Key legal and regulatory developments driving and shaping M&A
Growing global regulatory oversight and increased pressure on the Australian Securities and Investment Commission (ASIC) to take punitive action means that 2018 is to likely to be a year fraught with new and greater risks for Australian executives. ASIC penalties were once likened to “being hit with a lettuce leaf” by Financial System Inquiry chair David Murray, and there is a growing concern that executives are accepting pecuniary punishments as par for the course. Consequently, regulators and shareholders are increasingly incentivised to tackle corporate misconduct.
D&O litigation is on the rise around the world, reflecting a global trend towards personal executive culpability and increasingly stringent regulation. Class actions against Australian companies have tripled in the last five years1, with the majority of these disputes stemming from allegations of executive misconduct, such as failures to meet continuous disclosure obligations. As a result, Australian D&O insurers have felt an estimated loss ratio of at least 200 per cent.
Since a former ASIC chairman described Australia as a “paradise” for white-collar criminals in 2014, the national regulatory body has faced increasing pressure to exercise its powers more stringently, penalise wrongdoers and protect consumers.
2017 saw continuing criticism and calls for reform: a March 2017 Senate inquiry2 into white-collar crime, an October 2017 consultation paper3 released by the Federal Government’s ASIC Enforcement Review Taskforce, and a major research report published by the University of Melbourne Law School in November 20174. They all emphasised that the Australian corporate penalty regime is significantly more lenient than its international counterparts and may not be sufficient to deter misconduct.
In a push to discourage a culture that sees civil penalties as the “cost of doing business” the ASIC Enforcement Taskforce called for the enhancement of ASIC’s banning power and the introduction of disgorgement powers. It remains to be seen whether and when the Federal government will implement those recommendations, although it appears to be willing.
The shift from pecuniary penalties of old to a regime of disqualification and disgorgement will likely do significant personal damage to a penalised director or officer. The current maximum penalty for individuals is AU$200,000, a sum that has not increased since 1993, and is considerably more lenient than corresponding international penalties. A power to compel directors to disgorge funds obtained in the course of misconduct would sidestep this relatively low threshold.
For individuals whose careers and livelihoods depend on executive roles, a blanket restriction from acting as an executive or working in a specified industry would be particularly onerous. Both disgorgement and disqualification remedies are likely to have a much greater financial and reputational impact on an executive than a potentially affordable fine.
As shareholder litigation continues to grow, we can expect the D&O insurance market to harden. It will be especially interesting to see how insurers and insureds react to a new, more creative, ASIC penalty regime. How might an increased potential for disqualification or disgorgement affect executive attitudes to defending claims? How will it impact loss ratios? Will policy wordings tighten in response? Will premiums increase? We will be watching this space closely and sharing developments with you.
Lifting the fear and suppressing the greed’: Penalties for white-collar crime and corporate and financial misconduct in Australia (March 2017)
ASIC Enforcement Outcomes: Trends and Analysis, Company and Securities Law Journal, Vol. 35, No. 5, pp. 289-321, 2017.
In this issue, we cover a broad spectrum of ‘hot button issues’ for boards and companies operating internationally.
© Norton Rose Fulbright LLP 2021