Boardroom Briefing October 2019
The Federal Court has imposed personal liability on directors arising from Company breaches of its continuous disclosure duty under the ASX Listing Rules. ASIC’s focus, as the corporate watchdog with newly sharpened teeth, has implications for class action activity and your Directors' and Officers' cover.
The ASX listed Company held training contracts with the Victorian government. The government withheld certain payments. The Company did not disclose the withholding of those payments and when disclosure was made, it indicated initially that the withholding would not have a material impact on the share price; listed entities, under the Rules, must immediately disclose information a reasonable person would expect to have a material effect on the price of its securities. The directors’ position was based on information given to the board by management. The share price tumbled and ASIC brought proceedings, with the full force of the Corporations Act, for penalties and disqualifications against the directors even though the Company was the responsible entity for the continuous disclosure obligations.
The Federal Court determined that the Company had breached its continuous disclosure obligations to the market generally, and its underwriter more specifically. Certain directors were personally liable for permitting the Company to commit those breaches (the Court used the Corporations Act as a ‘stepping stone’ to the directors’ personal liability for failing to “prevent a foreseeable risk of harm to the interests of the company”). The Court found that whilst management must give the board the right information for it to discharge its duties, the board must challenge management if the board is not receiving the right sort of information. The attempt to excuse the directors’ breaches because they had also relied on external lawyers, as well as management, did not convince the Court.
Some believe that continuous disclosure obligations are to blame in part for the increasing representative action activity such as the QBE, Bellamy’s and Woolworths class actions. This is currently front and centre as the Australian Law Reform Commission recommended in January a review of the legal and economic impact of the disclosure Rule. There is a real fear that the heavy obligations imposed by the Rule is acting as a deterrent for quality people to become directors of listed companies.
In brief: The risk faced by directors under the continuous disclosure obligations is one factor for increased premiums for Directors' and Officers' cover and market withdrawal by insurers. A company must have in place protocols and training so the right quality information reaches the board and directors can make independent assessments of the company’s obligations, as highlighted by this recent case. To not do so, exposes directors and officers to personal liability under the Corporations Act and potentially hefty fines. Your Lockton Broker understands the unique challenges of the D&O environment.
ASIC v Vocation Ltd (In Liquidation)  FCA 807