A dog’s breakfast

A dog’s breakfast

I had the privilege this week of joining a prominent group of experts at a breakfast to discuss director obligations within the context of continuous disclosure.

All the stakeholders were present, including, I believe, a past director of the shareholders’ association.

The ASX stuck to its line that Chapter 3 of the listing rules sets out clearly the circumstances under which a company must disclose information and, under 3.1A, the exceptions under which the obligation is suspended.

Clause 3.1. “Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price of value of the entity’s securities, the entity must immediately tell the ASX that information.”

The AICD raised an interesting point however noting that the inclusion of the word ‘immediate’ in the listing rules with a definition in a guidance note was inadequate. The AICD also suggested that the definition of ‘material’ was problematic.

The discussion progressed and a far more interesting argument began to coalesce. Why should directors be personally liable for breaches of continuous disclosure? They aren’t elsewhere in the world.

Understandably personal financial consequences can be a terrific disincentive to doing the wrong thing but the burden is an enormous distraction to the sound and focused running of a business.

Either way, it represents another reason why, if I had an enterprise for sale, I would go for a trade sale rather than burden myself and my board with the obligations that inhere in running a public company.

The discussion continued and the subject of a higher frequency of class actions was raised.

Have we constructed – or allowed – a system that benefits society when beneficiaries and facilitators of class actions ostensibly solicit litigation actions by offering only upside and no downside? No win, no fee produces all sorts of misallocations of capital and has itself limitations. No satisfactory alternative was offered at the breakfast but while it is clear litigation funding offers a useful facility for those who may not be able to afford to pursue restitution themselves, it is also clear that the opportunity for vexatious claims is heightened while valid but smaller claims will continue to be ignored.

The topic I was most interested in but which was not discussed was whether the company is solely responsible for ensuring an efficient market. A company should be responsible for ensuring the market and its participants are:

1. Informed continuously
2. Informed equally
3. Informed truthfully

But is the company responsible for the subsequent trading in, and associated gains and losses made on, its shares?

My friend Professor Alex Frino, now Dean at Macquarie Graduate School of Management, recounted several examples of studies he had conducted, and on which he has been cross examined, where considerable effort has been expended to uncover the share price impact and dollar value of a company’s announcement made, not made, or made subsequently.

In a courtroom, expert witnesses like Alex are asked to attribute a monetary value to the subsequent share price action in an attempt to quantify the losses for those aggrieved by an alleged selective disclosure or breach of continuous disclosure. The burden of this loss is then borne by the company, its directors, and their insurer.

But is that right? What is the responsibility of those who profited from the indiscretion? What is the responsibility of those who sold shares to the buyers who subsequently lost? If they did so with information that clearly was not evenly distributed (albeit not deceitfully acquired) is that a legitimate advantage to be leveraged under capitalism? Or should the trades be reversed? Would that even be possible?

Warren Buffett, in his 1975 note to Katherine Graham at The Washington Post, wrote:

“…that relates to the periodic tendency of stock markets to experience excesses which cause businesses – when changing hands in small pieces through stock transactions – to sell at prices significantly above privately-determined negotiated values. At such times, holdings may be liquidated at better prices than if the whole business were owned – and, due to the impersonal nature of securities markets, no moral stigma need be attached to dealing with such unwitting buyers.”

It is clear we are a long way from anything resembling perfection and it is equally clear that we may never get there.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.