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Directors’ Duties in the On-line Environment

Directors’ Duties in the On-line Environment. Simon Rubenstein Solicitor ASIC. The Internet. Changing the way we communicate, transact and conduct business Provides for immediate and low cost access to and dissemination of information

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Directors’ Duties in the On-line Environment

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  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 director’s 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 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

  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

  18. 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 ]

  19. 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

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