The announcement on 20 February 2014 by listed litigation funder Bentham IMF Limited (IMF) that it would seek to launch a shareholder class action against the failed engineering and construction firm, Forge Group Limited (Receivers and Managers Appointed) (Administrators Appointed) (Forge), is a timely reminder for all directors and company officers that any perceived failure to comply with a company's continuous disclosure requirements may result in significant liability both to the company and its directors.
Here, Partner Michele Muscillo and Solicitor Luke Dawson examine the factual background resulting in the proposed class action and outline practical steps which companies can take to reduce the risk of facing a similar class action.
Background
The class action relates to two large power station projects of Forge's wholly owned subsidiary Forge Group Power Pty Ltd. The class action alleges that while Forge announced profit write-downs and earnings downgrades between 28 November 2013 and 29 January 2014, Forge knew or should have known about and subsequently disclosed, the problems at the power stations much early in 2013.
Continuous disclosure regime and 'market sensitive information' test
Under the continuous disclosure regime contained in both ASX Listing Rule 3.1 and the Corporations Act 2001 (Cth), a listed entity, such as Forge, must immediately disclose to the ASX any 'market sensitive information'. 'Market sensitive information' is information that concerns the company, if a reasonable person would expect that information to have a material effect on the price or value of that company's securities. There are very limited exceptions to this rule, which are contained in Listing Rule 3.1A.
Directors who are uncertain of whether or not information is 'market sensitive information' should refer to ASX Guidance Note 8, where ASX have set out a two question test, namely:
- "Would this information influence my decision to buy or sell securities in the entity at their current market price?"; and
- "Would I feel exposed to an action for insider trading if I were to buy or sell securities in the entity at their current market price, knowing this information had not been disclosed to the market?"
If the answer to either question is "yes", then that should be taken to be a cautionary indication that the information may well be market sensitive.
Alleged failure to comply with the continuous disclosure regime
The announcement from IMF appears to allege two broad categories of breaches of Forge's continuous disclosure obligations, namely that:
- Forge failed to disclose the problems with the power stations in a timely manner (Timely Disclosure); and
- Forge did not disclose the fact that its lender's ongoing support of Forge was conditional on Forge securing a fresh injection of equity (Accurate Disclosure).
The breaches alleged by IMF reiterate the importance of both the timeliness of disclosure and the accuracy of the disclosure made.
- Timely disclosure
-
While ASX have confirmed that 'immediately' does not mean 'instantaneously', and that they will take into account a number of matters when determining whether a company has 'immediately' disclosed 'market sensitive information' (including, the amount and complexity of the relevant information, board approval of any relevant announcement and independent verification of the accuracy of that information), it is extremely unlikely that if it is proved that Forge was aware of 'market sensitive information' in early 2013 and did not disclose this information until late 2013, that ASX would consider such disclosure to have occurred "immediately".
If a company becomes aware that it is obliged to disclose 'market sensitive information', but is unable to make an announcement using the ASX announcements platform for whatever reason, it should consider the use of a trading halt to ensure that trading in its securities does not occur on an uninformed basis.
- Accurate disclosure
- In addition to the timeliness of
Forge's disclosure, IMF allege that Forge's disclosure in
its three downgrade announcements misled the market, as they stated
that the lender ANZ had waived covenants and confirmed its ongoing
support, without disclosing that this was conditional on Forge
securing an injection of fresh equity. Companies and directors
should be aware that an officer or employee of a listed entity who
gives, or authorises or permits the giving of, materially false or
misleading information to ASX under Listing Rule 3.1 (including in
response to any enquiry ASX may make of the entity under that rule)
may commit a criminal offence under section 1309 of the
Corporations Act.
Relevantly, McLure JA in Jubilee Mines NL v Riley [2009] WASCA 62 [161] noted that:
"The 'information' [to be disclosed] must also include all matters of fact, opinion and intention that are necessary in order to prevent the disclosing company otherwise engaging in conduct that is misleading or deceptive or is likely to mislead or deceive ...".
Any announcement by a company which contains information which is conditional, or otherwise qualified upon some other information, should clearly state this in the announcement so as to not risk an accusation of misleading the market.
Concluding thoughts
While it remains to be seen whether IMF's allegations will be substantiated, the proposed class action is a stark reminder to directors and officers of companies that any perceived failure to comply with their continuous disclosure obligations may result in both real and personal liability.
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