A recent prosecution by ASIC against an ASX listed mining exploration company serves as a timely reminder about the repercussions of making misleading market announcements, not only for the company, but also for its directors.
On 19 August 2016, the Federal Court handed down a decision which saw two executive directors of Padbury Mining Limited (Padbury), Gary Stokes and Terence Quinn, being banned from managing corporations for three years and fined $25,000 each for breaching their disclosure obligations as directors. They were also ordered to pay ASIC’s costs of $200,000.
The decision came as a result of a civil penalty proceeding launched by ASIC in 2015, which sought relief against Padbury and its directors for a misleading ASX announcement made on 11 April 2014 regarding the funding of its flagship ‘Oakajee’ project. The announcement, which was authorised by the directors, represented that Padbury had successfully secured US$6.5 billion in funding from private Australian investors for the development of a deep water port and associated rail network in Oakajee, Western Australia.
The announcement did not disclose the identities of the investors, but did disclose that the funds would be provided in three tranches by way of an equity injection into a wholly owned subsidiary of Padbury, in exchange for a 64% stake in the subsidiary. It also disclosed that a shareholders’ agreement had been entered into with the investors. However, critically, it did not disclose that the funding was dependent on the satisfaction of numerous conditions, including that Padbury procure, prior to the release of each tranche of funding, a bank guarantee equal to 20% of each tranche.
The market’s initial response saw a significant increase in Padbury’s share price from $0.020 to over $0.052 in high volumes throughout morning trading, and was trading at $0.033 when the company was placed into a trading halt that afternoon pending an announcement disclosing the material terms of the shareholders’ agreement. However, the halt soon became a voluntary suspension, which was extended a number of times until Padbury finally released an announcement over two weeks later disclosing that the shareholders’ agreement had been terminated.
ASIC later commenced civil proceedings in the Federal Court against Padbury and the directors for misleading and deceptive conduct. The Federal court found that Padbury’s failure to disclose to the market the existence of the preconditions was misleading and constituted a breach of s 1041H of the Corporations Act 2001 (Cth), because, at the time, Padbury was not in a position to procure the bank guarantees required for the release of the funds.
It also found that Padbury further breached its continuous disclosure obligations by failing to identify the investor, which was later revealed to be Superkite Pty Ltd (which was placed into liquidation by its creditors in April 2015).
In a judgment reminiscent of the case against the directors of James Hardie, each of the two directors was also found to have breached their duty of care and diligence, for failing to undertake reasonable enquiries as to the capacity of the investor to meet its funding obligations. Judge Antony Siopis labelled the conduct of the two directors as “a serious departure from the standards expected of directors of a public company in a like situation."
It is worth noting that the directors in this case actually cooperated with ASIC and reached an agreement as to their penalties – they may have received a longer disqualification period if they had not shown such contrition.
This decision serves as a timely reminder of the serious ramifications which can result for both a company and its directors from a failure to exercise due care in checking the content of the disclosures to be made to the market before their release. It also provides a cautionary tale for directors about the importance of undertaking proper due diligence of parties involved in significant transactions.