Continuous disclosure requirements are in the spotlight in New Zealand and Australia. Last month we updated you on the New South Wales Court of Appeal overturning a decision involving the James Hardie Group. In this FYI, we detail further Australian and New Zealand developments concerning the continuous disclosure obligations of listed companies.
Australian news has highlighted continuous disclosure issues for Fortescue Metals Group (Fortescue).
Fortescue made a series of media announcements in 2004 to the effect that it had entered into binding agreements with Chinese companies to build and finance mining infrastructure. It transpired that the Chinese companies were not legally bound by the agreements.
The Australian Securities and Investments Commission (ASIC) took action against Fortescue and its chief executive officer. ASIC claimed that the announcements were misleading and that the failure to set out the terms of the agreements (or correct earlier announcements) amounted to a breach of Fortescue's continuous disclosure obligations.
A trial judge found against ASIC's claim. The judge characterised the statements as "necessarily underpinned by an opinion", reasoning that "an assertion as to the meaning and legal effect of an agreement is necessarily the product of an opinion formulated to that effect." Given that Fortescue and its CEO honestly and reasonably held the opinion, neither was liable for misleading or deceptive conduct and no duty to correct the announcements arose.
ASIC appealed. The Full Federal Court overturned the trial judge, and found the announcements to be misleading. The Court considered an ordinary and reasonable member of the investing public would have seen the announcements as confirmation that the agreements obliged the Chinese companies to undertake the building and financing of the infrastructure. The Court further held that, once it became clear the announcements were misleading, Fortescue's continuous disclosure obligations required it to correct them.
The CEO's knowing participation in the events meant he was found personally liable for misleading and deceptive conduct and the breach of Fortescue's continuous disclosure obligations.
Fortescue intends to appeal the decision to the High Court of Australia, claiming that the company always believed the agreements to be binding.
The Fortescue case illustrates the tension between the two sides of a continuous disclosure debate. Should companies and directors be liable when statements made represent views that are honestly and reasonably held? Do the interests of the public (in absolute accuracy) change the balance?
Nuplex Industries Limited (Nuplex) has settled a dispute with the New Zealand Securities Commission (Commission) over alleged breaches of Nuplex's continuous disclosure obligations. There remains no judicial ruling on continuous disclosure obligations in New Zealand, but this settlement provides useful lessons for listed companies.
Nuplex arranged facilities with a number of banks in 2005. Nuplex realised (it was alleged) in December 2008 that its bank covenants would be breached. The banks were advised of the apparent breach, but the market was not informed while Nuplex was in discussions with its banks. Nuplex confirmed the breach in the media release accompanying its financial statements in February 2009.
Rule 10.1.1 of the NZSX Listing Rules requires a listed company to inform the market of any "material information" concerning it as soon as it becomes aware of that information. Material information is information that a reasonable person would expect to have a material effect on the company's share price. This obligation has statutory recognition in section 19B Securities Markets Act 1988.
The Commission brought civil proceedings under the Act against both Nuplex and six current and former directors in April 2010, claiming that their continuous disclosure obligations had been breached. These proceedings were settled out of court in February 2011.
Nuplex acknowledged, in reaching the settlement, that the breach of the bank covenants was "material information" that should have been disclosed to the market as soon as it became apparent. The settlement agreement stated that Nuplex's acknowledgement was not an admission of liability.
Nuplex agreed, as part of the settlement, to make over $3 million available as compensation for shareholders who purchased or retained shares during the two-month period between the breach and the release of Nuplex's financial statements. Nuplex is to offer each of these shareholders a pro-rata share of the compensation sum. Nuplex also agreed to make a contribution of almost $150,000 towards the Commission's costs.
Lessons for Listed Companies and Directors
Continuous disclosure rules apply to information as it arises. If a company believes an agreement will be reached resulting in information no longer being "material information", then it may still be required to disclose that information prior to the agreement being reached. Directors need to take great care in these circumstances, as the boundaries of continuous disclosure obligations, and defences available, remain untested.