In 2004 and 2005 the Australian Securities & Investments Commission alleged Fortescue had failed to properly inform the market about contracts with a Chinese group concerning the development of rail infrastructure*.
The Federal Court did not accept that proposition, later the Full Federal Court overruled that decision and now they in turn have been overruled by a unanimous decision of the High Court.
ASIC is considering the impact of the High Court's decision on the continuous disclosure requirements. It seems they are concerned that the market is unclear what companies need to disclose about the nature and content of an agreement, and “what is necessary to ensure that the market is properly informed for the purposes of making investment decisions.''
For a number of years commentators including those in these pages (Greg Golding and Ronald Barusch) have expressed concern that the continuous disclosure regime was developing in a way where there was a substantial gap between what companies thought was appropriate and what the courts expected of them. The Fortescue case demonstrates that the High Court (at least) is much closer to the market’s perspective of what is required than their brothers on the Full Federal Court.
Indeed, the High Court decision suggests that directors involved in companies dealing with continuous disclosure have more scope to manage their announcements than had previously been thought. But maybe it also says something about whether ASIC is really the right body to be making decisions about market expectations concerning continuous disclosure.
The case is a win for commonsense. The 46 page judgment demonstrates the High Court’s commerciality and understanding of the nature of the cut and thrust of commercial life. But unfortunately very few of the companies or directors who need to consider their disclosure obligations are in a position to have the damning allegations of a regulator hang over them for a long period and the resources to seek the wisdom of the High Court.
Indeed, the case underscores the fact that the continuous disclosure announcements are often made in difficult circumstances where directors are trying to strike the right balance between the need to disclose too much and not enough. Justice Dyson Heydon seems to have recognised the difficulties faced by directors when he described in his separate judgment that the comments in relation to Fortescue’s contracts with Chinese China Railway Engineering Corp, China Harbour Engineering Corp and the China Metallurgical Construction Corporation were not directed to the public as a whole.
They were directed to a section of the public. It comprised superannuation funds, other large institutions, other wealthy investors, stock brokers and other financial advisers, specialised financial journalists, as well as smaller investors reliant on advice. This was not a naive audience. It was not an audience in whom the adjectives "Western Australian", "mining" and "Chinese" would excite a sudden certainty about the imminent creation of wealth beyond the dreams of avarice.
The majority decision of four judges also found that “the parties’ stated intention of making a legally binding agreement was genuinely shared by them”. In the end what we see is a judgment where the High Court has focussed on the underlying question of what is required in order for a statement not to constitute misleading or deceptive conduct. Because the High Court found there was no misleading or deceptive conduct, they did not explore other issues like directors’ obligations under the continuous disclosure laws or the application of the business judgement defence.
Clearly each case turns on its facts and the High Court was at pains to point out that its reasons in this case did not establish any general proposition to the effect that any public statement that company A has made a contract with company B necessarily conveys to its audience a message only about what the contractual document contains.
We can only hope that when the ASX and ASIC settle down to resolve the new wording of the proposed revised Guidance Note 8 that commonsense will also prevail. The meanings of words such as “immediately”, “aware” and “materiality” need to be construed with the same sensible approach as the High Court adopted and with due regard to commonsense and the environment in which the market and continuous disclosures operate.
But maybe the issue is bigger than this case. In 2002 (Making Continuous Disclosure Work – Outcomes v. Enforcement, JASSA, Spring 2002) I and others (see H Corlett, R da Silva Rosa and T Walter Corporate Executives’ Experiences of Continuous Disclosure) argued the need for our system of regulating continuous disclosure to leverage off the significant and measurable success of the Takeovers Panel and to introduce a “Disclosure Division” of that body to perform a non-judicial function related to disclosure misconduct.
Since 5 September 1994 continuous disclosure by Australian listed companies has been the foundation upon which much of our scheme for the efficient regulation of markets has been based. Our system of compulsory immediate release of information is based on an assumption that investors should be able to make investment decisions in the light of the best possible information and the powerful disinfecting quality of sunlight. That high-quality disclosure, in as near to real time as possible, will ensure that share prices better reflect value enhancing market accuracy. In that sense, the requirement of continuous disclosure is based on the market information principle, an assumption that the efficiency of a capital market depends on the amount of information available to and its distribution, among investors. But it also requires real time solutions to disclosure issues.
It is important to remember the nature of the problems that have emerged in this field. These issues are largely about the requirements of ASX Listing Rule 3.1 a provision that is somewhat aspirational in its terms. Like all the ASX Listing Rules, Rule 3.1 needs to be read (whatever its detail) by reference to the spirit, intention and purpose of the ASX Listing Rules and by looking beyond form to substance. As long ago as 1986 Young J. said:
"One falls into error if one treats the requirements of the listing rules as a technical document for construction in the same way as a statute. To my mind the listing requirements are a flexible set of guidelines for commercial people to be policed by commercial people. They are in the same category as guidelines or standards laid down by administrative bodies who are administering an Act of Parliament. These guidelines or standards are never intended to be inflexible rules, but rather principles to be administered and applied by an expert body in accordance with the prevailing ethos of those chosen to administer them.” see Fire & All Risks Insurance Co Ltd v Pioneer Concrete Services Ltd (1986) 10 ACLR 760 noted on appeal 10 ACLR 801 at 806.
Clearly the court is supporting the view that the ASX Listing Rules are not the kind of rules that ought to be enforced by a regulator like ASIC or that are traditionally associated with offences the subject of penalty notices or similar judicial processes.
While the current arrangements work satisfactorily there is scope to improve the provisions, not through penalty provisions or enforceable undertakings, but rather through the establishment of a new Disclosure Division of the Takeovers Panel.
The Disclosure Division would be designed to act with speed, it could apply a uniform standard based on experience and peer review of questions of compliance with continuous disclosure obligations. The Disclosure Division could determine whether there had been any “unacceptable disclosure practice” having regard to the spirit of the market misconduct provisions. A new approach could provide a considerable enhancement to the existing continuous disclosure regime. It may be an idea whose time has come.
This article originally appeared online at the University of New South Wales' Centre for Law, Markets and Regulation.