Australian IPOs and Takeovers: Liability Has Increased, Defences Are Eroded
Civil penalty liability now affects prospectuses and takeover documents, and the existing criminal and civil liability regimes for these documents have defences to liability.
Liability for companies launching an Australian IPO or takeover changed significantly this year—with not so much as a murmur of protest from the market. Due diligence just got more important, but the reason may surprise you.
Liability Has Increased
Civil penalty liability now affects prospectuses and takeover documents. That means substantial fines, which are now:
- For individuals—the higher of $1.05 million or three times the benefit derived/detriment avoided;
- For companies—the higher of $10.5 million, three times the benefit derived/detriment avoided or 10% of annual turnover (max. $525 million).
It also means:
- Disqualification sanctions for directors and management.
- No fault elements to be proved.
- Lower standards of proof ("balance of probability") compared to criminal fines ("beyond reasonable doubt").
- Liability for "attempted" contraventions (which is new).
- Liability for others "involved in the contravention", such as directors, management, potentially advisers.
- Proceedings can be brought directly by the Australian Securities and Investments Commission ("ASIC") with a revved-up enforcement mandate.
That's a big extension to liability.
It Gets Worse—Defences Are Eroded
The existing criminal and civil liability regimes for these documents have defences to liability:
- For prospectuses—for reasonable reliance, due diligence and withdrawal of consent.
- For takeover documents—for reasonable reliance, lack of awareness (for takeover documents) and withdrawal of consent.
Those do not apply to the new civil penalty liability.
It's not clear. The civil penalty liability regime deliberately excludes any element of fault, unless it is baked into the section that the contravention is based on.
Unfortunately, for prospectus and takeovers liability, the defences are in separate sections, and they apply specifically to criminal liability and civil liability only, not to any breach of the core section.
There is still a general defence for reasonable mistake of fact, and honesty can be a mitigating factor—but it is not a defence.
What Does that Mean?
The risk of ASIC action for companies, directors and others for serious deficiencies in disclosure is much higher. It does not mean you should give up on due diligence processes—if anything, they are more important and should be more intensive.
You can't afford to get something wrong.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.