Integrated financial reporting and key issues arising from ASIC’s new Regulatory Guide 247

The concept of integrated financial reporting has received greater attention from ASIC recently.  It is a process that involves a listed entity reporting on a wider set of ‘non-financial’ matters to the more usual financial disclosures included in the annual report (e.g. a company’s ‘social’ and ‘relationship’ capital).

Developments in this area have included the recent release of ASIC Regulatory Guide 247: Effective disclosure in an operating and financial review (RG 247), aimed at improving disclosure in the annual reports of listed entities via the operating and financial review (OFR).

The changes have been introduced to bring Australia in line with international accounting standards and are aimed at creating a ‘level playing field’ for companies that are proactive in their disclosure obligations with those that may be less transparent.  In doing so, it is hoped that investors will ultimately benefit.

ASIC has stated that its aim with RG 247 is to lift the standard of disclosure by:

• promoting better communication of useful and meaningful information to shareholders, and
• assisting directors to understand the requirements for an OFR (which is a requirement derived from section 299A Corporations Act).

ASIC has taken a generally sensible approach to RG 247, having taken on submissions provided during the consultation process.  ASIC has provided reasonable examples and, importantly, has clarified that OFRs are not intended to include ‘prospectus level’ disclosure. 

RG 247 emphasises the need for directors to take into account and include statements in the OFR on a company’s future prospects.  This has been done in an attempt to alleviate concerns that traditional financial reporting promotes short-term analyst reports, rather than setting a long-term strategy.  This has, understandably, raised concerns that an increased level of disclosure may provide more material to be reviewed against the “misleading and deceptive” statement provisions of the Corporations Act.

As with all public disclosure statements, we recommend that a verification process is undertaken as a means of limiting the risk that an incorrect disclosure is made (in the OFR or otherwise) and, of course, forward looking statements must be founded on a reasonable basis.

Unlike many other jurisdictions, such as the United States, there is no ’safe harbour’ defence against claims for forward looking statements which are ultimately found to be incorrect (e.g. where those statements are made in good faith).  As the potential liability regime has been extended via ASIC guidance, rather than through a legislative process, many directors are likely to approach the OFR disclosure obligations with caution, particularly in the absence of a safe harbour defence.

Care should be taken with use of section 299A(3) Corporations Act, which provides an exemption from disclosing information about business strategies and prospects for future years if disclosure of that information is likely to result in ’unreasonable prejudice‘ to the entity.  ASIC has previously interpreted such provisions sparingly and in RG 247 recommends that directors document their reasons ahead of publication if they are seeking to rely on this exemption.

RG 247 should also stand as a warning from ASIC on its intention to scrutinise the use of non-standard financial reporting to mask problems or show the company’s financial situation in a more favourable light.

An OFR is not required to be audited.  However, as it is part of the annual report, the auditor may draw out any inconsistencies.  ASIC has also indicated that it will undertake an active surveillance campaign for annual reports.  Companies should engage with their auditors early as to any additional scope of work that may be required.

Additional time should also be allowed for management and boards to prepare, review and settle the OFR and future financial prospects commentary.

For a full copy of RG 247, click here.

Will your email trails sink you in court?

Electronic communication, especially email, has grown exponentially and made a major contribution to business efficiency.  It has also changed behaviours, most notably through people being able to instantly issue instructions, converse and negotiate without the formalities of traditional written correspondence or face to face meetings.  Accompanying these changes has been a tendency for unguarded comment to be included in emails creating a permanent record of the person’s state of mind.  Frequently, and regrettably, these can incriminate the sender or the organisation they represent.  Emails of this nature can be referred to as VIPERS because they are viral, instantaneous, permanent, extraterritorial, regrettable and self-harming and are increasingly having a decisive effect in major cases. Such was the case in Norcast S.ár.L v Bradken Limited (No2) [2013] FCA 235.

In this case the plantiff, Norcast succeeded in recovering damages amounting to US$22.4 million representing the difference in price it received upon the sale of a subsidiary, NWS, and that which it would have received had the sale price not been reduced as a result of a bid rigging arrangement.  The original purchaser a Castle Harlan entity (CH) paid US$190 million and, immediately following settlement of the sale, sold NWS to a subsidiary of the defendant, Bradken for US$212.4 million.  It was found that the original and ultimate purchasers had entered into an arrangement whereby CH would bid and Bradken would not.

There are many interesting legal questions raised by this case which is subject to appeal, however the impact of extensive email correspondence between the parties is arguably the one which attracts the most interest.  The first point to be made is when a court is having to decide whether an arrangement has been made the intentions of the parties are crucial. Emails, a few of which are considered below, provided the Court with strong evidence from which to infer what the initial and ultimate purchasers were respectively thinking.

For example, the Judge infers from email correspondence in the early stages of the sale process: “For a company not interested in buying NWS, that was a lot of activity in one day directed to that end - the acquisition of NWS.”  Later, when Bradken asserted that it was considering the value of NWS with a view to making a direct bid Gordon J observes: “The form and content of the various communications are consistent only with an arrangement whereby CH would bid, and Bradken would not bid, for NWS…”

On another occasion, W, a Bradken employee emailed, P, an employee of CH a few days after CH had submitted its letter of intent to purchase NWS. In his Honour’s view, this was because W “could no longer stand the suspense” and wanted to know if there was any news or feedback on the bid.  His Honour’s view was that W “was not enquiring about the weather” and went on to reject W’s assertions that he was not aware that CH was actually making a bid of US$190 million.  These assertions were, he found, contrary to contemporary documentary record, in particular, contemporary emails.

It can be said in defence of emails that, in the circumstances of this case, they facilitated the negotiation of a complex international transaction involving a significant number of participants.  As is common, negotiations were fast moving, at times requiring swift responses to changing circumstances.  Electronic communication enabled this to happen efficiently.  However, it also created a rich transcript from which the court inferred the intentions of the parties from time to time notwithstanding evidence to the contrary from some very distinguished business people and organisations.

It was once said that the nature of an 'arrangement' is such that evidence of its existence will be hard to find as it may be arrived at as easily as by a wink or a nod.  Electronic communication, emails especially, may have changed all of that.

Professor Peter Little

Peter is a Professor of Business Law, Executive Dean of the QUT Business School and a Consultant to McCullough Robertson on Corporate Advisory issues.

Assessing criminal liability of directors – the State application of COAG guidelines

Extensive reform of Commonwealth and State legislation conducted over the past 3 years has not achieved any consistency on the matter of personal criminal liability of company directors.  Both NSW and Queensland have audited, reviewed and introduced amendments to relevant legislation, but with differing results – leaving directors and officers of corporations in Queensland with continued cause for concern about potential criminal liability.

This is despite all State and Territories, along with the Commonwealth, signing up to the National Partnership Agreement to Deliver a Seamless National Economy, on 7 December 2010.  The partnership agreement aimed to achieve a nationally consistent approach to the imposition of personal criminal liability for directors and other corporate officers for corporate fault.

At the time, the Council of Australian Governments (COAG), agreed to a set of six principles, along with detailed guidelines.  The principles indicated that personal criminal liability for officers was generally considered inappropriate, except in certain circumstances. 

According to these principles, personal criminal liability on a director for the misconduct of a corporation should be confined to situations where:

• there are compelling public policy reasons for doing so (such as the potential for significant public harm caused by the particular corporate offence)
• liability of the corporation is not likely on its own to sufficiently promote compliance, and
• it is reasonable in all the circumstances for the director to be liable considering:
• clarity of corporate obligations
• the director’s capacity to influence the conduct of the corporation, and
• the steps that a reasonable director might take to assure corporate compliance.

The principles further indicated that liability should occur where the director or officer encouraged or assisted in the offence or was negligent or reckless in relation to the corporation’s offending.  The guidelines specified that reversing the onus of proof should only occur if supported by rigorous and transparent analysis.

Results of the review

In New South Wales, the Miscellaneous Acts Amendment (Directors' Liability) Act No. 2 2011 (NSW) and the Miscellaneous Acts Amendment (Directors' Liability) Act 2012 (NSW) have resulted in the number of provisions imposing personal liability on company directors in NSW legislation being reduced from more than 1,000 to about 150.  NSW now only retains six statutes which require directors or officers to establish that they have not been involved in the contravention which may result in criminal conviction (reversing the onus of proof).

By contrast, the Directors’ Liability Reform Amendment Bill 2012 (Qld) is far less effective in achieving compliance with the COAG principles and guidelines.  The Australian Institute of Company Directors, in response to the Queensland Bill, estimated that after the legislation was passed there would still be in excess of 100 instances where directors or officers would remain criminally liable for a corporation’s fault unless they established their lack of involvement in the contravention.

Clearly, further reform in Queensland is required to address the ongoing situation of company directors and officers being potentially criminal liable in circumstances where their own culpability need not be established by regulatory authorities.

We will keep you posted as changes to Queensland state legislation progress.

Professor Paul von Nessen

A widely published corporate and commercial lawyer, Paul is a Consultant to McCullough Robertson on Corporate Advisory issues.

Continuous disclosure changes

Proposed changes

In October 2012, ASX released a package of proposed changes to the guidance for interpretation of continuous disclosure provisions in the Listing Rules.  Central to the amendments was a substantial expansion and revision of Guidance Note 8, previously updated in June 2005.

The key changes proposed included:

• a comprehensive update to Guidance Note 8
• the creation of a new ‘Abridged Guide’ for directors
• clarification that 'immediately', rather than meaning 'instantaneously', should be interpreted as 'promptly and without delay'
• further guidance on the use of trading halts
• additional specific disclosure requirements in Chapter 3 Listing Rules – e.g. the material terms of any employment, services or consultancy contract for a CEO, director or other related party, and
• further guidance on the Listing Rule 3.1A exception, including moving the reasonable person test to the third and final test in that rule – this change is reflected in the revised flowchart below and attached, replacing the version on page 20 of The Chairman's Red Book. 



Click to view larger



End of consultation process and effective date for changes

The consultation process has now been completed and updated versions of Guidance Note 8, the Abridged Guide and other related amendments to the ASX listing rules were released on 13 March 2013.

The revised version of Guidance Note 8 is scheduled to be published and come into effect on 1 May 2013.

Directors' duties

Shareholders have pooled their funds for a common purpose - to conduct an enterprise that they presumably could not afford to conduct on their own. The role of public company directors is to guide and grow business, observing the duties described below.

Chairman have a particular role to lead the board and to establish an environment in which executive management can successfully execute the strategy set for the company by the board.

As those ultimately responsible for the company's actions and the shareholders' funds invested in the company, directors are subject to a strict set of duties, reflecting the position of trust they hold.

An ability to fulfill these duties while successfully growing the business is the mark of a good company director; a clear understanding of risk versus reward is essential.

In simple terms, being a custodian of other people's money is a duty of the highest order and occasionally directors lose sight of this.

Summary of key duties

Directors must:

• act in good faith in the best interests of the company
• act for a proper purpose
• act with care and diligence
• not misuse information they receive in their role, or misuse their position, for their own or someone else's personal gain
• avoid conflicts of interest, and
• prevent insolvent trading.

Directors' duties have evolved over time. These are now set out in statutes (primarily the Corporations Act), however, a body of case law expands upon the underlying legal and equitable principles. A company's constitution generally also sets out additional duties and obligations of the directors of the company.

As a general rule, directors owe their duties to the company, not the shareholders or creditors of the company. However, there are provisions in the Corporations Act under which a director can be liable to these stakeholders (e.g. liability for insolvent trading).

A brief overview of each duty is set out in the the Chairman's Red Book. Click here to request a copy.