A recent case in the Federal Court1 highlights to Australian companies, particularly those with overseas-based directors, and foreign directors of Australian companies, the expectations placed on directors of Australian companies under the Corporations Act, particularly in relation to the due diligence process for disclosure documents. This follows a recent ASIC report in which it warned companies on cutting corners in IPOs (and other capital raising processes) in relation to due diligence processes – click here for our article on this report.
Background
The case involved Sino Australia Oil and Gas Limited (Sino) which was the Australian holding company of a Chinese operating company (Subsidiary) that provided oil and gas recovery services to China. Sino's Board consisted of Mr Shao, a foreign resident director based in China, and two non-executive Australian resident directors. Sino's only source of revenue was from the Subsidiary and Mr Shao was the only director with direct knowledge of and involvement in the Subsidiary's commercial affairs.
On 28 February 2013, Sino issued a prospectus for an initial public offering of fully paid ordinary shares in the company on the Australian Stock Exchange (ASX). A Replacement Prospectus was issued by Sino on 26 April 2013, followed subsequently by three Supplementary Prospectuses. Mr Shao signed the Replacement Prospectus and provided the director's declaration for each supplementary prospectus document.
Sino raised over $12.8 million from its initial public offering and became a listed disclosing entity on 12 December 2013.
Breaches of the Corporations Act
ASIC filed proceedings against Sino and Mr Shao in the Federal Court alleging that:
- Sino had made false representations in the prospectus documents in relation to patents claimed to be held by Sino and the Subsidiary;
- Sino had made misleading claims that it held 16 service contracts servicing 1,260 wells when in fact a foreign regulatory authority engaged by ASIC could only verify that Sino held 7 service contracts for 15 wells;
- Sino had failed to disclose material information concerning a significant profit downgrade for the 2013 calendar year, and the circumstances which caused the downgrade, to the ASX to allow the ASX to publish the information for prospective investors;
- Sino failed to disclose market sensitive information to ASX to provide to prospective investors, including failing to disclose material information concerning a significant profit downgrade for the 2013 calendar year and a substantial loan agreement entered into between the Subsidiary and a director of the Subsidiary's immediate holding company in China;
- Sino failed to fulfil its continuous obligation to disclose market sensitive information despite being a listed disclosing entity from 12 December 2013;
- Sino had provided false information to its auditors in relation to the Subsidiary's financial position during the course of the auditors' preparation of the Subsidiary's audited financial statements;
- Sino had engaged in misleading and deceptive conduct in relation to Sino's and the Subsidiary's financial position; and
- Mr Shao was involved in and had knowledge of Sino's failure to fulfil its continuous disclosure obligations and had breached his director duties under the Corporations Act.
The Federal Court found in favour of ASIC on each of these grounds and made declarations against Sino and Mr Shao.
Expectations for a foreign director
In turning its attention to Mr Shao's alleged breach of his director duties, the Federal Court noted that the fact Mr Shao did not understand English did not excuse him from his duty to exercise care and diligence when scrutinising each prospectus document. As a director, Mr Shao was required to inform himself fully of the content of the prospectus documents to determine their accuracy. Accordingly, Mr Shao was required to obtain a full Chinese translation of each prospectus document prior to signing or authorising their release in order to adequately discharge his duty.
The fact that Mr Shao did not understand Australia's legal requirements and had relatively little experience in the governance of public companies did not mean he could just delegate entirely to or rely entirely on the advice of the two Australian directors and professional advisers for the performance of his duties. The Federal Court stated Mr Shao was required to place himself in a position which would allow him to actively participate in company affairs to a standard expected of a responsible managing director and chief executive officer of Sino. In failing to do so, Mr Shao's conduct had led to Sino's contraventions of the Act and exposed the company to the imposition of civil penalties for the contraventions.
Key takeaways foreign directors of Australian companies
This case demonstrates that Australian courts will hold foreign directors of Australian companies to the same standards as their Australian counterparts, regardless of any lesser proficiency with the English language and Australian laws. The decision is another timely reminder to all foreign directors of Australian companies and Australian companies with overseas-based directors (as well as overseas companies considering listing on the ASX) to be familiar with the duties and obligations required of directors of Australian companies under the Corporations Act.
Footnote
1 Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934
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