Court decision

In a recent Compliance Update no. 12/20, the Australian Securities Exchange Limited (ASX) released updated guidance on Guidance Note 8 (GN 8) - Continuous Disclosure. 

We detail the Guidance Note changes and consider the case of ASIC v Big Star Energy Limited (No 3) [2020] FCA 1442 (ASIC v Big Star) as an important reminder to directors about their liability with their company’s continuous disclosure obligations. 

GN 8

The update to GN 8 includes substantial enhancements to the advice on earnings guidance and earning surprises. Importantly, the new guidance provides that where an entity does not have published earnings guidance on foot for the current reporting period and it is covered by sell-side analysts, ASX recommends that the entity consider notifying the market of a potential earnings surprise if and when it expects there to be a 15% or greater difference between its actual or projected earnings. 

GN 8 also specifies that ASX expects entities in these circumstances to provide their best estimate of the market’s expectations for their earnings. 

ASIC v Big Star 

Amongst the changes in GN 8, the ASX highlighted the recent decision in ASIC v Big Star Energy Limited (No 3) [2020] FCA 1442. 

On 9 October 2020, the Federal Court in ASIC v Big Star examined the continuous disclosure obligations under the Corporations Act 2001 (Cth) (Corporations Act) after a contested hearing and provided insight into directors’ accessorial liability for a company’s breach of its disclosure obligations. 

In this case, the Federal Court held that the listed entity breached ASX Listing Rule 3.1 and section 674(2) of the Corporations Act by announcing the sale of a significant asset without disclosing: 

1. the identity of the purchaser;
2. that the entity had done no due diligence to verify the capacity of the purchaser to complete the purchase; and
3. that the entity had in fact been informed by the purchaser that it had not yet received all funding approvals required to complete the purchase. 

The transaction ultimately failed to complete. The Court specifically rejected an argument by the entity that because the purchase was for cash consideration, the identity of the purchaser was not material. 

The key takeaways from ASIC v Big Star are: 

1. Materiality threshold under s 677: ASIC v Big Star confirms that section 677 of the Corporations Act is a deeming provision for the purposes of section 674. This is significant because it does not set a particularly high threshold for materiality. ASIC has stated that the judgment in this case reinforces the importance of the continuous disclosure regime to maintaining the integrity of the Australian securities market. The omissions from the company’s announcements to the market in this case were clearly material and therefore an appropriate subject for this civil penalty action by ASIC. 
2. Directors Liability: The Federal Court considered when directors will be liable for being involved in their company’s breach of disclosure obligations. ASIC v Big Star examined director’s liability in two ways: 
   • (a) in accordance with section 674(2), directors will be accessorily liable for the company’s primary breach if the directors had actual knowledge of the price sensitive information and of whether a reasonable person would expect the information to have material effect on the company’s share price. It is not enough that the directors should have known; and 
   • (b) under section 180(1), directors will be in breach of their fundamental duty to act with care and diligence if a reasonable person in his or her position should have known this information.
3. Courts consideration of GN 8: The Court does not examine whether GN 8 correctly reflects the continuous disclosure laws. However, Banks-Smith J at [53] stated: “Guidance Note 8 does not have statutory force but the ASX states in the note that it reflects the ASX's position as to how the law is intended to operate.” This affirms that the Court will examine a company’s continuous disclosure obligations against the Corporations Act rather than GN 8. Despite GN 8 not having the force of the law, it is important that all listed entities and their directors comply with it. 

It is important that company directors are aware of their liability in relation to their company’s ongoing disclosure obligations to avoid a breach under the Corporations Act. If you require assistance with understanding any of the matters raised in the most recent Compliance Update or Disclosure Obligations under the Corporations Act, please contact us.