ASIC muscles up on continuous disclosure

In 2018, in response to a capital raise conducted by Australia and New Zealand Banking Group Limited (ANZ) in 2015, two cases were brought against ANZ. 

1. In June 2018, following an investigation by Australian Competition and Consumer Commission (ACCC), the Commonwealth Director of Public Prosecutions (CDPP) laid criminal cartel charges against ANZ, two of the underwriters for the capital raise as well as senior executives from each institution.
2. In September 2018, Australian Securities & Investments Commission (ASIC) commenced proceedings in the Federal Court of Australia against ANZ alleging a breach of its continuous disclosure obligations in relation to the 2015 capital raise.

Criminal cartel case: CDPP v ANZ

ACCC alleged that during the 2015 capital raise, ANZ and the underwriters (being JP Morgan Australia Ltd, Citigroup Global Markets Australia Pty Ltd and Deutsche Bank AG) acted as a cartel in restricting the supply of shares to maintain ANZ’s market price. JP Morgan was granted immunity after cooperating with the investigation.

Breaching cartel laws attracts penalties of, for companies, up to 10% of their turnover or triple the profit gained and, for individuals, up to 10 years in jail.

However, the case was withdrawn by the CDPP last year.

Civil case: ASIC v ANZ

ASIC’s civil case against ANZ had been stayed until the hearing and final determination of the criminal cartel case. With the discontinuance of the criminal cartel case, ASIC was able to continue with its proceedings in which it is seeking a pecuniary penalty order and a declaration that ANZ breached its continuous disclosure obligations under section 674(2) of the Corporations Act 2001 (Cth) (Act) by failing to notify the Australian Securities Exchange (ASX) that approximately $791 million of the $2.5 billion of ANZ shares offered in the placement was to be acquired by its underwriters.

Section 674(2) of the Act, in combination with ASX Listing Rule 3.1, requires listed entities to notify the ASX immediately of any information which is not generally available of which it becomes aware that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of that entity’s securities.

ASIC alleges that:

• the fact that the underwriters allocated to themselves and subsequently acquired approximately 31% of the placement shares was material information that should have been disclosed to the market; and
• the non-disclosed information was likely to influence investors in deciding whether to acquire or dispose of ANZ shares given the significant amount of shares the underwriters had acquired and the expectation that the underwriters would promptly dispose of the shares and place downward pressure on the share price.

The purpose of the continuous disclosure obligation in the Act is to facilitate the fair, effective and efficient operation of the market and to maintain the integrity of the market by ensuring transparency and equal access to information. ASIC alleges that this was frustrated by ANZ’s non-disclosure and this resulted in:

• potential purchasers of ANZ shares likely refraining from purchasing shares in anticipation that disposal of shares by the underwriters would present an opportunity to purchase at a lower price; and/or
• sophisticated traders of ANZ shares likely engaging in trading activities (e.g. shorting shares in anticipation of being able to purchase them at a lower price).

ANZ has denied ASIC’s allegation that it has breached its continuous disclosure obligations, stating in its defence that the non-disclosed information was either immaterial or already understood by market participants, and the shares in question represented less than 1% of the ANZ shares on issue.

During the hearing, the experts for ANZ and ASIC were unable to agree on the extent market participants were aware about the underwriters acquiring the shortfall and on the extent that the non-disclosed information, if disclosed, would have changed the then market expectations.

The hearing concluded on 10 May 2023 and the judgment has been reserved.

This case comes only a few months after the Federal Court handed down the largest ever penalty of $15 million for breaching continuous disclosure laws against former logistics software company, GetSwift Limited. In response to the case, ASIC Deputy Chair Sarah Court stated the following:

‘Disclosure is critical to market integrity and consumer protection. The penalties imposed by the Court demonstrate the extent and seriousness of the misconduct in this matter and the importance placed by the Court on deterring others from engaging in similar behaviour. ASIC will continue to take action to hold companies and individuals to account for corporate misconduct of this kind.’

Stay tuned for an update on the case once it is published. You may also be interested in our article 7 Red Flag Lessons for Directors: 3 Recent Continuous Disclosure cases.

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