In June 2024, the Federal Court ruled that iSignthis Limited misrepresented its revenue composition and failed to disclose price sensitive information about the termination of its relationship with Visa, resulting in multiple breaches of the Corporations Act by both the company and its former director Mr Karantzis.
In light of this case and the ongoing discussions about amending the Corporations Act to strengthen ASIC’s powers to enforce continuous disclosure obligations, ASX-listed companies should review their internal policies regarding ongoing disclosure obligations.
Continuous disclosure requirements
Continuous disclosure obligations of ASX-listed entities are covered by the Corporations Act and Chapter 3 of the ASX Listing Rules. Subject to certain exceptions, Listing Rule 3.1 requires that once an ASX-listed 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. Failure to comply with this requirement by the listed entity may attract civil or criminal liability for itself and its officers or other sever consequences sch as class actions, ASIC infringement notices, suspension from trading or even delisting from the ASX.
The “iSignthis” case
The Australian Securities and Investments Commission (ASIC) initiated proceedings against iSignthis (now known as Southern Cross Payments Ltd) and its former chief executive officer and managing director, Mr Karantzis, for breaches of continuous disclosure obligations and directors’ duties. The Federal Court held that iSignthis misrepresented its revenue composition and failed to disclose price sensitive information about the termination of its relationship with Visa. Consequently, iSignthis and Mr Karantzis were found to have committed multiple breaches of the Corporations Act.
The Federal Court has addressed several issues in the iSignthis case which give guidance on how an ASX-listed entity should comply with its continuous disclosure obligations.
Suspension of trading not a defence
One key issue that the Federal Court considered was whether the fact that iSignthis was suspended from trading had made the information relating to its termination with Visa not material to its share price and therefore required no disclosure. iSignthis argued that, since its trading was suspended a reasonable person would not have regarded iSignthis’ termination with Visa as information that would have a material effect on iSignthis’ share price or value. However, the Court held that suspension of trading is not a defence for non-disclosure of market sensitive information as the disclosure may affect the disclosing entity’s underlying value even during a period of suspension of trading.
Exception under Listing Rule 3.1A may apply to negotiations to resolve a dispute
Further, iSignthis argued that it was able to rely on the exemption under Listing Rule 3.1A as the information regarding the termination of its relationship with Visa concerned an incomplete proposal or negotiation. The Court partially accepted iSignthis’ submissions and held that disclosure was not required during a period of ongoing discussions between iSignthis and Visa in relation to termination of their relationship. However, as soon as iSignthis received the letter from Visa regarding its final decision to terminate the relationship, iSignthis was obliged to notify such information immediately to the ASX.
The independent review and the Government’s response
The 2021 amendment to the Corporations Act by the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Amendment) updated the former “reasonable person test” in section 674 of the Corporations Act with a new section 674A which requires ASIC in civil penalty proceedings or private litigants in civil compensation proceedings to prove that a disclosing entity knew, or was reckless or negligent with respect to whether, the information would, if it were generally available, have a material effect on the price or value of the entity’s securities (Fault Element).
The inclusion of the Fault Element was intended to reduce the number of opportunistic class actions. However, according to the independent review conducted by Dr Kevin Lewis on the continuous disclosure regime in Australia following the Amendment (Lewis Report), the Amendment was detrimental to ASIC’s power to enforce continuous disclosure obligations. Consequently, the Lewis Report recommended to amend the Corporations Act as follows:
| Recommendation | Government Response |
|---|---|
| Remove the requirement for ASIC to prove the Fault Element in civil penalty proceedings (Recommendation 1). | The Government agrees to Recommendation 1. ASIC as the regulator plays a critical role in ensuring the transparency of the market by incentivising robust disclosure practices. The removal of the requirement for ASIC to prove the fault element in civil proceedings for breaches of continuous disclosure obligations would allow for more efficient enforcement of the regime. |
| Retain the requirement for private litigants to prove the Fault Element in civil compensation proceedings (Recommendation 2). | The Government agrees to Recommendation 2. However, whether the fault element should be retained for private litigants should be reconsidered in the longer term, if there is evidence to show that there has been a negative effect on disclosure standards or practices. |
| Address more fully how knowledge, recklessness or negligence is to be attributed to the disclosing entity (Recommendation 4). | The Government agrees to Recommendation 4. The Government agrees to amend the Corporations Act to expressly provide how state of mind can be attributed to the entity within the continuous disclosure regime. During implementation, the Government will consider the appropriate model for attribution be extended to the civil liability regime. |
Outlook
Once the Recommendations are incorporated into the Corporations Act, ASIC will no longer need to prove the Fault Element, which means that the burden of proof for ASIC to prosecute an ASX-listed entity will be reduced.
The iSignthis case should be regarded as a reminder of the serious consequences for underestimating or disregarding continuous disclosure requirements. Companies listed on the ASX should take additional steps to review and observe their ongoing disclosure obligations and adopt appropriate governance practices to comply with the law.