Some important principles of continuous disclosure were recently confirmed and clarified in ASIC v Big Star.
The Federal Court found Big Star had breached the continuous disclosure rules in relation to how it had disclosed the terms of agreements for the sale of company assets. In doing so, the Court confirmed the legal bar is low for whether price sensitive information is ‘material’ and should be disclosed: it is enough the information would be “likely” to “influence” investors’ decisions to buy or sell securities in that entity. The Court also highlighted the importance for company officers to take advice when uncertain about their continuous disclosure obligations.
The Court also considered when directors will be liable for being involved in their company’s contravention. A director’s liability is potentially two-pronged:
- accessorial liability for the company’s primary breach. This turns on whether the director had actual knowledge of both the price sensitive information AND of whether a reasonable person would expect the information to have a material effect on the company’s share price; and
- breach of the director’s fundamental duty to act with care and diligence. This is assessed on what a reasonable person in his or her position should have known (even if the director did not actually know that information).
In Big Star, the Court found the company’s director did not have actual knowledge of the relevant information, but had still breached his duties of care and diligence – including because he should have known some information about the asset sales (that was withheld from the announcement) would have had a material effect on the company’s share price if disclosed.
The facts of Big Star
Big Star was at the time (2015) an ASX-listed company, then known by a different name, operating in oil and gas exploration and production, largely located in Texas. Big Star had entered into and executed two purchase sale agreements (PSA) to sell major assets located in Texas. Big Star made a public announcement about the PSAs, and the share price jumped up. However ASIC was concerned that the announcement did not:
- identify the buyer;
- state that Big Star had not verified whether the buyer had the capacity to complete the purchases (as was the the case); or
- reveal that the buyer had not yet received all the necessary financial approvals to purchase one of the assets.
Big Star refused to comply with a request by ASX to reveal the buyer’s identity to the market, on the basis of what it claimed was implied (or standard) industry confidentiality, and the belief that the buyer would ‘walk away’ if its identity was revealed. There were no written confidentiality provisions in the PSAs.
Although refusing to include the requested information, Big Star issued a revised statement. Big Star took the view it had made truthful statements in its announcement (i.e. that it had received a signed PSA for the sales, which was strictly correct) and had made no claims as to whether the purchaser would complete.
A few days after the initial announcement, Big Star requested a trading halt; subsequently ASX suspended trading, and that suspension continued until the company entered voluntary administration approximately 7 months later. Neither asset sale was completed.
ASIC then commenced proceedings against Big Star and one of its directors and CEO, Mr Cruikshank. The foundation of ASIC’s claim was that Big Star had breached the continuous disclosure rules.
How did the Court approach the case?
The Company’s Obligation of Continuous Disclosure (s674, s677)
The Court noted the purpose of the continuous disclosure rules is to achieve a well-informed market, leading to greater investor confidence, and to enhance the integrity and efficiency of the capital market.
Specifically, regulated entities have a statutory obligation, set out in the Corporations Act, to comply with the ASX Listing Rules with respect to continuous disclosure. The Court also pointed out that regulatory guidance (in this case, Guidance Note 8), although useful in a practical sense, does not affect the operation of these rules.
Section 674 (2) of the Corporations Act and Listing Rule 3.1 set out the elements that ASIC had to demonstrate to the Court to show that Big Star had not complied with its continuous disclosure requirements. These were:
- There was information about specified events or matters (in this case, the PSAs);
- Big Star had that information and was aware of it;
- The information was not generally available; and
- A reasonable person would have expected that information to have had a material effect on the price or value of the shares in Big Star, if it had been generally available.
ASIC also took proceedings against one of the company’s directors and its CEO, James Cruikshank.
- Accessorial Liability (s79, s674)
The Court had to consider whether Mr Cruikshank had accessorial liability for the company’s failure of disclosure. A person is involved in a regulated company’s contravention if, and only if, the person:
- has aided, abetted, counselled or procured the contravention;
- has induced, whether by threats or promises or otherwise, the contravention;
- has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
- has conspired with others to effect the contravention.
In this case, ASIC pursued the cause of action that Mr Cruikshank was, by his acts or omissions, knowingly concerned in the company’s failure to disclose the three factors requested by ASIC.
ASIC therefore had to prove that Mr Cruikshank:
- knew the relevant information;
- knew that the information was not generally available; and
- understood a reasonable person would have expected the information, if generally available, to have a material effect on the company’s share price.
The Court accepted Mr Cruikshank knew of the information (that is, the identity of the buyer, the fact the buyer had not obtained financial approval for one of the purchases, and that Big Star had not undertaken due diligence on the buyer’s capacity to complete). However, the Court was not satisfied ASIC had demonstrated that Mr Cruikshank had actual knowledge the information was of such a nature that required disclosure, i.e. that he did not have actual knowledge of how a reasonable person would have regarded the information.
In reaching this conclusion, the Court:
- noted ASIC had relied on detailed expert evidence (from a boutique corporate adviser and equity market consultant) to prove the liability of Big Star;
- found that assessing the impact (or materiality) of the information on investors was a complex and nuanced issue, requiring consideration of the impact of only partial disclosure about the purchaser and the absence of conditions precedent, among other issues;
- acknowledged that it was not reasonable to expect Mr Cruikshank to have the detailed level of knowledge of the ASIC expert with respect to assessing the likely materiality of that information; and
- took into consideration that Mr Cruikshank had remained involved in the process, had not delegated responsibility, had continued to communicate with the company secretary, and had revised the announcements with thought to the contents.
Defence (s674 2(B))
Under the Corporations Act a person involved in a company’s breach of the continuous disclosure rules is not liable if they can prove that they took all reasonable steps (if any) to ensure that the company complied with its disclosure requirements, and after doing do, believed that the company was complying with its obligations.
Although Mr Cruikshank was not found to be involved in the company’s breach, the Court noted that he would not have been able to raise this defence because he did not take legal advice about the company’s position with respect to alleged confidentiality and the terms of the Listing Rules and Guidance Note 8. In the absence of such legal advice, it was difficult to raise any basis for a defence that he took all reasonable steps in the circumstances to ensure that the company complied with its disclosure obligations.
- Director’s Duty of care and diligence (s180)
However, the Court did find that Mr Cruikshank should have known or made proper inquiries relating to materiality. Further, he should have known that investors would have wanted to know the identity of the buyer to assess the sales’ prospects of completion.
For example, investors might be more cautious if there were a lack of publicly available information about the buyer. Further, there was no contractual confidentiality clause to prevent disclosure of the buyer’s identity. Despite an expert’s report, the Court did not accept that industry standards required confidentiality.
Business Judgment rule defence (s180(2))
Mr Cruikshank sought to rely on the business judgment defence. In line with earlier decisions, the Court dismissed this defence, finding the decision about disclosure did not pertain to ordinary operation of the business, but was instead a matter of compliance and regulation.
Where to from here?
The Big Star case clarifies how the courts will interpret the continuous disclosure requirements. Information should be disclosed if investors’ decisions about whether to buy or sell interests in the entity are likely to be influenced by the information.
A company director may have accessorial liability for breach of these continuous disclosure rules, if he or she has actual knowledge of the relevant information. This is a fairly high standard.
However, a company director will breach his or her legal duties of care and diligence where he or she should have acquired that knowledge.
The key takeaways from this case include:
- Disclosing entities should put in place processes to ensure they disclose information not generally available, which a reasonable person would expect to have a material effect on the price or value of the shares in the entity. In practice, this means the information would be likely to influence investors’ decisions whether to buy or sell securities in the entity.
- Company officers involved in the disclosure must inform themselves as to what investors will want to know with respect to a transaction or disclosure, and ensure the disclosure is in line with this. Taking legal advice is one of the steps that the Court considered to be reasonable (and we strongly recommend) in the circumstances.
 Australian Securities and Investments Commission v Big Star Energy Limited (No 3)  FCA 1442.
 The Court referred to ASIC v Vocation Ltd (in liq)  FCA 807, in which the business judgment defence was dismissed with similar reasoning. Refer to our case note on directors’ duties and fundraising for a discussion of the Vocation case.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please also note that the law may have changed since the date of this article.