Assessing Penalties for breaches of continuos disclosure Law Reporter

Thursday, 01 April 2004


    Once the CLERP 9 legislation (CLERP (Audit Reform and Corporate Disclosure) Bill 2003) is made law (which seems inevitable by at least the middle of the year), the Australian Securities and Investments Commission will have the power under a new part of the legislation to impose a maximum $100,000 "penalty" on companies which fail to comply with the continuous disclosure requirements of the legislation.

    Assessing penalties for breaches of continuous disclosure

    A case from the past foretells the future of infringement notices

    Once the CLERP 9 legislation (CLERP (Audit Reform and Corporate Disclosure) Bill 2003) is made law (which seems inevitable by at least the middle of the year), the Australian Securities and Investments Commission will have the power under a new part of the legislation to impose a maximum $100,000 "penalty" on companies which fail to comply with the continuous disclosure requirements of the legislation.

    As readers of this journal will know, this legislation has been introduced because ASIC allegedly found it very difficult to bring cases in the courts where breaches of the continuous disclosure regime were being alleged.

    But, as we have noted in previous issues of Law Reporter, ASIC was successful in two major "cases" involving allegations of breaches of the continuous disclosure regime concerning companies which enjoyed a high profile on the Australian Stock Exchange (the ASX). ASIC was able to extract settlements from both companies. The later "victory" involving Southcorp Wines saw actual court proceedings and an important judgment delivered by Justice Lindgren in the Federal Court in late November 2003. The case, ASIC v Southcorp Ltd (No 2) ((2004) 22 ACLC 1) is very important because it lays down certain guidelines on how the penalties under the infringement notice regime might apply. A brief background to the facts is necessary (as taken from the CCH Company Law Cases).

    A senior employee of listed company Southcorp Wines sent an e-mail to certain market analysts concerning the profit impact of the rather poor 2000 vintage of Southcorp Wines on the 2003 financial year. The specific information was disclosed to certain analysts before being disclosed to the ASX. This information was price-sensitive and was not generally available to the market at the time that it was released to analysts.

    Following investigations by ASIC it alleged that a contravention of the legislation had occurred. All parties agreed that the conduct constituted a contravention of the continuous disclosure"rules" in Listing Rule 3.1 of the ASX Listing Rules; it also apparently breached section 674 of the Corporations Act (the Act). As readers will know the Listing Rules of the ASX are legally enforceable.

    The parties also agreed that contravention of the continuous disclosure laws amounted to a civil penalty contravention under specific provisions of the legislation. If a court held that the contravention had been established in relevant proceedings, it would have been appropriate for the court to impose a pecuniary penalty on the company under section 1317G of the Act. The maximum penalty that could have been imposed under that section was $200,000 (the maximum penalty will be increased under the proposed CLERP 9 Bill to $1,000,000).

    ASIC and Southcorp negotiated a" settlement" of the alleged breach and agreed that the appropriate penalty was $100,000, the parties believing it was proper for the court to rule on the penalty.

    One of the criticisms of the infringement notice regime that had been proposed in 2003 was the fact that ASIC would have been given an absolute power to set the penalty. This was unconstitutional because under Australia's Constitution only a court can set a penalty. So the legislation has now been amended to provide that ASIC will be able to "suggest" penalties of up to $100,000 (depending on company capitalisation) but that the final penalty will be determined by the court. The involvement of the court is clearly vital in the proposed new regime. The decision of Lindgren J in this case is a major precedent. He commented not only on the way in which the penalty should be assessed but also on the importance of the disclosure regime. Lindgren J after noting the nature of the disclosure added this on the importance of such a practice on the market:

    "The reason is that selective disclosure is apt to generate confusion and a loss of faith in the market. In the present case, this was likely both to demonstrate self in, and to arise from, after-the-event belief and assertions that the fallen market price was caused by favoured informants [being able to offload]. Speculation and rumour deriving from selective disclosure is apt to cause a loss of confidence in the market. Selective disclosure is inimical to belief that a level playing field exists, as well as to its existence in fact.' (at par 36).

    The judge then turned to relevant arguments as to what the penalty regime would be and arguments put forward by ASIC and Southcorp. He analysed not only the facts but also the background to the legislation, why it was introduced, and the principles that should be applied by a judge setting a penalty in a case of this kind. He noted that Southcorp had improved its continuous disclosure regime as a result of certain incidents that had been influential in relation to the particular litigation, and this was a matter of some significance as far as he was concerned. Furthermore, he felt that by admitting the contravention (that is in other words not fighting the case) "Southcorp has obviated the need for lengthy, complex and costly litigation, freeing ASIC staff (and the court) to attend to other matters." (At para 49) (He noted that the case had originally been fixed for hearing for five days.)

    There was no suggestion that any officer or member of staff of Southcorp other than the senior employee referred to earlier was involved in the contravention. When Southcorp found out about the problem it immediately issued a trading halt and made an ASX profit clarification announcement. Lindgren J felt that the contravention was a "one off event; for reasons not connected with the circumstances of the present contravention [the relevant employee] is no longer employed by Southcorp, and, as already observed, Southcorp has updated its continuous disclosure policy and procedures." (At para 50)

    In imposing the penalty the judge noted that there were a number of cases involving the Trade Practices Act where the courts have laid down certain principles about the agreement of penalties between the Australian Competition and Consumer Commission and particular persons charged with breaches of that legislation. In particular he referred to the Northwest Frozen Foods case ((1997) 71 FCR 285) where the court accepted the practice of negotiation between the parties as being a useful way to proceed. The court in that particular case agreed that it would not "depart from an agreed figure [between the parties] merely because it might otherwise have been disposed to select some other figure, or except in a clear case." (See at para 54 of Southcorp)

    Lindgren J, however, recognised that it was important that the court avoid the danger that it might be seen as a "rubber stamp" in cases of this kind. There was nothing wrong, however, in providing a submission to the court on the penalty that might be agreed. (para 55)

    The judge then identified the importance of the relevant parties negotiating sensibly and providing the court with all relevant information. Two paragraphs from his judgment will be a clear signal as to how the infringement notice regime might proceed in the future in terms of the actual penalty that will be "settled" by ASIC and, if necessary by a court if the infringement notice is challenged: "I do not treat the present parties' joint suggestion of a penalty of $100,000 as a submission that the only appropriate penalty is exactly $100,000 - not $1 more or less. Rather, I regard the submission as one that a penalty of 'about half' the maximum penalty of $200,000 is appropriate.

    In another case, a regulator might reasonably be expected to supply to the court, in support of the penalty suggested, not only the customary statement of agreed facts and submissions, but also details of penalties which have been imposed in relevantly similar cases and of the circumstances of those cases. As noted at the outset, however, the present proceeding is special in that it is the first one brought for a contravention of the continuous disclosure provisions." (At paras 57-58)

    In conclusion the judge felt that not only was the penalty suggested in this case fitting but it was difficult for him to see why any other figure should be proposed.

    Clearly the Federal Court will be guided, as will the relevant Supreme Court (which can also hear these cases - unlike the trade practices area where only the Federal Court hears matters) by the suggestions made by ASIC and by the parties in appropriate cases. The extent to which the ASX will become involved in future cases involving breaches of the continuous disclosure regime will also be very interesting. We are entering into a new world where not only will companies be subject to increased fines in this area, but where individuals may also be made subject to penalties although thankfully, as was noted in last month's Early Warner, the Federal Treasurer has indicated that there will be a due diligence defence for breaches of the continuous disclosure regime.


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