• Introduction
• All recent publications
• Litigation & Dispute Resolution publications
• Litigation & Dispute Resolution services

Focus: Regulation & Compliance – May 2007

The lesser of two evils

In brief: Two recent releases from the Australian Securities and Investments Commission give us an insight into how the regulator attempts to respond flexibly to suspected breaches of the law. For business, however, this flexibility gives rise to what will often be a difficult choice: should the business fight ASIC or compromise and accept a 'softer' penalty? Partner Guy Foster (view CV) and Senior Associate Matthew McLennan look at the two procedures.

• The two releases
• Infringement notices
• Enforceable undertakings
• Difficult choices for business
• Pragmatism vs principle

The two releases

The first release [MR 07-62] announced the launch of a new guide clarifying the Australian Securities and Investments Commission's (ASIC) approach to accepting enforceable undertakings. The second [MR07-69] announced the payment by Promina Group Limited of $100,000 in response to an infringement notice following an investigation by ASIC into an alleged failure to comply with the continuous disclosure obligations contained in the Corporations Act 2001 (Cth).

Infringement notices

The regime

Part 9.4AA of the Corporations Act empowers ASIC to issue infringement notices proposing penalties for contraventions of the continuous disclosure provisions of the Act. The amount of the penalty may be $33,000, $66,000 or $100,000, depending on the market capitalisation of the company in question and whether it has previously failed to give proper disclosure. These figures may be contrasted with the maximum pecuniary penalty that could be imposed by a court under Part 9.4B of the Corporations Act ($1 million in the case of a body corporate).

A critical feature of an infringement notice is that it does not compel the company to pay a penalty. Rather, it presents the company with three options:

• comply with the notice and pay the penalty;
• persuade ASIC to withdraw the notice; or
• choose not to comply with the notice and face the consequences.

The incentive for the company to pay the penalty is that doing so brings the matter to an end so far as ASIC is concerned. ASIC cannot take civil or criminal proceedings against the company in respect of the breach alleged in the notice. There is no relief, however, for individuals knowingly concerned in the alleged breach, who will probably be directors or senior executives. The infringement notice regime does not apply to them.

The company's second option, which is to persuade ASIC to withdraw the notice, should not be overlooked but, as a practical matter, the prospects of success will normally be slim. ASIC's practice is to hold a hearing before issuing an infringement notice and one would expect the company to have put forward its defence at that hearing (see Continuous Disclosure Obligations: Infringement Notices, an ASIC guide, May 2004, para 16).

The third option, refusing to comply with the notice and fighting ASIC, brings with it the uncertainty, cost, delay, and unwanted publicity of litigation.

The Promina case

ASIC's media release says this of the infringement notice issued to Promina:

ASIC issued the notice because it believed Promina had contravened the continuous disclosure provisions of the Act by failing to inform ASX Limited (ASX) that it had received a proposal from Suncorp-Metway (Suncorp) to acquire all the ordinary shares of Promina.

According to ASIC, Promina first became aware of the proposal at 6:00 pm on 10 October 2006 and became obliged to disclose the proposal to the market at 12:03 pm the next day, following publication of a Dow Jones Newswire article which read:

'Suncorp (SUN.AU) is looking to buy Promina (PMN.AU) for A$7.50/share, according to talk circulating amongst hedge funds.... '

ASIC believes the article contained reasonably specific speculation about the proposal and that, as a result, the proposal ceased to be confidential for the purposes of ASX Listing Rule 3.1A(2).

Promina did not make an announcement concerning the proposal until 8.29 am on 12 October 2006.

Promina issued a media release of its own on 20 March 2007. It stated in part:

Promina elected to comply with the notice as it does not consider that its interests, or those of its shareholders, would be best served by engaging in a protracted legal dispute with ASIC.

However, Promina does not accept that it contravened the continuous disclosure obligations. Promina considers that to have made an announcement as suggested by ASIC on the afternoon of 11 October 2006 would have been misleading.

The Promina case raises two issues of principle considered by the Australian Law Reform Commission (ALRC) in its report, Principled Regulation: Federal, Civil and Administrative Penalties in Australia, ALRC 95 (2002). The ALRC noted that a disadvantage of an infringement notice scheme was that it created the risk that innocent people would pay a penalty in order to avoid the expense of contesting it (paras 4.74-4.75, 12.10). Judging by the Promina press release, this is arguably what has happened in this case.

The ALRC also stated that no public announcement should be made by a regulator about the issue of an infringement notice to, or the payment or non-payment of the amount specified in an infringement notice by, an identified or identifiable person, as the issue of an infringement notice amounts to an allegation only and is not conclusive proof that the offence or contravention has been committed. ASIC has never accepted the ALRC's view on this issue. Its guide to infringement notices makes it clear that it would publicise compliance with an infringement notice but it would always note that compliance with the notice was not an admission of liability (see para 40 of the guide). Rightly or wrongly, ASIC has announced Promina's compliance with the notice and the company has had to accept the publicity associated with its decision to pay the penalty.

Reform?

On 5 March 2007, the Commonwealth Treasurer released a consultation paper on the infringement notice provisions of the Corporations Act. The consultation paper revealed that, at the time, only five infringement notices had been complied with. The Promina notice is only the sixth given by ASIC and the first for the maximum amount of $100,000. No data is available on how many notices have been issued and not complied with or withdrawn by ASIC. The Treasurer has called for submissions on the infringement notice provisions of the law by 1 June 2007.

Enforceable undertakings

Another of the more flexible, and one of the most commonly used, of ASIC's powers is contained in ss93AA and 93A of the Australian Securities and Investments Commission Act 2001 (Cth). Those sections empower ASIC to accept enforceable undertakings. An enforceable undertaking is a promise to do or not do something which, if not fulfilled, can be enforced by court order.

The new ASIC guide to enforceable undertakings describes enforceable undertakings as an important component in our array of enforcement remedies to influence behaviour and encourage a culture of compliance for the benefit of all participants in the market we regulate (para 1.3). The guide contains examples of the kinds of enforceable undertakings that ASIC will accept (see table 3):

ASIC may accept an enforceable undertaking instead of seeking a civil order from a court (such as an award of damages), taking administrative action (such as cancelling a licence) or referring a matter to another administrative body (see para 2.1 of the guide). ASIC will not accept enforceable undertakings instead of commencing criminal proceedings, to secure payment of a pecuniary civil penalty, or in respect of deliberate misconduct or fraud (para 2.5).

Difficult choices for business

ASIC's infringement notice and enforceable undertaking 'powers' are powers without compulsion. ASIC cannot make a company pay a penalty and it cannot force a business to give an enforceable undertaking. It presents business with a choice: comply or contest.

Although obviously unwelcome, an infringement notice can have attractions for a disclosing entity in certain circumstances. It is quick. It reduces the impact of regulatory action or legal proceedings on senior personnel. It is likely to be cheaper than a court case if that is the alternative. While compliance may generate adverse publicity, that publicity is likely to be short-lived compared with the publicity that interlocutory court hearings and a trial can attract.

Difficulties arise, however, for the company that has been served with an infringement notice and is confident that it has done no wrong. The company may not, as a matter of principle, want to comply with the notice but feel compelled to do so for pragmatic reasons. For even if the company wins the case, it is likely to be left out of pocket on costs and victory may just be a flash of good news after prolonged negative coverage of the proceedings.

Further complicating the position is the threat of claims by disgruntled investors. Refusing to comply with an infringement notice may cause ASIC to bring court proceedings that, even if ASIC fails, may provide potential plaintiffs with a roadmap for framing their own claims and disclose evidence that can be used in subsequent civil litigation. On the other hand, compliance with a notice is no guarantee that civil claims will not be commenced. The law makes it clear that compliance with an infringement notice is not an admission of liability. Nevertheless, paying the penalty proposed by ASIC inevitably signals vulnerability to those looking to run class actions against companies that may have breached their continuous disclosure obligations.

Enforceable undertakings give rise to similar issues. Unless one is very confident of success in litigation with the regulator, an enforceable undertaking is likely to represent a good outcome. Depending on its terms, the undertaking will bring the matter to an end, so far as ASIC is concerned, more quickly and cheaply and with the prospect of less adverse publicity than the alternatives. On the downside, giving the undertaking is also a sign of vulnerability to potential legal action and ASIC's policy requirement that undertakings recite the underlying events could provide opponents with valuable clues. In addition, ASIC may provide lawyers acting for potential litigants with information it has gathered during its investigation.

Pragmatism vs principle

The flexibility in ASIC's enforcement powers enhances the regulator's ability to enforce the law and increases the likelihood of it taking action for breaches. But the greater range of possible outcomes can also provide opportunities for a business under investigation. The challenge is to quickly assess and balance the various competing matters of pragmatism and principle so that a matter can be managed towards one of the lesser evils. There is no simple formula for achieving that end but it is clear that the task would require not just an appreciation of the application of the law to the relevant facts, but also an understanding of the regulatory imperatives and likely reactions of ASIC.

'Of two evils, always choose the lesser' was Thomas à Kempis' advice to 15th century monks. The two recent media releases from the ASIC are a reminder that, hundreds of years later, businesses face the same choice.

For further information, please contact:

• Guy FosterPartner, Sydney
  Ph: +61 2 9230 4798
  Guy.Foster@aar.com.au
• Richard SpurioPartner, Melbourne
  Ph: +61 3 9613 8533
  Richard.Spurio@aar.com.au
• Geoff RankinPartner, Brisbane
  Ph: +61 7 3334 3235
  Geoff.Rankin@aar.com.au
• Andrew PascoePartner, Perth
  Ph: +61 8 9488 3741
  Andrew.Pascoe@aar.com.au
• Simon McConnellInternational Partner, Hong Kong
  Ph: +852 2840 1202
  Simon.McConnell@aar.com.au

Bookmark with What are these?