Joining us today is Jeff Mansfield who is a Partner in the Corporate Group at Addisons, Jeff thanks for joining us.
Now Jeff QBE could be facing a class action for allegedly breaching its continuous disclosure obligations after it announced a massive profit downgrade in its full year 2013 results, we're obviously still in the early stages but Jeff what are some of the issues likely to be?
Well let me give you a bit of background into what happened, and it goes back to Friday the 6th of December 2013 when QBE requested a trading holt on that Friday and they've referred in that trading holt to reviewing and analysing information related to their North American operations. So they had a board meeting on Friday the 6th of December and then on the Monday they came out with an announcement that they were going to have a net loss of around $250 million when the market was expecting a profit of more than US$1 billion, so a massive turnaround from what the market was expecting. And that change in profit arose from five matters that they listed out including write down of intangibles. So as a result of that a couple of law firms, Morris Blackburn and Slater & Gordon, are considering litigation on behalf of investors that invested immediately before that. So the issue is you know whether the previous announcements by QBE before the announcement in December were accurate and whether they should have advised the market earlier than that time as to what the profit was going to be.
So Jeff if we then move I guess to look at the obligations, what are the obligations for businesses when it comes to complying with these continuous disclosure obligations?
Yeah well the continuous disclosure obligations are effectively set out in the Listing Rule and the directors of QBE and officers of QBE would first be asking themselves when they come into possession of information whether that information was market sensitive, so that's the first question; whether the information would affect the price of QBE's securities or shares and would a reasonable person expect the announcement to affect the price. I suspect if there was a turnaround of that magnitude the market would say it was market sensitive, the question to QBE is going to be whether they disclose the relevant information immediately on becoming aware of it, that is whether the elements that made up the profit downgrade should have been disclosed earlier than they did.
So we're looking at an issue of timing essentially?
It's really an issue of timing and the real question will become in terms of whether they're at risk or not is when they became aware of those elements. Now obviously it's QBE becoming aware of those elements and QBE doesn't become aware of stuff unless the directors, the company secretary or senior officers become aware of it, so under the Listing Rules and the Guidance Note issued by the ASX, you know they insist upon companies having a process whereby information is escalated up to the relevant senior officers, so that will be the inquiry here, whether information in the North American operations was escalated up to the appropriate senior officer and whether that senior officer and the board made that information available immediately, and by immediately the ASX Guidelines say promptly and without delay. Now there's no doubt that the board became, you know, in their meeting on the 6th of December seems to have done all the right things, they had a trading holt, they announced it, they announced the revised forecast with revised assumptions, the question will be whether, you know, in a period three or four months beforehand whether they should have disclosed something before the board review.
So we don't obviously know all the facts and circumstances, but do you think that QBE could be at risk of breach in this case?
I think there's certainly something to look at and no doubt the two class action firms also think there's something to look at. I mean this reminds me of a couple of previous examples, there was a court case several years ago involving GIO and the takeover of GIO when there's an issue of whether the GIO board should have disclosed a profit downgrade as a result of the effect of a cyclone. So you know that's – that situation which occurred and should have disclosed that. The next issue is – the next example is Leighton's, and we're reminded of this Leighton's issue earlier this week because I think it was Morris Blackburn lodged court process to take action against Leighton's in respect of a profit forecast that they got wrong as well back in 2011, and in 2011 in respect of that $907 million profit reversal the ASIC fined through infringement notices put a penalty of $300,000 on Leighton's in sort of similar circumstances where three projects, or the profitability of three projects should have been disclosed earlier. Now obviously insurance is very complex, so any court action involving this matter will look at very complex matters.
Well Jeff certainly class actions are the topic du jour at the moment, there's a number of high profile class actions that we've seen, what do you think this trend signals to boards in terms of risk and are there strategies to avoid them?
Well yeah you're right in terms of this area of the law, you know we've seen the David Jones directors purchasing shares earlier this year, not really a continuous disclosure case but an insider trading case which has similar requirements. We had the New Crest market disclosures last year in respect of its profit downgrade, couple of other companies being fined money after infringement notices were served by the ASIC earlier this year, I mentioned the Leighton case. I think this is an area that is ripe for further litigation and the reason why it's ripe is these issues of whether things should have been disclosed are always going to be arguable and the reasonable person test is an objective test and unfortunately directors fall into the trap of thinking that they know what should be disclosed and take a subjective view on what should be disclosed, rather than the objective view as to what the market should be. So when you're looking at this, this is going to be an area for further inquiry by class action firms and I think we'll see a lot more and because of this uncertainty it's really good for the class action firms because it's going to lead to settlement and ultimately court action. Ultimately to avoid court action companies will want to settle these matters.
Yes certainly. Well as you say they'll want to settle these matters, is there anything they can do to get on the front foot to try and avoid these breaches?
Well I think companies have to make sure they have a continuous disclosure policy and it's a requirement of the ASX Listing Rules that they do indeed there are guidelines set out in the Listing Rules as to what to do, that's the first thing. But not just having that policy they need to implement it and train people within the organisation to escalate matters up to the right level in the company. We've produced a continuous disclosure flowchart, which I'd be happy to make available to any of your listeners, to really flow chart what needs to be done in the event of a continuous disclosure matter coming to the fore. Indeed you know the ASX in their Guidance Note 8 set out sort of various things that people should do include you know having draft letters prepared for disclosure, taking advantage of trading holts and suspensions, and speaking to the ASX if you've got any issues about this, so we recommend all those things.
Well Jeff just finally on that flow chart that you mentioned, is this available on your website?
It's available on the website and – but I could send it to anyone who would like to have it.
All right, well Jeff it's certainly an interesting topic and I think the investors and companies alike will be watching this one to see what happens, thanks so much for joining us.
That was Jeff Mansfield, who is a Partner in the Corporate Group at Addisons. Now listeners if you have any questions for Jeff you can send them through either using the panel on your screen or via email to firstname.lastname@example.org and if you want to find the flow chart it will be on the Addisons website which is www.addisonslawyers.com.au.