A Terrett, Transparency and disclosure: Implications of the bear raid on ABC Learning Centres (2009) 27 C&SLJ 139 at 143, citing several analyses of the underlying theory. 87. In a little more detail, it has been said (see R Langley, Over 3 years on: Time for reconsideration of the Corporate cop s power to issue infringement notices for breaches of continuous disclosure (2007) 25 C&SLJ 439 at 440: All markets require information to function and the share market is no exception. It has been said that a well informed market maintains market integrity and leads to greater investor confidence to invest in Australian business. It has also been said that the depth, liquidity and efficiency of the share market are enhanced by investor confidence and informed participation. Continuous disclosure of price-sensitive information plays a vital role in the operation of a fair and efficient market. It assists in reducing market volatility by ensuring investors have equal and timely access to material information about their investments. It allows securities, or more importantly their associated risk, to be priced accurately allowing for the appropriate distribution of capital throughout the economy. Continuous disclosure is fundamental to enable informed decision-making, soundly based shareholder activism and monitoring of management. Mandatory disclosure reduces agency costs arising from information asymmetry, enhances investor protection and avoids the social waste caused by the duplication of investor research due to the lack of information in the market (footnotes omitted). 88. The idea that underpins the above view is the hypothesis that the market operates efficiently such that share prices in the market are set by reference to all available information and are set rationally and without bias, so that it is not possible to take advantage of a situation where share prices do not reflect their true value. 89. Of course, it is accepted that a share market does not always operate efficiently in the sense described, and there are different forms of efficiency (weak, semi-strong and strong). Mandatory disclosure rules promote efficiency by seeking to ensure that all participants in the market are properly informed, and have available to them the same information as other participants. That is the underlying philosophy for the mandatory continuous disclosure rules in Australia: see A Zandstra, J Harris and A Hargovan, 18

19 Widening the Net: Accessorial Liability for Continuous Disclosure Contraventions (2008) 22 Australian Journal of Corporate Law 51 at 54-5, and the material there cited. 90. In the past, there were critics of the mandatory disclosure rules who argued that market forces would automatically encourage disclosure, without the need for mandatory disclosure rules. Further, it has been argued that the premise on which the efficient market hypothesis is based (namely, that disclosure of material information will be reflected in share prices), is unfounded. It has been argued that even when investors are supplied with all material information, they do not always make rational choices based on that information: see T Poisel and A Terrett, Transparency and disclosure: Implications of the bear raid on ABC Learning Centres (2009) 27 C&SLJ 139 at and the materials there cited. On balance, the authors there explain that the accepted wisdom is that a mandatory continuous disclosure regime does promote transparency and efficiency. 91. Hence, the essential premise that underpins the mandatory continuous disclosure regime is the idea that it is important for material information to be immediately available to all concerned, so that the information can be factored into share prices, and so that the individual participants may operate in the market knowing that the playing ground is level. 92. As to the theoretical underpinning of the sanctions for a contravention of the continuous disclosure rules, the commentators uniformly refer to strategic regulation theory. 93. Strategic regulation theory provides a broad perspective on the role of enforcement sanctions in securing regulatory compliance. The theory advocates regulatory compliance is best secured by persuasion rather than legal enforcement. The economic premise behind this view is that persuasive measures are less costly than enforcement measures. For persuasion to be effective, however, the threat of punishment must lie behind the regulator s conciliatory actions or gestures. This threat should consist of a set of integrated sanctions, which the regulator can enforce when a contravention occurs. The sanctions should escalate in severity in proportion to the nature of the contravention : G Gilligan, H Bird and I Ramsay, Civil penalties and the enforcement of directors duties (1999) 22 UNSW Law Journal 417 at

20 94. The theory was developed and expanded by Braithwaite and Ayres and is usually represented graphically by a pyramid model. According to the theory, individuals will be motivated by different factors and, therefore, a successful regulatory agency will need to have a range of enforcement options available to it and, in so doing, will be able to effect compliance at lower cost: see M Welsh, Continuous disclosure: Testing the correspondence between state enforcement and compliance (2009) 23 Australian Journal or Corporate Law 206 at It is there argued by Welsh that a successful enforcement regime must allow virtuous actors the chance to be virtuous and to comply voluntarily with the law and it must also have at its disposal some form of punishment to force non-responsive actors to comply: at 210. Also, the theory suggests that giving the regulator flexibility in sanction-selecting facilitates the aim of effecting proper enforcement, without severity: at Hence, the idea that underpins the difference remedies that are available to the regulator is essentially the need to have a balance between the carrot and stick approach to ensuring compliance. Some difficult issues and the decision in Jubilee Mines v Riley 97. It is now possible to deal in some detail with the analysis of the issue in Jubilee Mines. Before doing so, it is worth summating, in short form, the main points about the regulatory regime: (a) (b) (c) listing rule 3.1 requires notification on awareness of reasonably expected materially price or value sensitive information; s 674(2) equally requires notification on awareness of reasonably expected materially price or value sensitive information (if it is not generally available); for those purposes or at least for s 674(2) purposes, s 677 provides that there is taken to be a reasonable expectation of materiality if the information would or would be likely to influence persons who commonly invest in securities in deciding whether to acquire or dispose of the relevant securities. 98. A number of somewhat complicated issues have already been identified above or arise as to the manner in which the continuous disclosure regime operates and is to be 20

21 interpreted. Those issues include, first, an issue as to the proper scope and ambit of s 674(2). Is the section, in terms, to be construed as targeting inaccurate or misleading statements by a public company? Or, does the section meet its goal by ensuring that disclosure is made of material, price sensitive information such that, failing disclosure, the court should deal with what was omitted from disclosure and determine whether what was omitted should have been disclosed as material, in all of the circumstances? 99. Secondly, an issue has been identified as to the meaning of the concept of materiality in listing rule 3.1 and whether the answer is provided by s 677, such that information is material, price sensitive information if the information would be reasonably expected to influence a common investor in shares to buy or sell them, and such that there is no separate and super-added requirement to show that the information was material beyond showing its influencing impact on common investors behaviour Thirdly, an issue arises as to how s 674(2) and listing rule 3.1 are to be applied, in a case where a contravention by omission of material information is alleged. There is a question about whether the issue is answered on an ex ante basis or on an ex post facto basis, by reference to a consideration of what actually happened The first of the above issues is not really confronted or answered by the analysis in Jubilee Mines. But, in so far as the analysis goes in that case, it would appear to support the view that s 674(2) is to be approached on the basis that the enquiry is about whether information omitted from disclosure by a public company was required to be disclosed because it was material, in all of the circumstances. To that extent, Jubilee Mines supports the argument made above about what the section targets As to the second issue, by majority, the Court of Appeal concluded in Jubilee Mines that s 677 is to be applied in the determination of what is material for the purposes of listing rule 3.1. McLure JA strongly argues to the contrary in Jubilee Mines. Her Honour s view cannot be ignored but it is not the present legal position The third issue is not directly confronted in Jubilee Mines. It must be true that s 674(2) and listing rule 3.1 requires an ex ante, predictive, before-the event, enquiry as to whether information is material. After all, that is the manner in which the provisions must be approached by the directors of a public company in determining whether they are required to disclose some particular information. 21

22 104. That is to say, because of s 677 s focus is on what would influence or would likely influence common investors and because of s 674(2) s and listing rule 3.1 s focus on what a reasonable person would expect, it appears that these provisions require the issue of materiality to be determined on an ex ante basis. That is, the provisions require notification of information that would or would likely influence common investors, and a judgment as to that eventuality is required by the provisions to be made before the event Put differently, if material information were omitted, a court, in determining whether the provisions had been contravened, would be required to consider whether the information was, in the circumstances and context operating at the time when disclosure was required, information that would reasonably be expected to have a material effect by influencing or likely influencing share price or value. That is a forward, not backward, looking exercise The analysis that is required is, thus, an ex ante analysis. So much may be accepted However, that is not to say that evidence of what happened afterwards is not relevant to assist the court in its determination. What happened afterwards might be the best evidence from which to gauge the materiality of omitted information. In this regard, one commentator has said (see Richard Fisher, Managing commercial distress: Discharging obligations of disclosure (2007) 15 Insol LJ 23, 26-7 (footnotes omitted)): For the continuous disclosure rules to apply, the relevant information concerning the company must be material in the sense that a reasonable person would expect it to have a material effect on the price of the company s shares. There is a similar characterisation of the information that is relevant for the operation of the insider trading provisions. It is noted in Ford that: The concept of materiality conveyed by s 1042D is broadly similar to the approach taken in TSC Industries Inc v Northway Inc 426 US 438 (1976); 96 S Ct 2126 (applied in Basic Inc v Levinson 485 US 224 (1988)), admittedly in a different context. There the court said (at 449) that: [a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote... there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of the information made available. 22