Directors Counsel Time to review infringement notices

Professor Bob Baxt would like to see infringement notices for continuous disclosure breaches and penalties reviewed.

When the then chairman of the Australian Securities and Investments Commission (ASIC), David Knott, approached the Australian Treasurer of the day, Peter Costello, to seek the introduction into the Corporations Act 2001 of an infringement notice regime in 2003, he did so on the basis that the regulator was facing great difficulties in enforcing the continuous disclosure regime recently introduced into the Act.

The concept of an infringement notice regime, which was used very widely for parking offences and similar minor regulatory breaches of the law by state and territory governments, and apparently increasingly by the Commonwealth government, as a possible avenue for action by a major regulator such as ASIC came as a complete surprise to the commercial community and its legal advisers. I had the pleasure of working both with the Australian Institute of Company Directors and the Law Council of Australia in lobbying Costello to reject the infringement notice regime.

My stance was enhanced by the fact that I had participated as a consultant to the Australian Law Reform Commission (ALRC), which had been given the task of reviewing the administrative and other remedies available to regulators such as ASIC.

In its report issued in March 2003, entitled Principled Regulation: Federal, Civil and Administrative Penalties in Australia, the ALRC recommended in very clear terms that the federal government should not introduce the infringement notice regime to deal with breaches of the continuous disclosure provisions of the legislation.

It stated clearly in this report that an infringement notice regime was appropriate only for minor breaches of the law such as parking, speeding and related matters. It had, in the view of the ALRC, no role to play in dealing with breaches of complex and significant areas of commercial law.

Despite this strong recommendation, and the arguments put forward by Company Directors, the Law Council of Australia and the Business Council of Australia (amongst others), Costello decided to support Knott’s request. He did, however, advise me and colleagues who met with him on behalf of these organisations that the legislation once introduced would be reviewed in two to three years’ time. In fact, the regime was reviewed in 2007, I understand, but no public announcement was made surrounding the review and there was no discussion about it.

The opposition to the infringement notice regime was largely based on the fact that even though the issuing of an infringement notice did not mean that the company was in breach of a particular provision of the legislation, it nevertheless carried with it the suggestion that something was not quite right.

Furthermore, even though the maximum penalties available were reduced significantly from the initial amounts proposed, this was felt to be a form of “lazy regulation”.

In addition, there would be little guidance – for example, from a court – in terms of the meaning of the relevant provisions of the legislation or the subject of the investigation by the regulator once the notice had been issued. The notice would contain very little information and could not be relied on in any meaningful publicity by ASIC. It was felt that the media would have little, if any, interest in the issue.

However, while the use of the infringement notice regime has had little influence in terms of law reform, or interpretation of the law, it has had a significant impact, in my view, when the notices are issued together with ASIC obtaining an enforceable undertaking from the company.

This often triggers potential class actions, usually supported by a litigation funder, against the company and its directors. The rise in the use of such class actions has been raised as a major policy matter the federal government wishes to address.

Despite continued opposition to the use of the infringement notice regime, it has now been extended to other areas of the law.

In an article published in 2011, Professor Ian Ramsay and his research assistant Aakash Desai of the University of Melbourne, entitled The Use of Infringement Notice by ASIC for Alleged Continuous Disclosure Contraventions: Trends and Analysis 39ABLR 260, the authors note that while the infringement notice was supposed to provide a quick “remedy”, this objective had not been achieved. On average, ASIC took almost 250 days from the time of an alleged contravention to the issue of an infringement notice. The authors compared the use of the infringement notice regime to other enforcement measures which they believe are more effective.

The lack of speed and the clumsiness of the regime led to the regulator indicating that it would review the process and I understand that steps have been taken to ensure that this occurs. However, no more recent study has been undertaken, to my knowledge, to suggest that this has been successful.

In the context of the continuous disclosure regime, ASIC has advised that it has faced particular problems in dealing with the practice adopted by a large number of Australian companies in conducting confidential informed briefings with analysts. ASIC has expressed concern that these briefings can create problems. Firstly, there could be breaches of the continuous disclosure regime because the information provided to analysts might, and in most cases should, be released to the market. Secondly, insider trading issues may arise. However, ASIC has until recently done little more than conduct investigations and research into this area.

Very recently, ASIC released an important report which discusses the implications of this practice. At the same time, ASIC has also brought proceedings against Newcrest Mining for two instances involving its release of information to analysts where ASIC strongly believed it had breached the relevant legislation.

Report No. 393 released by ASIC in May 2014, entitled Handling of Confidential Information: Briefings and Unannounced Corporate Transactions, has been accompanied by some powerful statements by ASIC Commissioners John Price and Cathie Armour in relation to this practice. While Price emphasised that there had been few, if any, instances which required intervention on the part of ASIC, he said: “Companies must take responsibility for the proper handling of their confidential information. Sub-contracting to third parties and not worrying about it is not an option.”

He explained that companies had policies and procedures in place. His information, on the basis of research done by ASIC was that there was poor implementation of these policies.

Armour used the opportunity in releasing the report to warn companies that “ASIC would aggressively interrogate trades before announcements” and would take enforcement action where appropriate.

The Newcrest case illustrates the difficulties that ASIC faces in such cases.

ASIC believed information released by senior Newcrest employees to various analysts in briefings in May 2013 amounted to a potential breach of the continuous disclosure regime. As a result of the loss of confidentiality in respect of the information released, the company could not claim the protection of the carve out in the continuous disclosure regime.

ASIC and Newcrest accepted that the matter could be handled through a settlement procedure. The two combatants agreed to approach the Federal Court with a suggested settlement of the possible prosecution and a recommended set of penalties.

Justice Middleton in ASIC v Newcrest Mining Limited [2014] FCA 698 provided some interesting commentary on the penalty that should be imposed on the basis of the information disclosed to him. That information has not been included in the official court report published by the Federal Court of Australia. However, we should assume that Justice Middleton would have been completely satisfied that the penalty he imposed – a total of $1,200,000 for the two alleged breaches – was appropriate in the circumstances.

His comments on the penalty imposed, after an examination of the facts and relevant cases, is interesting: “It could be argued that even a $1 million [penalty – the maximum] for each contravention … may not be sufficient specific deterrent, in view of Newcrest’s size and financial position. However, in considering penalty … the court must view the potential range of conduct that may occur, including mitigating factors. This is not a case where ASIC has alleged that Newcrest (the corporate defendant) knowingly or intentionally contravened its continuous disclosure obligations. I am also satisfied Newcrest took its continuous disclosure responsibilities seriously.

“Further, there is no suggestion that there was a systemic problem with Newcrest as to continuous disclosure obligations”( at 45).

As already stated, Justice Middleton was obviously satisfied that the penalty in this case was appropriate. But he said he was tempted to impose a higher penalty of $500,000 for the second Newcrest offence, but on further reflection chose not to. Would a higher penalty have sent a clearer message than the one he believed he was sending?

One can contrast this approach, and the judge’s comfort in handling the particular penalty regime, to the critical remarks made by Justices Weinberg and Harper in the Victorian Court of Appeal decision in ASIC v Ingleby 2013 [VSCA 49] (See Company Director, June 2013).

Neither judge was happy with the penalty regime that ASIC proposed to the court at first instance (and the judges were even more critical of the trial judge’s decision to reduce the penalties).

They referred to the comprehensive report issued after the collapse of the Australian Wheat Board operations and the conclusions that various of its officers hade breached their duties.

Neither judge was happy with the proposal to approve the settlement agreement.
Indeed, both suggested that a kind of “rubber stamping” of the decisions reached by the regulator and the parties was involved.

As they both noted, the appropriate penalty regime was one that the court would have the final say on and should not be triggered as a fait accompli to be achieved as a result of discussions and negotiations between the regulator and the parties involved.

Justice Middleton agreed that the principle they referred to was relevant in the Newcrest case and was one that should be taken into account in matters of this kind.

In the Newcrest decision we have a court decision with a useful discussion of how penalties should be assessed in the context of the maximum penalties as set out in the legislation, and the approach to be taken by the courts in dealing with these matters. However, it would have been helpful had ASIC at some stage brought a case in which it could have argued more rigorously and vigorously on the interpretation of the continuous disclosure provisions and whether they had in fact been breached or not.

ASIC’s failure in the High Court decision in Fortescue Mining Limited and Forrest v ASIC (2012) 247 CLR 486 is one that certainly rankles in the executive meetings at the regulator and is regarded by many commentators as an unsatisfactory decision of the court in dealing with the continuous disclosure regime. We need some serious court evaluation of these matters.

Unless a case is brought and fought in the court through the relevant processes, what a case of this kind does merit, we will not be in a position of receiving a better evaluation of the meaning of the relevant statutory provisions which have been the subject of so many criticisms.

One final comment to round off my commentary: I do agree with ASIC that the maximum penalties available for a breach of these provisions are too low.

Were they higher, parties may be more willing to test their rights in a full blown court proceeding to ensure that the law was in fact being properly applied in the relevant circumstances.