01/05/2007 - 22:00

Poor disclosure culture heightens legal risks

01/05/2007 - 22:00


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An increased amount of litigation and regulatory action over the disclosure practices of listed companies has become one of the main risks facing company directors.

Poor disclosure culture heightens legal risks

An increased amount of litigation and regulatory action over the disclosure practices of listed companies has become one of the main risks facing company directors.

Listed litigation funder IMF (Australia) Ltd has become an important player in this regard.

It is funding shareholder class actions against six Australian companies, including AWB Ltd and Sons of Gwalia Ltd, over alleged breaches of their continuous disclosure requirements.

Law firms Maurice Blackburn Cashman, which has commenced action against construction company Multiplex Ltd, and Slater & Gordon have also been important players.

The Australian Securities and Investments Commission’s successful prosecution of struggling pharmaceutical company Chemeq Ltd has highlighted the obligations facing company directors.

The Federal Court ordered Chemeq to pay $500,000 in fines, which was the highest penalty awarded in Australia against a listed company for breaches of continuous disclosure rules.

“These court orders emphasise the importance of timely and accurate disclosure to shareholders and the market in general,” ASIC chairman Jeffrey Lucy said at the time.

ASIC’s action against Fortescue Metals Group and its chief executive Andrew Forrest, alleging statements about Chinese partners were misleading, provides another example of the regulator seeking to get tougher.

Yet another wake-up call for company directors was last year’s Supreme Court ruling against Jubilee Mines NL.

Jubilee was ordered to pay $1.8 million to former shareholder Kim Riley, who successfully claimed that he sold Jubilee shares only after the company failed to keep the market properly informed about nickel drilling results.

Clayton Utz partner Scott Crabb said companies need to ensure relevant officers fully understand their obligation to keep the market properly informed.

They should have written policies and procedures documenting the steps they need to take to ensure they are compliant.

“You cannot just pay lip service to this,” Mr Crabb said. “You need a whole culture that encourages people to comply.”

This should include regular reviews and audits and sanctions for non-compliance.

Mr Crabb said regulators were likely to look more favourably on companies with written policies in place.

He suggested companies go one step further and prepare internal rules and protocols, which might include materiality thresholds and guidelines on matters that must be reported to senior management.

Mr Crabb acknowledged it was difficult to be prescriptive, a view shared by Allens Arthur Robinson partner Stephen Cole, who said company directors ultimately had to make judgements about what should be disclosed.

He believes the task is getting more difficult for company directors.

“I think we are seeing a significant shift in the expectations of shareholders and regulators,” Mr Cole said. “It is one of the fundamental issues that weigh on the minds of company directors.”

Mr Cole emphasised the importance of having compliance policies in place and a culture of compliance.

Minter Ellison counsel Neil Fearis believes the biggest change has been ASIC’s policy of issuing infringement notices, and fines, to companies judged to have failed to meet their disclosure obligations.

Mr Fearis said this policy was controversial because ASIC was seen to be judge and jury, and companies may be tempted to simply pay the fine so they can get on with business rather than contest the matter in court.

He said it was ironic that company directors invariably sought legal advice on these matters.

“Really its not a legal question at all,” he said, noting that stockbrokers are a better guide as to what informa-tion is likely to affect the market.

Freehills partner Justin Mannolini believes new disclosure standards that have evolved are creating “structural stress” in the mergers and acquisitions market.

Many listed companies feel obligated to announce preliminary discussions about a possible transaction with unnamed parties, even if there is no certainty a deal will be finalised.

“It is more difficult to conduct those negotiations under the veil of secrecy,” Mr Mannolini told WA Business News.


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