Three recent Federal Court cases give further guidance to directors on how they should meet their obligations under the continuous disclosure provisions of the ASX Listing Rules and the Corporations Act1.
The cases are:
- ASIC v GetSwift Limited (GetSwift), a decision of Lee J in the Federal Court on 10 November 20212;
- Bonham as trustee for the Aucham Super Fund v Iluka Resources Ltd (Iluka), a decision of Jagot J in the Federal Court on 7 February 20223; and
- Crowley v Worley Limited (Worley), a decision of the Full Court of the Federal Court on 11 March 20224.
The purpose of this note is not to critique these cases but draw out some lessons to assist directors in complying with the continuous disclosure provisions5.
Red Flag 1: The obligation to comply with the continuous disclosure provisions is on the company, not on the company’s board. Therefore, it is not just the knowledge of the board which counts but the knowledge of the company’s senior executives.
Under ordinary principles of agency what is known by a senior executive of a company is known by the company. So even if the board does not know some information but a senior executive does, the company will be held to know that information6 and then the only question is whether the information is market sensitive information which should be disclosed by the company to the ASX or whether disclosure is not required as it comes within one of the exceptions to disclosure.
Red Flag 2: What a senior executive knows is information that:
(a) is actually known to that executive; and
(b) that executive ought to know in the circumstances, including an opinion that the executive ought to have reasonably held based on the facts actually known to that executive or that they ought to have known in the circumstances.
This knowledge is the knowledge of the company as well.
In Worley, the issue was whether Worley engaged in misleading and deceptive conduct by representing in a market release on 13 August 2013 that it expected to achieve a net profit after tax (NPAT) in excess of $322m in the financial year ending 30 June 2014 (FY14) and whether it had reasonable grounds to so expect in breach of section 1041H of the Corporations Act and other provisions and whether it contravened its continuous disclosure obligations under section 674 and Listing Rule 3.1 by not notifying the ASX that Worley did not have a reasonable basis for making the August 2013 earnings guidance statement and/or that Worley’s FY14 earning were likely to fall materially short of the consensus expectation of professional analysts that Worley would deliver between approximately $354m and $368m in NPAT for FY14.
The representation that Worley would achieve a FY14 NPAT of $322m or more was based on its FY14 budget, which was not released to the public, but was approved by the Worley board in August 2013 and forecast FY14 NPAT of $352m. However, a draft of the FY14 budget dated 27 May 2013 forecast NPAT of $252m, whereas Worley’s final budget forecasting NPAT was $352m. A $100m difference.
On 20 November 2013, Worley announced that it expected its FY14 NPAT to be between $260m to $300m. This caused a 26% drop in Worley’s share price.
The Full Court held that certain senior executives of Worley had the information available to them to reasonably form an opinion7, even though they did not form that opinion, that Worley did not have a reasonable basis to assert in its 14 August 2013 market release that its FY14 NPAT would be expected to exceed $322m. Thus, Worley was in breach of its continuous disclosure obligations as it was deemed to be “aware” of that “information”8.
Red Flag 3: A non-executive director, put on notice as to a deficiency in a market announcement, should take steps to ensure the announcement is accurately made.9
In GetSwift, Mr Eagle, a non-executive director of GetSwift, was put on notice that there was something seriously wrong with one of the ASX announcement to be made by GetSwift. This “should have rung alarm bells in a director’s mind”10. Mr Eagle sought to argue that he relied on his fellow directors who were more directly involved in drafting the ASX announcement. The judge accepted that in some circumstances it may be reasonable for a director to rely on others to discharge particular functions, but a non-executive director cannot rely on others when put on notice that something is wrong.11
Mr Eagle was found to be knowingly involved in three continuous disclosure contraventions by GetSwift of section 674(2) of the Corporations Act. Thus, Mr Eagle was in breach of the old section 674(2A) of the Corporations Act.
Mr Eagle was also held to have failed to exercise his powers and discharge his duties as a director with the degree of care and diligence required and thereby contravened section180(1) of the Corporations Act.
Lee J. said:
“a reasonable director in the position of Mr Eagle, with knowledge of GetSwift’s Prospectus, Continuous Disclosure Policy and what was presented to the market in the April Appendix 4C, the May Investor Presentation, the October Appendix 4C and the Key Partnership Announcement — ought to have know the Yum Announcement mischaracterised the terms of the Yum MSA. In all the circumstances, I am satisfied Mr Eagle ought to have known that the Yum Announcement omitted material information, with the potential to harm GetSwift’s interest by exposing it to the risk of legal proceedings, legal costs and penalties.”12
Red Flag 4: In making a representation as to a future matter, make sure that there is a reasonable basis for making that representation.
In Worley, the Court found that Worley’s FY14 budget, which forecast NPAT of $352m, was not a reasonable basis for Worley’s market release on 13 August 2013 that it expected to achieve a NPAT in excess of $322m in FY14.
Some points noted by the Full Court were:
- Aspects of the 27 May 2013 draft of the FY14 budget, which forecast Worley’s NPAT of $252m, were optimistic and that draft budget, overall, was “ambitious”, but the final FY14 budget still forecast NPAT of $352.1m.
- Senior management at Worley had strongly criticised aspects of the Worley budgeting and reforecasting processes.
- Historically, Worley had materially underperformed against its budget from FY09 to FY13 (except in FY12) and had to twice downgrade its earnings guidance in 2013.
- The FY14 budget process was not materially different from the process that had been followed in the preceding years.
- Worley’s markets were not growing or in fact were deteriorating when the FY14 budget was set, which was a persuasive reason for approaching the FY14 budget with caution.
- The FY14 budget was not a “P50” budget.
- A review of the Worley budgeting process showed that it was affected by a culture of optimism and there was insufficient allowance made for potential downsides.
By way of contrast, in Iluka, Justice Jagot13 held that Iluka had reasonable grounds for its market guidance about future sales of zircon, rutile and synthetic rutile in the period from 12 April until 9 July 2012, even though on 9 July 2012 when it released revised sales guidance its share price fell about 25%.
The existence or not of reasonable grounds for making a representation as to a future matter requires a look at the substance of the matter and not merely the process surrounding the making of the representation. However, Jagot J. did say in Iluka that:
“if the evidence establishes that a reasonable process has been implemented by well-qualified, informed and experienced people who must be inferred to have been doing their best at the time to provide accurate information, then there needs to be something in the evidence before it would be concluded that those people had all reached conclusions lacking reasonable grounds.”14
Red Flag 5: Disclaimers and qualifying statements may assist in deflecting an attack that a representation as to a future matter is not reasonably grounded and thus misleading and deceptive.
As part of Iluka’s ASX market release on 23 February 2012 concerning its projections as to its future sales was a statement that the projections were “provided to assist sophisticated investors with the modelling of the company, but should not be relied upon as a predictor of future performance”15. There were also numerous qualifications made in respect of the projections in the release.
With regard to this statement, Jagot J. said:
“This statement is not in fine print or at the back of the announcement. It is immediately before the table containing the production guidance and the commentary. In the context of the numerous qualifications surrounding it, this statement is warning the reader that if they are not a sophisticated investor capable of modelling then the information is not directed to them. This would mean that the ordinary and reasonable reader would treat the announcement with a greater degree of caution than might otherwise be the case.”16
His Honour proceeded to emphasise the importance of finding the dominant message of a statement. The judge said:
“the dominant message of [Iluka’s] 23 February 2012 announcement was the difficulty in forecasting global economic conditions and that sales would depend on global conditions. The dominant message was not that Iluka considered that its forecasts for sales were able to be relied upon as an expectation that could reasonably be expected to be accurate and fulfilled. The dominant message was that Iluka considered it appropriate to provide sophisticated investor with the best guidance it could at the time about sales it then expected, recognising that global economic circumstances made reliable predictions difficult.”17
As mentioned above, in this context, Jagot J. found that Iluka had reasonable grounds for its market guidance about its future sales.
Red Flag 6: Beware the dominant personality within your board.
GetSwift was a former ASX market darling. In December 2016, its shares listed at 20 cents. By December 2017, a GetSwift share was worth over $4.00 on the market. But by 7 December 2018, they had dropped to 52 cents per share.
In his judgment, Lee J. said of GetSwift:
“At the risk of over-generalisation, what follows reveals what might be described as a public-relations-driven approach to corporate disclosure on behalf of those wielding power within the company, motivated by a desire to make regular announcements of successful entry into agreements with a number of national and multinational enterprise clients.”18 (emphasis added)
The GetSwift chairperson “displayed a management style that owed little to the influence of the late Dale Carnegie. He was demanding, forceful and regularly brusque to the point of rudeness.”19
Lee J. found that the chairperson exercised close control over the contents and timing of ASX market releases. When another director said that she believed she was accountable for announcements that were released without her total understanding, the chairperson said: “That’s why you have director’s insurance”.20
Lee J. concluded that the chairperson had breached his director’s duties21 by causing or permitting “GetSwift to contravene statutory norms of conduct in circumstances where it was reasonably foreseeable that engaging in the conduct referred to might harm the interests of GetSwift by exposing GetSwift to the risk of legal proceedings for contraventions, legal costs and penalties.”22
Not much extra needs to be said except beware the dominant personality within your board.
Red Flag 7: Keep decision making within the board to avoid personal liability.
Lee J. made several observations on the operation of the GetSwift board including:
“As the evidence reveals, there was initially little by the way of formal procedure: board meetings were irregular and unstructured (the then company secretary was even told not to show up) (see [55]); agreements and announcements were negotiated and approved helter-skelter; and the fact was that those underneath Messrs Hunter and Macdonald were told what to do and how to do it, and when something went awry, the relevant employee was scolded.”23
Given GetSwift’s governance, it was the case, as Lee J. found, that the wording of several of GetSwift’s market announcements was the personal work of either the chairperson or the managing director, or both, but not the whole GetSwift board. This led Lee J. to conclude that in a number of circumstances under review, it was either the chairperson or the managing director who was personally liable for making misleading and deceptive statements to the market.
This personal liability could have been avoided if the chairperson and the managing director involved the GetSwift board in each decision to release an announcement to the market. In that case they would have been held to be “merely acting as a corporate organ”24 of GetSwift and thus not personally liable for the relevant misleading statements made.
1 A company listed on the equities market of ASX Limited is required to comply with the continuous disclosure regime set out in Listing Rule 3.1 subject to certain exceptions from disclosure in Listing Rule 3.1A.
If a listed company breaches Listing Rule 3.1, then under the previous law, there may be a contravention of section 674(2) of the Corporations Act if the information that the relevant company was required to notify ASX was not generally available and was information that a reasonable person would expect to have a material effect on the price or value of the company’s shares, if made generally available. An officer or director of the company might be held to be knowingly involved in the contravention by their company under the old section 674(2A) of the Corporations Act, which was the subject of these cases. In August 2021, section 674 was amended to introduce a requirement for knowledge, recklessness or negligence on behalf of the company in order for the company to be liable for a breach of a civil penalty provision.
In this note we refer to Listing Rule 3.1/3.1A and section 674 of the Corporations Act as the “continuous disclosure provisions”.
A failure by a listed company to make a disclosure in compliance with ASX Listing Rule 3.1 and old section 674(2) (or the new section 674A(2)) of the Corporations Act may also lead to a finding that an officer or director of the listed company failed to exercise their powers and discharge their duties as an officer or director with the degree of care and diligence required and thereby contravene section 180(1) of the Corporations Act.
2 [2021] FCA 1384, a judgment of some 2618 paragraphs.
3 [2022] FCA 71.
4 [2022] FCA 1522.
5 Each of the 3 cases also involved allegations of misleading and deceptive conduct in breach of various legislation.
6 Worley, Jagot and Murphy JJ. para [54].
7 The definition of “information” as defined in Listing Rule 19.12 and used in Listing Rule 3.1 includes an opinion “formed by oneself” . Worley, Perram J. para [4], Jagot and Murphy JJ, para [178]. The definition of “Information” in LR19.12 includes:
“(a) matters of supposition and other matters that are insufficiently definite to warrant disclosure to the market; and
(b) matters relating to the intentions, or likely intentions, of a person.”
Para 4.1 of ASX Guidance Note 8 makes it clear that the definition of information includes opinion.
8 Jagot J. also said in Iluka that “it is not difficult to conclude that if an officer possesses information from which the officer ought reasonably have drawn a particular conclusion, the entity has become “aware” of the information represented by that conclusion”: Iluka, para [703].
9 GetSwift, Lee J. paras [2593] to [ 2602].
10 GetSwift, Lee J. para [2600].
11 GetSwift, Lee J. paras [2599-2600].
12 Lee J’s review of the Yum MSA Information and Yum Projection Information Announcement – GetSwift paras [2610 – 2612].
13 Jagot J. was also a judge in the Full Court decision in Worley.
14 Iluka, Jagot J. para [670].
15 Iluka, Jagot J. para [633].
16 Iluka, Jagot J. para [633].
17 Iluka, Jagot J. para [634].
18 GetSwift, Lee J. para [8].
19 GetSwift, Lee J. para [13].
20 GetSwift, Lee J. para [2128].
21 That is, the GetSwift chairperson failed to exercise his powers and discharge his duties as a director with the degree of care and diligence required and thereby, contravened section 180(1) of the Corporations Act.
22 GetSwift, Lee J. para [2577].
23 GetSwift, Lee J. para [2550].
24 GetSwift, Lee J. para [2124].