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Directors’ Duties in the On-line Environment

In the rapidly evolving digital landscape, directors' duties face new challenges due to online communication and transactions. This overview addresses how existing duties apply to online conduct, highlighting case studies illustrating breaches and remedies available. It explores ASIC's regulatory efforts, including new tools for enforcement and the complexities of applying the Corporations Act in cyberspace. With the rise of misinformation and the need for consumer protection, understanding these duties is essential for compliance in today's online corporate environment.

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Directors’ Duties in the On-line Environment

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

  2. 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

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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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?

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

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

  12. 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

  13. 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

  14. 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

  15. 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.76E of Crimes Act)

  16. 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?

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

  18. LibertyOne & 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 ]

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

  20. LibertyOne & 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

  21. 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

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