When is a final decision not final? Key learnings from the ASIC v iSignthis saga

The recent decision of the Federal Court in relation to proceedings brought by ASIC against iSignthis Limited and its former Managing Director and CEO, Mr Nickolas Karantzis^[1] highlights that a unilateral decision may still constitute an incomplete negotiation (and therefore have the benefit of an exception to disclosure) depending on the subsequent conduct of the parties.

The decision also provides useful guidance for both listed entities (and their directors) on their continuous disclosure obligations during a period of suspension, and the obligation to take “reasonable steps" to ensure that information provided to ASX (as the operator of a financial market) is not false or misleading.

In this Insight, we provide an overview of the Court’s findings and summarise some of the key takeaways and learnings on these issues.

A final decision or a negotiation?

The Court accepted that the exception to disclosure under ASX Listing Rule 3.1A for an “incomplete proposal or negotiation” extends to commercial negotiations (and not just transactions) and that, where a party has expressed a decision or position to be “final” this may not be the case (and the exception may continue to apply, subject to confidentiality being maintained) for so long as the parties continue to engage in active dialogue.

While the question on this point was “finely balanced”, the Court found that iSignthis was entitled to rely on the exception to avoid disclosure of the fact that Visa had made the decision to terminate its relationship with the company (which was material price sensitive information) on the basis that:

• although Visa had, on 17 April 2020, expressed the termination decision in the language of finality, it also continued to review documents provided and to engage with iSignthis in relation to the underlying issues until 12 May 2020;
• in commercial negotiations, people often make a decision and then change that decision; and
• it would have been counter-intuitive to require immediate disclosure of the termination on 17 April 2020, and doing so had the potential to adversely affect the possibility of iSignthis persuading Visa to reconsider its position.

But the failure to disclose on (or shortly after) 12 May 2020 was a breach of iSignthis’ continuous disclosure obligations (and, by failing to take reasonable steps to ensure that iSignthis complied with its obligations, a breach by Mr Karantzis of his duty of care and diligence as Managing Director under section 180(1) of the Corporations Act).

Of interest on this issue is that the Court approached the question of disclosure on the conclusion that, for so long as Visa continued to engage with iSignthis, its decision was in fact not final, and therefore remained an “incomplete negotiation”.

Without the benefit of hindsight, it may be difficult for a listed entity to determine the precise point in time at which the disclosure obligation is triggered – as it may not be able to readily identify whether a decision by a counterparty is “final” (at least from the other party’s viewpoint) and therefore no longer an incomplete negotiation. It is likely that, in any given scenario, this issue will need to be carefully considered and monitored, and the listed entity will need to demonstrate some factual basis for forming the view that a “final” decision continues to remain open to negotiation.

Suspension is not a defence to a failure to disclose price sensitive information

iSignthis sought to advance the proposition that information concerning the Visa termination was not material price sensitive information on the basis that, since trading in its shares was (at all relevant times) suspended, a reasonable person would not have expected the information to have a material effect on the price of its shares.

This argument failed on the basis that section 674(2) of the Corporations Act refers not only to “price” but also takes into account the underlying “value” of the relevant securities.

Accordingly, a market-sensitive event that occurs during a period of suspension can have a real (albeit latent) effect on the underlying value and can also affect off-market trading during the period of suspension. Further, the Listing Rules make clear (both in Listing Rule 18.6 and Guidance Note 8) that the continuous disclosure obligations continue to apply, even if trading in an entity’s securities is suspended.

Providing false or misleading information to ASX

The case also highlights the obligation of directors (and other officers and employees) to take “reasonable steps” to ensure that information they provide to ASX is not false or misleading (including by omission) under section 1309(2) of the Corporations Act.

Mr Karantzis was found to have breached this prohibition by failing to take appropriate steps to ensure that information provided to ASX in response to various queries raised by the market operator about the Visa termination was not false or misleading – with the court noting that various responses provided to ASX were “non-responsive”, “disingenuous” and appeared to be an “attempt to distract the ASX” (iSignthis being of the view that ASX was treating it unfairly and in “bad faith”).

The Court did not accept that Mr Karantzis could rely on the fact that he sought legal advice to establish that he had taken “reasonable steps”, given that:

• the advice sought did not involve a fact checking or due diligence exercise; and
• (in any event) the information provided was objectively false or misleading, and in circumstances where he was actually aware of the true position.

In this respect, the Court noted that the “reasonable steps” exemption will only apply in circumstances where an officer or employee does not know the underlying facts concerning information to be disclosed and takes reasonable steps (e.g. by making reasonable inquiries or placing reasonable reliance on someone else) to ensure that the information was not false or misleading (including by omission). This did not occur.

As the Court noted, “it can never be reasonable to decide not to respond, or not to respond openly and candidly, to questions from the operator of a financial market.”

Other key takeaways and issues of interest

• In determining whether a directors’ breach of duty is “serious” for the purposes of determining penalties under section 1317G of the Corporations Act, the issue is the degree to which the conduct has departed from the required standard, rather than the actual (or potential) harm that has been caused. Accordingly, a breach can be serious (and pecuniary penalties imposed) even if the consequences of the relevant conduct were minimal.
• The duty of care and diligence in section 180(1) of the Corporations Act requires directors to take reasonable care not only to ensure that accurate information is provided to the market, but also to ensure (at least in the context of analyst briefings) that they are sufficiently prepared to respond to questions and to correct any misunderstandings or misconceptions that may develop (of which they become aware).
• The proceedings only involved iSignthis and the former MD / CEO, and ASIC elected not to proceed against the non-executive directors.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).