The Parliamentary Secretary to the Treasurer, Chris Pearce, has announced that he has referred issues arising from the High Court
decision in Sons of Gwalia Ltd v Margaretic (the Sons of Gwalia case) to the Corporations and Markets Advisory Committee (CAMAC) for consideration and advice.

The Parliamentary Secretary has requested that CAMAC examine three issues:

1. Should shareholders who acquired shares as a result of
   misleading conduct by a company prior to its insolvency be able to
   participate in an insolvency proceeding as an unsecured creditor for
   any debt that may arise out of that misleading conduct?
2. If
   so, are there any reforms to the statutory scheme that would facilitate
   the efficient administration of insolvency proceedings in the presence
   of such claims?
3. If not, are there any reforms to the
   statutory scheme that would better protect shareholders from the risk
   that they may acquire shares on the basis of misleading information?

UPDATE 21 September 2007: CAMAC issues discussion paper

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
contravention.
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.

How does a company board manage the inherent conflicts (and act in the interests of shareholders) when managers and some directors make an offer for the company?

ASIC gave an indication of the complexities in its recent statement on Alinta. Alinta formed an Independent Directors Committee.

The use of special transaction committees is discussed in this Harvard Law School video from its Corporate Governance Program. (The video is long but if you start at the 8 minute mark you get the gist of the issue).

via The Harvard Law School Corporate Governance Blog

The significant increase in merger and acquisition activity has prompted discussion of when ASX-listed companies must announce offers received by them, even if they are conditional or only "indicative and non-binding".

Section 674 of the Corporations Act obliges a listed company to notify its market operator of "information that a reasonable  person would expect, if it were generally available, to have a material effect on the price or  value of … securities" of the company.

Generally if no firm offer has been made yet the target has no obligation to
make an announcement. For example, ASX Listing Rule 3.1A.3 excludes the
obligation to make announcements about incomplete proposals, matters of
supposition or matters that are insufficiently definite.

However if the offer is a prelude to a possible takeover bid, an announcement should be made to protect the interests of shareholders who may sell on-market at a lower price before a bid is announced. It is important to keep the market informed of price-sensitive information. Failure to alert shareholders of off-market offers may leave directors open to criticism that they have denied shareholders an opportunity to sell into the takeover offer. But if the announcement is premature (and there is no certainty the offer will be accepted) the market could be equally mislead: should the approach be disclosed without disclosing the indicative amount or the identity of the bidder?

An early announcement by the target may put pressure on the bidder to clarify or improve its offer. If the target makes no announcement but the bidder makes a unilateral statement the target may have to defend its silence. Disclosure is essential; it’s all a matter of timing.