06-246 Chemeq Limited ordered to pay $500,000 in fines for breach of continuous disclosure provisions
Tuesday 25 July 2006
The Chairman of ASIC Mr Jeffrey Lucy announced that Chemeq Limited (Chemeq) has been ordered to pay fines of $500,000 for breaches of continuous disclosure provisions by the Federal Court of Australia, finalising ASIC’s civil penalty proceedings against listed company Chemeq.
In a settlement between ASIC and Chemeq reached on 29 June 2006, Chemeq consented to two declarations being made that it had contravened the market disclosure provisions of the Corporations Act as follows:
A declaration that Chemeq, between 10 February 2003 and 30 April 2004, did not tell the Australian Stock Exchange (ASX) about the increased costs of constructing and commissioning its manufacturing facility at East Rockingham in Western Australia, when that information was, throughout the period, not generally available and information which a reasonable person would expect to have a material effect on the price or value of the fully paid ordinary shares in Chemeq (First Contravention), and
A declaration that Chemeq, between 10.22 am AEST on 6 October 2004 and 3.36 pm AEST on 7 October 2004, failed to disclose certain information about the commercial impact of a patent granted in the US in October 2004, when that information was, throughout the period, not generally available and information which a reasonable person would expect to have a material effect on the price or value of the fully paid ordinary shares in Chemeq (Second Contravention).
During the period of the First Contravention, Chemeq raised about $45 million by issuing shares and about 40 million fully paid ordinary shares in Chemeq were traded on the ASX. In relation to the Second Contravention, approximately 26 million shares were traded during the two-day non-disclosure period.
Mr Justice French of the Federal Court ordered that Chemeq pay a fine of $150,000 in respect of the First Contravention and $350,000 in respect of the Second Contravention. As agreed between the parties, ASIC was also awarded costs of $170,000.
‘This is the highest penalty awarded in Australia against a listed company for breaches of continuous disclosure rules’, Mr Lucy said.
‘These court orders emphasise the importance of timely and accurate disclosure to shareholders and the market in general.
‘Chemeq’s court admissions confirm the strength of ASIC’s case’, he said.
Mr Justice French said, ‘Compliance policies and procedures will not be effective unless there is, within the corporation, a degree of awareness and sensitivity to the need to consider regulatory obligations as a routine incident of corporate decision-making.’
‘This kind of general sensitivity to the issues underpins what is sometimes called a ‘culture of compliance’, he said.
Chemeq was listed on the ASX in August 1999 after raising $3.5 million from the issue of 14 million ordinary shares of 25 cents.
Chemeq owns the intellectual property associated with an acrolein-based polymeric antimicrobial, which was developed as an alternative to antibiotics for the prevention and control of intestinal bacterial diseases in intensively reared livestock, and related intellectual property.
On 23 December 2004, after a three month investigation by ASIC and referrals from the ASX, ASIC commenced civil penalty proceedings against Chemeq in the Federal Court in Perth.
ASIC sought declarations that between November 2002 and October 2004 Chemeq breached the continuous disclosure provisions of the Corporations Act, which requires listed entities to promptly disclose market sensitive information to the ASX. ASIC sought pecuniary penalties.
On June 29 2006, Chemeq admitted two separate contraventions. The first contravention would have attracted a penalty of up to $200,000. The second contravention, which occurred after 1 July 2004 when the CLERP 9 legislation commenced, would have attracted a fine of up to $1 million.
The first contravention
Chemeq admitted that between 10 February 2003 and 30 April 2004, it knew that the total anticipated cost of the Rockingham facility had increased from $25 million to ultimately in excess of $50 million, but did not notify the ASX of the cost overruns.
Mr Justice French said that while this contravention was not the result of deliberate or reckless conduct by Chemeq, it cannot be dismissed as mere carelessness. He noted that the directors and officers of Chemeq during the relevant period were kept informed of the cost overruns and that it simply did not seem to have occurred to them that this was a matter which required disclosure.
‘This suggests that at the time the Board of Chemeq had a serious lack of appreciation of its obligations’, Justice French said.
The second contravention
On 6 October 2004, Chemeq made an announcement to the ASX. The announcement dealt with the granting of a US patent and the first distribution of its product to South Africa. Included in the announcement was a statement that Chemeq ‘has been granted an additional US patent (previously pending only), which extends the company’s exclusive protection in manufacture and marketing of its veterinary products in this country to the year 2020’.
However, Chemeq failed to tell the ASX that the issue of the US Patent was not material to Chemeq’s commercial position in the context of the whole of its intellectual property portfolio and in light of the difficulty with enforcing the patent rights.
Following a query from the ASX on 7 October 2004, relating to a newspaper article about the significance of the patent, Chemeq clarified the significance of the patent to the ASX.
Following the announcement on 6 October, the share price of Chemeq climbed from $1.78 to close at $2.82 and 7 October 2004 climbed to over $3. The total volume traded during the non-disclosure period was 26.8 million shares.
Mr Justice French said, ‘In my opinion, the matters referred to by ASIC in its submissions, which I accept, has justified a penalty at the level for which it contends.’