This article by me was first published in Complinet.
On 16 December 2008 as the Commonwealth Bank of Australia (CBA) was attempting to close a AU$2 billion capital raising it received updated information about its impairment expenses. The issue was abandoned and CBA blamed its adviser for telling potential investors of the impairment expense before the rest of the market.
The Australian Securities and Investments Commission (ASIC) issued an infringement notice to CBA alleging it had failed to notify the Australian Securities Exchange (ASX) after becoming aware of information about its expected loan impairment expense (LIE) to gross loans and acceptances ratio for the financial year ending 30 June 2009.
On 14 October 2009 CBA paid a penalty of $100,000 to ASIC relating to the Bank’s alleged failure to comply with the continuous disclosure obligations in the Corporations Act 2001 (the Corporations Act).
On or by 13 November 2008, CBA was aware that its expected LIE for the full financial year ending 30 June 2009 was expected to be between 40 and 50 basis points, estimated to be $1.867 billion.
On 16 December 2008, CBA attempted a $2 billion capital raising, including an institutional placement at $27 per share, managed by Merrill Lynch.
In the afternoon of 16 December 2008, Merrill Lynch offered to CBA to make confidential soundings of major CBA shareholders to ascertain interest in this placement. Merrill Lynch undertook the confidential soundings and advised CBA of the outcome.
By about 3pm on 16 December 2008, following the completion of analysis in relation to its projected LIE for 2009, CBA was aware that its projected LIE to gross loans and acceptances for the financial year ending 30 June 2009 would equate to about 61 basis points, with the majority in the first half.
About 3:59pm on 16 December 2008 CBA forwarded the Information to Merrill Lynch in a draft media release in the course of discussions about its attempted capital raising.
About 7:10pm on 16 December 2008, CBA forwarded an announcement to ASX entitled ‘Commonwealth Bank Capital Raising’ in which CBA stated that it had completed a $2 billion capital raising, including an institutional placement at $27 per share, which had been managed by Merrill Lynch. It also stated that:
“the full year loan impairment expense to gross loans and acceptances is now expected to be around sixty basis points, with the majority in the first half” .
That announcement was released by the ASX about 7:14pm on 16 December 2008.
The capital raising was abandoned.
What were ASIC’s concerns?
Sixty basis points of estimated average gross loans and acceptances would have been approximately $2.5 billion compared to the previous estimate of about $1.8 billion.
ASIC believes that CBA was obliged to immediately notify ASX with the new information, as it was a significant deterioration in its expected LIE ratio and was, therefore, price sensitive information.
Between 3pm and 7.10pm on 16 December 2008, the Information was not generally available.
The significance of the timing was that between 3pm and 7.14pm on 16 December 2008 CBA was attempting to close a AU$2billion capital raising and potential investors knew about the impairment expense before the rest of the market.
CBA has elected to comply with the infringement notice. As stated in the Corporations Act, compliance with the notice is not an admission of guilt or liability. By making the payment, CBA is not regarded as having contravened subsection 674(2) of the Corporations Act (obligation of an entity to provide material information to the market operator).
Nevertheless the CBA’s CEO says the bank has reviewed, and would continue to regularly review, its continuous disclosure procedures and introduce improvements where appropriate.
The use of infringement notices is intended to resolve issues more quickly and remove the need for expensive and lengthy court cases.
This case still took nearly a year to resolve. Nevertheless a court case would have been embarrassing for CBA and involved disclosure of commercially confidential information.
Continuous disclosure and infringement notices
Listed companies that do not immediately disclose to the market operator materially price-sensitive information that is not generally available, so that it can be provided to investors, breach their continuous disclosure obligations under section 674(2) of the Corporations Act. That provision is reflected in stock exchange listing rules (eg Listing Rule 3.1 of the ASX Listing Rules).
If ASIC has reasonable grounds to believe that the continuous disclosure provisions have been breached, it may issue an infringement notice that requires a monetary penalty to be paid.
The key features of the infringement notice process are:
- infringement notices will be used for less serious contraventions of the continuous disclosure obligations;
- an ASIC delegate who has not been involved in the investigation will decide whether or not to issue a notice, and the company will be able to present information before the delegate makes a decision;
- the company can decide whether or not to comply with the notice;
- if the company complies, it is not an admission of liability. ASIC will publish details of the notice but cannot commence further proceedings against the entity in relation to the breach specified in the notice.
Under section 1317DAE of the Corporations Act the penalty for an alleged contravention of section 674(2) depends on the company’s market capitalisation. The maximum penalty is $100,000.
For listed companies, any information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities must be disclosed to the market immediately.
The company must not intentionally, recklessly or negligently fail to notify the market of any information that is not generally available, if the information is such that a reasonable person would expect it to have a material effect on the price or value of the company’s securities. This ‘reasonable person test’ is by reference to whether the information would influence a person who commonly invests in securities.
Each listed company needs a procedure for reporting by managers and subsidiaries of information, the receipt of that information by a committee or the company secretary, the determination of whether such information is likely to have a material effect on the value of its securities and deciding if information should be disclosed or not.
Failure to disclose can result in criminal sanctions or civil penalties and orders for compensation for loss or damage.
ASIC Regulatory Guide 73 details how ASIC administers infringement notices for breaches of continuous disclosure law.
Infringement notices are designed to provide a fast and effective remedy so that redress is proportionate and proximate in time to the alleged breach.
As compliance is not an admission of liability, companies under investigation should consider them as an alternative to litigation for resolution of the issue.