Continuous Disclosure Rules | Federal Court orders Rio Tinto to pay a $750, 000 penalty for its admitted contravention of its continuous disclosure obligations

Overview

In early March 2022, the Federal Court of Australia delivered its decision to fine Rio Tinto Ltd $750,000 (of a then maximum penalty of $1 million) for Rio Tinto’s admitted breach in 2012-2013 of its continuous disclosure obligations.[1]  The Court found that during December 2012 to January 2013, Rio’s executive officers sat on the findings of a report that certain mining assets failed to live up to previously publicly reported expectations.

This ended the proceedings commenced in March 2018 by ASIC.  The final orders were made after ASIC and Rio Tinto filed joint penalty submissions.  Rio Tinto paid ASIC’s costs.

During the proceedings, ASIC pursued other charges against Rio Tinto, and against its chief executive officer and chief financial officer at the time.[2]   Apart from the company’s breach of its continuous disclosure obligations, all other charges were dismissed.  The (both now former) CEO and CFO always denied any wrongdoing.

In Australia, the continuous disclosure rules essentially require that materially sensitive information is disclosed to the market immediately.  These laws have recently changed to include a fault element i.e., it must be shown the disclosing entity:

‘knows, or is reckless or negligent with respect to whether, the information would … have a material effect on the price or value of securities of the entity.’

It may be time for companies to review their compliance process.  Some of the reasoning in this case suggests that the practical effect of this continuous disclosure rule change will be that the courts will assess the compliance processes within the disclosing entity to determine whether the necessary fault exists.  Diligent record keeping is key to protecting a company and its officers from the expense and stress of litigation.

Background

Rio Tinto Ltd (Rio Tinto) is an Australian public company listed on the ASX.  It operates as a dual-listed structure, Rio Tinto Group, with Rio Tinto plc, a UK publicly listed company.  Rio Tinto plc is listed on financial markets in London and New York.

In 2011, the Rio Tinto Group acquired all the issued shares in Riversdale Mining Ltd.  Riversdale’s business comprised mining and exploration assets in Mozambique.  Rio Tinto’s annual review for the year ending December 31, 2011, released to the ASX by Rio Tinto and Rio Tinto plc, made extremely positive statements regarding the Mozambique assets.  Rio Tinto went on to make public representations at seminars, presentations and in its half-year report for the period ending June 30, 2012, about the resource (coal) quality, quantity, and prospects.

However, a report of a review of the assets, prepared by a Technology and Innovation Team within the Rio Tinto group, did not support those representations.  In fact, that report directly negated the representations.  That report was submitted to executive officers of Rio Tinto on 21 December 2012.

From 21 December 2012 to 17 January 2013, the executive officers assessed the implications of the new information.  They announced the substance of the report to the ASX on 17 January 2013.

During that period of assessment, more than 31 million shares in Rio Tinto were traded on the ASX – more than $2 billion in total value.

The subsidiary was divested in 2014.

The law regarding continuous disclosure

Rio Tinto is subject to the ASX Listing Rules.  Rule 3.1 states:

‘Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.’[3]

There are at least two broad ways in which companies can be pursued by ASIC for breach of continuous disclosure obligations:

1. Legal action for civil penalties, as in this case. Under the new law (not applied in this case), ASIC must establish the fault element.
2. Infringement notice. Under the new law, ASIC may still issue an infringement notice without requiring evidence of a fault element.

There are exceptions to the disclosure rule, namely:

1. disclosing the information would breach the law.
2. the information is incomplete (e.g., an incomplete proposal or negotiation).
3. the information includes supposition or is insufficiently definite.
4. the information is generated for internal management purposes.
5. the information is a trade secret.

Disclosure in these circumstances is only excluded if the information is confidential and ASX has not formed the view that it has ceased to be confidential.  Additionally, a reasonable person must not expect the information to be disclosed.

The finding in Rio Tinto

The Court concluded that the relevant information (impairment of a wholly owned subsidiary) was not generally available; a reasonable person would expect it to have a material effect on price or value of Rio Tinto’s securities; and the information was not discoverable by anyone outside Rio Tinto.

2021 changes to continuous disclosure obligations

Since this case was commenced, the continuous disclosure rules have been modified.  Temporary changes that were introduced during the pandemic, to relieve directors of a near impossible task of disclosing all information that might materially affect the company’s shares value during a volatile period, became permanent law in August 2021.[4]  Under the new laws, a company will only be found to breach its disclosure obligations if:

the entity knows, or is reckless or negligent with respect to whether, the information would, if it were generally available, have a material effect on the price or value of securities of the entity.

The effect of this added requirement to prove a fault element is at present uncertain. Recklessness and negligence are unfamiliar concepts in company law.  They are more usually associated with the criminal law and torts/civil liability systems.  These concepts do not sit well within the company law framework.

The drafting of the new fault element seems ambiguous because it relates to negligence and recklessness as to whether the information would have a material effect i.e., as to the outcome.  It seems to us the underlying policy intention is to determine if there has been recklessness or negligence in relation to the processes to determine whether there has been a material effect.  In other words, the drafting emphasizes a failure of outcome, rather than a failure of process.

This reform will be reviewed in 2 years.  The stated aims include to provide greater certainty to enhance commercial decision-making, to reduce class actions, and to better align Australian law with US and UK law.  Regardless, what is clear from this case is that companies should make sure they have good processes and keep good records.  Despite any uncertainties in the impact of the new law, processes and records will assist in the event of an inadvertent breach of disclosure rules.

Because the Rio Tinto case predated these reforms, there was no requirement under the relevant law to prove a fault element.  However, the Court did consider whether there was a fault element for the purpose of assessing the appropriate penalty, as discussed below.

How the Court assessed the size of the penalty

The purpose of a civil penalty is to promote statutory compliance and protect public interests.  In this case, the Court considered, and Rio Tinto admitted, that the contravention was serious.

The Court considered the factors relevant to the appropriateness of the civil penalty. They included the size and standing of the company, and the adequacy of the company’s processes for compliance and regulation.[5]  Rio Tinto argued its processes were careful and that the failure to disclose arose due to error. The emphasis of the judicial comments on the regulatory and compliance processes may provide an insight into how the new fault element will be interpreted.

Relevantly, ASIC accepted that the contravention in this case was not deliberate or reckless, and that no officer or employee of the company had knowingly, wilfully, fraudulently, or dishonestly contravened any legal obligations.[6]  The agreed absence of a fault element was considered a mitigating factor.

Additionally, the Court noted that Rio Tinto had not been found to contravene its continuous disclosure obligations previously.  Also significant was the magnitude of the effect of the non-disclosure (e.g., the predicted and actual effect on share price, and the prejudice to those who acquired or disposed of shares in the period of nondisclosure).

Take home messages

From August 14, 2021, the continuous disclosure rules have changed.  A plaintiff alleging a breach by a company of its continuous disclosure obligations must now prove that the company knew that the information would have a material effect on the price of the company’s securities, or that the company was reckless or negligent in failing to recognize the information would have such an effect.

This Rio Tinto case was decided on the law that predates this reform.  However,

1. ASIC did consider whether fault was involved and agreed in joint submissions that the nondisclosure was inadvertent i.e., no fault element.
2. Although the Court did not expressly review that assessment, it implicitly accepted it because the Court accepted the proposed penalty in the joint submissions.
3. Comments by ASIC and the Court suggest that the new legislation will, to an extent, protect companies and their officers. To avail themselves of this legislative protection, companies should keep diligent and accurate records to demonstrate adequate processes to ensure continuing disclosure standards, and compliance with those processes.

[1]ASIC v Rio Tinto Ltd (No 2) [2022] FCA 184.  Rio Tinto was fined for breach of s 674(2) of the Corporations Act 2001 (Cth).

[2] These charges included potential breaches of the following sections of the Corporations Act 2001 (Cth):

1. by Rio Tinto: s304 (compliance with accounting standards and regulation); s305 (true and fair view); s1041H (misleading or deceptive conduct in relation to a financial product or financial service provisions); and
2. by the CEO and CFO: s344 (contraventions of extension of auditor terms) and s180 (general duties of care and diligence).

[3] Italics added.

[4] There is a period from 22 March 2021 to 14 August 2021 (the period between the expiry of the temporary modifications and the commencement date of the permanent changes) where the fault element provision is not law.

[5] The Court discussed Rio Tinto’s continuous disclosure regime and its adequacy at [48]-[52].

[6] At [47] the Court considered that the absence of deliberateness, recklessness, knowledge, willfulness, and fraud (factors that are similar, but not identical to the new fault element test) was a mitigating factor with respect to determining the penalty.