Enforcing Good Corporate Governance: Why ASIC is No Toothless Tiger

This week on You Legal TV, and in my latest article, I discuss the deal with Bellamy’s. Watch our summary below or read on for more information about how ASIC has upped its enforcement game.

See below for the complete transcript of this episode -

Hello, welcome to You Legal TV.

Recent drama has unfolded for infant milk company Bellamy’s board of directors, making a compelling governance study. Falling sales in 2016 from a new strategy to target the China market resulted in the January resignation of Bellamy’s Managing Director, and an Extraordinary General Meeting has been called, under section 249D of the Corporations Act 2001.

At the meeting, Shareholders may remove four directors and replace them with directors new to the board. A major shareholder says the current directors don’t have the skills and experience required.

This started as a case of strategic missteps in sales and operations, but the fallout showcases the importance of continuous disclosure between management and the board.

Contact us if you’d like more information on fulfilling your continuous disclosure obligations and complying with standards of due care and diligence.

Why ASIC is No Toothless Tiger

ASIC has often been accused of being a toothless tiger when it comes to exercising its muscle and prosecuting errant directors for breaching their duties under the Corporations Act 2001 (Cth) (‘the Act’), but recent figures tell a very different story.

Civil Penalties Provisions

The civil penalties regime was introduced into Australia’s Corporations Act 2001 (Cth) in 1993. It was designed to overcome some of the hurdles of bringing criminal actions against directors who had breached their duties under the Act.

The civil provisions are often referred to as ‘quasi-criminal’ or ‘punitive civil sanctions’ and allow ASIC to bring civil proceedings against directors for conduct that clearly falls short of the standards imposed by the Act but which may not meet the required evidentiary burden of proof required for a criminal conviction.

The civil penalties provisions are most often used to prosecute breaches of the duty to exercise due care and diligence or failure to meet continuous disclosure obligations.

ASIC, of course, still has the power to bring criminal proceedings and works closely with the Department of Public Prosecution in both civil and criminal matters.

Some of the most recent and well-known civil actions have included Storm Financial Services, in which ASIC pursued the directors for contravening their obligations to provide financial advice, and the MFS Group collapse in which ASIC prosecuted directors under the civil penalties provisions for entering into related party transactions.

When the civil penalties provisions were first introduced in 1993, it took nearly 4 years for ASIC to bring the first case, and ASIC earned a reputation as a toothless tiger.

In 2000 however, new legislation was introduced that removed some of the challenges faced by the interplay between the civil and criminal provisions, and in the years that followed, we saw the collapse of HIH, One. Tel and Citigroup. ASIC began making use of the civil penalties provisions.

The ASIC Enforcement Outcomes Report for the period January 2016 to June 2016, show 107 civil matters currently pending before the court in relation to misconduct, including failure to disclose and corporate governance misconduct. In the same period, and in addition to the matters still before the Court, ASIC successfully prosecuted 11 instances of misconduct under the civil penalties provisions.

32% of the civil penalties actions are bought against individual directors. Importantly, in the small business category, the percentage of enforcement results for misconduct by directors is as high as 94%.

Consequences can vary depending on the severity of the breach but include pecuniary penalties of up to $200,000 for an individual and $1 million for a corporation. The Court may order payment of compensation and can prohibit individuals from managing or directing a company.

ASIC continues to demonstrate that it is committed to enforcing good governance, and its success rate using the civil penalties provisions is impressive.

Bellamy's

The fiasco at Bellamy's continues after its Extraordinary General Meeting today, where motions were voted on to remove directors and install new ones. The EGM was called on the premise that the poor financial performance at Bellamy's was the result of poor corporate governance and proper due diligence, reinforced by articles in the Corporations Act 2001.

Jan Cameron, the key shareholder leading the dissident campaign, failed to secure a spot on the board though two of her associates were successful in getting elected. The meeting was preceded by a shock resignation by chairman Rob Woolley the day before -- merely one of many unfolding events during the months-long ordeal plaguing Bellamy's as a result of a failed expansion into the Chinese market and dropping share prices.

The takeaway for all directors is to ensure that you are fulfilling your continuous disclosure obligations and complying with appropriate standards of due care and diligence. If in doubt, always seek professional legal advice.

What Should I Do Next?

Contact us if you would like further legal advice on maintaining good corporate governance and compliance. Our lawyers at You Legal will be happy to assist you in whatever way we can.

* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.