Directors’ duties and fundraising

Directors’ duties and fundraising has been in the spotlight again with the recent decision in ASIC v Vocation Ltd (In Liq).ⁱ

The case highlights that directors and officers of companies can incur significant personal liabilities in connection with continuous disclosure obligations and false or misleading statements made during fundraising activity.  In this case, the chair, CEO and CFO of a failed company Vocation Limited had proceedings brought against them by ASIC in connection with an earlier fundraising.

Vocation Ltd was an ASX-listed company which provided vocational education and training.

In July 2014, the Victorian Department of Education and Early Childhood Development (DEECD) notified Vocation that it was withholding funding of almost $20 million, and directed Vocation to suspend new enrolments, due to concerns about how some of Vocation’s courses were run.

Vocation did not immediately inform ASX or make a public announcement.  Vocation issued a statement on 25 August 2014 which did not reveal the full extent and nature of DEECD’s withholding of funding and the suspension of enrolments.  In September 2014, Vocation provided a Due Diligence Questionnaire (DDQ) to the underwriters in relation to a $74 million fundraising from institutional and sophisticated investors.  The DDQ included the statement that the DEECD had indicated “a willingness” to pay a substantial portion of the withheld funds within a fortnight, but did not state the existence and nature of the conditions that qualified that agreement.  The DDQ also stated that lost revenue from suspended enrolments had been offset by enrolling students in other courses, (which had not at that stage been achieved.)

When Vocation made full disclosure to ASIC and the public in October 2014, the share price dropped considerably.

ASIC pursued a civil penalties case against Vocation at the Federal Court of Australia.

Decision

The Court found that the company Vocation had contravened the Corporations Act requirement of continuous disclosure by a listed entity, and had engaged in misleading or deceptive conduct.

The Court also found that the officers (CEO, Chair and CFO) of Vocation had contravened s 180 of the Corporations Act, which set outs company officers’ duties of care and diligence. A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

• were a director or officer of a corporation in the corporation’s circumstances; and
• occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

The failure of the duty of care and diligence was, in the case of:

• the CEO, for permitting or causing both:
  1. the company’s noncompliance with its continuous disclosure requirement; and
  2. its engagement in misleading or deceptive conduct via the August 25 announcement and the DDQ;
• the Chair: for permitting the company to breach its continuous disclosure requirement;
• the CFO: for permitting or causing the company to engage in misleading or deceptive conduct by issuing misleading statements in the DDQ.

ASIC did not pursue the officers personally for breach of continuous disclosure and misleading or deceptive conduct, even though those laws allow for accessorial liability. The court did not consider that the business judgment defence was available in this case.

Takeaways

Some key issues emerge from this case.

Directors’ and officers’ duty of care and diligence (s 180):  Increasingly, there is an expectation that boards cannot rely on external advice without question, and similarly cannot accept information provided by management at face value.  The onus is on the board to challenge and analyse the information they receive and to seek clarification where required.

• A CEO must inform him-or herself about matters under discussion;
• Management must provide the board with information but equally the board must ask management to provide the appropriate information;
• The board must analyse and challenge information provided.

ASIC actions:  ASIC is signalling that it will pursue s 180 actions in these cases, with penalties to officers involved. In related proceedings, the Federal Court disqualified the officers involved from managing corporations for several years and imposed penalties.ⁱⁱ

Business Judgement Rule: The Business Judgment Rule is not a defence for breaching a director’s duty of diligence and care in respect of the continuous disclosure requirement, as the latter is fundamentally a matter of compliance, not of business judgement.

Materiality:  Even if the company reasonably believes that the information has no material effect, such a position does not negate the requirement to disclose the information.

Processes:  Each company needs to put in place processes which facilitate the exchange and analysis of information between the board and management, and between the board and external advisers.

i Australian Securities and Investments Commission v Vocation Limited (In Liquidation) [2019] FCA 807

ii Australian Securities and Investments Commission v Vocation Limited (In Liquidation) (No 2) [2019] FCA 1783