Continuous disclosure trips up director who failed to act with care and diligence

The long-running saga of the ASIC proceedings against the entity formerly known as Antares Energy Limited and its director James Cruickshank has reached the penalty stage, with the disqualification of Mr Cruickshank for four years, along with an order to pay a $40,000 pecuniary penalty together with 90% of ASIC's costs of the proceedings (Australian Securities and Investments Commission v Blue Star Helium Limited (No 4) [2021] FCA 1578).

The decision also:

• confirms that contraventions that involve a breach of continuous disclosure obligations are, by their very nature, viewed as serious contraventions; and
• reinforces the personal risks that company officers face if they fail to act with due care and diligence in ensuring compliance with continuous disclosure obligations.

The announcement to the market – minus mention of the counterparty

Over the course of a week in September 2015, an ASX-listed company Blue Star Helium Limited, then known as Antares Energy Limited, announced to the market that it had entered into two agreements to sell resources assets in Texas for approximately USD 253 million. (This was at a time when Antares' market capitalisation was AUD 21.6 million).

The announcement neither:

• identified the purchaser apart from saying it was a private equity buyer; nor
• revealed the purchaser had not received all financing approvals to purchase one of the assets; nor
• stated Antares had done no due diligence on its capacity to complete either purchase.

Trading in shares in Antares immediately following the announcements was elevated and the share price jumped, initially by some 250% from AUD 0.09 to AUD 0.50. 

The ASX asked Antares to disclose the name of the purchaser, but Antares refused because it believed that would jeopardise completion of the sale (although neither sale agreement contained any confidentiality provisions). As a result of this refusal, Antares' shares were suspended from trading on the ASX. The sale of neither asset completed. The suspension of Antares' shares was never lifted and it entered voluntary administration.

ASIC subsequently filed proceedings in the Federal Court in which it alleged that Antares failed to comply with Listing Rule 3.1 of the ASX Listing Rules by not notifying the ASX of the 3 matters identified above. ASIC also alleged that Mr Cruickshank was liable as an accessory for Antares' breach of its continuous disclosure obligations and had contravened his director's duty under section 180(1) to act with care and diligence by causing or permitting Antares not to disclose the relevant information.

In October 2020, Justice Banks-Smith found that:

• Antares breached its continuous disclosure obligations;
• Mr Cruickshank was not liable as an accessory for Antares' breach. (To be liable be liable as an accessory for a company's breach of its continuous disclosure obligations a director must actually know the relevant information was likely to influence persons who commonly invest in securities. It is not enough that the directors should have known); and
• Mr Cruickshank did, nevertheless breach section 180(1) of the Corporations Act. (A director can be liable for a contravention of section 180(1) if they should have known the information in question was likely to influence persons who commonly invest in securities even though they did not actually know this).

What the director did – and should have done

On 16 December 2021, Justice Banks-Smith delivered her decision on penalty. In doing so, the court noted that:

• at the relevant time, Mr Cruickshank was a director of Antares. He was also the chairman and chief executive officer of the company and president of Antares US, an indirect wholly owned subsidiary of Antares;
• in his roles, Mr Cruickshank was expected and assumed to have knowledge of the company's business and finances and some general knowledge of its shareholder base;
• Mr Cruickshank also had a number of formal qualifications including a commerce degree, graduate diploma in applied finance, a certificate relating to 'Advanced Investor Relations' and fellowship of the Australian Institute of Company Directors;
• Mr Cruickshank had over 20 years' commercial experience in commercial banking and equity markets;
• based on the 2015 half yearly report, Mr Cruickshank can be taken to have known the significance of the completion of the agreements to the ongoing financial position of the company and the material uncertainty as to the company's financial position that had been identified by Ernst & Young as auditors;
• Mr Cruickshank was the central player in the events relating to the proceedings. He was the directing mind and will of Antares. There was no suggestion he delegated responsibility with respect to disclosure to the ASX to anyone else;
• Mr Cruickshank was personally involved in the transactions and communications with Mr Hanson of Wade Energy on behalf of Antares. He knew who the purchaser was, knew that Wade Energy had not yet received all financing approvals necessary to complete the purchase of the Big Star Assets and knew matters relating to the absence of independent verification or due diligence as to the financial capacity of the purchaser to complete; and
• there is no evidence that Mr Cruickshank undertook investigations and completed inquiries about Wade Energy or Mr Hanson, nor that he exercised any due diligence. (The ASX squarely raised the issue of due diligence with Mr Cruickshank).

Given all of this, what would a person in Mr Cruickshank's position exercising reasonable care and diligence have done? More than what he actually did do, said the Court; that person would:

• have considered the express terms of the agreements, would have appreciated the absence of any express confidentially term and, if uncertain, would have sought legal advice as to whether and how Antares was bound by any such obligation (but there was no suggestion advice was sought);
• have reviewed Listing Rule 3.1A and Guidance Note 8 and appreciated that:
  • the position of the ASX was that a confidentiality agreement does not prevent an entity from complying with its obligations under the Listing Rules; and
  • sufficient detail should be provided in any announcement to enable investors to understand the ramifications of the information and to assess its impact on the price or value of shares;
• not have come to the view that the information was exempt from disclosure based on alleged confidentiality;
• have considered the impact of the market announcements and the likely reactions of investors in context – they would have taken into account the significant quantum of the purchase price, the absence of any reference to conditions precedent and that the information bore all the hallmarks of a binding agreement;
• have sought to assess the prospect of the sale of the assets completing, and that disclosure of the name of Wade Energy would have equipped them to research that entity and take into account any information (including a lack of available information) in making their assessment;
• have appreciated that investors might be more cautious about the prospects of completion in a scenario where there was an absence of publicly available information about the purchaser;
• have recognised that the Cumulative Information would have been likely to influence investors in deciding whether to hold or sell their shares or whether to acquire new shares;
• (absent some other comfort), have been concerned about the indication that finance was not in place for Big Star and would have carefully considered and understood that such information was material to the market;
• have appreciated that an investor may be more nervous or cautious about the prospect of completion and, it follows, the receipt of the settlement proceeds, if they were provided with the Cumulative Information;
• have appreciated that the Cumulative Information was of a nature that would or was likely to influence investors in deciding whether to acquire or dispose of shares; and
• not have understood the responses and inquiries made by the ASX during the balance of the Relevant Period to have indicated that the disclosure via the Clarification Announcement met its concerns over disclosure about the identity of the purchaser or due diligence raised by the ASX.

Assessing the pecuniary penalties under the Corporations Act for failing to act with care and diligence

Section 1317G of the Corporations Act provides for pecuniary penalties to be imposed, with the range of penalties varying depending upon whether the provision is a "corporation/scheme civil penalty provision" or a "financial services civil penalty provision".

A breach of section 180 is a corporation/scheme civil penalty provision while a breach of section 674 is a financial services civil penalty provision.

A breach of a civil penalty provision opens the door to ASIC seeking a disqualification order under section 206C. The general practice of the court has been to:

• consider the question of disqualification (to protect the public and further the objectives of personal and general deterrence) before turning to the question of a pecuniary penalty;
• consider imposing a pecuniary penalty only if it considered that a civil penalty disqualification provides an inadequate or inappropriate remedy.

In considering the prospect of disqualification, the nature of the contravention and the seriousness of the contravention are important issues, both as to whether a disqualification order should be made and its duration. A mitigating factor is the likelihood of the defendant reforming as well as the 8 discretionary criteria set out in Commissioner for Corporate Affairs (WA) v Ekamper.

Mr Cruikshank's contraventions were regarded as serious. While his conduct was not deliberately wrongful or dishonest, it was not trivial, minor or inadvertent and it involved a degree of deliberate decision-making on his part. He was an active participant in the events and on notice of the ASX's concerns over the issue of due diligence and the issue of disclosure of the Purchaser Identity Information.

Mr Cruickshank's apparent failure to obtain or consider independent legal advice regarding disclosure obligations in the circumstances was regarded by the court to be significant. Additionally, his failure to lead evidence on the effect any disqualification may have on him now or in the future or on his ability to meet any pecuniary penalty was noted. So too his failure to express remorse or recognition of his conduct falling short of the standards required of him. These are lessons that other directors would to do well to assess.

Taken as a while, Mr Cruickshank's failings were extensive and serious. The court did not view the case as a matter where mitigating circumstances featured in any meaningful way. In the circumstances the court ordered Mr Cruickshank to pay a pecuniary penalty of $40,000, he was disqualified from managing a corporation for a period of four years, and ordered to pay 90% of the plaintiff's costs of the proceedings.

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