The continuous disclosure rules have been in the news in recent times because of the publicity around NZX's Clear Grain Exchange, the level of media interest no doubt reflecting the NZX's dual role as market regulator and listed company.
Today both the Financial Markets Authority and the Special Division of the NZ Markets Disciplinary Tribunal advised that they would not be taking their inquiries any further.
But the steady stream of litigation and evolving case law, both here and in Australia, around the disclosure requirements point to the need for directors and senior management to be vigilant around their obligations in this area.
Three recent cases of particular interest are, from Australia, ASIC v Fortescue Metals Group and ASIC v James Hardie (the company decision rather than the directors’) and, in New Zealand, the (discontinued) civil proceedings by the Securities Commission against Nuplex Industries and six of its present and past directors.
Fortescue Metals Group (Fortescue)
Fortescue was found to have provided misleading information to the market by presenting as legally binding “framework agreements” it had signed with three Chinese companies for a major infrastructure project when in fact the agreements were not enforceable in any real sense. The court found contraventions of both statutory continuous disclosure obligations, and the more general obligation not to mislead or deceive in securities markets dealings (in New Zealand, found in section 13 of the Securities Markets Act 1988).
Both Fortescue and the Chinese contractors gave evidence that they intended the contracts would be binding and that they regarded the releases FMG had made to ASX to be accurate.
However the Federal Appeal Court of Australia said that this was irrelevant as the test was an objective one: “It is the effect of a statement upon the persons to whom it is published, rather than the mental state of the publisher, which determines whether the statement is misleading or deceptive, or likely to mislead or deceive”. In other words, a breach can occur even where there is no intention to mislead.
Further, it can occur even where there is no complaint from shareholders of being deceived or of suffering a loss as a consequence of the misconduct. “[I]f the market were materially misled, it can hardly be right that a prosecution not commence because, by reason of serendipity, shareholders made a gain...That is not what Parliament had in mind.”
The Court also found that the CEO and managing director, John Forrest, had breached his general director’s duties by exposing the company to civil penalties through his “knowing participation” in the events leading to the company’s breaches. The company and Forrest are appealing to the High Court of Australia.
James Hardie Industries Ltd (JHIL)
Much of the attention in the fireball of legal action arising from JHIL’s disastrous attempt in the early years of this millennium to limit its exposure to asbestos claims has been preoccupied by the proceedings against the directors and senior company executives.
But the company was also sued separately for breach of its continuous disclosure obligations for:
- failing to disclose between March 2003 and June 2003 that it had entered a Deed of Covenant and Indemnity (DOCI) which transferred liability for its historic asbestos production out of the JHIL group, and
- incorrectly stating, in a slide lodged with ASX, that all future claims had been fully provided for.
The Appeal Court said the claims of full funding and the establishment of the DOCI would improve market sentiment toward JHIL and should therefore have been disclosed.
JHIL argued that it was an honest error of judgement which had been supported by external legal advice. But the legal opinion that the company was relying upon was highly provisional and said that, if the company’s view that the DOCI would not influence the share price was correct, then no disclosure would be required.
The Court savaged both arguments, saying: “What it told the market and when it did so was deliberate and also well thought through. Its contravening conduct demonstrated a significant disregard for honesty and transparency and a subjective willingness to interpret its statutory obligations to suit its own corporate purposes”.
The Nuplex proceedings were eventually settled through a negotiated settlement which represented a good, pragmatic result for the Securities Commission, but has meant an important test case never made it to judgment.
The Commission alleged that Nuplex breached the disclosure regime by failing to disclose a forecast, and subsequent, breach of a banking covenant. Nuplex argued that it was in ongoing confidential discussions over the relevant period with its banking syndicate to relax or reset the covenant, and that disclosure could have prejudiced the company, its shareholders and the banks.
Areas of law which would have been tested were 2008 amendments to the Securities Markets Act extending liability for continuous disclosure breaches to secondary parties (in this case, the directors), and the scope of the directors’ reasonable steps defence, particularly their reliance on the “safe harbour” exceptions to the disclosure listing rules.
The NZX has sought, post-Nuplex, to provide some clarity around some of these issues in a revised Continuous Disclosure Guidance Note
. NZX says that if a listed issuer becomes aware that breach of a financing covenant or other material covenant is inevitable it must disclose this, even if that is ahead of the breach arising.
While covenant waiver negotiations may still be an “incomplete proposal”, warranting non-disclosure, directors of listed issuers should be particularly vigilant to monitor them in case it becomes apparent a waiver will not be obtained, or confidentiality is not maintained, as immediate disclosure will then be required.
Roger Wallis is a partner in Chapman Tripp specialising in securities law.