CAMD Corporate Accountability Meetings and Disclosure Case Study Sample

CAMD Corporate Accountability: Meetings and Disclosure Case Study

Assignment Details

Question 1

Assume you are the company secretary of WTF and MG. MG’s chief financial officer (CFO) has told you MG’s assets are sufficient to cover the maximum criminal fine or civil penalty able to be awarded by the EPA. Your external lawyers advise that a fine or civil penalty is not the only legal risk here. They say it is possible that the liabilities arising from potential remediation orders or third-party damages claims could exceed MG’s ability to pay. They also say MG appears to have legal grounds on which to seek to have the notice issued by the EPA, or at least some aspects of it, lifted. However, that will take time and money, and the outcome is uncertain.

The CFO calculates that even if MG succeeds in having the EPA’s notice lifted, it and other adverse publicity is likely to cost MG $25 million in lost sales revenue and other costs while its mulch piles cannot be moved. MG’s revenue for the year ending 30 June 2024 had been on track towards its forecast of $125 million, so a $25 million reduction would reduce that to $100 million. Prior to MG’s trouble, WTF had been on track towards its financial forecasts for the year that were published on the ASX Market Announcements Platform, including revenue of $1,500 million and net profit before tax (earnings) of $250 million.

You have been asked by the relevant board(s) to urgently advise them on the following matters:

(a) WTF’s disclosure obligations (if any) required across the events since 19 February 2024, pursuant to its continuous disclosure obligations under ASX LR 3.1 and the Corporations Act 2001 (Cth) (CA). Include if disclosures were, or are, needed with respect to the following matters and, if so, how and when they should have been, or should now be made:

(i) adverse media reporting identifying MG

(ii) attendance and testing by EPA officers at MG’s depot on 19 February 2024

(iii) ascertainment of MG’s insurance situation

(iv) the remediation notice issued by the EPA

(v) receipt of testing results from the EPA

(vi) any other relevant issues you feel warrant disclosure (if any, specify and explain).

(b) Consider relevant directors’/officers’ duties. Advise the relevant board(s) as to any contraventions. If there appear to have been such contraventions, do they require disclosure? If so, to whom? What steps should have been, and/or should now be, taken pursuant to relevant directors’/officers’ duties or other areas of law?

Question 2

As company secretary, advise MG’s board on the following issues:

(a) Would you, as company secretary, agree to put your name to the quote in the media release as prepared by Vent It? Explain to the board why or why not.

(b) Assume your answer to part (a) was in the negative. Which officer(s), or internal or external advisor(s) to MG, would you recommend be asked to:

(i) author the quote (explain why), and/or

(ii) once the terms of the proposed media release are agreed, take responsibility for it (explain why).

(c) What process should be followed, and what (if any) other information, assurances and/or advice should be obtained before the quote is attributed and the proposed media release issued? You can assume here it is ultimately agreed to issue the media release in its current terms (with possible change to the quote’s author).

(d) If asked, would you recommend any prior edits to the terms of the proposed media release? If so, draft your edits and provide reasons for your changes. (Note: Extracts that you use from the media release to answer part (d) are not included in your overall word count. As a suggestion, you could manually strike through extracts from the media release and insert your recommended edits in a different colour).

(e) Advise MG of any further risks of legal action (if any) it and/or its officers may face in this matter (beyond any you have earlier identified — cross-reference those rather than repeating them). Here, focus on potential contraventions of any provisions of the CA and include case law.

(f) If such legal risks exist, then what action(s) should be taken mitigate them?

Question 3

To make a bad situation even worse, MG now receives a letter from a lawyer demanding it:

(a) immediately cease and desist using the letters ‘MG’ (which are branded on all MG’s vehicles and machinery) and expunge those letters from all MG’s machinery, website, etc; and

(b) pay $200,000 compensation for the damage to the reputation its client, the company which owns the trademarked ‘MG’.
MG’s CFO estimates that the business disruption caused by grounding, then repainting, all MG’s equipment in the manner the letters demand would cost the company $50,000. On the other hand, the CFO notes, ‘if the company needs to repaint its entire fleet, then the mulch remediation notice means that now is likely MG’s least costly time to do so while its transport fleet is not at full capacity’.

(c) Vent It suggests a rebranding (and, ideally, a renaming campaign given reputational damage) which they could implement for $200,000. They ask if renaming MG at this point is a viable option.As company secretary of MG, advise the board in relation to each of the matters raised in parts (a), (b) and (c) above.

You can find case study on Governance Academy ‘s website

Solutions

Question1

(a) Disclosure Obligations of Wastelands to Future Ltd

The case involving Melbourne Gardensupply Pty Ltd (MG), a subsidiary of Wastelands to Future Ltd (WTF), presents profound considerations that fall under the company's obligations for disclosure under the ASX Listing Rules (ASX LR) and the Corporations Act 2001 (Cth) (CA) (Asic.gov.au, 2024). Since the seriousness of events began unfolding since February 19, 2024, relevant boards are encouraged to make a decision on whether to provide timely and accurate disclosures.

(i) Adverse Media Reporting Identifying MG

Negative media attention can significantly impact investor sentiment and market confidence. Under ASX Listing Rule 3.1, listed entities are bound to make known any information that could affect the price or value of their shares, and this includes articles suggesting that MG has caused asbestos contamination of various areas in Melbourne. Overall, MG ought to have issued a statement on the same day after the media report the first time around, providing background, stating the claims against it, and explaining how the company reacted. Stress needs to now be laid on the intent of MG for resolution. Not doing so may attract even regulatory action and some liability on account of market manipulation.

(ii) Attendance and Testing by EPA Officers at MG’s Depot on 19 February 2024

The arrival of EPA officers to MG's depot on February 19, 2024, and testing of mulch samples is a major event that occurred in this regard and might impact the finances of MG. Under the continuous disclosure obligations of ASX LR 3.1 and the CA, WTF was obligated to announce this event since it involved an inspection that may trigger material liabilities (Asx.com.au, 2024). That disclosure should have been made right after the visit by the EPA but showing whether the nature of the inspection was to enforce the regulations, or testing purposes and risks as well to MG's operations. In such a situation, aside from the effects to the MM, for MBA assignment expert such information would be important in letting investors know about the kind of financial and operational impacts there might be on MG.

(iii) Ascertainment of MG’s Insurance Situation

Its external lawyers have correctly pointed out that all liabilities arising from asbestos-related issues are excluded by express condition in its insurance policies. In this regard, the situation places MG in a precarious financial position considering potential liabilities it could face in terms of remediation orders and third-party claims. Pursuant to ASX LR 3.1, WTF has a duty to disclose any material information likely to affect its financial position. After MG has determined its insurance position, the effects of such a position should be disclosed. Such disclosure should include the description of the financial risks that MG will face as there is no form of coverage in place for asbestos liabilities, so the investors are appropriately kept updated over its impact on the financial health of MG.

(iv) The Remediation Notice Issued by the EPA

This remediation notice was issued to MG by the EPA on March 1, 2024. It directly affects the operations of the company and incurs heavy financial fines as well, which may make this time very crucial for MG. Under ASX LR 3.1, it has been classified as information that is likely to affect the company's operations and its financial prospects. Therefore, WTF is duty-bound to disclose the receipt of the remediation notice forthwith stating the terms and conditions stipulated by the EPA as well as the consequences of which may result for MG. The disclosure shall be crucial in maintaining transparency with the shareholders as well as ensuring market integrity is intact.

(v) Receipt of Testing Results from the EPA

On 18 March 2024, MG issued an asbestos-free report in respect of mulch samples which were taken by the EPA. The above outcome could be positive and able to neutralize part of the negative impacts of the previous results. However, under ASX LR 3.1, this information must be disclosed publicly upon obtaining because it could affect opinion in the market and investors' confidence once more. Disclosure is required in a manner that it communicates the relevance of findings to the ongoing investigations and dedication of MG toward compliance and operational integrity.

(vi) Other Relevant Issues Warranting Disclosure

This disclosure should also cover litigation risks as a result of any action MG may take against EPA regarding the remediation notice and the more general impact on its business based on asbestos contamination. Because the outcome of these proceedings is still uncertain, with potential eventual material financial consequences, WTF owes a responsibility to disclose this risk to investors. Disclosures on how the business has responded strategically to the crisis, like steps in improving operational procedures and safeguards against future liabilities, would also be prudent. Besides fulfilling the legal aspect, these disclosures will further establish MG's commitment to the ethical way of doing business and accountability.

(b) Directors’ and Officers’ Duties in the Context of MG’s Legal Challenges

Against such a legal battle background as experienced by Melbourne Gardensupply Pty Ltd (MG), the board of Wastelands to Future Ltd (WTF) should assess the duties that the Corporations Act 2001 (Cth) (CA) has placed on its officers and directors regarding whether they had, in fact, contravened anything (Asic.gov.au, 2024). Specifically, the duties promulgated within sections 180 to 184 of the CA are standard of care and diligence, good faith, and prohibition against improper use of position or information.

Potential Contraventions of Directors’ Duties

Some of the key duties include acting in the best interest of directors to ensure that they are well-informed regarding any matter affecting the company. Given the seriousness of the problems that the environment poses to MG, and the associated cost considerations thereof, there is even a scenario in which the directors could have breached their duty of care and diligence if not obtained proper briefings on the implications of the EPA notice and the status of MG's insurance cover. In addition to this, in case the directors have been tardy in raising the issue of the adverse media coverage or not arranging the risk mitigation measures timely, such might amount to a breach on the part of the directors of their duty to act in good faith in the interests of the company.

If it is established that there have been breaches of the directors' duties, these may need to be disclosed to some third parties. Section 674 of the CA requires listed companies disclose information likely to have a material effect on the price or value of their securities. Any incidents that are likely to have an impact on the financial health or the public image of MG ought to be notified both publicly and to the ASIC. Other shareholders should also be notified through public announcements or reports to keep their confidence in the management of the firm.

Steps to Address the Issues

As such, management boards are expected to respond in a prompter manner and take all actions necessary to ensure that risks are addressed and their responsibilities fulfilled. This shall be through the implementation of relevant compliance and risk management structures that will ensure that the directors are fully updated on key events. Training should also be provided periodically on the duties of directors and consequences attached to defaulting on the CA.

Question 2

(a) Advice on Media Release Quote

It would be suggested that being a company secretary, not to accept the proposal of giving a name for the quote on the media release prepared by Vent It. These are the issues of duty of care and diligence that have been stated in sections 180 to 184 of the Corporations Act 2001 (Cth) in which it is said that the best interest to run the company should be provided by directors and officers. An honest quote free from deceptive information, most especially when serious allegations are raised as to the environmental compliance of MG, should be accorded priority. The liabilities that might exceed the capability of MG may bring an alerting signal in terms of public statements. According to Australian Securities and Investments Commission v. Adler, false or misleading information may be a leading cause of serious legal consequences and requires one to conduct proper communication with the public. (Aicd.com.au, 2024).

(b) Recommendations for Media Release Responsibility

If the decision is not to quote in the media statement, then it should be prepared and checked by people who have authority and knowledge.

(i) Author the Quote:

This quote should be drafted by MG's CFO with support from General Counsel. This is because CFO is better placed with comprehensive knowledge of the financial implications surrounding the incident and can ensure the statements are in line with MG's fiscal realities, especially in light of the potential $25 million in revenue that could have been lost given the external advisors' projections. Once again, the role of General Counsel would also be imperative to ensure that the quote was compliant with the Corporations Act 2001 (Cth), particularly regarding misleading or deceptive conduct by virtue of section 1041H. The joint assurance means MG would be in a position to have a quotation that would accurately reflect that position and avoid the risk of legal exposure.

(ii) Responsibility for the Media Release:

Once the terms of the proposed media release are agreed upon, it is advisable that final responsibility for the media release lies with the Chief Executive Officer. He is the final authority for public communications on behalf of the company as well as its general reputation. The approach is consistent with the case in Re Wambo Coal Pty Ltd, which emphasized that the CEO should oversee the communication strategies to ensure they accurately depict the company's actual state. Since the prevailing situation is sensitive, involvement of the CEO will also ensure that the message communicated complied with MG's strategic goals and was sent with proper authority (Merendino & Sarens, 2020). Such a layered approach, which integrates both financial and legal know-how into the crafting of the statement while at the same time holding the executives accountable for its release, will protect MG from attacks that could have emerged against it at the same time strengthening people's confidence in decision-making processes that are conducted by the management team.

(c) Process and Assurances for Media Release

There should be a formal procedure before the quote is assigned and the proposed media release is published to ensure every detail, promise, and advice was acquired. Firstly, the board shall hold a meeting to consider the full text of the proposed draft of the media release. Through such process, all the statements must be true and in accordance with the legal responsibilities of MG pursuant to the Corporations Act 2001 (Cth) (Legislation.gov.au, 2024). This entails demonstrating that the law of section 674 has been complied with, this includes ensuring that material information is disclosed to the ASX in time.

The final draft of the media release should then be sought to be reviewed with the expert legal counsel. This is basically necessary to ensure that the contents do not expose MG to liabilities for misleading or deceptive conduct pursuant to section 1041H of the Corporations Act. In this regard, the CFO can provide a representation of the following financial statements within the release to prevent the likelihood of miscommunication about the fiscal position of MG. By having an internal sign-off involving the General Counsel and CEO, the media release process will be vetted, and ultimately finalized with the overall strategic communication of MG.

(d) Recommended Edits to the Proposed Media Release

I review the terms of the draft media release, and make a few editing recommendations to make the language more specific and compliant with all necessary legal requirements. Firstly, any language that is often interpreted to be unduly optimistic or speculative should be toned down. For example, from a statement in the release that says "We are optimistic that we will be able to resolve this shortly", it would be rewritten as "We are actively addressing the issues identified by the EPA and see a reasonable resolution," which would thereby reduce the risk of falsehoods towards stakeholders and align with section 674 obligations found under Corporations Act 2001 (Cth) that requires the provision of truthful disclosure.

The statement should also clarify that the EPA is investigating at present. This can be achieved by just providing the line that reads "We are cooperating fully with the EPA's investigation and will provide updates as they become available". This demonstrates transparency and compliance with section 1041H concerning misrepresentative conduct. Such changes would therefore ensure that the media release carries the real picture of MG while lowering litigation exposure and increasing public confidence over the way in which the company is reporting news.

(e) Additional Legal Risks for MG and Its Officers

Apart from the risks identified above, MG and officers may be vulnerable to the potential litigation relating to breaches of the duties of the directors under the Corporations Act 2001 (Cth) or the CA. For example, section 180(1) of the CA requires directors and officers to exercise care and diligence (Aph.gov.au, 2024). The following case is worth noting, Hall v. Poolman [2007] NSWCA 30, in which the court held that a director must be proactive so as to mitigate risks that can seriously affect the reputation and financial standing of the company (Jhklegal.com.au, 2024).

Moreover, if the EPA's cleanup orders materially harm MG's economic interests, the same section 181 could be applied to challenge the directors under this act also since they must act in good faith in the best interest of the corporation. If the board is determined not to have made appropriate action to protect the assets and otherwise advance the interests of different stakeholders appropriately, the directors can face personal liability. The sensitivity of this situation calls for strong governance and compliance mechanisms that may help soften the legal risks involved in such circumstances.

(f) Mitigating Legal Risks for MG and Its Officers

To minimize the above-identified legal risks, MG's board should adopt a proactive compliance strategy that will involve risk assessment and the installation of robust controls. The boards should consult with independent external legal advisors to peruse remediation orders issued by the EPA and examine possible grounds for appeal. The board must also ensure that all forms of communications make no false or misleading representation in compliance with the provisions in section 1041H of the Corporations Act 2001 (Cth), which carries a positive duty to avoid misleading or deceptive conduct (Aph.gov.au, 2024). In this, the training of directors and officers would focus more on the responsibilities under the CA specifically sections 180 and 181 that were said to be relevant in the decision made in Hall v. Poolman [2007] NSWCA 30, especially relating it to diligence and good faith in making a decision (Jhklegal.com.au, 2024). A well-defined course will ascertain MG's intentions to comply and will therefore save it from liabilities.

Question 3

Advice on Legal Demands and Rebranding for MG
With a recent legal letter demanding that MG stop using the "MG" trademark and seek compensation on damages, it is now up to the board to consider all the implications behind these demands and the possible strategies available to address them.

(a) Cease and Desist Demand

Great legal issues arise because the company demands an immediate stop in using the "MG" branding. It has to decide if it can plead this case at all based on trademark rights or prior use. The Trade Marks Act 1995 (Cth) suggests that a trademark can be registered if it distinguishes the goods or services of one entity from another (Legislation.gov.au, 2024). If MG can demonstrate, and perhaps establish, that there has been such widespread usage as to have created a common law trademark, then perhaps there exists a defence to this cease-and-desist letter. There could be a strategic approach leading to negotiation, that is reducing the chances of litigation but not compromising the brand identity of MG.

(b) Cost of Compliance and Business Disruption

The cost to repaint all equipment and vehicles would be estimated by the CFO at $50,000. This expense must then be weighed against the damage to the reputation and concomitant loss, in terms of finances if this were to not occur at this juncture. If the cost does seem reasonable, it would be an excellent opportunity for MG to deal with at least some of its various concerns concurrently. Grounding the fleet in such a non-complete status might help to reduce interruptions to the business. If the board chooses to comply, all expenses supporting any claims made against the trademark owner based on losses from the demand should be documented by them.

(c) Rebranding and Renaming Campaign

Its suggestion to change the brand and rename at a cost of $200,000 is something that needs to be deliberated closely. After all this turbulence with what's happening in the world today, strategic rebranding may give MG an opportunity to break free from the bad print it has been carrying with the "MG" name, as well as getting its market position improved. Still, the board needs to weigh up and see what the consequences would be in the long run should the company lose an established brand. Renaming can lead to confusion with customers and stakeholders, which may have a direct relation to the decrease of brand loyalty and awareness. MG should also take into consideration the adequacy of the proposed campaign and its alignment to the firm's strategic objectives.

For instance, case law such as Cadbury Schweppes Pty Ltd v. Pub Squash Pty Ltd [1980] 1 NSWLR 85 holds the lesson that brand integrity and consumer trust have to be preserved (Nswlr.com.au, 2024). The board should also ask itself whether it is a good time at this moment to rebrand or wait for the determination of the issues regarding the EPA remediation notice. The board of MG should decide the legal and operational implications of the cease-and-desist demand, what compliance might cost, and the costs and benefits associated with rebranding. Consultation with appropriate legal advice to help manage the trademark issue, coupled with a strategic analysis of the expense versus reward in terms of compliance and rebranding, will increase MG's choices for informed decisions that will protect the reputation and long-term health of the company. It is the first responsibility of the board to ensure the chosen course causes minimal disruption while maximizing protections for the long-term health of the firm.

References

Laws
Corporations Act 2001 (Cth)
Trade Marks Act 1995 (Cth)
Case Examples
Hall v. Poolman [2007] NSWCA 30
Cadbury Schweppes Pty Ltd v. Pub Squash Pty Ltd [1980] 1 NSWLR 85

Journals and Websites

Aicd.com.au. (2024). The Adler-Williams cases on appeal Law Reporter. Retrieved from: https://www.aicd.com.au/corporate-governance-sectors/small-business/family/the-adler-williams-cases-on-appeal-law-reporter.html.[Retrieved on 22nd September 2024]

Aph.gov.au. (2024). Parliamentary Joint Committee on Corporations and Financial Services. Retrieved from: https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/

OversightofASIC/-/media/61587BCF18944D4DB5EF36B446D8605B.ashx#:~:text=Pursuant%20to%20

subsection%201041H(1,likely%20to%20mislead%20or%20deceive..[Retrieved on 22nd September 2024]

Asic.gov.au. (2024). Replaceable rules outlined. Retrieved from: https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/constitution-and-replaceable-rules/replaceable-rules-outlined/.[Retrieved on 22nd September 2024]

Asx.com.au. (2024). Continuous Disclosure. Retrieved from: https://www.asx.com.au/documents/rules/Chapter03.pdf.[Retrieved on 22nd September 2024]

Jhklegal.com.au. (2024). Hall v Poolman and the Impact on Liquidators Pursuing Insolvent Trading Claims. Retrieved from: https://www.jhklegal.com.au/hall-v-poolman-and-the-impact-on-liquidators-pursuing-insolvent-trading-claims/.[Retrieved on 22nd September 2024]

Legislation.gov.au. (2024). Corporations Act 2001. Retrieved from: https://www.legislation.gov.au/C2004A00818/2015-04-14/text.[Retrieved on 22nd September 2024]

Legislation.gov.au. (2024). Trade Marks Act 1995. Retrieved from: https://www.legislation.gov.au/C2004A04969/2021-09-01/text.[Retrieved on 22nd September 2024]

Merendino, A., & Sarens, G. (2020). Crisis? What crisis? Exploring the cognitive constraints on boards of directors in times of uncertainty. Journal of Business Research, 118, 415-430. Retrieved from: https://pureportal.coventry.ac.uk/files/51391264/Binder2.pdf.[Retrieved on 22nd September 2024]

Nswlr.com.au. (2024). Cadbury schweppes pty ltd and others v pub squash co pty ltd. Retrieved from: https://nswlr.com.au/view/1980-2-NSWLR-851.[Retrieved on 22nd September 2024]