Contested court decisions on continuous disclosure are infrequent, particularly when one considers that continuous disclosure is an important topic that in-house lawyers of listed companies grapple with on a regular basis. Continuous disclosure obligations are adjudicated on by the courts in shareholder class actions and penalty proceedings brought by ASIC.
Shareholder class actions rarely run to judgment. In fact, there's only been one shareholder class action that has run to judgment in Australian history. The number of ASIC penalty proceedings is constrained by the resources and priorities of the regulator. So, when a court makes a decision about continuous disclosure after a contested hearing, it's worth taking notice! On 9 October 2020, such a decision was made: ASIC v Big Star Energy Limited (No 3)  FCA 1442.
What was ASIC v Big Star about?
The first defendant in ASIC v Big Star was Big Star Energy Limited; the second defendant was its chair and CEO, James Cruickshank. At the relevant time, Big Star Energy Limited was known as Antares Energy Limited (Antares). Antares was an oil and gas exploration and production company focused on activities in West Texas.
On 7 September 2015, Antares announced via the ASX that it had entered into two agreements to sell major assets in Texas. The announcement neither:
- identified the purchaser apart from saying it was a private equity buyer; nor
- revealed the purchaser had not received all financing approvals to purchase one of the assets; nor
- stated Antares had done no due diligence on its capacity to complete either purchase.
These were significant transactions to Antares. The purchase price, which was stated in the ASX announcement, was approximately USD 253 million. At the time, Antares' market capitalisation was AUD 21.6 million. It also had an impending liability to convertible noteholders of AUD 47.5 million, which proceeds of the sale would go towards discharging. Following the announcement, Antares' share price rose from AUD 0.09 to AUD 0.50.
The ASX requested Antares disclose the name of the purchaser, but Antares refused because it believed that would jeopardise completion of the sale. Antares took this stance despite the two sale agreements not containing any confidentiality provisions. As a result of Antares' refusal to provide the further disclosure sought, Antares' shares were suspended from trading on the ASX on 15 September 2015. The sale of neither asset completed. The suspension of Antares' shares was never lifted and it entered voluntary administration on 28 April 2016.
ASIC alleged that Antares breached its continuous disclosure obligations under section 674 of the Corporations Act by not disclosing all or any of the information in the three dot points above during the period of 7-15 September.
ASIC also alleged that Mr Cruickshank was liable as an accessory for Antares' breach of its continuous disclosure obligations and had contravened his director's duty under section 180(1) to act with care and diligence by causing or permitting Antares not to disclose the relevant information. So what was the outcome? Justice Banks-Smith of the Federal Court found:
- Antares breached its continuous disclosure obligations;
- Mr Cruickshank was not liable as an accessory for Antares' breach;
- but Mr Cruickshank did breach section 180(1).
What do I need to take away from ASIC v Big Star?
ASIC v Big Star is a mixed blessing for listed companies and their directors. It provides some comfort in relation to the risk of director's accessorial liability for a company's breach of the continuous disclosure provisions. On the other hand, it provides little comfort in relation to the risk of the director breaching the duty under section 180(1) to act with care and diligence. ASIC v Big Star also serves as a further reminder that the provisions of the Corporations Act (particularly section 677) are the key source of a company's continuous disclosure obligations.
There are four important points to take away from ASIC v Big Star.
First, it confirms the important role that section 677 of the Corporations Act plays in continuous disclosure. There are several elements to a contravention of the continuous disclosure obligations contained in section 674 of the Act. A critical element is whether the information that should allegedly have been disclosed was "information that a reasonable person would expect … to have a material effect on the price or value of … securities of the [listed] entity". This element is stated in section 674(2)(c)(ii). It is often referred to as the "materiality" element. Its operation is affected by section 677 which states that for the purposes of section 674, "a reasonable person would be taken to expect information to have a material effect on the price or value of … securities … if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the … securities". A key issue is whether section 677 is a "deeming provision" for the purposes of section 674 or just gives guidance on section 674's operation. ASIC v Big Star confirms that it is a deeming provision. This view was also expressed in a continuous disclosure judgement of the Federal Court given in 2019: ASIC v Vocation Limited (In Liquidation)  FCA 807. The confirmation in ASIC v Big Star is significant because other decisions of the Federal Court have described section 677 as giving "guidance" on the operation of section 674 or "elaborating" and "illuminating" the element of materiality. These decisions do not expressly say that section 677 is not a deeming provision but do not attribute to it the significance that would usually be associated with a deeming provision.
The status of section 677 as a deeming provision is significant because section 677 does not set a particularly high threshold for materiality. It merely requires the information to "be likely to … influence persons who commonly invest in securities in deciding whether to acquire or dispose of … securities". The information does not need to compel someone to buy or sell securities; just be "likely" to "influence" their decision. It is not surprising that section 677 has been said to set a "looser and lower" standard for materiality than section 674 suggests.
Second, ASIC v Big Star confirms that a director cannot be liable as an accessory for a company's breach of its continuous disclosure obligations unless the director actually knew the relevant information was likely to influence persons who commonly invest in securities (ie. the director actually knew the information was material to the company's share price). It is not enough that the directors should have known.
Third, ASIC v Big Star confirms that a director can be liable for a contravention of section 180(1) if they should have known the information in question was likely to influence persons who commonly invest in securities even though they did not actually know this. Mr Cruickshank was found to have breached section 180(1) on the basis that he should have known.
Fourth, ASIC v Big Star placed little to no weight on ASX Guidance Note 8 when deciding whether Antares had breached its continuous disclosure obligations. Those who deal with continuous disclosure will be very familiar with this note. It is a detailed document that provides the ASX's views on the operation of the continuous disclosure laws. ASIC v Big Star contains no discussion of whether ASX Guidance Note 8 is a correct reflection of the continuous disclosure laws. Justice Banks-Smith simply said it "does not have statutory force but… reflects the ASX's position as to how the law is intended to operate". This is a reminder that a court will assess a company's compliance with its continuous disclosure obligations against the provisions of the Corporations Act and not ASX Guidance Note 8.