It’s good governance - Don't overstate the commercial significance of your IP

By Cynthia Sargent and Claire MacMillan.

Key Points:
The Chemeq decision is a reminder of the importance of good governance and highlights that companies must be careful what they disclose to the market about their IP.

The Corporations Act requires that if a company becomes aware of information that would have a material effect on the price or value of its shares, the company must immediately disclose that information to the market.

Further, under ASX Listing Rule 3.1, once a company is aware of information that a reasonable person would expect to have a material effect on the price of the company's shares, the general rule is that the company must immediately disclose that information to the ASX.

Changes in the status of IP will not necessarily have a material effect on share price

Information that could have a material effect on the price or value of shares includes information about changes in assets, new products or discoveries.

While a change in the status of IP, such as the grant of a patent, might be expected to have a material effect on the price of a company's shares, the recent decision in ASIC v Chemeq [2006] FCA 936 makes it clear that announcing the grant of a patent in circumstances which overstate its commercial significance contravenes the Corporations Act.

The Chemeq decision is a reminder of the importance of good governance and highlights that companies must be careful what they disclose to the market about their IP.

What happened in Chemeq?

Perth veterinary drug company Chemeq is a public company listed on the ASX. On 6 October 2004 Chemeq issued about 8.5 million fully paid ordinary shares (increasing the number of its fully paid ordinary shares on issue to about 102 million).

On the same day Chemeq also made an ASX media release that included an announcement that Chemeq had been "granted an additional US patent ... which extends the company's exclusive protection in manufacture and marketing of its veterinary products in this country, to the year 2020. Granting of this patent means that no other party may manufacture or market Chemeq's CHEMEQ polymeric antimicrobials in the large US market." [1]

Following a query by the ASX on the next day, 7 October 2004, Chemeq was required to make an announcement to clarify the true position about the significance of the US patent, ie. that it was not material to Chemeq in the context of the whole of its IP portfolio.

On 5 October 2004 522,680 Chemeq shares were traded. In contrast, between 6 and 7 October 2004 26,821,595 Chemeq shares were traded and there was an increase in the order of 58% in the market price of Chemeq's shares. Following Chemeq's announcement on 7 October 2004, its share price fell in the order of 15%.

ASIC's allegations

ASIC sought declarations and penalties on the basis that Chemeq had contravened the Corporations Act by failing to disclose information that would have a material effect on the price or value of its shares during a material trading period (between 6 and 7 October 2004).

The Court's view

The Court stated that:

• the US patent was not commercially significant because it did not protect Chemeq's product. It protected a particular manner of formulating the product; and
• Chemeq's management were aware that because of the nature of the patent, it would be difficult to detect any infringement of the IP rights conferred by the patent. As such, Chemeq was unlikely to seek to enforce the rights conferred by the patent.

The Court considered it significant that at the time Chemeq disclosed the grant of the patent, Chemeq's management knew that the US patent was not material to the company's commercial position in relation to the whole of its IP portfolio.

The Court concluded that in the circumstances by failing to notify the ASX that the grant of the US patent would not result in a material change in Chemeq's commercial position, Chemeq contravened section 674(2) of the Corporations Act.

Consequences of not complying with disclosure requirements

There can be both civil and criminal consequences for companies and directors in failing to comply with disclosure requirements. In Chemeq, the Court ordered that Chemeq be fined $350,000 in relation to disclosure of information relating to the US patent and that it pay ASIC's costs of the proceedings.

What does this mean for you?

Companies must be mindful of the commercial significance of their IP and any changes to its status. Disclosures to the market about IP should be the subject of good corporate governance.

For example, before announcing the grant of a patent, a company should ask:

• What is the nature of the IP protected by this patent?
• Will we, or can we, enforce the rights conferred by the patent?
• How does the grant of the patent affect the whole of our IP portfolio?

If, as in Chemeq, there is a change in the status of a company's IP that does not alter its commercial position or does not increase the commercial value of its IP, care must be taken when (and if) any announcement about that IP is made to the market.

For further information, please contact Cynthia Sargent.