A misleading ASX announcement can lead to ASIC prosecuting the listed entity and those officers who authorised the announcement.
In the recent Padbury case, this resulted in two directors being disqualified from managing corporations for 3 years and having to pay pecuniary penalties of $25,000 each.
In August 2016, the Federal Court of Australia decided a case in which directors of Padbury Mining Limited were held to have caused the company to make a misleading ASX announcement. This resulted in those directors being disqualified from acting as directors for a 3 year period and having to pay a pecuniary penalty of $25,000 each.
The case is a salutary reminder of the importance of ensuring ASX announcements are prepared carefully.
Summary of facts
Padbury Mining Limited had, for some time, been trying to develop a deep water port at Oakajee in Western Australia and an associated railway network.
At 9.40am on 11 April 2014, Padbury made a triumphant announcement to ASX that it had ‘successfully secured’ funding of $6 billion for the project.
However, the announcement failed to disclose the conditions precedent upon which the funding depended and also the identity of the parties who would provide the funding. The conditions precedent were significant. They required Padbury to obtain a bank guarantee which would match the funding provided from the proposed funder. It was conceded that Padbury did not have the ability to do this.
The last sale price of the shares before the announcement was $0.02 per share. After the announcement, the shares traded at $0.045 and traded within the range of $0.032 and $0.052 per share. A total of 209,366,987 shares were traded.
At 2.15pm on the same day as the announcement, at the company’s request, the shares went into a trading halt, pending an announcement of more details regarding the funding. The shares remained in trading halt or in suspension until 29 April 2014, when it was then announced that the parties to the funding agreement had terminated their agreement. Funding for the project was never obtained and the project has never been constructed.
ASIC prosecuted the company and the two directors involved in authorising the first announcement, the managing director and the chairman, Mr Gary Stokes and Mr Terence Quinn.
The company admitted it had breached the ASX continuous disclosure obligations by failing to disclose the conditions precedent and the identity of the persons responsible to provide the funding. It admitted that this information was likely to influence people who commonly invest in securities in deciding whether to acquire shares in Padbury and that a reasonable person would expect that information, if it were generally available, to have a material effect on the price or value of Padbury shares.
The two directors admitted that, by authorising the release of the ASX announcement, they had breached their directors’ duties under section 180 of the Corporations Act (the duty of care and diligence) and ought have been aware that the announcement would be harmful to Padbury as:
Padbury would breach its continuous disclosure obligations; and
if the misleading or deceptive nature of the announcement was revealed, it would be harmful to Padbury’s reputation, adversely impact on its ability to procure funding to develop the project and expose Padbury to litigation and regulatory action.
Before the court hearing, ASIC, the company and the directors had reached a settlement and agreed proposed orders.
The court accepted the proposed orders. The court said that, in deciding whether to accept the orders proposed by the parties, the court would have regard to the public interest, which includes recognising the benefit of prompt settlement of enforcement proceedings.
The court ordered that the two directors be prohibited from managing a corporation for a period of 3 years. On the application of the managing director, an exception was made so that he could remain a director of the trustee company of his superannuation fund, of which he was the only member. The court also imposed a pecuniary penalty on each of director of $25,000.
In coming to this decision, the court looked carefully at the James Hardie decision in 2012, where the directors of James Hardie were held to be in breach of their duties in approving a misleading ASX announcement relating to the adequacy of funding of the company’s Asbestos Compensation Foundation. The penalties imposed in the Padbury case and the James Hardie case were the same.
The ASX continuous disclosure obligations on listed companies are onerous and must be treated with great care to avoid risking a breach. Failure to comply can lead to prosecutions, as the Padbury case shows, and can also lead to shareholder class actions, as breaches by various other listed entities have shown.