ASIC v Soust
The directors of any company in Australia, and at some places, even the officers of the company have been given certain powers and duties, due to the reasons that they run the company on behalf of the shareholders of the company (Cassidy, 2006). All the powers that have been given to the directors, along with the obligations which have been imposed on them, have to be discharged in a proper manner, which works in the interest of the company, instead of the personal interest of the company (Latimer, 2012). These obligations have been imposed through the Corporations Act, 2001 (Cth) (Australian Government, 2017).
One of such cases where the directors failed to work in the best interest of the company was seen in the case of Australian Securities & Investments Commission v Soust [2010] FCA 68. In this case, it was held by the Federal Court Judge that indeed Soust had breached his director’s duties as he failed to act in good faith and misused his position (Hodgkinson, 2010). The following parts contain a discussion over this very case and the manner in which Soust breached his duties.
In this case, the CEO (Chief Executive Officer) and the MD (Managing Director) of Select Vaccines Limited (the company) was Dr. Martin Soust. The terms of his services as being the MD of the company were contained in Executive Service Agreement, where his annual fee was stated at $24,500 along with the bonuses which were linked to the movements in the prices of shares (Woodhead, 2012). A bonus in this case would have been payable only if the share prices of the company would change and they would perform better than the change in the Intersuisse Citotech Index by more than 10% points. The balance date of the company was based on the end of the calendar year, i.e., December 31st and on this very date, the share prices movements were measured for the reporting period (ASIC, 2010).
Soust also had a seat amongst the Board of Directors and like the senior employees and the other directors of the company he was under an obligation to follow the share trading policy of the company. And so, Soust was restricted from trading in the new shares of the company, save for the six week period followed by the company’s AGM, i.e., the Annual General Meeting, and after the half yearly and the annual results of the company have been released (Hodgkinson, 2010).
Still, a bid was placed by Soust through the telephone to his stock broker on December 31st 2007, late in the night, which was outside the permissible trading windows. Till that moment, the last preceding sale was undertaken at 2 cents for each share. Soust knew that this lack of market depth would mean that a number of trades would be needed for fulfilling his order and that would result in the price being driven up beyond the value of 2.4 cents for each share, which was the last offered price. He immediately transacted at this price and within minutes two more trades were made at 2.5 cents for each of the share. This resulted in the prices being raised by 19.05% in an instance in comparison to the prices of previous year on the same date, which was at 2.1 cents for each share. And this would enable the share prices to outperform the index as required by the Executive Service Agreement terms. In case this trade had not been made, there would have been a decrease in the share prices by 4.76% and the shares would have underperformed in the index by 3.27% (Hodgkinson, 2010).
Duties Breached
The board meetings and the meeting of the remuneration committee were attended by Soust. And in these meetings, he failed to disclose that a trade had been made by him due to which the share prices were raised from 2 to 2.5 cents for each share. Due to this non-disclosure, the board could only acknowledge the fulfillment of the criteria laid down in Soust’s service agreement and hence he was paid the performance bonus. This would certainly be avoided if the involvement of Soust in the transaction was known (Hodgkinson, 2010).
The ASIC blamed Soust for undertaking the transactions due to which the artificial prices for the shares were created, i.e., it was a market manipulation on part of Soust (Bowley, 2013). Due to this, a misleading and a false appearance had been created as per which it was portrayed that for the shares that there was an active market or that they had been traded in a regular manner at a given prices, and hence, the same was market rigging. Along with these claims, the ASIC also alleged that Soust had contravened his director duties by failing to act in the best interest of the company, and for proper purpose (Hodgkinson, 2010).
The factual background evidence with regards to ASIC was not challenged by Soust. Though, he did claim that his actions did not breach the sections of the Corporations Act, 2001. This was because the transactions, which were undertaken by him, were not fictitious and instead were genuine. He also claimed that the seller was not at all misled. Soust also stated that it was not artificial to purchase the shares at the prices for which they were being offered. The clandestine motive did not have an impact over the authenticity of the trade. Lastly, he stated that when an individual does something for increasing the prices of the shares, it was not illegal (Jade, 2010).
It was argued by the ASIC that the transactions were just undertaken so that the artificial price could be created, which was the contravention of the primary or the sole purpose of setting up the market. They claimed that Soust was not a genuine buyer who could have only hoped for the shares to be at the best prices, which would be accepted by a willing and a well informed seller, in an ordinary manner. Conversely, Soust paid such a price which showed the lack of genuine force of demand and supply. And due to these reasons, the undertaken transaction had a false and misleading appearance, with regards to their price (O’Connell, 2013).
Section 181(1) of the Corporations Act, 2001 contains the provisions with regards to the civil obligations imposed over the directors, as well as, the other officers of the company to act in a manner which shows good faith and the actions have to be undertaken for proper purpose where the best interest of the company is kept in mind, while the duties are discharged and the powers are exercised (Australasian Legal Information Institute, 2017).
Decision of the Court
Through section 182(1) of this very act, another civil obligation has been imposed over the officers and the directors of a company, whereby they are prohibited from making an improper use of the position which they hold in the company, in such a manner, which is detrimental for the company, and due to which a person advantage or an advantage for someone else is attained (ICNL, 2017).
The contravention of both of these sections attracts the civil penalties as are contained in section 1317E of this act. This section empowers the court to make a declaration of contravention (WIPO, 2015). Once this has been made by the Court, the ASIC can apply for pecuniary penalties on the basis of section 1317G of this act, along with making an application for a disqualification order pursuant to section 206C of this act (Federal Register of Legislation, 2017).
The submission of the ASIC was preferred by the Federal Court. The Federal Court held that the key test which had to be applied in this case for the prices was to see if they were contrived or constructed in a manner which would be different in comparison to what would have ordinary been in the normal course of things. For the integrity of the market, it was crucial that the concerned buyers for the securities are interested in the lowest prices possible and for the sellers they are concerned with attaining the highest price possible. In case a different approach is taken, the same would distort the normal market force of demand and supply. To consider the genuine seller’s existence in an isolated environment or in a vacuum would cause a misconception it has to be shown that there is an absence of a genuine buyer, as was purposed with the acquisition of the assets from the market at the lowest prices possible (Hodgkinson, 2010).
The court also held that when a purchase of the shares of the company was made at prices which were artificially made high, Soust breached the share trading policy of the company. Further, when he failed to disclose this transaction to the board of director and to the remuneration committee, Soust breached his duty of good faith which he owed as being the director of the company. Due to these reasons, the court held that the provisions of the Corporations Act had been breached which attracted civil penalty. Along with this, it was also submitted to the Federal Court that the pecuniary penalties had to be applied, in addition to considering the notion that whether or not, Soust should also be disqualified from the companies’ management (Australasian Legal Information Institute, 2010).
As per his directors’ duties, Soust had to make a proper use of his position, where the interest of the company had to be kept supreme. However, just to make the bonus, which otherwise he would not have been able to make, Soust made an improper use of his position and did something, which was ultimately detrimental for the company. Hence, he contravened two separate directors’ duties, i.e., failure to act in the best interest of the company and making an improper use of the position which he had in the company. Had Soust not been involved in such transaction, or had he disclosed the transaction made, to the board, he would not have been given the bonus, for which he undertook these transaction. Soust not only breached the share trading policy of Select Vaccines in a deliberate manner, he consciously lied to the board which showed the severity of his conduct, along with the egregious nature of his conduct (Australasian Legal Information Institute, 2010).
Due to these reasons, the court made a declaration of contravention as per section 1317E of the Corporations Act and as per section 1317G of this act, a pecuniary penalty was also under the power of the court to make (Australasian Legal Information Institute, 2010).
Conclusion
To conclude, this case shows that the directors are required to refrain from indulging in such activities, which result in them gaining an advantage for themselves. And even when they enter into such transactions, it is their duty to make proper disclosures about the same to the board of directors and the other places, where needed. This would allow the obligations imposed over the directors of the company to be fulfilled in entirety. In case, the same is not done, it would result in the contravention of the directors’ duties. In this particular instance, along with the breach of directors’ duty provisions, the provisions with regards to misleading and deceptive conduct were also breached.
References
ASIC. (2010). 10-88AD ASIC obtains pecuniary penalty and disqualification order against former Select Vaccines director. Retrieved from: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2010-releases/10-88ad-asic-obtains-pecuniary-penalty-and-disqualification-order-against-former-select-vaccines-director/
Australasian Legal Information Institute. (2010). Australian Securities & Investments Commission v Soust [2010] FCA 68 (15 February 2010). Retrieved from: https://www.austlii.edu.au/au/cases/cth/FCA/2010/68.html
Australasian Legal Information Institute. (2017). Corporations Act 2001. Retrieved from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions
Australian Government. (2017). Corporations Act 2001. Retrieved from: https://www.legislation.gov.au/Details/C2013C00605
Bowley, R. (2013). DPP v JM: High Court clarifies the meaning of “artificial price” under s 1041A. Retrieved from: https://opus.lib.uts.edu.au/bitstream/10453/44097/4/58340B2B-D59F-4207-BCF1-1B5BA8631498.pdf
Cassidy, J. (2006). Concise Corporations Law (5th ed.). NSW: The Federation Press.
Federal Register of Legislation. (2017). Corporations Act 2001. Retrieved from: https://www.legislation.gov.au/Details/C2013C00605
Hodgkinson, J. (2010). CEO guilty of market manipulation. Retrieved from: https://johnhodgkinson.wordpress.com/2010/02/19/ceo-guilty-of-market-manipulation-and-market-rigging/
ICNL. (2017). Corporations Act 2001. Retrieved from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf
Jade. (2010). Australian Securities & Investments Commission v Soust [2010] FCA 68. Retrieved from: https://jade.io/article/126608
Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia Limited.
O’Connell, A. (2013). Protecting the Integrity of Securities Markets — What is an ‘Artificial Price’?: DPP (Cth) v JM. Retrieved from: https://blogs.unimelb.edu.au/opinionsonhigh/2013/08/01/o-connell-jm/#more-1608
WIPO. (2015). Corporations Act 2001. Retrieved from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817
Woodhead, B. (2012). ASIC hits and misses. Retrieved from: https://webcache.googleusercontent.com/search?q=cache:FM1rFQRrOIcJ:www.afr.com/business/asic-hits-and-misses-20120503-j2xi4+&cd=1&hl=en&ct=clnk&gl=in
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