Assessing materiality for the purposes of the continuous disclosure provisions

The phrase "persons who commonly invest" is important to the application of Australia's continuous disclosure and insider trading provisions. For instance, for the purposes of the continuous disclosure obligation, a reasonable person is taken to expect information to have a material effect on the price or value of securities of a disclosing entity if the information would, or would be likely to, influence "persons who commonly invest" in securities in deciding whether to acquire or dispose of the securities.

In a 2017 article in the Company and Securities Journal, I explored the judicial interpretation of the phrase, and identified a number of difficult questions that arise, such as:

• does the phrase "persons who commonly invest" necessarily require a certain frequency of investment?
• does the phrase include both rational and irrational investors?
• does the phrase include retail and institutional investors? What about value investors versus day traders?

The phrase has been considered recently in an interesting decision of Nicholas J in Australian Securities and Investments Commission v Vocation Limited (in liq) [2019] FCA 807. The case concerned a civil penalty proceeding brought by ASIC against Vocation and certain of its directors, including for breach of the continuous disclosure obligation.

Consistent with the Full Court's decision in Grant-Taylor v Babcock & Brown Limited (in liq) (2016) 245 FCR 402, Nicholas J held that "persons who commonly invest" embraces both sophisticated and unsophisticated investors. However, on the issue of the different types of potential investors (e.g. institutional investors, private investors, day traders, hedge funds) his Honour stated:

"[ASIC's expert's] evidence indicated that institutional investors are most likely to determine the price at which publicly listed securities trade. Further, the use of the word "invest" rather than purchase or acquire in s677 suggests that the hypothetical reasonable person referred to in that section will be someone who makes an assessment as to whether to buy or sell securities on the basis of a company's earnings or potential earnings and the potential return the investment offers after making an allowance for risk.

I do not think a knowledge of the investing behaviour of speculators and day traders who seek to profit on the back of rumour or momentum rather than company fundamentals would be of any assistance in determining what information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of particular securities. That observation would hold true for hedge funds at least in circumstances where they are not making their investment decisions based on company fundamentals."

While it may not be the last word on the subject, this exclusion of speculators, day traders and hedge funds (at least those not investing based on fundamentals) from the class of persons who "commonly invest" is helpful, and in some cases could be critical to the ultimate determination of materiality. It is consistent with guidance provided by the ASX as to its application of the materiality test for the purposes of the Listing Rules (see ASX Listing Rules Guidance Note 8, at p.10).