Clifford Chance

The Full Federal Court has provided valuable guidance on the operation of Australia's continuous disclosure laws, upholding the decision in Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited (No 2) [2023] FCA 1217 that ANZ breached its continuous disclosure obligations during a $2.5 billion institutional share placement.

Background

On 6 August 2015, ANZ undertook an institutional share placement to raise $2.5 billion which was fully underwritten by Citigroup, Deutsche Bank, and JP Morgan (Underwriters). ANZ's shares were placed in a trading halt, and the placement was announced to the market. By the end of the day, the Underwriters proposed that approximately $754 to $790 million of the shares not be allocated to investors and instead be taken up by the Underwriters. ANZ approved this allocation.

The following day, ANZ announced the completion of the placement but did not disclose that the Underwriters were to take up a significant proportion of the shares. ASIC contended that ANZ breached its continuous disclosure obligations under the Corporations Act 2001 (Cth) (Corporations Act) and the ASX Listing Rules (Listing Rules) by failing to disclose this information.

Primary Judgment

At first instance, Moshinsky J found that ANZ had contravened section 674(2) of the Corporations Act by not disclosing the Underwriters' acquisition of shares. Moshinsky J held that the information was material and not generally available, and that a reasonable person would expect it to have a material effect on the price or value of ANZ's securities.

ANZ was ordered to pay a pecuniary penalty of $900,000 (see Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited (No 3) [2023] FCA 1565).

Grounds of Appeal

ANZ's appeal raised four grounds:

1.  The primary judge erred in finding the pleaded information fell within section 677 of the Corporations Act by failing to construe and apply correctly the words “persons who commonly invest in securities”.
2.  The primary judge erred in finding the pleaded information was material within the meaning of section 677 of the Corporations Act by failing to properly consider additional context.
3.  Closely related to ground 2 above, the primary judge failed to have proper regard to what ANZ knew and understood, when assessing the materiality of the pleaded information.
4.  The primary judge erred in finding that the pleaded information was “information concerning" ANZ within the meaning of Listing Rule 3.1.

The Court dismissed each ground of appeal.

Reasons

Ground 1: Materiality under section 677 of the Corporations Act

The court rejected ANZ’s argument that the materiality test requires the information to have an established economic value effect, finding that such a requirement would be a gloss on the statutory regime. The court confirmed that materiality is a matter of judgment, informed by commercial common sense, and does not require proof of an actual effect on the price or value of the shares, noting that prices can diverge from value and that the market can misprice securities (the basis of fundamental analysis).

The court confirmed that the test under section 677 is objective and requires a predictive and hypothetical analysis. Officers of the entity must put themselves in the shoes of persons who commonly invest in securities and form a hypothetical view as to whether the information would influence their decision to acquire or dispose of the entity’s securities. The class of “persons who commonly invest in securities” includes not just sophisticated investors, but also small, infrequent, and unsophisticated investors: Grant-Taylor v Babcock & Brown Ltd (in liq) [2016] FCAFC 60.

Grounds 2 and 3: Consideration of additional context and ANZ's knowledge

ANZ argued that additional contextual information, specifically the Underwriters' intentions not to be short-term sellers and their hedging strategies, should have been considered by the court when considering whether the pleaded information was material. The primary judge acknowledged this information but found it to be too general and lacking in detail to meaningfully affect the assessment of materiality.

The court agreed with the primary judge's assessment, finding that the Underwriters' assurances were expressed in general terms and were still subject to further consideration, which ANZ sought further assurances on, and so did not provide sufficient specificity to negate the inference or expectation that the Underwriters would promptly dispose of allocated or acquired placement shares, and accordingly, place downward pressure on ANZ’s share price.

Ground 4: "Information concerning" ANZ within the meaning of Listing Rule 3.1

The court rejected ANZ's argument that the pleaded information was about the Underwriters' intentions and not about ANZ itself.

The court affirmed the primary judge's interpretation of the meaning of the words "concerning it" in Listing Rule 3.1, which was found to have its ordinary meaning of "relating to, regarding, or about" ANZ. The court reasoned that a broad construction aligns with the purpose of the continuous disclosure regime, which aims to enhance the integrity and efficiency of capital markets by requiring timely disclosure of price or market-sensitive information.

The court also noted that the examples given under Listing Rule 3.1, such as under-subscription or over-subscription to an issue of securities, support this broader interpretation. These examples indicate that the rule is not limited to information about the entity's business or assets but also includes information about its securities.

Key Takeaways for Entities Subject to the Continuous Disclosure Regime

Courts are willing to adopt a broad interpretation of materiality and "information concerning" an entity

The concept of material information under section 677 of the Corporations Act is broad and inclusive. Information is deemed material if it would influence persons who commonly invest in securities, not necessarily if it has an established economic value effect. This means that entities must consider a wide range of factors, including potential investor reactions and market expectations, when determining their disclosure obligations.

Likewise, the term "information concerning" the entity, as used in Listing Rule 3.1, should be interpreted broadly. This includes information relating to significant transactions and outcomes that affect the entity, even if the information also involves the actions or intentions of third parties, such as underwriters or shareholders.

Contextual information will not necessarily negate materiality of primary information

While contextual information can be relevant, it does not necessarily negate the materiality of primary information. Entities must be cautious in assuming that additional context will render certain information immaterial.

Case citation: Australia and New Zealand Banking Group Limited v Australian Securities and Investments Commission [2024] FCAFC 128.