Directors

1
Directors Duties in the On-line Environment

• Simon Rubenstein
• Solicitor
• ASIC

2
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

3
Overview

• Application of directors duties
• Remedies for breach of directors duties
• Regulating and enforcing corporate activity in
  the online environment
• Rentech
• LibertyOne and Samson

4
Application of directors duties

• Starting point - existing directors duties apply
  to conduct occurring online
• Application of the existing directors duties to
  the online environment only limited by
  imagination and yet to be fully appreciated

5
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

6
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

7
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

8
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

9
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?

10
Regulation and Enforcement

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

11
Enforcement

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

12
Enforcement

• Internet element to many ASICs 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

13
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

14
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

15
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)

16
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?

17
LibertyOne Samson

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

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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

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LibertyOne Samson

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• Offer withdrawn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

20
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

21
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