21 September 2005
Key Points:
Biotech and pharmaceutical companies must understand and comply with their obligations under the continuous disclosure rules.
On 1 August 2005, biotechnology drug development company Solbec Pharmaceuticals Limited ("Solbec") paid a penalty of $33,000 to the Australian Securities and Investments Commission ("ASIC") for breaching the Stock Exchange continuous disclosure obligations imposed by the Corporations Act 2001 (Cth).
This is the first time the new infringement notice provisions in the Act, which provide an additional remedy to ASIC for breach of the continuous disclosure obligations, have been used.
This provides a timely reminder to the biotech and pharmaceutical industries of the importance of complying with the continuous disclosure obligations and evidences that ASIC is monitoring compliance closely.
What actually happened?
Solbec is a Perth based biotech company listed on the Australian Stock Exchange ("ASX"). It claimed that Coramsine, a drug it is developing, brought about total remission of malignant mesothelioma in mice when combined with immunotherapy. This, along with other claims, was made in a company announcement to the ASX on 23 November 2004. The announcement resulted in the price of ordinary shares of Solbec almost doubling during trading that day. However, on 24 and 25 November 2004, media articles were published revealing the limited number of mice that were used in Solbec's trial and also the differing effect that the drug had on each mouse.
On 26 November 2004 Solbec released a second announcement to the ASX which clarified the 23 November 2004 announcement by advising that only five mice were used in the trial, that the trial was only run for a period of 16 days and that two mice went into remission, two experienced severely decreased tumour growth while the other died as a result of a Coramsine overdose.
ASIC issued an infringement notice alleging that Solbec had failed to inform the ASX of particular details regarding the nature of the trial. Specifically, the number of mice used and the time period of the trial were not originally revealed. Under section 1317DAJ(3)(b) of the Act, Solbec elected to comply with the notice and paid $33,000. Under the infringement notice provisions, by doing so, Solbec is not considered to have breached the Act or admitted liability.
Tell me about the law
ASX Listing Rule 3.1 requires that as soon as a company becomes aware of information that a reasonable person would expect to have a material effect on the price or value of the entity's securities, then the company must immediately disclose it to the ASX.
The Act obliges an entity listed on the ASX to notify the ASX of information which:
Clearly, Solbec was obliged to inform the ASX of the specific details of its trial and its results in its initial announcement, not two days later.
Companies can be exempt from these disclosure requirements pursuant to the listing rules if a reasonable person would not expect the information to be disclosed and the information is confidential and one of five other criteria are met, the key ones being where the information relates to an incomplete negotiation or is not sufficiently definite to warrant disclosure. If any one of these three limbs ceases to apply (e.g. confidentiality is lost) the exemption ceases to apply and immediate disclosure is required. Breaching the continuous disclosure requirements leaves companies at risk of criminal or civil prosecution or, following recent changes to the Act, having an infringement notice issued. ASIC's Guide of May 2004 - Continuous disclosure obligations: infringement notice - describes the new infringement notice regime as filling a "gap in the current enforcement framework". It is intended to provide a faster and more economically efficient remedy where entities fail to comply with the continuous disclosure obligations by not disclosing material information to the ASX in a timely manner.
The main stages involved in the issuing of infringement notices are:
If the infringement notice is complied with, ASIC will publish the details of the notice including the name of the entity, the penalty payable and the conduct specified. Further, if proceedings are commenced, this and the outcome will be published in a media release.
Listed companies should also be aware that liability for breaches of the continuous disclosure obligations is not restricted simply to the company, but extends to those involved in its contravention of the continuous disclosure obligations. People involved include those who aid, abet, counsel or procure the contravention and those who in any way, by act or omission, directly or indirectly, are knowingly concerned in or a party to the contravention. There is, however, a defence if a person proves they took all reasonable steps to ensure that the entity complies and believes, on reasonable grounds, that the entity was, in fact, complying. Additionally, even if companies do comply with the infringement notice ASIC may still instigate civil penalty proceedings against individuals involved in the contravention.
Compliance essential
The biotech and pharmaceutical industries are already very heavily regulated. Amidst all the industry specific regulation, it is easy for listed entities to forget how strict their continuous disclosure obligations actually are. However, such forgetfulness and the failure to have systems in place to ensure compliance with continuous disclosure obligations could have significant ramifications.
The introduction of the new infringement notice regime, coupled with ASIC's willingness to pursue Solbec as demonstrated above, highlight that ASIC is now better able to pursue "less serious" breaches of the continuous disclosure obligations.
The authors gratefully acknowledge the assistance of Melody Webb in the preparation of this article.
For further information, please contact Robyn Baker and Paris Petranis.
