ANZ to pay $900,000 for a multi-million dollar lesson on continuous disclosure compliance

In what ASIC has described as a “landmark continuous disclosure case”, ANZ has been fined? $900,000 for breaching its continuous disclosure obligations in the course of conducting a $3 billion capital raising in 2015. In absolute terms, the penalty is a drop in the ocean for ANZ. But in the context of 2015 when the maximum penalty for a single breach of continuous disclosure laws was $1 million, the case is significant. As ASIC Deputy Chair Karen Chester noted, speaking about the case last Friday:

“If such a contravention occurred today, the maximum penalty could be anywhere between $15 million to $780 million. Listed entities should see today’s penalty decision as a strong and purposeful warning to fully meet their continuous disclosure obligations. …” (emphasis added)

So what did ANZ do to deserve such reproval?

By omitting to disclose that approximately 30% of the institutional uptake in its capital raising had in fact been met by underwriters rather than institutional investors, ANZ failed to keep the market appraised of information that was likely to have a material impact on the price of ANZ shares. In doing so, the efficiency and integrity of the market was seriously compromised, as investors traded on the presumption that the institutional placement had been fully placed to institutions with no shortfall, when this was far from the truth.

The problem stemmed from a change in the level of demand from several large institutional players that ANZ expected to participate in the capital raising. Hedge funds which threw big numbers around early on in the institutional placement changed their tune on subscribing for quite so many shares, resulting in a substantial discrepancy between the subscription numbers recorded in the underwriters’ books and the actual appetite of the hedge funds. Concerned with the risk that the hedge fund investors would immediately sell the excess if they were allocated the full amount, causing substantial market volatility, the underwriters felt they had no choice but to take on a considerable number of the shares themselves.

ANZ, who was well advised of the underwriters’ decision and received only vague assurances that they would not immediately sell-down their ANZ shares in the aftermarket, nonetheless announced to market at 7:30am on 7 August 2015 stating the placement had been successfully completed, without any reference to the underwritten component. Expert evidence also noted that coincident media reports described the bookbuild as “covered” and that the lead managers had managed to “get the deal away”, both being colloquial terms referring to the successful completion of the placement, thereby reinforcing the market’s (mistaken) expectations.

Within this context, the court was convinced that ANZ had failed to disclose material price-sensitive information to the market in breach of its continuous disclosure obligations. Had the actual extent of the underwriting been disclosed, market participants would have traded on the very different expectation that the underwriters would promptly dispose of their allocated shares, placing downward pressure on ANZ’s share price.

The ANZ case is a resounding reminder to companies to be judiciously transparent as to the level of demand on its securities in a capital raising (or conversely, the extent of the shortfall and its allocation). This is undeniably important in a free market where demand is directly linked to the price of shares.

If you have any questions about what you need to disclose as a listed entity, please get in touch.