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Key points
- The Jubilee decision says that the continuous disclosure rules may not require disclosure of raw data, where its significance is unappreciated and no decision has been made as a consequence of it.
- A court decision offers some welcome guidance in this difficult area—the target of class action litigators and so M&A risk.
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Fifteen years after Jubilee Mines (Jubilee) was the beneficiary of its neighbour’s inadvertent assaying on a Jubilee tenement, the Western Australian Court of Appeal has confirmed that Jubilee’s continuous disclosure obligations did not extend to it being required to disclose the significant nickel grades found, when Jubilee neither appreciated their significance, nor intended to do anything to benefit from them.
Judicial authority on the application and effect of the continuous disclosure obligations is welcome. Why?
Primarily, because listed entities want to know as much as they can about what amounts to compliance and non-compliance with those obligations. Court decisions on this are sparse—potentially a factor in the increasing level of (damaging) public speculation of companies’ non-compliance. While ASIC has been active in monitoring, investigating and even issuing infringement notices for non-compliance with continuous disclosure obligations, the statutory infringement notice regime does not yield a binding and determinative precedent on compliance in the way that a court decision does.
Secondly, because whether a company has complied with these obligations can determine:
- risk in acquiring that company - including of class actions by shareholders come ‘would be creditors’
- that company’s level of disclosure obligations for its scrip transactions and capital raisings.
This judicial authority is particularly welcome because it recognises that raw data of which a company becomes aware—but does not appreciate its significance—is not necessarily disclosable under the continuous disclosure rules; those rules can only require disclosure—they do not extend to requiring the entity to take the raw data and make an appropriate business decision about it; the rules should not be construed in a way contrary to their purpose, as countenancing the disclosure of incomplete or misleading information.
How did Jubilee come to be in a position where it may have been required to disclose?
In 1994, Western Mining Corporation (WMC) inadvertently undertook some test drilling on a neighbouring tenement in Western Australia belonging to Jubilee. WMC passed on the assay results of this test drilling to Jubilee which indicated potential nickel sulphide deposits. At the time, Jubilee was interested in gold exploration and did not have sufficient resources to undertake further exploratory activity. Jubilee also failed to appreciate the significance of the assay results. Accordingly, it did not disclose the results at that time.
Two years later, WMC provided Jubilee with further interpretation of the 1994 results, after which Jubilee released an announcement about the results and acknowledged that it intended to undertake exploratory drilling at the site. Jubilee’s share price went up following the announcement. Although there were no further developments in relation to the site, Jubilee did go on to become the third largest producer of nickel in the world and was acquired by Xstrata plc in 2007 for A$3.1 billion.
At first instance, the Supreme Court of Western Australia held that Jubilee breached its continuous disclosure obligations in 1994. The Western Australian Court of Appeal overturned this decision on appeal.
What did the court decide?
The continuous disclosure obligation is limited to disclosure of information
In upholding Jubilee’s appeal, the court held that Jubilee had no obligation to make disclosure following receipt of the WMC information, at least and until it altered its position and decided to undertake exploratory drilling. Jubilee was only obliged to disclose information which it had or ought to have had. The requirement to disclose cannot be extended to information arising from business decisions which Jubilee had not made, such as the decision to undertake exploratory drilling.
The court stated that no part of the continuous disclosure regime obliges companies to make consequential business decisions based upon a proper appreciation of the information in their possession. It does not matter if a disclosing entity fails to appreciate the significance of the data, although the court did leave open the possibility of making an adverse finding if the assessment was negligent and not honestly held on reasonable grounds. The continuous disclosure regime is limited to the information only, and does not extend to referencing business decisions, which might or even should be made as a result of the receipt of the information.
Actual intentions affect what needs to be disclosed
Jubilee did not make a business decision to conduct exploratory mining and its obligation of disclosure fell to be assessed by reference to an actual intention. If, for whatever reason (including flawed reasons), Jubilee had no current intention of undertaking exploratory drilling on the tenement, then the question of whether it would be required to disclose any information would have to be judged in relation to that intention. Jubilee’s drilling intentions were part of a mix of relevant factors in determining whether the information is materially price sensitive. The intentions may not immediately obviate the obligation to disclose but they may deprive the information of the material price sensitive feature requiring disclosure.
How did the test of ‘material effect on price or value’ work?
In addressing the ambit of the materiality test, the court noted that the question of whether a reasonable person would consider information to have a material effect on the price or value of securities, is deemed as answered if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, or buy or sell those securities. So, if the information has the ‘influencing persons who commonly invest’ characteristic then it is to be taken to be information which falls within the scope the ‘material effect on price or value’ test.
Can you determine materiality retrospectively - by looking at the impact on share price when the information was later released?
This decision also determined that the fact of an announcement is not of itself an admission that there was a legal obligation to make such an announcement either then, or at any earlier time. The fact of an announcement does not carry with it any implied admission to the effect that an announcement was compulsory.
The decision confirms that there is still scope to determine materiality retrospectively: in other words, that using a later announcement as evidence of the likely effect upon the price of shares of an earlier announcement is permissible - although in this case, the Court of Appeal noted that the first instance decision had weighed and assessed the differences in circumstances between 1994 and the circumstances of the 1996 announcement.
Effect of disclosure of statements on intentions
The court also assessed a scenario where Jubilee would have to disclose the data provided by WMC together with additional statements that it did not intend to act on this information. This is because the alternative of disclosing the data without information on intentions would be tantamount to misleading and deceptive behavior (regardless of whether this reflected a junior miner industry practice of taking a positive slant on announcements to increase interest!).
The court reasoned that if the announcement of the drill hole data was accompanied by a statement to the effect that the company had no current intention of undertaking exploratory work it would not be likely to influence persons who commonly invest in securities in deciding whether or not to buy or sell shares, as the hypothetical scenario of gain to such a person, would be most unlikely or improbable, at least in the foreseeable future. In those circumstances, it would be difficult to characterize the information as being obliged to be disclosed under the continuous disclosure obligations.
What is the significance of this decision?
This decision is significant because it enunciates a broader approach to obligations of disclosure being assessed in relation to the totality of relevant information. In this case, the information related to the nickel discovery as a whole was not information that had a character that required disclosure. As Associate Justice McLure summarized, it would be inconsistent with the purpose of the disclosure regime to narrowly confine ‘information’ by taking it out of its broader factual and commercial context then gauging whether that information has then satisfied the objective material effect on the price test.
The continuous disclosure regime is designed to ensure an informed market in listed securities and it would be entirely contrary to this objective if it seemed the law advanced the disclosure of core information absent surrounding circumstances. Not only would this facilitate the propagation of incomplete or misleading information, but it would also create obligations that lead to information disclosures in a greater number of scenarios pre-empting business decisions.
More information
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