The price of Continuous Disclosure Obligations breach

Public companies are required to abide by the continuous disclosure obligations contained in Chapter 6CA of the Corporations Act 2001 (Cth) together with Chapter 3 of the ASX Listing Rules for ASX listed public entities.

The penalties ordered against Holista Colltech Ltd for breach of these obligations are a notable example of the consequences of a failure to comply. 

Continuous disclosure breaches often also result in shareholder class actions, as seen in the group proceedings brought against G8 Education Limited, adding to the price to be paid by companies for a failure to meet their continuous disclosure obligations.

The Holista Colltech Ltd Case

Holista Colltech Ltd made an ASX announcement on 9 April 2020 stating it had placed an order for 415,000 bottles of sanitizer effective against COVID-19 worth $3.8 million in revenue. The Federal Court found that at the time of announcement, Holista was aware that no such order had been placed and the revenue figure was unlikely to be realised, and had failed to disclose this information to the ASX. No notification was given until an announcement on 9 July 2020 that sales expectations had been reduced to $500,000.

According to ASIC, Holista’s conduct allowed shares with a value of $48,166,765 to be traded in conditions where the market and investors were uninformed.

The Court handed down a $1.8 million fine, plus costs, and disqualified Holista’s CEO Dr Rajendran Marnickavasagar from managing a company for four years.

Holista Collitech shares have been suspended from the ASX since the issue of the Court’s judgement.

The G8 Education Limited Case

G8 will pay $46.5 million after reaching an agreement with shareholders who argue they purchased shares at an inflated price whilst the company failed to disclose information relating to its actual 2017 financial performance. Whilst the settlement is without admission of liability, it shows the price of failing to disclose in an accurate and timely manner.

In May 2017, the company announced forecast earning guidance of $170 million. This figure was downgraded to $160 million in December 2017, which saw share prices plummet by 23%. Actual full year earnings of $156 million were ultimately reported in February 2018.

Decreasing occupancy rates in G8 early childhood centres due to oversupply in the industry and new educator ratio regulations were cited as information that G8 knew or ought to have known would have a material financial effect but was not adequately reflected in their guidance.

G8’s share price is still trading well below the pre-December 2017 price.

Disclosure obligations at a glance

Public companies (both listed and unlisted) that have issued any enhanced disclosure securities are subject to the disclosure obligations.

The disclosure obligations, both under ASX Listing Rule 3.1 and in the Corporations Act, are designed to enable informed trading and require that once an entity is or becomes aware of any information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell the ASX (or ASIC for unlisted companies) that information. The disclosure obligation under the Corporations Act extends to information the entity knows, or is reckless or negligent to the fact, that it would have a material effect on the price or value of the securities.

It is important that disclosures are made both promptly, and accurately.

Notification

Whilst listed entities must e-lodge an announcement, unlisted entities that become aware of information they are required to disclose can inform ASIC by lodging a Form 1003 Disclosure notice for unlisted disclosing entity. This can be found here.

The disclosures made by ASX listed companies are readily available via the AASX Company Announcements platform: https://www.asx.com.au/markets/trade-our-cash-market/todays-announcements

Disclosures made by unlisted companies are required to be made available to investors as soon as practicable. ASIC has issued a good practice guide that suggests posting information on the company’s website is the most timely and efficient way to do so.    

Adam Martin

Partner
T: + 61 3 9119 2585
E: adam.martin@nortonwhite.com

Address: Level 13, 459 Collins Street, Melbourne VIC 3000

Alison McKenzie

Partner

T: + 61 3 9119 2535

E: alison.mckenzie@nortonwhite.com

Address: Level 13, 459 Collins Street, Melbourne VIC 3000

Renay Sumercan

Solicitor

T: + 61 3 9119 2584

E: renay.sumercan@nortonwhite.com

Address: Level 13, 459 Collins Street, Melbourne VIC 3000