More headwinds for shareholder class actions: no continuous disclosure breach by CBA in not disclosing regulatory issues 

The Federal Court has dismissed the shareholder class action against Commonwealth Bank in Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Limited (No 5) [2024] FCA 477 for alleged breaches of its continuous disclosure obligations and misleading or deceptive conduct in relation to its non-compliance with AML/CTF laws.

The case provides important guidance on the scope and application of the continuous disclosure regime for listed entities and the factors that determine the materiality of information for disclosure purposes.

The outcome demonstrates the difficulties shareholders face in bringing shareholder class actions, with the benefit of hindsight, which arise out of major regulatory issues and enforcement action, particularly in demonstrating that information was known or had been pieced together at precise, earlier points in time.

What you need to know

• CBA was not obliged to disclose the "information" in the form pleaded by the applicants as it was not material and to do so would have been misleading (see "what was alleged should have been disclosed?" section below).
• CBA did not engage in misleading or deceptive conduct as it did not make the misrepresentations alleged by the applicants.
• The applicants did not establish loss resulting from the alleged non-disclosures, as they did not prove that the market price of CBA shares was inflated or that they suffered any detriment.

What you need to do

• Listed entities must carefully assess the materiality of information before making disclosures and ensure that disclosed information is not misleading by omission or lack of context.
• Generally companies may be required to disclose material regulatory issues, but materiality, and the timing and content (including whether any disclosure is required before there is an outcome to a regulatory investigation) are matters that require careful consideration.
• Listed entities must also ensure that they have adequate evidence to support their disclosures and representations, and that they can defend their decisions and actions in the event of litigation.

What was the case about?

On 3 August 2017, AUSTRAC announced that it had commenced proceedings against CBA for serious and systemic non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). By 7 August 2017, CBA's share price had dropped 5.4%.

AUSTRAC and CBA later agreed to a $700 million penalty to resolve the proceedings, which was approved by the Federal Court in June 2018.

The class action filed in October 2017 on behalf of certain CBA shareholders made the key allegations that:

• Continuous disclosure: CBA breached its continuous disclosure obligations because it had failed to disclose information about multiple serious instances of non-compliance with its AML/CTF obligations from at least June 2014 and the potential for substantial civil penalties because of exposure to enforcement action by AUSTRAC in relation to that non-compliance. The applicants alleged that the Bank was required by r 3.1 of the ASX Listing Rules to disclose this information because it would have had a material effect on the market price of CBA shares.
• Misleading or deceptive conduct: CBA engaged in misleading or deceptive conduct by representing to the market in various annual reports, ASX announcements and other disclosure documents that it had in place effective systems for ensuring compliance with relevant regulatory requirements, that its risk management systems ensured appropriate monitoring and reporting of compliance activities, and that it had complied with its continuous disclosure obligations.
  
  Shareholders claimed they suffered loss by acquiring CBA shares at a price inflated by CBA's "market contraventions", demonstrated by the fall in the share price following AUSTRAC's commencement of enforcement proceedings.

What did the Court find?

The findings were resoundingly in CBA's favour. In essence, the Court found that:

• CBA was not obliged to disclose the information in the form pleaded by the applicants as it was not material and to do so would have been misleading;
• CBA did not engage in misleading or deceptive conduct as it did not make the representations alleged by the applicants; and
• The applicants did not establish loss resulting from the alleged non-disclosures, as they did not prove that the market price of CBA shares was inflated or that they suffered any detriment.

The next section takes a closer look at the Court's reasoning on each of the issues.

Continuous Disclosure

What was alleged should have been disclosed?

While the precise form of the pleaded non-disclosure depended on the particular time period, the applicants pleaded that CBA was required to disclose the following four broad categories of information that CBA held over 2014 to 2017.

• Late threshold transaction reports (TTR) Information: that CBA failed to give threshold transaction reports to AUSTRAC for approximately 53,506 cash transactions of $10,000 or more processed through IDMs.
• Account Monitoring Information: that CBA failed to conduct account level monitoring with respect to 778,370 accounts.
• IDM Risk Assessment Information: that CBA did not comply with its own AML/CTF program by failing to carry out any assessment of the ML/TF risk of its intelligent deposit machines (IDMs) prior to their roll-out or until 3 years following their introduction.
• Potential Penalty Information: that CBA was potentially exposed to enforcement action by AUSTRAC in respect of allegations of serious and systemic non-compliance with the AML/CTF Act, which might have resulted in CBA being ordered to pay a substantial civil penalty.

Was CBA "aware" of the information?

The Court did not accept the applicants' submission that CBA was aware of all the integers of Late TTR Information, Account Monitoring Information and Potential Penalty Information as pleaded during the period 16 June 2014 to 23 April 2017.

The Court considered that the applicants had adopted an incorrect approach in formulating their case because it was based on facts that could only be ascertained at later points in time and was divorced from the reality of whether an officer within the bank actually knew or ought to have known those facts at the time when disclosures allegedly should have been made.

Justice Yates held that the starting point for determining awareness is what the person knew, should have known or formed an opinion on. Awareness does not extend to unknown facts that could have been discovered through investigation which did not in fact take place.

However, the Court did find that the bank was aware of the Late TTR Information, Account Monitoring Information and Potential Penalty Information by 24 April 2017 - a few months before AUSTRACs announcement.

The Court also found the bank was constructively aware of the IDM Risk Assessment Information from 26 October 2015 because it should have known about the requirements of its own AML/CTF Program, which required a separate assessment for IDMs before their rollout, and it knew no such assessment had been conducted.

Did the ASX Listing Rules require the information to be disclosed?

The Court found that CBA was not obliged to disclose the pleaded information to the market because it was not "material".

Much of this aspect of the decision turned on the pleaded form of the disclosures the applicants alleged CBA should have made, which the Court found were incomplete, vague and imprecise and would have been misleading without further contextual detail.

For example, with respect to the Late TTR Information as pleaded, the Court found that it would have been misleading to omit that: (a) the single coding error causing the issue had been rectified; and (b) the late TTRs had been lodged. It was also relevant that the error affected a relatively small part of the bank’s overall threshold transaction monitoring processes. The omission of these facts was important because, without them, investors would likely be left with the wholly false impression that the problem had not been rectified and was ongoing.

Having regard to the information in context, the Court was not persuaded that it would have influenced investors to buy or sell shares, and nor would it have had a material effect on the price or value of CBA shares.

Similarly, the Potential Penalty Information was not considered to be material because to say the bank was potentially exposed to enforcement action without further detail and context regarding the bank's alleged non-compliance would not provide investors with useful information such that it would influence their behaviour.

Misleading or deceptive conduct

The applicants submitted that from the date the failures occurred, CBA did not have in place effective policies, procedures and systems for ensuring compliance. They submitted that reasonable investors would expect "trivial, limited or one-off breaches" from time to time in an organisation the size of CBA, but no more than that. Therefore, an investor would have interpreted the alleged representations as CBA having effective compliance policies, procedures and systems and that the bank had complied with all the regulatory requirements imposed on it, except for only minor breaches.

The Court rejected that any such representations were made and found that reasonable investors would not understand the bank to have made unqualified representations about their regulatory compliance, and that investors would understand that financial institutions are not free of risk of non-compliance.

Further, his Honour accepted CBA's submission that express statements on which the applicants relied in fact emphasised the bank was exposed to operational, regulatory and reputational risks in relation to non-compliance.

Loss and damage

The Court found that even if the applicants had succeeded in their case on contravention, they would have lost on causation and loss.

The Court held the correct approach to establishing loss is to start with the precise information that the bank should have disclosed at the time it should have made the disclosure, then to consider whether the disclosure of that information to the market at that time would have resulted in CBA shares trading on the ASX at a lower price than they did. This was not the case the applicants presented.

In any event, the applicants did not establish that had any part of the alleged information been disclosed at any particular time, the market price of CBA shares would have been lower immediately following the disclosure. Nor did they adduce evidence as to whether they would have acquired their shares at the time of acquisition if they had known the pleaded information.

What does this mean for class actions?

The class action failed because the applicants’ case was "divorced from reality" as to what the bank actually knew or ought to have known at the time the alleged disclosures should have been made. Applicants must clearly and precisely articulate the form of disclosure that should have been made, and the applicants here were unable to prove all the various factual integers feeding into such announcements at relevant times.

The outcome demonstrates the difficulties shareholders face in bringing class actions, with the benefit of hindsight, which arise out of major regulatory issues and enforcement action, particularly in demonstrating that information was known or had been pieced together at precise, earlier points in time. Often those connections are only made over time in the course of investigations as further information and context comes to light. The judgment reinforces the need for companies to take a careful approach to continuous disclosure as rushing to the market with information that is incomplete, vague or lacking context will be misleading. Generally companies may be required to disclose material regulatory issues, but materiality, and the timing and content (including whether any disclosure is required before there is an outcome to a regulatory investigation) are matters that require careful consideration.

This judgment does not represent the end of shareholder class actions which, despite recent losses, are well-established. This was a difficult and complex case for the applicants. Going forward, when bringing "springboard" class actions arising from regulatory breaches and enforcement action, plaintiff lawyers and funders will have a heightened focus on ensuring that complete, point-in-time evidence underpins the information that allegedly should have been disclosed. It will not be sufficient for applicants to show that such matters might have been discovered through an investigation that had not yet taken place.

Authors: Angela Pearsall, Partner; Lucinda Hill, Partner; Marianne Hong, Senior Associate; and Jessica White, Associate.