WEEKEND READ: Rock and a hard place

If company directors don't reveal their margin loan arrangements, they risk breaching continuous disclosure laws. If they do, they're ripped to shreds by predatory hedge funds. Corporate and securities lawyer Tim Woodforde explains their legal dilemma.

Hedge funds, for better or worse, exploit weaknesses in markets and market participants. An economist may well regard this as healthy, at least on a theoretical level, if it promotes efficiency. However, the markets are not a jungle and participants are entitled to expect that rules designed to protect the integrity of markets will be observed and enforced.

In recent weeks, sensing a growing controversy, the ASX and ASIC have issued a number of media releases reminding market participants of a range of laws designed to protect the integrity of markets, including laws relating to continuous disclosure (and the disclosure of substantial holdings), short selling and market manipulation. These public statements are responding to a growing chorus of concerns being expressed by market commentators and participants that some market participants, including hedge funds, appear to be sailing close to the wind and have perhaps even crossed the line to engage in illegal conduct.

This may well be true – but at present we do not know, although ASIC has indicated it is investigating. However, part of the immediate solution proposed by the ASX and ASIC has the potential to exacerbate the problem, by exposing listed entities and their shareholders to further predatory action by hedge funds and other market participants.

Margin loans and material events

On February 29, 2008, the ASX and ASIC issued a joint media release relating to the disclosure of directors’ margin loans and the disclosure of material events under financing arrangements. Accompanying the media release was a new guidance note on the application of the continuous disclosure obligation under ASX Listing Rule 3.1, which requires a listed entity to disclose immediately any information that it is aware of concerning it that a reasonable person would expect to have a material effect on the price or value of securities. Noting that the expectations of the reasonable person will evolve over time, the ASX expressed the view that these evolving standards may now require disclosure of:

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