“No one is beyond the law”
There has been a significant amount of recent media coverage regarding the continuous disclosure requirements imposed on listed companies. This follows on from ASIC issuing $300,000 worth of infringement notices to Leighton Holdings for continuous disclosure breaches.
ASIC’s chairman, Greg Medcraft, recently stated words to the effect that “no one is beyond the law, and we have the resources to take on the big cases”. This message is a timely reminder that companies should understand their continuous disclosure obligations. The key is to have in place a comprehensive policy, compliance system and education program. A company that has these should assess whether their procedures are adequate and have systems in place to ensure compliance. A company that does not have any or all of these must prepare and implement them.
Consequences of a breach for companies, directors and executives
A breach of the continuous disclosure provisions may result in civil penalties (for the company, its directors, executives and others who are “involved”), compensation orders, infringement notices, and criminal offences resulting in fines and/or imprisonment. These breaches are often public and result in an undermining of investors’ confidence in the company.
Directors and senior executives are likely to be involved in a contravention if they were aware, or ought to have been aware, of continuously disclosable information. An appropriate continuous disclosure system is crucial because it is a defence if the person involved can prove that they took all reasonable steps to ensure, and on reasonable grounds believed, that the company complied with its continuous disclosure obligations. The court will also consider whether that person acted honestly and whether that person ought fairly to be excused, having regard to all the circumstances.
Reasonable steps defence – what is required
A company should have a continuous disclosure policy managed by a sufficiently senior executive designated as the disclosing officer, a compliance system and an education program.
The policy needs to identify the continuous disclosure requirements and circumstances in which the disclosure obligations under the ASX Listing Rules do not apply, such as withholding confidential information that a reasonable person would not expect to be disclosed, and which satisfies one of the five carveouts, for example, where the information concerns an incomplete proposal or negotiation. “Carve-outs” are often a source of disagreement regarding their application to particular information so executives need to understand how they operate so relevant information is not dismissed. The policy should provide sufficient explanations so executives can assess whether to provide various information to the disclosing officer, including:
- the disclosure requirements under the Corporations Act and the ASX Listing Rules and the carve-outs
- the involvement of executives in ensuring compliance
- the consequences for the company and its executives for non-compliance
- worked examples as guidelines
An appropriate compliance system (in addition to a policy) would assist in establishing the reasonable steps defence. For example, a policy requiring executives to bring materially price-sensitive information to the disclosing officer’s attention may not have a system to enable executives to identify such information. A compliance manual should be prepared with appropriate explanations, examples and charts so an executive can assess the information before determining whether to inform the disclosing officer. The manual should also address how that (and other supporting) information is communicated.
Continuous disclosure requirements should also be included on the agenda for executive meetings to ensure that they are regularly considered.
Executives should also be educated to understand what information should be filtered and to prevent the disclosing officer being inundated with irrelevant information. An appropriate education program could include:
- preparing an outline of the continuous disclosure obligations, which can be provided to each of the most senior executives heading a business unit
- attending a meeting with the disclosing officer, the executive heading a business unit and the company’s lawyers to discuss the outline and the compliance system and policy
- providing a workshop for other senior executives that may come into contact with price-sensitive information to summarise the paper and the compliance system.
Given the range of consequences associated with a breach of the continuous disclosure requirements, particularly for company directors and executives, having adequate continuous disclosure procedures in place will be crucial, if and when there comes a time that a director or an executive needs to rely on the reasonable steps defence.