Price sensitivity of underwriter allocations – the Federal Court takes a firm stance!

By Vanessa Murphy and Deborah Chew

The Federal Court has handed down its decision in ASIC v Australia and New Zealand Banking Group Limited (No 2) [2023] FCA 1217, finding that ANZ had breached its continuous disclosure obligations after undertaking a $2.5 billion institutional share placement in 2015. The case highlights the importance of considering continuous disclosure obligations in the context of a placement not only to satisfy the cleansing notice requirements, but also in respect of transaction outcomes that may meet the price sensitivity test.

Continuous disclosure obligations

Under the Corporations Act and ASX Listing Rules, listed entities have an obligation to immediately disclose information concerning the listed entity that is not generally available and that a reasonable person would expect, if generally available, to have a material effect on the price or value of the entity’s securities (subject to certain exceptions). A reasonable person is taken to expect information to have a material effect on the price or value of securities where the information would or would be likely to influence persons who commonly invest in securities in deciding whether to acquire or dispose of those securities.

The proceedings against ANZ

ASIC alleged that ANZ breached its continuous disclosure obligations by failing to advise the market that approximately $790 million of the shares offered in the placement (around 32%) had not been allocated to institutional investors and instead would be taken up by the underwriters (Underwrite Allocation) or that a significant proportion of the shares offered in the placement were to be acquired by the underwriters (Significant Proportion Information).

ANZ asserted that the Underwrite Allocation did not need to be disclosed to the market on the bases that:

• while the details of the Underwrite Allocation was information that was ‘not generally available’, the Significant Proportion Information was generally available, as it could be deduced or inferred from readily observable matter;
• even if the information was disclosed:
  • a reasonable person would not have expected it to have a material effect on the price of ANZ’s shares; and
  • it would not be likely to influence investors in deciding whether to acquire or dispose of ANZ’s shares; and
• the Underwrite Allocation and Significant Proportion Information was not information ‘concerning it’ within the meaning of ASX Listing Rule 3.1 (discussed below).

Decision

The court held that ANZ had breached its continuous disclosure obligations, as both the Underwrite Allocation and the Significant Proportion Information were information ‘concerning’ ANZ, were not generally available and were material, therefore requiring disclosure under Listing Rule 3.1 and section 674 of the Act.

Information concerning ANZ

In considering whether information about the underwriters’ shareholdings and their anticipated trading decisions was information that ‘concerned’ ANZ (within the meaning of Listing Rule 3.1), the court did not find that a disclosure obligation arises every time that a listed company becomes aware that a substantial shareholder intends to sell a significant number of its shares. Instead, the court concluded that the Underwrite Allocation and Significant Proportion Information concerned ANZ because they were an outcome of a substantial transaction by ANZ. That is, the key connection between the underwriters’ shareholding and ANZ was not simply that the shareholding was of shares in ANZ, but that the shareholding resulted from a transaction by ANZ.

Information not generally available

ANZ had argued that the Significant Proportion Information was generally available because it was widely known by market participants that the underwriters had not successfully placed all of the placement shares with ANZ’s long term domestic shareholders, with the inference that the underwriters would either need to place the shares with shareholders who would be likely to sell them quickly, or buy them themselves. The court rejected that position, instead finding that the Significant Proportion Information was not ‘readily observable’ shortly before trading in ANZ shares recommenced after the placement and had not (at that time) been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities.

Materiality

Under Listing Rule 3.1, information is only required to be disclosed if a reasonable person would expect the information to have a material effect on the price or value of the listed entity’s securities.  In pleading its case, ASIC did not argue that the underwriters would actually sell their ANZ shares in a way that would put downward pressure on the company’s share price, and the court noted that as a matter of commercial sense, none of the underwriters would have a commercial incentive to negatively impact the share price through the way they dealt with their share allocations. The court nonetheless agreed with ASIC that if the underwriters’ share allocations had been disclosed, persons who commonly invest in securities would have expected that the underwriters would promptly dispose of their allocations, and in so doing, would place downward pressure on the share price. The information therefore was material.

Potential penalties

The maximum penalty faced by ANZ is $1 million, on the basis that the breach occurred in 2015.  Since then, the maximum penalty for a single breach of the continuous disclosure obligations has increased to the greater of:

• 50,000 penalty units (currently $15.65 million);
• three times the benefit obtained and detriment avoided; or
• 10% of annual turnover, capped at 2.5 million penalty units (currently $782.5 million).

Conclusions for listed entities

The Federal Court’s decision demonstrates the importance of issuers considering whether the implications of the outcomes of a capital raise need to be disclosed (beyond what may be specifically required in ASX Appendices or by other Listing Rules).

In addition, ASIC’s recent enforcement action in this area (with listed entities such as Australian Mines Limited and GetSwift Limited also being hit with penalties earlier this year), shows that it is continuing to focus on continuous disclosure. This is consistent with the market’s expectations, given the increasing prevalence of class actions in Australia.

For queries regarding continuous disclosure obligations, please feel free to contact a member of our Capital Markets team.

This article was written with the assistance of Laurice Aziz, Law Graduate.