Directors’ Duties in the On-line Environment

Simon RubensteinSolicitor

ASIC

The Internet

• Changing the way we communicate, transact and conduct business

• Provides for immediate and low cost access to and dissemination of information

• However, not immune from acts of misrepresentation and fraud

• This creates challenges for regulation and enforcement

Overview

• Application of directors’ duties • Remedies for breach of directors’ duties • Regulating and enforcing corporate activity

in the online environment– Rentech– LibertyOne and Samson

Application of directors’ duties

• Starting point - existing directors’ duties apply to conduct occurring online

• Application of the existing director’s duties to the online environment only limited by imagination and yet to be fully appreciated

Application of directors’ duties

• Consider some examples:– Blair and the misuse of company information– Sara-Marie and the posting of false and

misleading information on the company website

– Christina ‘chats’ about proxy voting at an up and coming annual general meeting

Remedies for breach

• Civil remedies– Final injunctions to prevent threatened or

continuing breaches– Interlocutory injunctions available to freeze

assets or restrain conduct pending final determination

Remedies for breach

• Civil Penalty Orders– Civil penalty regime applies to breach of

directors’ duties– Civil rules of evidence and procedure apply– Declaration of contravention– Pecuniary penalty order (up to $200,000)– Disqualification order– Compensation order

Remedies for breach

• Criminal– No longer criminal liability for breach of duty

to act with reasonable care and diligence– Liability may arise for breach of the remaining

three duties but only where the director acts recklessly or with intentional dishonesty

– Possible jail sentence, fine and automatic disqualification

Regulation and Enforcement

• The Internet presents new challenges for ASIC including:– Understanding the technology– Understanding the interaction with the

provisions of the Corporations Act– Applying the technology

• So how does ASIC regulate in the online environment?

Regulation and Enforcement

• Policy initiatives• Consumer protection initiatives• Enforcement of the provisions of the

Corporations Act

Enforcement

• Development of new enforcement tools including:– Electronic Enforcement Unit– Automated Internet surveillance tool– Enforce-net training– Electronic evidence tool kit

Enforcement

• Internet element to many ASIC’s investigations• IOSCO surf day results include:

– Illegal offerings– False or misleading statements– Market manipulation– Unlicensed investment advice

• Issue of directors’ duties underlies much of this conduct

Rentech

• Background– NASDAQ listed, technology company– Bulletin board postings and unsolicited (spam)

e-mail– Statement that price to go up on back of

imminent news– Price doubled, volume up by almost 1000%– Company denied truth of statement

Rentech

• Investigation– Identifying person who posted bulletin board

messages– Identifying person who sent spam messages– Understanding the technology– How to gather and present electronic evidence

Rentech

• Offences– Making statements and disseminating

information that was false and misleading and likely to induce the purchase of securities (s.999 of Corporations Act)

– Unauthorized and unlawful interference with a computer network (s.76E of Crimes Act)

Rentech

• Issues– Difficult to remain anonymous on the Internet– What if ‘promoters’ had been engaged by

directors to increase online exposure of company?

– In what circumstances would directors be liable?

LibertyOne & Samson

• Background– Fundraising offer published on IDS– Directed at shareholders of LibertyOne– Titled ‘Samson Deposit Plan’– Seeking to raise $5M– No offer document

LibertyOne & Samson

• Breach of the Corporations Act– Disclosure requirements– Advertising requirements– Misleading or deceptive– Breach of directors’ duties to act in good faith

and for a proper purpose and with care and diligence

– [director vigorously denies breaches occurred - ed ]

LibertyOne & Samson

• Enforcement action– Offer withdrawn– Corrective statement published on IDS– All money collected ($100,000) returned to

investors

LibertyOne & Samson

• Issues– Rules relating to disclosure and fundraising

apply to offers on the Internet– Offers published on Internet are unlikely to be

‘personal’ ones and thus unlikely to be exempt– Real risk of breach of directors’ duties for

conduct of this kind

Conclusion

• Existing laws (including directors’ duties) apply in the online environment

• ASIC is rising to the challenge of regulating and enforcing laws in the online environment

• ASIC adept at tracking electronic footprints and using the latest cyber technology