Key Issues Company Secretary

The AWB shareholder class action — lessons in continuous disclosure

By Jason Geisker, Senior Associate, Maurice Blackburn Lawyers1

It would be a difficult task to find found that a ‘transaction was deliberately anyone in with even a passing and dishonestly structured by AWB so as to interest in corporate governance issues misrepresent the true nature and purpose • AWB shareholders alleged of the trucking fees and to work a trickery that the company’s failure who was not familiar with the kickback scandal involving AWB Limited’s on the ’. Shareholders have lost half the value of their investment. Trade to report involvement in contracts with during the time of with Iraq worth more than A$500 million kickback schemes breached UN sanctions and the UN Oil-For-Food per annum has been forfeited. Many senior continuous disclosure Programme. executives have resigned, their positions obligations and that being untenable. Some entities will not deal AWB’s denials and silence AWB’s misconduct has since been widely with the company. Some wheat farmers do amounted to misleading reported and is well documented in so unwillingly but are, at present, compelled ’s report on the Inquiry into by law to do so. AWB is threatened by law conduct certain Australian companies in relation suits both in Australia and overseas. There are to the UN Oil-for-Food (OFF) Programme. potential further restrictions on AWB’s trade • AWB’s share price declined It was the findings from the Cole Royal overseas. And AWB has cast a shadow over dramatically during the Commission that prompted shareholders Australia’s reputation in international trade. to engage Maurice Blackburn to conduct a class action. Legal proceedings began in Following the release of the Cole Report, the Federal Court in 2007, following the Maurice Blackburn filed a representative • Unresolved questions dramatic collapse of AWB’s share price. proceeding in the Federal Court of about assessment of loss Australia in April 2007 against AWB Ltd in shareholder class actions During the period between 1999 and on behalf of John and Kaye Watson and and the complexities 2003 AWB paid several hundred million another 454 AWB shareholder claimants. surrounding the case caused dollars in ‘kickback’ fees, which were IMF (Australia) Ltd funded the costs of difficulties in calculating the received by the former the litigation and provided security for regime in Iraq. These payments were any adverse costs orders made in favour value of shareholders’ claims contrary to UN sanctions imposed on of AWB in the proceeding. Over 1,200 against AWB Iraq. The repercussions of AWB’s actions additional AWB shareholder claimants were enormous and placed Australia in subsequently applied to join the action breach of its international obligations. during the course of the litigation. It has been said that AWB’s participation in the kickback scheme now represents In light of the detailed findings made by one of the largest corruption scandals in Commissioner Cole it may be surprising Australian corporate history. to some to learn that AWB chose to ‘vigorously defend’2 the shareholder In the prologue of his report published in class action. Between 2007 and the end November 2006, Commissioner Cole stated: of 2009, more than 70 interlocutory applications and directions hearings were The consequences of AWB’s actions, however, have been immense. AWB has brought before the Federal Court. In April lost its reputation. The Federal Court has this year the court granted settlement

402 Keeping good companies August 2010 approval of the shareholder class action in breach of UN sanctions. Between 1999 had been ‘totally transparent’ and ‘acted following AWB’s agreement in February to and 2003, AWB paid more than US$200 above board’ in relation to its contracts make a payment of $39.5 million including million to Iraq as part of these covert with Iraq executed through the UN OFF costs. In gaining settlement approval some arrangements. Programme. It was further alleged that, may argue that an important opportunity by the company’s silence, AWB also made for judicial determination of the law in AWB also placed Australia in contravention implied representations to shareholders relation to causation and loss assessment of UN sanctions by further inflating some that the company was complying with its in shareholder class actions has been lost. wheat export contracts to recover an continuous disclosure obligations. So what prevented the AWB shareholder alleged debt owed by the Iraqi regime to class action trial from continuing and BHP, which had since been assigned to a Shareholders said that AWB had thereby proceeding to final judgment? company known as ‘Tigris Petroleum’. caused loss or damage to them ‘by reason of’ or ‘resulting from’ this conduct. The shareholder case against AWB The shareholders’ case asserted that the company was aware of Awareness The subject matter of the shareholder this information, and that any reasonable claims arose out of AWB’s wheat exports person who commonly invests in securities Part of the breach of continuous disclosure to Iraq under the UN Oil-for-Food would have expected this information to obligations case against AWB required Programme between 1999 and 2003. have a material effect on the price or value shareholders to establish that AWB was The UN OFF Programme was established of AWB securities.6 It was said that AWB’s ‘aware’ of the information not disclosed. in 19953 by the UN Security Council in continuing failure to disclose this information ‘Awareness’ is a term defined in the ASX response to the dramatic human impact resulted in an inflated market price for Listing Rules and requires that a ‘director’ or that trade sanctions were having on Iraqi AWB shares. Consequently AWB securities ‘executive officer’ has or ought reasonably citizens. The UN OFF Programme provided were purchased by claimants at a higher to have come into possession of the certain exemptions to sanctions to allow price than the true value of those securities. information in the course of their duties as delivery of humanitarian supplies, such Shareholders argued this information was a director or executive officer of that entity.7 as medicine and food.4 The UN sanctions material because such activities: prohibited funds from being made • called into question AWB’s corporate On the eve of the trial, AWB admitted available to Iraq. The resolutions obliged all reputation and investor confidence in that it was aware that it had made the so nation states to ensure that their nationals its corporate governance called fee payments to Iraq, but argued 5 adhere to the terms of the sanctions. • put at risk AWB’s dominant share of the that such payments were not contrary to valuable Iraqi wheat export market and UN sanctions. Shareholders alleged that Australia was obliged to prevent its there was ample evidence to establish that • created a significantly increased risk ‘nationals’ from contravening these senior executives of AWB were aware that that the statutory regime providing resolutions. One way it did so was by way payment of the so-called fees was likely for the ‘single desk’ system and with of amendments to the Customs (Prohibited to be in contravention of UN sanctions it, AWB’s virtual monopoly on bulk Exports) Regulations 1958, which provided and that AWB had taken positive steps wheat exports, would be reviewed and that all exports from Australia to Iraq to prevent this information from being modified by the Federal Government were prohibited without permission of disclosed, even in circumstances where to the detriment of AWB. the relevant Minister. Such permission direct inquiries were made of AWB.8 could only be granted if the Minister was satisfied that the export did not place Misleading conduct Australia in breach of its obligations under Defences Shareholders also alleged that AWB the UN resolutions. AWB asserted various other defences in had also contravened the misleading answer to the shareholders’ claims: conduct provisions of the Corporations Between 1999 and 2002, AWB inflated • Australian courts had no jurisdiction Act 2001, Australian Securities and the price of 20 of its wheat export to hear significant aspects of the Investments Commission Act 2001 contracts with Iraq by including provision shareholders’ claims because they (ASIC Act) and Trade Practices Act for so called ‘transportation fees’ and were said to involve matters of state, 1974 (TPA) by making various express ‘handling fees’. AWB obtained funds in which the court was not permitted to representations in its annual reports payment of the wheat export contracts adjudicate on from the UN escrow account, including and in other ASX and media releases to • the information was not ‘material’, the so-called ‘transportation fees’ and the effect that its business affairs were in the sense that it would not be ‘handling fees’. AWB then paid these fees being conducted ‘legally’, ‘ethically’, ‘in expected by a reasonable person who to a front company and Iraq conduits accordance with the highest standards commonly invests in securities to have thereby enabling Iraq to obtain funds, of integrity and propriety’ and that AWB

403 Key Issues Company Secretary

a material effect on the price or value Shareholders argued that the information being the date the Cole Inquiry hearings of AWB securities regarding the extent of AWB’s dealings commenced. • the company’s constitution purported with Iraq was not public information and to waive claims by shareholders would have been likely to influence people It was said that the ‘materiality’ element of s 674 of the Corporations Act made it • the information had allegedly already who commonly invest in securities in been made public, primarily via a series deciding whether to acquire or dispose of clear that the subject and purpose of the of media publications of rumours AWB securities. This conclusion was said provision is to ensure that the market has of AWB’s alleged involvement in to be supported by the dramatic decline in all the information about a company that it kickbacks to Iraq and by the findings of the market price of AWB securities from requires to determine the price or value of a UN inquiry in 2005. 16 January 2006 depicted in Figure 1,9 its securities. That purpose is given effect by

Figure 1: AWB Limited — daily closing price and trading volume annotated with major events

7.00 12,000 16 January 2006: Start of public hearing of the Cole Inquiry 6.00 10,000 - 24 November 2006: Submission of Cole Report to the Governor General - 27 November 2006: Public release of 5.00 the Cole Report 8,000

4.00

12 May 2006: 6,000 The Cole Inquiry adjourns 3.00 27 October 2005: Closing price ($) Release of the Volcker Report 22 August 2006: olume (thousands) V The Cole Inquiry 4,000 resumes hearing 2.00

2,000 1.00

- 0 1 Jul 06 9 Jan 06 2 Oct 06 6 Feb 06 3 Apr 06 4 Sep 06 24 Jul 06 6 Mar 06 7 Aug 06 1 May 06 23 Jan 06 12 Jun 06 26 Jun 06 03 Oct 05 17 Oct 05 16 Oct 06 30 Oct 06 20 Feb 06 17 Apr 06 18 Sep 06 31-Oct-05 12 Dec 05 26 Dec 05 14 Nov 05 28 Nov 05 13 Nov 06 27 Nov 06 20 Mar 06 21 Aug 06 15 May 06 29 May 06

AWB Trading volume AWB Closing price S&P/ASX 200 index

404 Keeping good companies August 2010 considering the impact of the contravention • one advantage of the rule in Potts v • compensation should be measured on the market through its collective pricing Miller is that it avoids difficult questions by reference to a methodology that of AWB securities following revelation of of causation that might otherwise arise is consistent with the overriding AWB’s conduct with Iraq. if the actual receipt on realisation is compensatory principle and the treated as being the value obtained, purpose, objects and wording of the because in the period between the continuous disclosure regime. Assessing loss transaction date and the date of resale AWB shareholders sought statutory other factors may have influenced the The question of causation compensation for their losses. Importantly value or resale price of the asset and damage raised some in the context of shareholder actions • other approaches to the assessment particularly complex issues for breach of continuous disclosure of damages, so long as they work no obligations, the measure of loss under injustice, may be appropriate specific to the AWB action. each of the statutory provisions relied For instance, information or on10 was said to be at least ‘the difference • the rule in Potts v Miller will between the price paid for the AWB normally not apply where either the ‘corrective disclosures’ regarding securities and the real value of the AWB misrepresentation has continued after AWB’s misconduct were said to the date of acquisition so as to induce securities at the time of purchase had ultimately be made public via the all the information been known to the the plaintiff to retain the asset or the market’. This measure is adopted from circumstances of the case are such that Cole Inquiry, which proceeded what is known as ‘the rule in Potts v the plaintiff is, by reason of the fraud, over an extended period. Miller’11 that was explained by Gibbs CJ in ‘locked into the property’ and 12 Gould v Vaggelas (1985) 157 CLR 215. • there can be circumstances in which it However, AWB argued that proof of It is well established that in an action is proper to require a plaintiff only to individual reliance by shareholders was where the plaintiff has been induced by bring into account the actual proceeds required. It was recognised there are the fraudulent misrepresentation of the of the asset provided that he has acted cogent arguments for different approaches defendant to enter into a contract of reasonably in retaining it. In such to measurement of loss in these types of purchase, the measure of damages usually circumstances the loss is the purchase shareholder class actions. Additionally, the applicable is the difference between the price less whatever is ‘left in hand’. question of causation and damage raised real value of the property at the time of the some particularly complex issues specific to purchase and what the plaintiff paid for Consequently, there are no rigid rules the AWB action. For instance, information it:… Events that happen after the time of about the approach to assessing damages the purchase may throw light on the real in shareholder claims alleging a breach or ‘corrective disclosures’ regarding AWB’s value of the property at that time: Where of the continuous disclosure obligations. misconduct were said to ultimately be made the property has depreciated in value after Although the predominant view is that public via the Cole Inquiry, which proceeded the purchase, and the depreciation was the measure of damages applicable will over an extended period. Rather than AWB due to some cause inherent in the property usually be the difference between the providing a single and comprehensive itself, the depreciation must be considered ‘true value’ of the securities at the time ‘corrective disclosure’ to ASX, information in determining the real value of the property of purchase and the actual price paid, in was said to have been gradually made at the relevant time, but where the cause some circumstances this will not be the public via a series of submissions, addresses of the depreciation was “independent”, and evidence made public during the course “extrinsic”, “supervening” or “accidental”, case and the ‘left in hand’ approach may of the Cole Inquiry. The manner in which the additional loss is not the consequence of be more appropriate. this information ultimately became publicly the inducement and it should not be taken into account in arriving at the value of the available compounded the difficulties in property at the time of the purchase… Issues on settlement measuring causally connected loss arising from AWB’s conduct. However, the rule in Potts v Miller is by no Shareholders argued that: means an exclusive method of measuring • proof of individual shareholder reliance shareholder loss. Other legal principles on the company’s misconduct is not Conclusion a necessary element required by the relating to the assessment of loss may also The AWB case presented one of the first 13 legislation apply. These principles include that: opportunities for judicial determination • the fundamental rule is that the • the causal link between the of many unresolved legal issues pertinent plaintiff should be compensated contraventions by AWB and damage to shareholder class actions since the • the rule in Potts v Miller is a ‘second to shareholders was established by settlement of the Aristocrat matter in order’ rule and is only a means proving that shares in AWB traded at 2008.14 That being so, it was highly of giving effect to the overriding prices higher than they would have had likely that any decision would have been compensatory rule the contraventions not occurred subject to appeal, regardless of the initial

405 Key Issues Company Secretary

decision, resulting in significant additional to the assessment of loss in the context of or becomes aware of any information’. legal costs and delays in recovering shareholder class actions in Australia. ’Aware‘ is defined in Listing Rule 19.12 as compensation for shareholders. applying to a ’director or executive officer’ Jason Geisker can be contacted on (02) 8 See, for example, AWB’s response to the These uncertainties contributed to 8267 0916 or by email at JGeisker@ Canadian Complaint in January / March the parties’ desire to resolve claims on mauriceblackburn.com.au. 2000, its response to the US Wheat acceptable terms in the interests of all Associates complaint on 6 June 2003 and its group members. On 27 April 2010 Foster J public announcements to the ASX on 27 and 28 October 2005 in respect of the IIC Report approved a proposed settlement agreement Notes 9 The author acknowledges and thanks Dr reached in February during the course of 1 The author and Ben Slade, Managing F Dunbar of NERA Economic Consulting for the trial, whereby AWB agreed to pay $39.5 Principal of Maurice Blackburn, conducted preparation of the chart million inclusive of legal costs in resolution of the AWB class action on behalf of 10 ss 1317HA and 1041I of the Corporations Act, the shareholder class action. shareholders in the Federal Court of Australia s 12GF of the ASIC Act and s 82 of the TPA in Sydney, proceeding NSD 2020 of 2007 11 (1940) 64 CLR 282 It can be expected that considerations of 2 AWB Ltd, 2007, Annual Report, p 104 12 At pp 220-221 cost and delay will continue to factor in 3 United Nations Security Council Resolution 986 13 See HTW Valuers (Central QLD) Pty Ltd v the prevalence of shareholder class action 4 The combined effect of UNSC Resolutions Astonland Pty Ltd (2004) 217 CLR 640 and settlements. These considerations, coupled 661 and 986 Smith New Court Securities Ltd v Citibank with uncertainties regarding loss assessment, 5 Charter of the United Nations Act 1945 ss 4, NA [1997] AC 254 (quoted with approval in demand that real efforts be made to achieve 5 and schedule articles 25, 39, 41, 48 and 49 HTW Valuers) a commercial and timely resolution of such 6 s 674(2) of the Corporations Act 2001 14 See Dorojay Pty Ltd v Aristocrat Leisure Ltd claims. Only where a settlement cannot 7 See ASX Listing Rule 19. Listing Rule (Federal Court of Australia, NSD 362/2004), be reached will the courts then have the 3.1 contains the continuous disclosure which settled following initial trial but prior opportunity to clarify the correct approach requirement, namely ’once an entity is to judgment being delivered by Stone J.

406 Keeping good companies August 2010