Class Action, the Leighton Settlements and Continuous Disclosure

Wednesday 24 September 2014 @ 11.54 a.m. | Corporate & Regulatory | Trade & Commerce

Earlier this year (May 2014) major construction company Leighton Holdings conditionally settled a shareholder class action for $69.45 million in what has now turned into a seminal case regarding continuous disclosure to shareholders.

Background

Investors had taken action over the company's $1.1bn write-downs and $427 million losses over a full year which it had announced on 11 April 2011. The losses saw the company's share price plunge 14 percent which resulted in a $907 million loss, more than had been forecast by Leighton only two months earlier on 14 February 2011.

Representing the shareholders in a class action, the law firm Maurice Blackburn, filed a claim in October 2013 which alleged that Leighton had known of the write-downs months ahead of the decision and so had "deceived or misled" its investors.

In its class action claim, Maurice Blackburn alleged that Leighton's conduct contravened the "continuous disclosure rules" of the Australian Stock Exchange (the ASX), namely, the Listing Rules at Chapter 3 and in particular Rule 3.1, which provides:

"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 or value of the entity’s *securities, the entity must immediately tell ASX that information . . ."

The claim also alleged breaches of the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) and the Australian Consumer Law 2010 (Cth).

Initially, the company had said it would vigorously defend itself against the class action but ultimately decided to settle the matter (see Inabu Pty Ltd v Leighton Holdings Limited [2014] FCA 622 (6 June 2014) and Inabu Pty Ltd v Leighton Holdings Limited (No 2) [2014] FCA 911 (25 August 2014)).

Implications Arising from the Matter

It is clear from this matter that the Australian Securities and Investments Commission (ASIC) and the courts take "continuous disclosure" very seriously, and, given the effects that delaying the disclosure of sensitive information can have,  an adverse finding by regulators can have serious and wide ranging implications for a company and its stakeholders.

These implications, in addition to fines imposed by the regulators, can include:

  • Negative reviews by the media and commentators;
  • A detrimental effect on the company’s reputation and employee morale; and worst of all;
  • The likely loss of investor confidence as can be seen in the Leighton matter.

As an indication of the seriousness of the regulators, the ASIC Chairman, Greg Medcraft is quoted as saying on the Leighton matter, that:

"Compliance with 'continuous disclosure provisions'goes to the heart of ASIC’s priority of promoting fair and efficient markets. All listed companies should have procedures in place to ensure that they comply with their continuous disclosure requirements".

Subsequent Comment and Reaction

A representative of Maurice Blackburn was reported as saying that, ". . . an early settlement [was] beneficial for affected shareholders and the company" and that:

"It demonstrates that we have a mature and effective class actions regime that large organisations understand can hold them to account for their errors, . . .A case like this reinforces to all investors in the Australian market that they can have faith in our system".

The point was also made that private enforcement in the form of class actions makes a difference and complements the enforcement activities of ASIC.

The director of Inabu (a key applicant in the case), Mr David Sloper, was reported as being "relieved to see justice done" saying also that:

"People lost money they invested in good faith, and I'm grateful that this class action has given me and others the opportunity to recover compensation for our losses, . . ."

Speaking for Leighton, its chief executive was reported as saying the agreement to compensation was "not an admission of guilt" and that:

"It is important to note that the settlement is not an admission of any liability or a finding of any breach of law against Leighton or any of our executives, . . ."

TimeBase is an independent, privately owned Australian legal publisher specialising in the online delivery of accurate, comprehensive and innovative legislation research tools including LawOne and unique Point-in-Time Products.

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