Directors Duties in the Online Environment Simon Rubenstein

Directors’ Duties in the On-line Environment Simon Rubenstein Solicitor ASIC

The Internet • Changing the way we communicate, transact and conduct business • Provides for immediate and low cost access to and dissemination of information • However, not immune from acts of misrepresentation and fraud • This creates challenges for regulation and enforcement

Overview • Application of directors’ duties • Remedies for breach of directors’ duties • Regulating and enforcing corporate activity in the online environment – Rentech – Liberty. One and Samson

Application of directors’ duties • Starting point - existing directors’ duties apply to conduct occurring online • Application of the existing director’s duties to the online environment only limited by imagination and yet to be fully appreciated

Application of directors’ duties • Consider some examples: – Blair and the misuse of company information – Sara-Marie and the posting of false and misleading information on the company website – Christina ‘chats’ about proxy voting at an up and coming annual general meeting

Remedies for breach • Civil remedies – Final injunctions to prevent threatened or continuing breaches – Interlocutory injunctions available to freeze assets or restrain conduct pending final determination

Remedies for breach • Civil Penalty Orders – Civil penalty regime applies to breach of directors’ duties – Civil rules of evidence and procedure apply – Declaration of contravention – Pecuniary penalty order (up to $200, 000) – Disqualification order – Compensation order

Remedies for breach • Criminal – No longer criminal liability for breach of duty to act with reasonable care and diligence – Liability may arise for breach of the remaining three duties but only where the director acts recklessly or with intentional dishonesty – Possible jail sentence, fine and automatic disqualification

Regulation and Enforcement • The Internet presents new challenges for ASIC including: – Understanding the technology – Understanding the interaction with the provisions of the Corporations Act – Applying the technology • So how does ASIC regulate in the online environment?

Regulation and Enforcement • Policy initiatives • Consumer protection initiatives • Enforcement of the provisions of the Corporations Act

Enforcement • Development of new enforcement tools including: – Electronic Enforcement Unit – Automated Internet surveillance tool – Enforce-net training – Electronic evidence tool kit

Enforcement • Internet element to many ASIC’s investigations • IOSCO surf day results include: – – Illegal offerings False or misleading statements Market manipulation Unlicensed investment advice • Issue of directors’ duties underlies much of this conduct

Rentech • Background – NASDAQ listed, technology company – Bulletin board postings and unsolicited (spam) e-mail – Statement that price to go up on back of imminent news – Price doubled, volume up by almost 1000% – Company denied truth of statement

Rentech • Investigation – Identifying person who posted bulletin board messages – Identifying person who sent spam messages – Understanding the technology – How to gather and present electronic evidence

Rentech • Offences – Making statements and disseminating information that was false and misleading and likely to induce the purchase of securities (s. 999 of Corporations Act) – Unauthorized and unlawful interference with a computer network (s. 76 E of Crimes Act)

Rentech • Issues – Difficult to remain anonymous on the Internet – What if ‘promoters’ had been engaged by directors to increase online exposure of company? – In what circumstances would directors be liable?

Liberty. One & Samson • Background – Fundraising offer published on IDS – Directed at shareholders of Liberty. One – Titled ‘Samson Deposit Plan’ – Seeking to raise $5 M – No offer document

Liberty. One & Samson • Breach of the Corporations Act – Disclosure requirements – Advertising requirements – Misleading or deceptive – Breach of directors’ duties to act in good faith and for a proper purpose and with care and diligence – [director vigorously denies breaches occurred - ed ]

Liberty. One & Samson • Enforcement action – Offer withdrawn – Corrective statement published on IDS – All money collected ($100, 000) returned to investors

Liberty. One & Samson • Issues – Rules relating to disclosure and fundraising apply to offers on the Internet – Offers published on Internet are unlikely to be ‘personal’ ones and thus unlikely to be exempt – Real risk of breach of directors’ duties for conduct of this kind

Conclusion • Existing laws (including directors’ duties) apply in the online environment • ASIC is rising to the challenge of regulating and enforcing laws in the online environment • ASIC adept at tracking electronic footprints and using the latest cyber technology