The role of continuous disclosure

The Federal Court awards damages for failure to disclose information.

As regular readers will be well aware, the Australian Securities and Investments Commission, and the Australian Stock Exchange are campaigning vigorously to enhance the role of continuous disclosure in Australian company law. With the spectacular collapse of a number of organisations over the past 12-18 months, and extraordinary events occurring in the United States in relation to the role of auditors, we will see a great deal more attention paid to these and related issues over the next few years. The regulators often call for more power in this area, because it is so difficult for them to succeed in court cases to expose the failure of companies to disclose appropriate information. But, a recent decision of Gyles J in the Federal Court illustrates that if the facts are able to be established the courts will reward parties who have suffered damage as a result of a failure to disclose relevant information. In GPG (Australia) Trading Pty Ltd v GIO Australia Holdings Ltd ((2002) 20 ACLC - yet to be reported) the facts were briefly these (as taken from the CCH Corporate News).

GIO Australia Holdings Ltd (GIO) had made a number of announcements during the period May to August 1999 to the stock market pursuant to its continuous disclosure obligations under the relevant law. As more information came to hand GIO had repeatedly revised forecasts of the losses it would suffer in various reinsurance portfolios. Nevertheless, the impression that had been given was that GIO had sufficient reserves and provisions to cover the expected losses and that no further revision would be necessary. The AMP organisation was then only a majority shareholder in GIO. It expressed some concerns about the information being released but continued to support GIO, its management team and its approach to the future management of these risks. Throughout August 1999 both AMP and GIO continued to receive updated actuarial reports on the extent of GIO's ailing reinsurance portfolios. The contents of these updated reports (which were expressed by the authors to be preliminary and subject to certain qualifications) were not released to the market. The directors of GIO made the decision not to release the information on the basis of its preliminary and heavily qualified nature. The plaintiff, GPG (Australia) Trading Pty Ltd (GPG), an institutional investor, had watched these events as they unfolded.

In September 1999 both AMP and GIO announced their intention to enter a scheme of arrangement under which AMP was to buy out the remaining shares of GIO not already held by it. AMP's announcement was unqualified. A week later GPG, after analysing all publicly available information including the terms of the scheme, and sensing an opportunity to profit, commenced its plan to acquire a large stake in GIO. It continued to purchase GIO shares for a number of weeks. The boards of GIO and AMP continued to receive further preliminary updates on the extent of GIO's reinsurance losses but chose not to release this information to the market on the same basis as for the previous decision. By the end of November 1999 the directors of GIO were comfortable with the accuracy of the updated actuary reports and publicly announced a further deterioration of its reinsurance book. GPG stopped buying shares after this point. Two days later both GIO and AMP announced that AMP had resiled from the scheme as originally proposed but had agreed to amended terms which represented a lower fixed payment to GIO's minority shareholders. GPG ultimately participated in the revised scheme. It then on sold the AMP securities (notes) which had been issued as part of the scheme of arrangement between AMP and GIO and suffered a significant loss (up to $8.3 million). GPG sued both GIO (and AMP) arguing that the failure to disclose the actuarial reports and the fact that future losses might arise amounted to misleading or deceptive conduct by GIO.

Gyles J in the Federal Court upheld its claim concluding that reasonable readers (including investors such as GPG) would have assumed, that, at the date of the announcement of the original scheme proposal, there was no relevant adverse change known to GIO compared with the announcements made in August 1999. In his view GIO had sufficient knowledge of the problem to require a public announcement or warning that further losses were anticipated. Reference should also have been made to the actuarial reports which were qualified to reveal the preliminary nature of this information. In his view the failure of GIO to do so amounted to misleading and deceptive conduct. As noted, GPG had also sued AMP. In this instance the judge ruled against it. According to him AMP was involved on the other side of the transaction and owed no duty to the market to disclose information that it had received. The court also rejected the argument that AMP had engaged in unconscionable conduct within the meaning of the unwritten law by resiling from the original scheme. Had the court ruled otherwise it might have set aside the transaction.

It is interesting that in this particular context we see civil litigation leading to a successful result. Obviously ASIC has a higher standard to prove if it wishes to show that a breach of the law has occurred in which case it would also seek civil penalties. One wonders whether the law should be strengthened in any particular way to enhance the powers that the regulators already have. I suspect that the law is fine as it is. Until we see that there are real difficulties in claiming relief in cases of this kind (and there may be an appeal on this matter which could lead to a different result) the editor does not believe that the law warrants any significant change.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.