Big Star trips over stepping stone: Corporate and director liability in ASIC v Big Star Energy Ltd

  • Big Star affirms business judgment rule defence does not apply to compliance issues.
  • Big Star underscores the need for directors to seek advice if uncertain of disclosure obligations or exemptions from disclosure.
  • Big Star offers guidance on the legal test for accessorial liability for breach of disclosure law.

The Federal Court decision in ASIC v Big Star Energy Ltd (No 3) [2020] FCA 1442 (Big Star) has important lessons for directors in discharging the company’s compliance obligations under continuous disclosure law. Failure to pay attention runs the risk of director liability for breaching their duty of care and diligence — illustrated in this case where the chair and CEO was held to have contravened s 180(1) of the Corporations Act 2001 (Corporations Act).

Following recent success in ASIC v Vocation Ltd,1 Big Star is yet another example of ASIC’s success in its stepping-stone litigation strategy. The strategy involves ASIC establishing corporate fault in the first instance, followed by a personal action against individual company officers alleging failure to protect the company from a foreseeable risk of harm and the risk of penalty for contravention of the Corporations Act.2

In addition, under the continuous disclosure legal framework, directors may also face accessorial liability under s 79 of the Act for the company’s primary breach of disclosure obligations. The legal test to establish this type of liability, however, fell short of the required standard of proof in Big Star, thereby absolving the director for accessorial liability.

Facts

Antares Energy Ltd (Antares, now known as Big Star Energy Ltd) was an oil and gas exploration and production company and its shares were listed on the ASX. Over the course of a week in September 2015, Antares announced to the market that it had entered into two purchase and sale agreements (PSA) to sell resources assets located in Texas, USA. Both announcements were significant to Antares.

Prior to the PSA announcements, the closing price for shares in Antares on 7 September 2015 was $0.09 and the company had a market capitalisation of approximately $21.6 million. It had a potential liability of nearly $47.5 million to convertible noteholders.

Trading in shares in Antares immediately following the PSA announcement increased significantly with a massive jump in the share price. The closing share price of Antares on 10 September 2015 was $0.50. There was also a significant increase in trading volume of the shares following the PSA announcements.

Some days after the initial PSA announcements to the market, trading in shares in Antares was halted at the request of Antares and ultimately suspended by the ASX. At the time when proceedings commenced, Antares was in voluntary administration but that is no longer the case.

Legal issues

Against these key facts, ASIC commenced proceedings against Antares and alleged that:

  • Antares failed to disclose important information to the market at the time of the announcement in breach of its obligations of continuous disclosure.
  • Antares should have disclosed the name of the prospective purchaser or that the company should have disclosed that the chair and CEO of Big Star, Mr James Cruickshank, had been told that the purchase did not have financial approval in place and Big Star had not independently verified the capacity of the purchase to complete the acquisitions.

ASIC sought court declarations and orders under the Corporations Act 2001 as to alleged breach of its continuous disclosure obligations by Antares.

ASIC also alleged that Mr Cruickshank (as chair and CEO) failed to discharge his duties to Antares with the requisite degree of care and diligence by causing Antares to fail to company with its continuous disclosure obligations, and thereby contravened s 180 of the Corporations Act.

Mr Cruickshank denied Antares acted in contravention of its disclosure obligations. In the alternative, he argued that if he was involved in such a contravention, s 674(2B) applied because he took all reasonable steps to ensure that Antares complied with its obligations and he believed on reasonable grounds that Antares was complying with its obligations.

Mr Cruickshank denied he acted other than with the degree of care and skill of a reasonable director as referred to in s 180(1) of the Act. In the alternative, he argued that the safe harbour in the business judgement rule in s 180(2) applied.

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Legal framework

The disclosure requirements within the ASX Listing Rules have statutory force by s 674 of the Corporations Act. To establish a contravention of s 674(2), ASIC was required to demonstrate that:

  • there was information about specified events or matters within the meaning of Listing Rule 3.1 and s 674(2)(b)
  • Antares had that information and was aware of it
  • the information was not generally available (s 674(2)(c) (i) and
  • a reasonable person would have expected that information to have had a material effect on the price or value of the shares in Antares, if it had been generally available (s 674(2) (c) (ii) Listing Rule 3.1)
Big Star also affirms that the stepping-stone litigation strategy adopted by ASIC is alive and well, with a civil penalty decision for director liability anticipated in 2021.

Decision

In finding corporate liability for breach of disclosure law, the court found that Mr Cruickshank had actual knowledge of the identity of the purchaser and held (at [303]) that he was at all material times the directing mind and will of Antares and was personally involved in the transactions on behalf of Antares.

The court was satisfied from the evidence presented that Mr Cruickshank knew of, approved and authorised the release of the PSA announcements to the market. Based on this finding, the court was satisfied that Antares was aware of the information within the meaning of Listing Rule 19.12.

To satisfy the ‘materiality’ requirement imposed by s 674(2)(c) (ii), above, the court in the Big Star case [at 236] drew upon the observations of Nicholas J in ASIC v Vocation Ltd (in liq) [2019] FCA 807 at [519] and held:

… the information must be ‘non-trivial’ and rise beyond information that merely ‘might’ influence a decision by investors. Determining whether information is material may sometimes involve balancing the probability that a particular event will occur and the potential impact of the event on the company’s business.

Drawing upon legal authorities,3 the court in Big Star noted ([at 239]) that the relevant test is ex ante, in that it requires a court to assess materiality as at the time it is alleged disclosure should have been made and that this is matter that is appropriately addressed by expert evidence.

Expert evidence in this case demonstrated that a reasonable person would have expected that information to have had a material effect on the price or value of the shares in Big Star, if it had been generally available.

Absence of due diligence

The court found (at [294]) that Mr Cruickshank provided no explanation as to what the exercise of due diligence entailed and that there was no evidence that the Chair and CEO undertook investigations and completed enquiries.

Accessorial liability

ASIC, however, was unsuccessful in establishing a separate contravention under section 674(2A) against Mr Cruickshank of being ‘involved in’ the company’s breach of disclosure law. The court was not satisfied that the director had actual knowledge that the information was material to investors. Objectively, the director should have known or made proper inquiries relating to materiality — but, the court held (at [503]) that is not the test for actual knowledge.

The court found that the assessment of materiality, on the facts of this case with reference to the different types of investors, was not straightforward and that it was unreasonable to expect the director to have detailed knowledge on this subtle and complex issue.

The court, however, nonetheless considered the s 647(2B) due diligence defence and was not satisfied that it would have been discharged (at [508]) due to the failure of the director in seeking legal advice on disclosure obligations.

Breach of duty of care and diligence

The court held (at [522-525]) that a person in Mr Cruickshank’s position exercising reasonable care and diligence would have:

  • considered the express terms of the PSAs
  • appreciated the absence of any express confidentiality term and, if uncertain, would have sought legal advice
  • reviewed Listing Rule 3.1A and Guidance Note 8
  • not come to the view that the information was exempt from disclosure based on alleged confidentiality
  • considered the impact of the PSA announcements and the likely reactions of investors in context
  • recognised that investors would have sought to assess the prospect of the sale of the assets completing, and that disclosure of the purchaser’s name would have equipped them to research that entity and take into account any information (including a lack of available information) in making their assessment
  • appreciated that investors might be more cautious about the prospects of completion where there was an absence of publicly available information about the purchaser
  • been concerned about the indication of finance was not in place for Big Star and would have carefully considered and understood that such information was material to the market.

The court concluded (at [528]) that Mr Cruickshank failed to exercise the degree of care and diligence that a reasonable person in his position would have exercised in the circumstances of this case.

Business judgment defence

The reliance on s 180(2) by the chair and CEO was rejected by the court on the basis that the decision as to non-disclosure was not about the ordinary business operations of Antares, but about compliance.

Relying upon legal authorities on this point,4 the court considered (at [531]) that a decision by a director to cause or permit a company not to disclose certain information is not a business judgement in the relevant sense.

Further, given the director did not provide any evidence in the case, it was held (at [532]) that the court was not satisfied that the director informed himself appropriately about the question of disclosure or that he reasonably believed he had done so.

Lessons

Relying on the leading authorities,5 Big Star soundly reinforces that:

  • the main purpose of the continuous disclosure regime is to achieve a well-informed market, leading to greater investor confidence
  • the object of disclosure is to enhance the integrity and efficiency of capital markets by requiring timely disclosure of price or market sensitive information
  • ss 674 to 677 are remedial or protective provisions and should be construed beneficially to the investing public.

Big Star also affirms that the stepping-stone litigation strategy adopted by ASIC is alive and well, with a civil penalty decision for director liability anticipated in 2021.

Big Star, however, demonstrates that a director cannot be held liable as an accessory for a company’s breach of continuous disclosure obligations unless the director actually knew the information was material to the company’s share price. The decision offers directors some protection from a contravention of s 674(2A) on the basis that it is insufficient to say that the director should have known of the material information. Knowledge, for purpose of liability under s 674(2A), means actual and not constructive knowledge.

Big Star demonstrates that the essential elements for the contravention of s 674(2A) by a director are such that the bar may be high in a case, such as this, for ASIC to establish the requisite knowledge as to the materiality of the information.

It pays to remember, however, that directors are not off the hook in the absence of actual knowledge on the materiality of information. This is because liability for a breach of s 180(1) is assessed on what a director should have known, and not on actual knowledge.

The decision in Big Star is a good illustration of the legal nuance in the two different types of, and test for, director liability, resulting in ASIC’s mixed success in this case.

Notes
  1. [2019] FCA 807.
  2. See further, Herzberg A and Anderson H, ‘Stepping Stones — From corporate fault to directors’ personal civil liability’, 2012 40 Federal Law Review 181; Zhou, A ‘A Step Too Far? Rethinking the stepping stone approach to officers’ liability’ (2019) 47 Federal Law Review 151; Hargovan A, 2019 Governance Directions Vol 71, No 11, p 659.
  3. James Hardie Industries NV v ASIC [2010] NSWCA 332; ASIC v Vocation Ltd [2019] FCA 807; Noske v The Queen [2017] WA.
  4. ASIC v Vocation Ltd [2019] FCA 807; ASIC v Fortescue Metals Group Ltd [2011] FCAFC 19.
  5. James Hardie Industries NV v ASIC [2010] NSWCA 332; Grant-Taylor v Babcock & Brown Ltd (in liq) [2016] FCAFC 60.

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