Continuous disclosure penalty breach guidelines

I recently discussed continuous disclosure in the context of takeover offers.

It’s worth looking at some recent cases to get some guidelines on penalties in the event of a breach of continuous disclosure obligations to shareholders generally.

In the last year there have been significant damages awarded and settlements reached for non-disclosure: Jubilee Mines, Multiplex and Chemeq.

ASIC v Chemeq was decided in July 2006 and seems to have strengthened ASIC’s approach to subsequent non-disclosure prosecutions. Chemeq agreed with ASIC to plead guilty to 2 breaches of the disclosure obligations in the Corporations Act; the issue for the Federal Court was the amount of the fine.

Mr Justice French of the Federal Court ordered that Chemeq pay a fine of $150,000 in respect of the First Contravention (non-disclosure of cost over-runs)and $350,000 in respect of the Second Contravention (non-disclosure of the value of a patent). As agreed between the parties, ASIC was also awarded costs of $170,000.

So what did the Judge take into account in assessing a penalty? The over-riding principle is whether the corporation has a culture of compliance, whether it has in place
policies and procedures designed to achieve compliance with the requirements.

He identified the following 13 specific factors relevant to
the level of penalty for contravention of the continuous disclosure provisions.
The list is non-exhaustive:

1. The extent to which the information not disclosed would have been expected to
and (if applicable) did affect the price of the contravening company’s
shares (s 674(2)(c)).
2. The extent to which the information, if not generally available, would have
been discoverable upon inquiry by a third party (s 676(2)).
3. The extent (if any) to which acquirers or disposers of the company’s
shares were materially prejudiced by the non-disclosure (s 1317G(1A)).
4. The extent to which (if at all) the contravention was the result of
deliberate or reckless conduct by the corporation.
5. The extent to which the contravention was the result of negligent conduct by
the corporation.
6. The period of time over which the contravention occurred.
7. The existence, within the corporation, of compliance systems in relation to
its disclosure obligations including provisions for and evidence of education
and internal enforcement of such systems.
8. Remedial and disciplinary steps taken after the contravention and directed to
putting in place a compliance system or improving existing systems and
disciplining officers responsible for the contravention.
9. The seniority of officers responsible for the non-disclosure and whether they
included directors of the company.
10. Whether the directors of the corporation were aware of the facts which ought
to have been disclosed and, if not, what processes were in place at the time, or
put in place after the contravention to ensure their awareness of such facts in
the future.
11. Any change in the composition of the board or senior managers since the
12. The degree of the corporation’s cooperation with the regulator
including any admission of contravention.
13. The prevalence of the particular class of non-disclosure in the wider
corporate community.

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