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Coffey, Josephine --- "One law for all no more: The demise of Common Law contractual obligations in Stock Exchange regulation in Australia, New Zealand, the United Kingdom and Ireland" [2006] NZYbkNZJur 14; (2006) 9 Yearbook of New Zealand Jurisprudence 210

Last Updated: 22 April 2015

One Law For All No More: The Demise of Common Law Contractual Obligations in Stock Exchange Regulation in Australia, New Zealand, the United Kingdom and Ireland

Josephine Coffey*

i. INTRODUCTION

Since the eighteenth century, the relationship between a stock exchange and its listed companies, and between the stock exchange and its members, has been regulated by the terms of a common law contract and its associated rights and obligations. This paper is a review of the approaches taken by four common law jurisdictions to the general regulation of the market place, and more specifically to the regulation of ongoing corporate disclosure of material information to the market. In all cases, the common law contractual obligations of disclosure have been supplemented to a certain extent by legislation and codes of corporate governance. In two instances, the common law is also complemented by the directives of the European Union.

Does some market regulation by black letter law, the legislation and codes, distance the obligations of the regulated party? Where there is an ongoing obligation of corporate disclosure that can influence the second by second adjustments of share prices on the market, is there a need for greater immediacy on the part of the regulator? Does the privity of the common law contract and the relationship between the company and the market regulator make the obligations to fulfil the terms of the contract more immediate?

ii. UNITED KINGDOM

‘So the old Yellow Book is now and FSA Purple Book’¹

The earliest evidence of organised trading in marketable securities dates from 1698 when John Castaing began to issue a list of stock and commodity prices called ‘The Course of the Exchange and other things’ from the ‘Office in Jonathan’s Coffee-house’. Regulation was not a strong point in those early

* Dr Josephine Coffey, Business Law, School of Business, The University of Sydney.

1 Financial Services Authority, Maintaining Standards, Speech by Howard Davies, Chairman

FSA, IFAC Conference Edinburgh 25 May 2000.

days, with outbursts such as the ‘South Sea Bubble’, but by 1801 ‘the first regulated exchange came into existence in London and the modern Stock Exchange is born.’²

Under the London Stock Exchange (LSE) guidelines to continuing obligations, a listed company was required to notify the exchange without delay of

‘all relevant information’ that was not public knowledge and ‘any major new developments in the company’s sphere of activity’ that could be price sensitive.³ Any change in the financial condition or expected performance of a listed company should be disclosed.

The LSE’s Listing Rules were commonly know as the Yellow Book but from December 1999 the LSE and the Financial Services Authority (FSA) cooperated to provide an approach to listing that retains the standards of the Yellow Book but minimises the duplication of the listing process.⁴

Consequently, HM Treasury agreed that it would be appropriate for the FSA

to become the ‘UK Competent Authority for Listing.’⁵

Effective 1 May 2000,⁶ the role of Competent Authority and the enforcement of the listing rules are no longer the responsibility of the LSE, which followed the ASX model and become a company listed on its own exchange. Shares in London Stock Exchange plc were listed on the main market on 20 July 2001.⁷

The FSA, as the single statutory market regulator under the Financial Services and Markets Act 2000 (UK), now has responsibility for supervising the LSE. As a result, there is a ‘two-stage admission process’ for companies wishing to list securities in London: the company must apply to the UK Listing Authority (UKLA), a division of the FSA, for admission to the Official List and then must apply to the LSE for admission to trading on the stock market.⁸ As the Chairman of the Financial Services Authority quipped:

2 London Stock Exchange, Our History: http://www.londonstockexchange.com/

3 London Stock Exchange, Continuing Obligations Guide (1999) Part 1 Disclosure of Price Sensitive Information Listing Rule 9.1, 9.2; UKLA, The Continuing Obligations Guide, Appendix 3, December 2003, Chapter 2 Disclosure of Price Sensitive Information.

4 Financial Services Authority, The Transfer of the UK Listing Authority to the FSA,

Consultation Paper 37, December 1999. www.fsa.gov.uk

5 London Stock Exchange, New Arrangements for UK Listing Authority, Press Release 4

October 1999.

6 UK Listing Authority, Listing Rules, Press Release 10 April 2000.

7 London Stock Exchange, Interim Report - Six Months ended 30 September 2001 London

6 November 2001 1-13, 3.

8 Financial Services Authority, Introduction to the Financial Services Authority, London,

1 December 2001 at 3, 14 and 15; London Stock Exchange Admission and Disclosure

Standards, May 2001 at 1.1.

So the old Yellow Book is now and FSA Purple Book. The observant among you will note that the contents are almost exactly the same.⁹

The continuing obligations, discussed above, remain unchanged but are now contained in the listing rules of the UKLA.¹⁰ These obligations are also reinforced by the similar LSE disclosure standards 3.1 and 3.2.¹¹

The Listing Rules and further information is continually updated by amendments to the UKLA Sourcebook Chapter 9 concerning Continuing Obligations. Paragraphs 9.1, 9.2 state that a company must notify a Regulatory Information Service without delay of any major new developments and all relevant information which are not public knowledge but may lead to substantial movement in the price of its listed securities. A company need not disclose confidential ‘impending developments or matter in the course of negotiation’ as long as there is no breach of confidence that would be likely to lead to substantial movement in the price of its listed securities.¹²

The UKLA declines to define the term ‘substantial movement’ as a standard of the materiality of the disclosure.¹³ This decision is in line with ASX policy. The LSE had previously stated that a ‘substantial movement of price’ cannot be measured by a formula such as a theoretical percentage change of share value in a given time period. It is sufficient that the information is price sensitive and has the potential to have a significant effect on the share price.¹⁴ The result was LSE reluctance to impose formal sanctions on a company for a failure to disclose. One penalty for non-disclosure remains a suspension of trading in the company’s securities.¹⁵

The enforcement¹⁶ powers of the UKLA are potentially stronger than those of the LSE. If a company has breached any provision of the listing rules, then the Authority can impose a financial penalty or publish a statement censuring

9 Financial Services Authority, Maintaining Standards, Speech by Howard Davies, Chairman

FSA, IFAC Conference Edinburgh 25 May 2000.

10 UK Listing Authority, Listing Rules, 1 December 2001 Chapter 9 pars 9.1, 9.2.

11 London Stock Exchange, Admission and Disclosure Standards, May 2001 Part 2 at 3.1,

3.2.

12 UK Listing Authority, Sourcebook, December 2003 amendment Listing Rules, Chapter 9.

13 UK Listing Authority, Guidance Manual, 1 December 2001, Appendix 3 Continuing

Obligations Guide, 2.3.

14 Frost CA ‘Disclosure Policy Choices of UK Firms Receiving Modified Audit Reports’

(1997) 23 Journal of Accounting and Economics 163-187, 166.

15 London Stock Exchange, Admission and Disclosure Standards, May 2001 Part 2, 4.4 to

4.10.

16 Financial Services Authority, FSA Handbook of Rules and Guidance Enforcement - Chapter

14, Sanctions for Market Abuse, 14.3, 14.7.

the company ‘subject to the provisions of the Act.’¹⁷ Similar penalties apply to a director who is knowingly concerned in the breach. This UK example was the impetus behind ASIC’s successful call for the right to impose fines on companies for market offences.¹⁸

As in Australia, any impending strategic developments or ‘matters in the course of negotiation’ must be disclosed where there is reason to believe that a breach of confidentiality has or is likely to occur. There is emphasis in the UK on a warning announcement, even if the company is unsure whether there has been or is likely to be such a breach, it should at least issue a warning to the UKLA stating the accuracy, or otherwise, of potential leaked information. The company should issue the warning announcement if any hint of the undisclosed price sensitive information appears in a press article or in a share price movement.¹⁹

These guidelines remind the recipients of confidential information that they may not deal in the company’s securities until the information is made public. There is a warning of the insider dealing provisions, contained in the Criminal Justice Act 1993 (UK), which can apply to those who trade while in possession of undisclosed price sensitive information. The LSE model code still remains as an appendix to Chapter 16 of the UKLA listing rules. The purpose of the code is to ensure that directors and officers of a listed company do not trade in securities of that company while they are in possession of undisclosed price sensitive information. The code encompasses advisers and others who are closely connected with a company. If there is any matter that constitutes unpublished price sensitive information, then directors and officers must obtain the permission of the chairman, or other designated director of the company, before selling or purchasing shares in the company. The designated director must maintain a written record of any trading permission or refusal that is given. These are the minimum requirements of the model code.²⁰

17 UK Listing Authority, Listing Rules, 1 December 2001 Chapter 1 paras 1.8, 1.9; Financial

Services and Markets Act 2000 (UK) ss123(1)(a), 123(1)(b).

18 ASIC, Media Release, 01/283 13 August 2001; Knott D ‘Launch of the Australasian Investor

Relations Association’ Speech by the Chairman, ASIC 13 August 2001, 3 & 4.

19 London Stock Exchange listing rule 9.4, replaced by UK Listing Authority Listing Rules listing rule 9.4; London Stock Exchange, Admission and Disclosure Standards, May 2001, Part 2, 3.4.

20 London Stock Exchange, Model Code to Chapter 16 of the Listing Rules (1999), replaced by Appendix to Chapter 16 of the UK Listing Authority Listing Rules 1 December 2001.

iii. eUrOpean UniOn

The European Union (EU) does not directly impose a regulatory system on the European stock exchanges. Instead, the relevant organisation, the European Commission (EC) will address directives to member states, including the United Kingdom. It is the Commission that proposes a new regulatory measure. The Council of Ministers, representing the Member States, can then approve the proposal and enact it as a Directive.

The 1979 EEC Admissions Directive stated that:

The company must inform the public as soon as possible of any major new development in its sphere of activity which are not public knowledge and which may, by virtue of their effect on its assets and liabilities or financial position or on the general course of its business, lead to substantial movements in the prices of its shares.²¹

The UKLA Sourcebook Chapter 9 Continuing Obligations under the Listing Rules, discussed previously, has the notation CARD Article 68 and 81 written alongside paragraph 9.1, which replicates the directive quoted above. This notation is a reference to the Consolidated Admissions and Reporting Directive (CARD) 2001/34/EC of the European Parliament and of the Council on the admission of securities to official stock exchange listing and the information to be published on those securities.²²

It is anticipated that most of CARD will shortly be replaced by new EU directives, ²³ the Prospectus Directive (PD)²⁴ and the Market Abuse Directive (MAD).²⁵ The Commission adopted the two technical regulations required to implement PD and MAD in April 2004 and the PD Regulation will apply from 1 July 2005, which is also the deadline for Member States to implement the framework for the Directive.²⁶

21 Directive 79/279/EEC: The Admissions Directive of 5 March 1979: coordinating the conditions for the admission of securities to official stock exchange listing. Annex Schedule C, 5(a) Additional Information.

22 UK Listing Authority, Sourcebook, February 2004 amendment Listing Rules Definitions

– Directives.

23 Financial Services Authority, Review of the Listing Regime, Discussion Paper 14, 30 July

2002 at 15.

24 Directive 2003/71/EC.

25 Directive 2004/39/EC.

26 European Commission Securities, Commission Adopts Two Technical Measures to Implement the Prospectuses and Market Abuse Directives, Press Release IP/04/563, 29 April 2004: www.europa.eu.int/comm/internal_market/securities

FSA has undertaken a major review of the listing regime to ‘accommodate the impact of the changes being proposed to UK Company Law and to the European regulatory framework’²⁷ and it anticipates that the main body of the Listing Review rule changes will be made in line with this timetable. The FSA has published its ‘near final’ and intends to make ‘final Listing Rules and Prospectus Rules at the June board meeting...to come into effect on 1 July

2005.’²⁸ The Market Abuse Directive legislates for the disclosure of ‘inside information’ which is currently also dealt with in Chapter 9 of the Listing Rules under Continuing Obligations. The FSA ‘Purple Book’ has been ‘restructured into the Listing Rules, Disclosure Rules – reflecting the requirements of the Market Abuse directive – and the Prospectus Rules.’²⁹

A further consideration is the role of the UKLA Listing Rules in the event of a merger between the LSE and a European exchange. The FSA says that it is indifferent to the nationality of ownership of an entity that it regulates but it considers the possibility that a new owner may decide to operate the LSE from another EU Member State. All formal regulatory control would then be transferred from the FSA to the ‘home’ regulator and could change the regulation of LSE’s markets and the ability of FSA to enforce the UK listing regime and to pursue market abuse.³⁰ Continuous disclosure may suffer as a result, in spite of the ‘over-arching requirement for listed companies to disclose information likely to affect their share price as soon as it is available:’

Whilst the basic requirements within Europe are based on the EU Admissions Directive, there is perceived to be a degree of divergence in practice across Europe. The UK is viewed by investors as having more comprehensive and regular disclosure than Continental Europe...The comparatively high incidence of disclosure in the UK market may also be attributable to the relative size and maturity of that market compared with those elsewhere in Continental Europe...the number of companies meriting analysts’ research and the sophistication of the investor community drives greater demand for increased information disclosure.³¹

27 Financial Services Authority, Review of the Listing Regime, Update 21 March 2005.

28 Financial Services Authority, FSA Publishes Final Rules for New Listing Regime, Press

Release FSA/PN/043/2005, 28 April 2005.

29 Ibid.

30 Financial Services Authority, London Stock Exchange Mergers Enquiry, FSA Submission to the Competition Commission 12 May 2005 at 9-10.

31 Ibid, Annex A: Primary Market Comparative Regulation Study – Key Themes Report by

PriceWaterhouseCoopers, April 2002 at 22.

iv. ireLand

‘The Listing Rules of the Irish Stock Exchange comprise the UK Listing

Authority Purple Book as modified...’³²

The Irish Stock Exchange (ISE) acknowledges that its roots go back to 1793 when stock exchange trading first began in Dublin. The legislation currently regulating the ISE is the Stock Exchange Act 1995, ‘an Act to repeal The Stock Exchange (Dublin) Act, 1799.’³³ ‘The Stock Exchange’ was established under a Deed of Settlement of 31 December 1875 and was amended on 29 February

1972 to facilitate the amalgamation in 1973 of the Irish Stock Exchange, the Stock Exchange, London, with other regional exchanges in Ireland and

11 in Britain to form a federation that was termed the International Stock Exchange.³⁴ At this time, the ISE’s official designation was the ‘Irish Unit of the International Stock Exchange of the United Kingdom and the Republic of Ireland.’³⁵

The 1995 legislation, which was introduced to implement the 1993 EC Investment Services Directive (ISD)³⁶ designates the Central Bank and Financial Services Authority of Ireland as the Competent Authority for authorising stock exchanges and member firms in Ireland.³⁷ The Minister has designated the ISE as the Competent Authority for the purpose of implementing the EU Directives adopted by Ireland under the European Communities (Stock Exchange) Regulations 1984.³⁸ In applying the Directives, there is nothing to oppose the ISE from imposing obligations on issuers of securities that are admitted to the Official List, which are ‘more stringent than or additional to the requirements of the directives’³⁹ provided they are imposed consistently.

Under Part V of the Companies Act 1990, the ISE undertakes reviews of relevant company announcements and unusual price movements as it is responsible for the investigation of possible cases of insider trading.⁴⁰ While

32 Irish Stock Exchange, The Listing Rules: www.ise.ie

33 Stock Exchange Act 1995 – Long Title and s4.

34 European Communities (Stock Exchange) Regulations 1984, Reg 2, Interpretation; London Stock Exchange, Our History: the UK exchange adopted the ‘London Stock Exchange’ as its trading name in 1991. www.londonstockexchange.com

35 Stock Exchange Act 1995 – Interpretation s4.

36 Directive 93/22/EC.

37 Irish Stock Exchange, The Stock Exchange Act 1995.

38 European Communities (Stock Exchange) Regulations 1984, Reg 7, Establishment of

Competent Authority.

39 European Communities (Stock Exchange) Regulations 1984, Reg 3, Application of

Directives.

40 Irish Stock Exchange, Insider Dealing.

there is a prohibition on the use of ‘inside information’, there does not appear to be a positive duty of continuous disclosure by listed companies under this legislation. However, the 1979 EEC Admissions Directive, quoted above,⁴¹ is implemented as part of the European Communities (Stock Exchange) Regulations 1984.

The ISE Listing Rules comprise the UKLA Listing Rules as modified by the

‘Notes on the UKLA Listing Rules.’⁴² The Board of ISE, as the designated Competent Authority in Ireland, has adopted the UKLA rules for companies seeking admission to, or listing of securities on the Official List of the Exchange. As none of the ISE modifications to the ‘Purple Book’ amend UKLA listing rule 9.1 concerning the general obligation of disclosure, the two sets of rules are in unison with each other on this issue, and with the EC Directive, as discussed previously. It would be anticipated, that the ISE would adopt the Revised UKLA Listing Rules effective 1 July 2005 to implement the new EC Prospectus Directive.⁴³

v. aUStraLia

‘The Listing Rules are not just binding contractually...The Listing Rules create obligations that are additional, and complementary, to common law obligations and statutory obligations.^’44

Although there were no listing rules, as we now know them, in existence in the 1890s, the stock exchange’s application form, to be completed by a company requesting quotation of its securities, includes the condition that it must agree:

to give prompt notification of all calls, dividends, alteration of capital, or other

material information.⁴⁵

This last phrase appears to be the first example of an Australian listing requirement demanding continuous disclosure of material information by a company. It established the principle that there is a contractual obligation⁴⁶ for

41 Directive 79/279/EEC. Note 22.

42 Irish Stock Exchange, Notes on the UKLA Listing Rules, 29 November 2004, Introduction at 2.

43 Directive 2003/71/EC.

44 Australian Stock Exchange Limited, The Listing Rules, Introduction, 13 May 2005: www. asx.com.au

45 Salsbury S and K Sweeney, The Bull, the Bear and the Kangaroo: The History of the Sydney

Stock Exchange (1988) 203.

46 The contract is now found in ASX Listing Rules Part 3 of Appendix 1A, General Admission

Application and Agreement 1 January 2003.

a listed company to release relevant information to the market on an ongoing basis. As such, it is an early forerunner of ASX listing rule 3A(1) and the present rule 3.1 and 3.1A.

At the conclusion of his history of the Sydney Stock Exchange, Professor Stephen Salsbury stated that the exchange had been surprisingly innovative. The stock exchange’s listing rules had ‘long run ahead of the demands of the various colonial and state company laws and so it helped instil confidence in Australian securities.’⁴⁷

Prior to the formation of ASX on 1 April 1987, a degree of unity between the various State stock exchanges meant that they were able to demand adherence to the listing rules. On occasion, large companies would fail to comply, as they were aware that any action by the exchange to suspend securities or delist the company could eventuate in lower market turnover. This rebellion risked the relevance of ‘on-change’ trading and even the viability of the stock exchange.

Adamson⁴⁸ points out that News Limited received a ‘testy letter’ from the chairman of the Melbourne Stock Exchange for announcing a new issue through the press prior to advising the exchange. It is understood that this threat of non-compliance from large or popular corporations still exists to some extent, in spite of legislative support for the listing rules (Corporations Law/Corporations Act 2001 ss777/793C, 1114/1101B) and particularly for the continuous disclosure rule 3.1 with separate statutory backing from the continuous disclosure provision.

The first Securities Industry Act 1970 (NSW) was effective 8 April 1970, just as the mining boom of the late 1960s was ending.⁴⁹ The legislation concentrated mainly on regulation of stockbrokers and their relationships with clients and the stock exchange. This was the first major encroachment on the stock exchange’s self-regulation. Shortly afterwards, in July 1970, the Rae Committee⁵⁰ began its examination of the securities industry.⁵¹ The

47 Salsbury and Sweeney, supra n 45 at 453.

48 Adamson, GA, Century of Change: the First Hundred Years of the Stock Exchange of Melbourne (1984) 60. (Listing rule 15.7 states that an entity must not release information that is for release to the market until it has given the information to ASX.)

49 Poseidon NL reached a peak of $280 per share on 12 February 1970 as cited in Salsbury and Sweeney, supra n 45 at 353.

50 Senate Select Committee on Securities and Exchange, chairman Senator Peter E Rae.

51 Salsbury and Sweeney, supra n 45 at 371.

Committee’s report was released on 18 July 1974⁵² and was scathing in its criticism of the industry. As a result, revised legislation was introduced and the Securities Industry Act 1975 (NSW) added statutory enforcement to the listing requirements from 1 March 1976.

The stock exchanges were still responsible for initiating and amending these rules but the government had a period of time in which it could disallow implementation of the rules. Provisions to prohibit market manipulation⁵³ and to extend the earlier insider trading provision⁵⁴ were introduced into the legislation. In 1980, this legislation was subsequently incorporated into the Companies Code, and a decade later formed the basis of Chapter 7 on Securities in the Corporations Law and then the Corporations Act 2001.

Section 674 states that a listed disclosing entity must comply with the listing rules of a securities exchange or a listing market on matters of disclosure. The securities exchange, ASX, is initially responsible for enforcing compliance with the rules. At times, the extent of the stock exchange’s authority to enforce compliance has been uncertain.

The decision of Street J in the New South Wales Supreme Court in Equity, in Kwikasair Industries Ltd v Sydney Stock Exchange Ltd,⁵⁵ firmly based the stock exchange’s right to suspend securities or remove a company on the agreement between the two parties. The rights of the parties emanate from the context in which agreements are made for the listing of securities on the stock exchange’s Official List.⁵⁶ In FAI Insurances Ltd v Pioneer Concrete Services (No 2),⁵⁷ in the Supreme Court of New South Wales, Kirby P supported a wider interpretation of the authority of the stock exchange than had previously been recognised. Prior to the introduction of the Companies Code, there was less appreciation of the power of the stock exchange to enforce its listing rules.

Under the old Securities Industry Act 1975, Kirby P held:

52 Parliament of the Commonwealth of Australia Australian Securities Markets and their

Regulation Report from the Senate Select Committee on Securities and Exchange Part 1

Canberra AGPS 1974, Part 2 1974, Part 3 1975 (Rae Report); Salsbury and Sweeney, note

45 at 405; Baxt R, HAJ Ford and AJ Black Securities Industry Law 5^th Ed (1996) 302; Redmond P Companies and Securities Law Sydney 2^nd Ed (1992) 56.

53 Salsbury and Sweeney, supra n 45 at 422-424; Baxt et al, supra n 52 at 302.

54 Baxt et al, supra n 52 at 310; Insider trading was initially prohibited by s75A of Securities

Industry Act 1970 (NSW).

55 Kwikasair Industries Ltd v Sydney Stock Exchange Ltd (1968) ASLC 30,701 reprinted in Australian Corporations and Securities Law Reporter (1998) 303-721 to 303-753; Redmond P Companies and Securities Law Sydney 2^nd Ed (1992) 898; Baxt et al, supra n

52 at 171.

56 Kwikasair, ibid, 30, 708.

57 FAI Insurances Ltd v Pioneer Concrete Services (No 2) (1986) 10 ACLR 801.

[I]t was necessary to establish outside the section [the former equivalent of 793C of the Corporations Act], a contractual or statutory obligation to observe the listing requirements...but the Securities Industry Code imposes its duties more clearly. By force of the section it gives statutory recognition and significance to the listing requirements.⁵⁸

Kirby P disagreed with the decision of Young J at first instance. Young J saw

the listing requirements as only:

...a flexible set of guidelines for commercial people to be policed by commercial people...principles to be administered and applied by an expert body in accordance with the prevailing ethos of those chosen to administer them.⁵⁹

This approach undervalues the special statutory recognition that is now accorded to the stock exchange rules, first by the Companies Code and then by the Corporations Act under ss793C and 1101B. In a later case, Hillhouse v Gold Copper Exploration NL,⁶⁰ Macrossan J acknowledges the shift in emphasis of s42 of the Companies Code, equivalent to s793C of the Corporations Act, which was recognised by Kirby P in FAI.⁶¹

A broad interpretation of the authority of the listing rules was again recognised in TNT Australia Pty Ltd v Poseidon Limited (No 2).⁶² In the Supreme Court of South Australia, Jacobs J held that a notice of meeting was invalid when it failed to give full and fair disclosure of a proposed merger. He supported the right of ASX to enforce the ‘spirit’ of the listing rules by demanding greater disclosure:

The Rules by which the defendant is bound, state in an introduction that the Stock Exchange, in administering the Rules, ‘looks to companies to comply with the spirit as well as the letter of those Rules’ and I think that in a commercial document such as this it ought to be construed and interpreted by a Court in such a way as to give effect to the spirit and the purpose of the Rule.⁶³

Courts have long acknowledged this contractual obligation to comply with the listing rules. In Ampol Petroleum Ltd v RW Miller Holdings Ltd,⁶⁴ Street CJ considered it:

58 Ibid, 810.

59 Ibid, 811.

60 Hillhouse v Gold Copper Exploration NL (1988) 14 ACLR 423, 433.

61 FAI Insurances Ltd v Pioneer Concrete Services (No 2) 10 ACLR 801 (1986).

62 TNT Australia Pty Ltd v Poseidon Limited (No 2) [1989] SASC 1319; (1989) 15 ACLR 80.

63 Ibid, 85.

64 Ampol Petroleum Ltd v RW Miller Holdings Ltd [1972] 2 NSWLR 850.

...common ground that Miller was bound by contract to the Stock Exchange to observe the rule.⁶⁵

Lord Wilberforce for the Privy Council affirmed this on appeal. He held that an issue of shares to Howard Smith was in contravention of the stock exchange regulations:

...which moreover have contractual force.⁶⁶

In October 1992, ASX issued its Exposure Draft of Proposed Listing Rule Amendments and Other Issues.⁶⁷ One of the proposals was listing rule 3J(37). The rule would require every director and secretary of a listed company to enter into a written undertaking with ASX. This agreement would acknowledge that a company was contractually bound to comply with all aspects of the listing rules. However, the stock exchange would continue to have absolute discretion to grant a waiver of a particular rule at the request of a listed company.

Appendix 16A of the listing rules, effective 1 July 1996 and now replaced by an expanded Appendix 1A,⁶⁸ is evidence of this contractual arrangement. The secretary and a director of the company should execute the standard form agreement under the company’s seal. The terms are more comprehensive than those of the original draft contract. The agreement now recognises the absolute discretion of ASX to quote, suspend and remove securities from trading on the stock exchange. The company also agrees to ASX’s discretion to grant a waiver of a particular rule. There is a contractual obligation to comply with the ‘spirit’⁶⁹ of the listing rules and to indemnify the stock exchange for any claim, action or expense arising from breach of the contract.⁷⁰

Emphasising a broader interpretation of the ‘spirit’ of the ASX listing rules is in keeping with the ‘purposive’ construction required by former s109H. Since the introduction of the Corporations Act 2001, s15AA of the Acts Interpretation Act replaces s109H of the Corporations Law. This interpretation of the provisions of the Corporations Act will prefer a construction that promotes the purpose or object underlying the law, whether that purpose or object is expressly stated or not.

65 Ibid, 881.

66 Howard Smith v Ampol Ltd (PC) [1974] UKPC 3; [1974] AC 821 at 838.

67 Australian Stock Exchange Limited Exposure Draft of Proposed Listing Rule Amendments and Other Issues October 1992, 61.

68 Appendix 16A was deleted 1 July 1997 and amended to form Part 3 of Appendix 1A, General

Admission Application and Agreement, ASX Listing Rules issued 1 July 2000.

69 Ibid, Appendix 1A, clause 6 (clause 4 when issued 1 July 1996).

70 Ibid, Appendix 1A, clause 3.

Some elements of the Appendix 1A agreement have led to argument that the legal framework of the relationship between ASX and the listed company is so:

...indeterminate as to raise the question of whether it creates a binding

obligation upon either the ASX or the listed company.⁷¹

The traditional doctrine of contract demands certainty by both parties of the terms of the contract. A degree of uncertainty is added to an Appendix 1A agreement by the absolute discretion that ASX reserves for itself to enable it to administer the rules more effectively. The exercise of this discretion, to grant a waiver of a company’s obligation under a particular rule, could be viewed as an alteration by only one party of a term of the agreement.⁷²

Prior to the legislative amendments of the 1990s, ASX saw itself as having a narrow but significant role in regulating listed companies. Its authority was based on the willingness of companies to undertake an obligation and enter into a contract with ASX to ensure compliance with the listing rules.⁷³ The principal enforcement procedures available to the stock exchange, in increasing degrees of severity, were to suspend trading in a company’s securities, to seek a Court order under ss793C or 1101B of the Corporations Act to enforce compliance with the rules, or to remove the company from the Official List.

Where there is an infringement of an ASX listing rule, the stock exchange has the contractual right under the Appendix 1A agreement to suspend a company’s securities from trading or remove the company from the Official List. However, ASX does not always wish to take this action, as it would deny market access to investors and shareholders of the company.

The Securities Industry Act 1975 (NSW) introduced a provision for the enforcement of the listing rules by an earlier version of s793C. Section

793C(1), (2), in Part 7.2 of the Corporations Act states that an application may be made to the Court by ASIC, ASX or a person aggrieved to obtain an order of compliance with, or enforcement of, the relevant operating rules, in this instance the ASX listing rules. The original provision was amended with the introduction of continuous disclosure in September 1994 to clarify the definition of a ‘person aggrieved’.

71 Spender P ‘The Legal Relationship between the ASX and Listed Companies’ (1995) 13

Co&SecLJ 240-275, 240.

72 Ibid, 241.

73 Parliament of the Commonwealth of Australia Corporate Practices and the Rights of Shareholders Report of the House of Representatives Standing Committee on Legal and Constitutional Affairs Canberra AGPS November 1991 (Lavarch Report) 17 par 2.4.11.

A company, by agreeing to have its securities included on the Official List of the stock exchange, is deemed to ‘be under an obligation to comply with... a licensed market’s operating rules’ (s793C(1)). This obligation arises from the contractual obligation to comply with the listing rules, as discussed in the previous section.

Section 1101B(1) is a miscellaneous provision in Part 7.12 of the Corporations Act. A companion to s793C, it is also concerned with the power of the Court to make certain orders (s1101B(4)) for a contravention on the application of ASIC or ASX. Also effective 5 September 1994, s1101B was further amended to complement s793C by extending to a ‘person aggrieved’ the right of application to the Court (s1101B(1)(d)).

Both these provisions specify that the Court may direct a person, or the directors of a body corporate, to comply with the listing rules of the stock exchange (ss793C(2)(b) and 1101B(4)(b)). An infringement of the listing rules is not an offence under either provision. However, s1101B(10) states that a contravention without reasonable excuse of an order of the Court can result in a fine and imprisonment.⁷⁴

These seldom used powers of the stock exchange under the statute existed prior to the introduction of s674 penalties in 1994. They could still be utilised to penalise a company in a case of persistent non-compliance with listing rule 3.1.

vi. new zeaLand

‘The Listing Rules contain the terms of a contract...’⁷⁵

As with the forty odd Australian stock exchanges that existed at the time, NZX, formerly the New Zealand Stock Exchange (NZSE), emerged from the gold rush of the 1870s with early stock markets in Auckland, Wellington, Dunedin and Christchurch.⁷⁶ The regional trading floor were closed after the introduction of electronic trading in 1991 and following in the footsteps of ASX, the New Zealand Stock Exchange was demutualised and incorporated as a limited liability company from 31 December 2002. The transformation was completed on 30 May 2003, when the renamed New Zealand Exchange Limited, trading as NZX, listed its securities on it own exchange.⁷⁷

74 Schedule 3 Penalties: 100 penalty units or imprisonment for two years or both. Penalties for bodies corporate are five times the maximum pecuniary penalty for that offence (s1312). A penalty unit is $110 (s4AA of the Crimes Act 2001 (Cth)).

75 NZSX and NZDX Listing Rules – Forward (Amended 1/5/04).

76 NZX, History: www.nzx.com

77 Ibid.

For over a century the former NZSE had ‘facilitated and regulated New Zealand’s share market’⁷⁸ However, statutory amendments were moving apace with the stock exchange and its regulatory role. In December 2002, the then acting general counsel for NZSE, Elaine Campbell commented that:

[T]he enacting of the Securities Markets and Institutions Bill coupled with the start of the revised NZSE listing rules this week has created quite a stir in the market. Media commentary has related mainly to a single aspect of the renamed Securities Markets Act 1988 and the revised listing rules introducing a continuous disclosure regime for listed companies.⁷⁹

The co-operative nature of this regulation is necessary as ‘NZSE’s proximity to the market is essential to flexible and responsive monitoring and application of the continuous disclosure framework’ and ‘this is strengthened by the Securities Commission’s legislative investigation and enforcement powers.’⁸⁰

The Securities Markets Act 1988 (formerly the Securities Amendment Act

1988) regulates various activities on securities markets, including insider trading and continuous disclosure: sections 7 to 19 define insider trading and tipping with the possibility of civil liability for breach of the provisions; sections 19A to 19S provide a ‘statutory framework for continuous disclosure of information to securities markets by public issuers under the listing rules of registered exchanges, and provides remedies where this is not done.’⁸¹

Specifically, s19B states that public issuers must disclose in accordance with any applicable listing rules, while the Commission (s19G) and the Court (s19K) may make orders requiring disclosure or corrective statements and the Court may impose civil remedies such as pecuniary penalties and compensatory orders (ss19L, 19M).

This legislation also provides for the registration of securities exchanges, such as NZX, the review of the exchange’s conduct rules and supervisory responsibilities of the Securities Commission in respect of the exchanges.

In support of this co-regulatory environment, the NZSE had released a consultation paper in March 2002 concerning revisions of the listing rules to align them more closely with the continuous disclosure and directors trading disclosure requirements of the Securities Markets and Institutions Bill. One of the stated aims of these changes was ‘to reflect the formulation of the

78 NZX, About NZX: www.nzx.com

79 Campbell, Elaine (Acting General Counsel for NZSE) New Disclosure System a Plus Speech

6 December 2002, 1.

80 Ibid.

81 Securities Commission New Zealand, The legislation we work with: Securities Markets Act

1988: www.sec-com.govt.nz

continuous disclosure test in the [Bill] and Rule 3.1 of the [ASXLR].’⁸² The continuous disclosure obligation for listed issuers to comply with section 10 of the NZX Listing Rules and the Securities Markets Amendment Act 2002 was introduced on 1 December 2002. This ‘aligning of ‘New Zealand with Australian practice is a major change from the previous “relevant information” rule.’⁸³

NZX listing rule 10.1.1 on Material Information parallels ASXLR 3.1 and

3.1A in outlining the basic obligation and the exceptions or ‘carve-outs’ to the obligation of corporate disclosure. Rule 10.1.1 (c) requires the release of Material Information necessary to prevent the development or subsistence of a market which is materially influenced by false or misleading information.⁸⁴ The intention of this section mirrors that of ASXLR 3.1B, which was reintroduced from 1 January 2003 to correct or prevent a false market.

The Forward of the NZX Listing Rules states in section 1 that the ‘“Rules” contain the terms of a contract under which issuers...undertake to abide by [the] rules imposed’ but, as in the other jurisdictions, this contractual obligation would have been described as inadequate in promoting the introduction of increased statutory regulation.

vii. cOncLUSiOn

The listing agreements for both ASX and NZX still emphasise the common law contractual relationship between the company and the exchange, the immediacy of the market place is enhanced by this. A similar contract was outlined in the Introduction to the Yellow Book but this did not survive the transformation to the UKLA ‘Purple Book.’⁸⁵ The LSE Admission and Disclosure Standards require a signed declaration that the company acknowledges it ‘obligations under the Standards’⁸⁶ and is in compliance

82 NZX, NZSE Releases Consultation Paper on Proposed Listing Changes, Press Release 26

March 2002: www.nzx.com

83 NZX, Listed issuer rules – Continuous Disclosure: www.nzx.com

84 NZSX and NZDX Listing Rules – Section 10 Disclosure and Information (Amended 1/5/04);

New Zealand Stock Exchange Limited, Guidance Note – Continuous Disclosure – March

2005 1-17.

85 Introduction to the UKLA Listing Rules deleted December 2001.

86 London Stock Exchange Admission and Disclosure Standards April 2002 Form 1 Application for Admission of Securities to Trading, 2.11.

with the requirements of any securities regulator. A similar signed declaration acknowledging the company’s ‘obligations under the listing rules’ is required by either the UKLA or the ISE.⁸⁷ These obligations are statutory.

ASX still maintains a direct contractual relationship with is listed companies. This is an advantage that could be more directly utilised to increase market transparency by public queries of companies when unexplained price variations occur in market trading. ASX seems unlikely to become more aggressive in this aspect of market supervision as it reviews the cost of its role as overseer of the Listing Rules. The cost of enforcing compliance of the rules also deters the Australian Securities and Investments Commission from following the UKLA model. The Federal Government has recently entered the debate with a warning to ASX ‘against any attempts to offload its regulatory functions onto the...Commission.⁸⁸ The regulatory status quo will be maintained, at least for the time being.

87 UK Listing Authority Listing Rules Schedule 3A Application for Admission of Securities to the Official List April 2002; Irish Stock Exchange Notes on the UKLA Listing Rules Application for Admission of Securities to the Official List Schedule 3A 29 November

2004.

88 Patten, Sally ‘ASX Keeps Its Supervisory Options Open’ The Australian Financial Review

6 June 2005, 53; The Hon. Chris Pearce MP, Parliamentary Secretary to the Treasurer 2005

SDIA Conference Sydney 2-5 June 2005.