(Solution) Assignment on Commercial Law

Commercial Law 1
Corporation Law

Commercial Law 2
Introduction:
This paper discussed the case law Australian Securities and Investments Commission v
Southcorp Ltd [2003] FCA 1369; (2003) 130 FCR 406. In this case court intended the provision
related to the continuous disclosure among the other things also for the purpose of preventing
particulars disclosure related to the market sensitive information. In this case, court consider the
importance of the existence of the code of conduct or code related to the best practice which is
adopted by the company for deciding whether director of the company breach their statutory and
common law duties (Kluwer, 2011).
Structure of this report includes brief introduction of the case, duties breached by directors under
both common and statutory law, evaluation of the decision taken by the court, and impact of their
decision on the corporate law and other companies in Australia. Lastly, paper is concluded with
the brief conclusion.
Background of the case:
Proceedings related to this case was first conducted in the Court under which civil penalty was
sought for the breach of the provisions related to continues disclosure. Currently, provisions
related to the continuous disclosures are referred under the corporation Act 2001.
In this case, defendant (“Southcorp”) was the famous producer of the wine, as they are the 17th
largest listed company in the Australia in context of the market capitalization. On 18th April
2002, allegation was made by the plaintiff (ASIC), that defendant with the help of Glen
Cunningham (General Manager of Corporate Affairs) disclosed following information by E-mail
to the eleven analysts:
 That almost 2000 vintage super premium wines produced by the defendant were expected
to be sold in the financial year of 2003.
 the poor 2000 vintage wine will affect the gross profit of the company on the 2003
financial year compared to the 2002 financial year was expected to be of the order of $30
million.
In this case, parties were agreed that conduct of the Glen results in the contravention of the
provision by Glen related to the continuous disclosure stated under section 674(2) of the Act.

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Subsection of this section reflects the civil penalty provisions of the Act and in case court
believed that defendant breach the provision stated under this subsection, then Court had power
to made declaration of contravention under the section 1317E(1). In case, declaration related to
the contravention had been made and some other conditions were also satisfied then Court had
power order against the person who contravenes these sections under section 1317G(1) to pay to
the Commonwealth a pecuniary penalty of up to $200,000. In this case, parties were agreed with
the contravention and Court would impose penalty on the defendant. They also submitted the
penalty amount that was $100,000 (Sulaiman, 2007).
Breach of duty:
Section 674(2) of the Corporation Act 2001 stated the provisions related to the continuous
disclosure. It must be noted that, listing disclosing entity is bound by some disclosure
requirement in the listing rules of market. This section is applied on the listed disclosing entities
and stated that the organization has information that must be notified by the organization to the
market operator which is not generally available and any reasonable person would expect that
such information had potential to materially affect the price or value of ED securities of the
organization. Organization is under obligation to inform the market operator about such
provisions in relevance of those provisions.
It must be noted that in case organization fails to comply with these provisions then it is
considered as an offence under section 1311(1). Any person, who is involved in this, contravenes
the civil penalty provision stated under section 1317E.
This section further states that, person does not contravene the above stated provision if the
person satisfied the court that they took all the necessary steps which are considered as
reasonable steps in the situation for the purpose of ensuring the listed disclosing entity complied
with its obligations, and after taking these steps organization genuinely believed that the listing
disclosing entity complied with the stated obligations.
Mr. Rares characterized the sending of E-mail by Mr. Glen on 18th April as an “honest blunder”.
There were no evidences which stated that Mr. Glen had any fraudulent intention or any other
unworthy motive behind these e-mails. However, it seems that Mr. Glen only ensuring that all
the analysts who had been earlier consider all the facts which he believed that already disclosed
by the defendant. However, while sending the e-mail, Mr. Glen fails to consider the fact that the
information sent by him went further than the previous disclosure of the defendant. This can be
understood through example, information related to the impact of $30 million on the gross profit
because of the defendant adoption of the poor 2000 vintage Wine, and this impact will be
expected in full range in the one financial year, 2003.

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It can be said that disclosure of these provisions effect the organization in adverse manner as it
directly affect the price or value of ED securities of the organization. This result in disclosure of
the information which had material interest, and this result in failure of the directors to
contravene their fiduciary duties stated under common and statutory law. Section 180 and 181 of
the Corporation Act 2001 imposed duty on the directors of the company to exercise their power
and perform their obligation with due care and work in the best interest of the company. In this
case, directors of thee company fails to fulfill their duties under these sections.
It must be noted that directors of the company can use the provision of the due diligence as the
defense also, but in context of the contravention of the section 674(2) it can be said not only
entity was liable but the person who actually contravenes this provision was also liable. It can be
said that it was necessary for the company to incorporate an effective continuous disclosure
compliance program in case organization and its directors wants to avoid the liability under this
section and use due diligence defense (Seeto & Howatson, 2008).
Court’s decision:
In this case, court held that defendant sent an e-mail through its Executive General Manager of
Corporate Affairs, Glen Cunningham to the eleven analysts, and such e-mail include material
information which has capability to affect the price or value of ED securities of the organization.
Court further stated, defendant fails to inform the Australian Stock Exchange Limited (``ASX'')
in context of the information, before such information was sent to the analysts. Court believes
that, by sending the e-mail, defendant transferred the information to the selectively analysts,
without disclosing that information to the ASX who was the operator of the listing market and
this results in the contravention of the section 674(2) of the Act.
In this case Court observes “whether any extra information provided to expert, instructions given
to them, and any declarations transmitted to them cannot be maintained at the similar time in
which opponent wants to depend on the declarations in the proceedings. Particularly, in context
of draft of declarations, it can be said that process in which an expert witness was provided in
relation of the drafts of their declaration to which they were agree or not, results directly in the
reasonable implication which means that the draft may have influenced the expert and as per that
the effects of those drafts on the view of the expert must be open for the scrutiny. Court
appreciates this practice and stated that this practice may be common in opposition proceedings
and may be convenient for the parties of the case to notify the difficulty which was generally
related to the engaging experts. However, Court does not believe that this act was done in the
expectation that an honor of the claim is likely to be maintained. In this context, holding the
claim for honor would not be consistent with the objectivity and transparency needed in lieu of
the evidence provided by the expert (Brown, 2006).
This case was decided by the Federal Court and the first division in context of the civil penalties
introduction for breach of continuous disclosure obligations, under section 674(2) of the

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Corporations Act. This case also develop some doubts in context of the personal-corporate
morality argument which results in another question “what was the factor related to the
corporation which direct the people to act in such ways that they would not do in the private
lives”?
By considering this question, it can be said that in what manner an individual would see who was
engaged in the major fraud in the organization. For answering these questions, it was important
to recognize the fundamental conception of the corporation which was permitted by law. For the
purpose of initiating this concept in context of the corporation, individual must recognized that
corporation was the social institution. However, it was necessary to understand that corporation
was the legal institution, and existence and capacity to operate rely on the law and legal
provisions (Warren, 2005). Many years ago corporation was considered as the government entity
and based on the government bodies to operate their business. By the end of the 19th century, a
new perception was formed in the common law and this perception was adopted by number of
countries and this was to have far-reaching consequences: the concept that the corporation was
created as a natural which was similar to the human beings. Therefore, it can be said that it was
not necessary to hold the mangers and officers liable for everything on personal level, but in case
managers or officers involve in major fraud on their hand, then only they shall be held personally
liable.
Impact of the decision:
In this case, advice was provided by the defendant in advance, through the ASX and on the
website of the Southcorp’s in context of all the briefings. It was necessary for the corporations to
understand that they must disclosed all the material information which had potential to effect the
price of the corporation must be disclosed through the ASX and also placed on the website of the
company. In this case, company fails to fulfill this provision and send the e-mail which contain
the material information to the analysts before sending such information to the ASX (market
operator).
Later, board of directors of the defendant company adopt new document and distributed the same
within the corporation. This document defines the new rules related to the continuous disclosure
of the material information and other related provisions in lieu of section 674(2) of the Act.

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Southcorp already had a document which defines the policy and procedures in context of the
disclosure of information that would directly affect the price and value of the Company's shares.
However, in this new document, defendant updates the policies related to the disclosure of
information that would directly affect the price and value of the Company's shares.
Conclusion:
After considering the facts of the case, it can be said that, court intended the provision related to
the continuous disclosure among the other things also for the purpose of preventing particulars
disclosure related to the market sensitive information. Disclosure of these provisions effect the
organization in adverse manner as it directly affects the price or value of ED securities of the
organization. This result in disclosure of the information which had material interest, and this
result in failure of the directors to contravene their fiduciary duties stated under common and
statutory law.
References:
Australian Securities and Investments Commission v Southcorp Ltd [2003] FCA 1369; (2003)
130 FCR 406.
Brown, A. (2006). Legal and Patent Attorney Privilege. Available at:
https://andrewbrown.co.nz/media/1060/legalpapriv.pdf. Accessed on 18th May 2018.
Corporation Act 2001- Section 181.
Corporation Act 2001- Section 182.
Corporation Act 2001- Section 674.
Kluwer, W. (2004). ASIC v SOUTHCORP LIMITED (NO 2), Federal Court of Australia, 27
November 2003. Available at:
https://iknow.cch.com.au/document/atagUio377942sl10431553/asic-v-southcorp-limited-no-2.
Accessed on 18th May 2018.
Kluwer, W. (2011). Morley V Australian Securities And Investments Commission (No 2);
Shafron V Australian Securities And Investments Commission (NO 2), Supreme Court of New
South Wales, Court of Appeal, 06 May 2011. Available at:
https://iknow.cch.com.au/document/atagUio1876801sl297816015/morley-v-australian-

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securities-and-investments-commission-no-2-shafron-v-australian-securities-and-investments-
commission-no-2-supreme-court-of-new-south-wales-court-of-appeal-06-may-2011. Accessed
on 18th May 2018.
Seeto, G. & Howatson, C. (2008). continuous disclosure compliance program. Available at:
https://www.claytonutz.com/knowledge/2008/january/compliance-with-continuous-disclosure-
obligations. Accessed on 18th May 2018.
Sulaiman, A. (2007). Corporate governance issues and enforcement activities of the Malaysian
corporate regulators. Available at:
http://www.clta.edu.au/professional/papers/conference2007/2007AS_CGIEAMCR.pdf.
Accessed on 18th May 2018.
Warren, M. (2005). Corporate Governance and The Role of the Courts in Changing Community
Behaviour” for the 2005 ASIC Summer School. Available at:
http://www5.austlii.edu.au/au/journals/VicJSchol/2005/1.pdf. Accessed on 18th May 2018.