Australian Securities and Investments Commission, in the matter of Chemeq Limited (ACN 009 135 264) v Chemeq Limited - [2006] FCA 936 - FCA 2006 case summary — Zoe

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Australian Securities and Investments Commission, in the matter of Chemeq Limited (ACN 009 135 264) v Chemeq Limited

[2006] FCA 936

Federal Court of Australia|2006-07-24|Before: French J

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Court

Federal Court of Australia

Decision date

2006-07-24

Before

French J

Source

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Judgment (10 paragraphs)

[1]

A. IT IS HEREBY DECLARED THAT: 1. On 30 April 2002, the defendant told the Australian Stock Exchange Limited (the ASX) that it had begun construction of a commercial-scale production facility at East Rockingham in Western Australia (the Rockingham Facility) budgeted to cost AU$25 million over a period of approximately 12 months. 2. In the period 10 February 2003 to 30 April 2004: (a) the defendant had information that the total anticipated cost of the Rockingham facility was in excess of $25 million and in particular; (i) by February 2003 knew that that cost was in the order of $35 million; (ii) by August 2003 knew that that cost was in the order of $45 million; (iii) by September 2003 knew that that cost was in the order of $50 million; (iv) by December 2003 knew that that cost was in excess of $50 million. (the Rockingham Cost Increase Information). (b) the Listing Rules of the ASX, being the market operator of a listing market in which the defendant was a listed disclosing entity, required the defendant to notify the ASX of the Rockingham Cost Increase Information. 3. By failing to notify the ASX of the Rockingham Cost Increase Information during the period from 10 February 2003 to 30 April 2004, the defendant contravened s 674(2) of the Corporations Act 2001 (Cth) (the Act) (the First Contravention). 4. On 6 October 2004 at 10.22am AEST the defendant told the ASX among other things that it had been granted an additional US patent, which extended the defendant's exclusive protection in manufacture and marketing of its veterinary products in that country to the year 2020 (the US Patent Announcement). 5. In the period from the time of the US Patent Announcement until 3.36pm AEST on 7 October 2004: (a) the defendant had information that the patent the subject of the US Patent Announcement was not material to the defendant's commercial position in the context of the whole of its intellectual property portfolio because: (i) it protected a particular method of formulating the defendant's product but not the product itself; (ii) it was difficult to detect an infringement of the intellectual property rights conferred by the patent and therefore difficult to enforce those rights; and by reason of those matters the issue of the patent did not represent any material change in the defendant's commercial position (the US Patent Information); (b) the Listing Rules of the ASX, being the market operator of a listing market in which the defendant was a listed disclosing entity, required the defendant to notify the ASX of the US Patent Information. 6. By failing to notify the ASX of the US Patent Information during the period from the time of the US Patent Announcement until 3.36pm AEST on 7 October 2004, the defendant contravened s 674(2) of the Act (the Second Contravention). B. PENALTIES 7. In respect of the First Contravention the defendant pay to the Commonwealth a pecuniary penalty in the sum of $150,000. 8. In respect of the Second Contravention the defendant pay to the Commonwealth a pecuniary penalty in the sum of $350,000. C. COSTS 9. The defendant pay the plaintiff's costs of this proceeding fixed in the sum of $170,000. D. CROSS-CLAIM 10. The defendant's cross-claim is dismissed with no order as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA

[4]

REASONS FOR JUDGMENT Introduction 1 Chemeq Limited (Chemeq) is a public company included in the official list of market for securities operated by the Australian Stock Exchange (ASX). It owns intellectual property associated with an acrolein-based polymeric antimicrobial developed as an alternative to antibiotics for the prevention and control of intestinal bacteria diseases in intensively reared livestock (the Chemeq Product). The technology underlying the Chemeq Product has other possible applications including inorganic sunscreens, preservatives in cosmetics and human pharmaceuticals. 2 On 22 December 2004 the Australian Securities and Investments Commission (ASIC) commenced proceedings in this Court against Chemeq. ASIC sought declarations and penalties against the company because it had contravened the Corporations Act 2001 (Cth) (the Act) by failing to disclose to the ASX information material to the price of its shares. 3 Following various interlocutory steps and discussions between ASIC and Chemeq, the number of contraventions alleged was reduced to two. The first of these concerned what might broadly be called cost overruns in the construction of a facility for the manufacture of Chemeq's product at Rockingham. A figure of $25 million known to the market increased between February 2003 and April 2004 to $35 million, then $45 million, then $50 million without market disclosure. 4 The Second Contravention related to the effect of a patent obtained in the United States relating to a process for formulating the Chemeq product. The patent had no commercial significance, a fact which was not disclosed to the market in a material trading period between 6 and 7 October 2004. 5 Chemeq has admitted these contraventions of the Act. ASIC and Chemeq both submitted that penalties of $150,000 for the First Contravention and $350,000 for the Second Contravention are appropriate. The maximum penalty for which the law provides increased between the time of the first and second contraventions from $200,000 to $1 million. So although the First Contravention was the more serious of the two, the penalty proposed is lower because the maximum penalty applicable is significantly lower. 6 For the reasons that follow I am satisfied that it is within the power of the Court to make declarations that the contraventions alleged did occur. On the Statement of Agreed Facts submitted by the parties, those contraventions are established. I am also satisfied, having regard to the relevant sentencing principles, that the penalties proposed are appropriate and will make orders accordingly. Chemeq will also have to pay ASIC's costs of the proceedings agreed at $170,000. The cost overruns in the construction of the Rockingham facility 7 On 30 April 2002 Chemeq informed the ASX, in a media release, that it had begun construction of a commercial production facility at East Rockingham. After announcing the raising of $5 million at $2 per ordinary share in placements to institutional and other sophisticated investors it added: Additionally, Chemeq also announces that it has begun construction of its commercial-scale production facilities in Western Australia, budgeted to cost $25 million over a period of approximately 12 months. The facility, located 40 km south of Perth at East Rockingham, is being built and financed in stages. The plant, on an 8-hectare site, will produce all requirements to 2006/7 and is being built to internationally approved US Food and Drug Administration (FDA) Standards.' 8 Dr Graham Melrose, then Chairman and Chief Executive Officer of Chemeq, was quoted as saying that the first commercial stage of the plant was due to be commissioned in the first quarter of 2003 with immediate sales to Asian countries planned. Sales world wide would follow. The Chemeq product was one of those which it was said would be manufactured at the proposed facility. 9 On 2 August 2002 Chemeq made a announcement to the ASX to the effect that it had raised approximately $8 million. It said: 'Combined with earlier placements to other institutions and sophisticated investors, Chemeq has raised approximately $15.5 million this year.' Each new share had carried with it one free option exercisable at $2.30 before 31 January 2003. The company expressed its optimism that the additional $8 million in options would be substantially taken up. The release then stated: 'The funds raised will be used for the construction of Chemeq's $25 million manufacturing facilities, which are being built and financed in stages.' A release, on 9 August 2002, announced the raising of an additional $2.6 million from institutions and sophisticated investors, bringing the company's total capital raising for the year to $18 million. 10 On 16 December 2002 in a further media release Chemeq referred to the manufacturing facility and said: '. The eight-hectare site for the manufacturing facility has been granted all regulatory approvals for plant construction of total output 250 tonnes per annum. . Currently, Chemeq is constructing infrastructure for 250 tonnes per annum output, including offices, laboratories, amenities, warehousing and formulation areas. . At this stage of construction, flooring, concrete slabs including hydraulic and electrical services in the entire offices, laboratories, amenities, warehousing and formulation areas have been completed; except for the formulation areas, all walls have been completed and roofing structures begun.' . Construction is to FDA standards for veterinary manufacture. FDA regulations limit scale-up rate to 10-fold expansions between successive plants; on this basis, Chemeq is currently constructing a 20 tonne per annum process output - with 200 tonne per annum planned to immediately follow. This additional manufacturing capacity will be majorly funded by cashflows from the 20 tonnes per annum facility.' 11 On 4 February 2003, Chemeq announced the raising of a further $10.6 million from option holders, bringing its total capital raising for the preceding 12 months to $28.6 million. It said: 'The funds will be used for the construction of Chemeq's $25 million manufacturing facility, which is due for completion towards the end of first-half of 2003. The manufacturing facility is being built on an 8-hectare site, to internationally approved US Food and Drug Administration (FDA) standards.' Initial output from the manufacturing facility would be sold in South Africa and New Zealand where Chemeq had regulatory approvals. Australia, Asia and other international markets were to follow. The potential global market was estimated to be worth AUS$10 billion. 12 A meeting of the directors of Chemeq was held on 10 February 2003. The minutes of that meeting record a discussion about Chemeq's relationship with Transfield, the contractor building the East Rockingham facility. The minutes recorded, inter alia: 'Transfield are projecting a cost of $38m; Chemeq believes it will be $36m.' 13 In a further media release and announcement to the ASX on 4 April 2003 Chemeq announced that it was upgrading and expanding its 20 tonne per annum manufacturing facility, currently under construction, for production of its veterinary drug. Included in the announcement were the statements that: '1. The design of the manufacturing facility has been expanded and up-graded so that production will continue, uninterrupted during periods of maintenance and cleaning; 2. The warehousing and formulation areas of the manufacturing facility have been increased, so as to accommodate future productive capacities of 750 tonnes per annum; 3. Construction, already designed to FDA standards for veterinary pharmaceuticals - has now been up-graded for potential manufacture of human pharmaceuticals.' Chemeq announced that it had executed a new construction contract for its facility with John Holland Pty Ltd with no change in operational staff at the construction site - those staff having been transferred to John Holland. The anticipated schedules for the facility were: '. "Lock-up" in stages, beginning end April 2003; . Occupancy, in stages, beginning end July 2003; . Commissioning, during August to October 2003 (saleable product is anticipated during this period).' 14 On 20 May 2003 a further announcement was made by way of a status report on the construction of the manufacturing facilities. The infrastructure in the facilities had been upgraded to accommodate future productive increases of the 20 tonnes per annum process plant to 750 tonnes per annum. 15 On 25 June 2003 Chemeq announced that it had raised '… $25 million to fund upgrades and expansion of its manufacturing facilities'. The money came from a placement of new ordinary shares at $5.35 to institutions and sophisticated investors. It was to be partly used for previously announced upgrades and expansion of Chemeq's 20 tonne per annum manufacturing plant then under construction as follows: '1. Expansion and upgrade, so that production would continue, uninterrupted during periods of maintenance and cleaning; 2. Expanded warehousing and formulation areas of the manufacturing facilities, to accommodate future productive capacities of 750 tonnes per annum; 3. Upgrade from Food and Drug Administration (FDA) standards for veterinary pharmaceuticals to manufacturer of human pharmaceuticals.' Chemeq also said: 'The funds will also be used to expedite the construction of an additional 200 tonne per annum plant as soon as possible, following the completion of the 20 tonne per annum plant within the facilities, due for commencement of commissioning in October 2003.' 16 At some time prior to a meeting of the Board of Chemeq held on 25 August 2003, members of the Board were provided with a document entitled 'Chemeq Rockingham Production Facility Report for July 2003'. On page 2 of this document there appeared a statement that the forecast final cost of the facility was $45,561,000 of which $22,561,000 had been expended. The report stated: 'There has been an increase in forecast final cost of $2.6M even after allowing a reduction in contingency by $750k.' 17 On 11 September 2003 Chemeq made a further media release and announcement to the ASX. It reported that occupancy of infrastructure areas within the company's manufacturing facility had taken place and that validating and pre-commissioning of facilities had commenced on schedule. The announcement had continued: 'Costs of the manufacturing facility, originally budgeted at AUD$25 million for the 20 tonne per annum plant, will be increased, commensurately with the planned upgrade to US Food and Drug Administration (FDA) standards and expansion of the facility to accommodate next stage development, as previously announced on 4 April 2003 and 25 June 2003. Additional costs are expected to be in the order of AUD$10 million and will not be fixed until after the current, competitive tender processes for supply of equipment for the manufacturing facility are completed. Currently, Chemeq has AUD$26 million in cash.' It is agreed that by 30 September 2003 Chemeq's management was aware that the anticipated construction cost of the East Rockingham facility was likely to be in the order of $50 million. 18 On 5 November 2003 Chemeq told the ASX that it had exercised a right to purchase the land upon which its manufacturing facility was constructed for AUD$2 million. Construction of all the infrastructure to accommodate a production rate equivalent to 750 tonnes of active ingredient per annum was complete. This infrastructure would support and formulate 20 tonnes per annum of active ingredient from manufacturing plant 1 and 200 tonnes per annum from manufacturing plant 2. 19 On 12 December 2003 Chemeq announced that it had raised $20 million from its share purchase plan. It stated: 'The funds will be used firstly, as working capital to finance production and inventory from Chemeq's first manufacturing facilities; secondly, to support the immediate planning and then first stages of construction of Chemeq's second manufacturing facility.' It is common ground that by December 2003 Chemeq's Board of Directors and its management knew that the anticipated construction cost of the Rockingham facility was likely to exceed $50 million. 20 Chemeq's half year report for the half year ended 31 December 2003, submitted to the ASX, disclosed that the book value of its property, plant and equipment was $37.3 million and its total assets were approximately $72 million. It identified its prime activity during the half year as the ongoing construction of its manufacturing facility. Its loss to 31 December 2003 of AUD$4.169m represented a direct investment into supporting the construction activities and building the company's '… unique future as an Australian manufacturer and seller of its own patented, synthetic pharmaceutical drugs'. 21 In a quarterly cashflow report for the quarter ended 31 March 2004 published to the ASX on 30 April 2004, Chemeq stated that in the quarter ended 31 March 2004 it had made cash payments to the order of $13 million for the acquisition of physical non-current assets. Factual background relating to non-disclosure of patent information 22 On 16 February 2000 Chemeq made an application under the Patent Cooperation Treaty (PCT) to the Patents Office of IP Australia which identified the United States as one country in respect of which it sought to obtain intellectual property protection for an invention which was a particular method of formulating the Chemeq Product. 23 Patents protecting the Chemeq Product comprise seven families. The PCT application was within one of those families and related to a specific method of improving the efficacy of the Product and its antimicrobial function by preparing it in certain alcohols through a series of steps involving particular temperatures and times. The PCT application was filed with the United States Patent and Trade Marks Office on 8 November 2001. The term of patent protection in the United States, as provided in s 154 of Title 35 of the US Code, is 20 years from the date of filing the application for the grant of a patent. 24 On 10 December 2003 Chemeq made an announcement in the media and to the ASX in relation to its patent approvals. The announcement stated, inter alia: 'Pharmaceutical company Chemeq Ltd … today announced that it has received approval of patents for its antimicrobials in USA, Europe, Australia, Eurasia and China. This family of approved patents include claims protecting all aspects of Chemeq's technology under patent law. This gives Chemeq additional monopolies in manufacture and marketing of their antimicrobials. The claims include:

New synthetic molecules
Methods of synthesis of these molecules 3. Compositions derived from the formulation of these synthesised new molecules 4. Market uses of these compositions. "Importantly, these patents confirm Chemeq's key monopolies in the manufacture and marketing of our unique polymeric antimicrobial for use in pig and poultry markets, globally" said Dr Graham Melrose, Chairman and Chief Executive Officer, Chemeq Ltd.' After referring to the 'key US patent' Chemeq's statement quoted its Chairman Dr Melrose as follows: '"Incorporating today's announcement, Chemeq will now have approximately 60 approved patents and 150 patents pending. The approval processes on all patents pending are progressing satisfactorily and if approved, would give additional monopolies considerably beyond 2020. These processes which generally take in the order of six years in many countries are well progressed by Chemeq. In the meantime national and international patent applications protect our position during the examination processes."' 25 On 27 August 2004 Chemeq lodged a prospectus with the ASX for non-renouncable rights offer to raise $20.3 million. At par 3.7 of the prospectus it was stated: 'Patented intellectual property and other applications Chemeq has been granted patents in more than 80 countries including the USA, and countries within Europe and Asia. Chemeq has more than 175 patents pending which, if granted, will take potential manufacturing and marketing monopolies beyond the year 2020. Chemeq's key patents are comprehensive and cover molecules, syntheses, compositions and uses. All intellectual property is 100% owned by Chemeq.' 26 On 28 September 2004 Chemeq was told by its patent attorneys that the patent seeking protection for the process of formulation in respect of which Chemeq had filed its PCT application on 8 November 2001 was to be granted by the United States Patent and Trade Marks Office on 12 October 2004. The term of the patent was to be 20 years from 16 February 2000. 27 On 6 October 2004 Chemeq issued 8,478,155 fully paid ordinary shares under its non-renouncable rights offer which closed on 27 September 2004. The number of its fully paid ordinary shares on issue thereby increased to 101,737,865. On the same day, Chemeq made an ASX media release under the headline 'PATENT GIVES PROTECTION TO 2020 AND DISTRIBUTION BEGINS'. The release opened with the statement that Chemeq: '. [H]as been granted an additional US patent (previously pending only), which extends the company's exclusive protection in manufacture and marketing of its veterinary products in this country, to the year 2020.' The announcement went on: 'Granting of this patent means that no other party may manufacture or market Chemeq's CHEMEQ polymeric antimicrobials in the large US market. Already, Chemeq has been given expedited review status for the approval process of its drug (for pigs) in the US market. Chemeq's technologies are protected by granted patents in 80 countries, plus approximately 175 patents pending. The safety and efficacy of Chemeq's technologies have been established over several years, in registered independent international laboratories and successful R & D and commercial field trials in a number of countries.' There followed under the heading 'Distributed Sales Order' reference to a small additional sale in South Africa of product manufactured in Chemeq's APVMA approved pilot facility. 28 On 7 October the West Australian newspaper published an article including statements attributed to Chemeq that: '"[T]he issue of the US patent was a major milestone in Chemeq's bid to sell its polymeric anti-microbial, which is described as a replacement for the use of human antibiotics as growth promoters in pork and poultry production into the lucrative US market" and "[I]t's a most important patent … In a nutshell, to have these exclusive rights in the most important market is obviously a very big achievement and an important milestone."' (sic) 29 At the time of the announcement and the report in the newspaper the relevant US patent was known to Chemeq's management not to be material to Chemeq's commercial position in relation to the whole of its intellectual property portfolio. This was because:

The relevant US patent protected a particular method of formulating the Chemeq Product but not the Chemeq Product itself;
It is difficult to detect an infringement of the intellectual property rights conferred by the relevant US patent and therefore difficult to enforce those rights, 30 On 7 October 2004 in response to a price query received from the ASX, Chemeq told the ASX that the issue of the relevant US patent while significant from a technical perspective did not represent any change in its commercial position other than to extend its patent protection from 2016, which had been announced in December 2003, to 2020. Statutory framework 31 Chapter 6CA of the Act is entitled 'CONTINUOUS DISCLOSURE'. It came into effect on 11 March 2002. Amendments to its provisions came into effect on 1 July 2004. Prior to its enactment the continuous disclosure provisions were found in ss 1001A, B, C and D of the Corporations Law. These imposed a prohibition against intentional, reckless or negligent non-disclosure which are no longer elements of the prohibition. Their removal reflects a widening of its scope. 32 Section 674 provides, inter alia: (1) Subsection (2) applies to a listed disclosing entity if provisions of the listing rules of a listing market in relation to that entity require the entity to notify the market operator of information about specified events or matters as they arise for the purpose of the operator making that information available to participants in the market. (2) If: (a) this subsection applies to a listed disclosing entity; and (b) the entity has information that those provisions require the entity to notify to the market operator; and (c) that information: (i) is not generally available; and (ii) is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity; the entity must notify the market operator of that information in accordance with those provisions.' Subsections (2A) to (5) are not material for present purposes. 33 Section 676 explains the concept of general availability in relation to information: '(1) This section has effect for the purposes of sections 674 and 675. (2) Information is generally available if: (a) it consists of readily observable matter; or (b) without limiting the generality of paragraph (a), both of the following subparagraphs apply: (i) it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities of a kind whose price or value might be affected by the information; and (ii) since it was so made known, a reasonable period for it to be disseminated among such persons has elapsed. (3) Information is also generally available if it consists of deductions, conclusions or inferences made or drawn from either or both of the following: (a) information referred to in paragraph (2)(a); (b) information made known as mentioned in subparagraph (2)(b)(i).' Section 677 provides: 'For the purposes of sections 674 and 675, a reasonable person would be taken to expect information to have a material effect on the price or value of ED 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 ED securities.' 34 The term 'listed disclosing entity' is defined in s 111AL of the Act thus: '(1) For the purposes of this Act, a disclosing entity is a listed disclosing entity if all or any ED securities of the entity are quoted ED securities. (2) For the purposes of this Act, a disclosing entity that is not a listed disclosing entity is an unlisted disclosing entity.' The term 'disclosing entity' is defined in s 111AC thus: '(1) If any securities of a body (except interests in a managed investment scheme) are ED securities, the body is a disclosing entity for the purposes of this Act.' The term 'ED securities' is defined in s 111AD: '(1) Securities of a body are ED securities (short for "enhanced disclosure securities") for the purposes of this Act if, and only if: (a) they are ED securities under section 111AE, 111AF, 111AFA, 111AG or 111AI; and (b) they are not declared under section 111AJ not to be ED securities.' Relevantly s 111AE then provides: '(1) If: (a) a body corporate is, with its agreement, consent or acquiescence, included in the official list of a prescribed financial market; and (b) the market's listing rules (according to their terms) apply to the body in relation to a class (which may be some or all) of securities issued by the body; securities issued by the body in that class are ED securities, and that market is a listing market relation to that body.' 35 Section 92 of the Act defines 'securities' to mean, inter alia: 'shares in, or debentures of, a body;' (s 92(1)(b)) It is not in dispute that Chemeq is and was at the time of the admitted contraventions, a 'listed disclosing entity' by virtue of ss 111AD and 111AE of the Act. 36 Part 9.4B of the Act deals with the civil consequences of contravening civil penalty provisions. Section 1317DA provides as follows: 'In this Act: corporations/scheme civil penalty provision means a provision referred to in subsection 1317E(1), other than a financial services civil penalty provision. financial services civil penalty provision means a provision referred to in any of paragraphs 1317E(1)(ja) to (jg).' 37 Section 1317E provides, inter alia: '(1) If a Court is satisfied that a person has contravened 1 of the following provisions, it must make a declaration of contravention: … (ja) subsection 674(2), 674(2A), 675(2) or 675(2A) (continuous disclosure);…' 38 As to the penalty provisions as at April 2004, the time of the First Contravention, s 1317G(1A) provided: 'A Court may order a person to pay the Commonwealth a pecuniary penalty of up to $200,000 if: (a) a declaration of contravention by the person has been made under section 1317E; and (aa) the contravention is of a financial services civil penalty provision; and (b) the contravention: (i) materially prejudices the interests of acquirers or disposers of the relevant financial products; or (ii) materially prejudices the issuer of the relevant financial products or, if the issuer is a corporation or scheme, the members of that corporation or scheme; or (iii) is serious.' 39 At the time of the Second Contravention, s 1317G(1A), which became effective on 1 July 2004, provided: 'A Court may order a person to pay the Commonwealth a pecuniary penalty of the relevant maximum amount if: (a) a declaration of contravention by the person has been made under section 1317E; and (b) the contravention is of a financial services civil penalty provision; and (c) the contravention: (i) materially prejudices the interests of acquirers or disposers of the relevant financial products; or (ii) materially prejudices the issuer of the relevant financial products or, if the issuer is a corporation or scheme, the members of that corporation or scheme; or (iii) is serious.' The relevant maximum for which s 1317G(1B) provides is $1 million for a body corporate. 40 At the time of the Contraventions the provisions of the relevant ASX Listing Rules were in the following terms: '3.1 Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities, the entity must immediately tell ASX that information. 3.1A This rule does not apply to particular information while each of the following applies: 3.1A.1 A reasonable person would not expect the information to be disclosed. 3.1A.2 The information is confidential and ASX has not formed the view that the information has ceased to be confidential. 3.1A.3 One or more of the following applies. (a) It would be a breach of a law to disclose the information; (b) The information concerns an incomplete proposal or negotiation; (c) The information comprises matters of supposition or is insufficiently definite to warrant disclosure; (d) The information is generated for the internal management purposes of the entity; (e) The information is a trade secret.' 41 Listing Rule 19.2 provides: 'An entity must comply with the listing rules as interpreted: . in accordance with their spirit, intention and purpose; . by looking beyond form to substance; and . in a way that best promotes the principles on which the listing rules are based.' The importance of continuous disclosure 42 ASIC made submissions in relation to the penalty question about the philosophy behind, and the importance of, continuous disclosure. Among the materials it placed before the Court, was an ASX publication entitled 'Continuous Disclosure The Australian Experience' published on 20 February 2002. That report gives a useful overview of some of the relevant history and principles underlying the development of the continuous disclosure regime. 43 In 1991 the Australian Companies and Securities Advisory Committee concluded that a statutory system of continuous disclosure would promote confidence in the integrity of Australian capital markets and provide benefits to market participants and management in various ways. It would: '. Overcome the inability of general market forces to guarantee adequate and timely disclosure by disclosing entities; . encourage greater securities research by investors and advisors. This ensures that securities prices more closely, and quickly, reflect underlying economic values; . ensure that equity and loan resources in the Australian market are more effectively channelled into appropriate investments and that funds are withheld or withdrawn from poorly performing disclosing entities. This will promote capital market efficiency; . assist debtholders (sic) in monitoring performance of disclosing entities and thereby determine whether, or when, to exercise any right to withdraw or reinvest their loan funds, or convert debt to equity; . act as a further, or substitute, warning device for holders of charges over corporate assets, that breaches in covenants may have taken place, or the risk of default has increased; . assist potential equity or debt holders of disclosing entities to better evaluate their investment alternatives; . lessen the possible distorting effects of rumour on securities prices; . minimise the opportunities for insider trading or similar market abuses; . improve managerial performance and accountability by giving the market more timely indicators of corporate performance; . encourage the growth of information systems within disclosing entities, thereby assisting directors to make decisions and to comply with their fiduciary duties; . reduce the time and costs involved in preparing takeover and prospectuses (sic) documents.' 44 As a result of concerns about corporate misconduct in the 1980s a need for enhanced disclosure by companies was identified. The Corporate Law Reform Bill 1993 contained provisions which enhanced periodic reporting requirements, and imposed disclosure obligations. The disclosure regime so introduced was described by the ASX as 'co-regulatory' on the basis that it relies upon the statutory application of the ASX Listing Rules in relation to disclosure. 45 The legislative policy behind continuous disclosure was set out in the Second Reading Speech of the Minister for Administrative Services introducing the Corporate Law Reform Bill (No 2) 1992 into the Senate on 26 November 1992. He said, inter alia: 'An effective disclosure system will often be a significant inhibition on questionable corporate conduct. Knowledge that such conduct will be quickly exposed to the glare of publicity, as well as criticism by shareholders and the financial press, makes it less likely to occur in the first place. In essence, a well informed market leads to greater investor confidence and in turn to a greater willingness to invest in Australian business.' Parl Deb 26.11.92 at p 3581 46 The importance attached to the continuous disclosure provisions of the Act by the legislature is emphasised by the penalties for their contravention which have recently been significantly increased and their widened scope since 2002 which is now not limited to intentional reckless or negligent non-disclosure. That is not to say that elements of intention or recklessness or negligence will not be relevant to the penalty to be imposed. Procedural history 47 On 22 December 2004 ASIC commenced proceedings in this Court seeking declarations and penalties in relation to eight alleged contraventions of the continuous disclosure provisions of s 674(2) of the Corporations Act. A statement of claim was filed with the application. Chemeq filed an appearance on 4 February 2004. Lee J made directions on 4 March 2005 for the filing of Chemeq's defence and any counterclaim. The time limits were extended by consent orders on 19 April 2005. A defence was filed by Chemeq on 27 May 2005 together with a cross-claim for declarations that Chemeq was 'excused' from the various contraventions alleged against it. An amended statement of claim was filed on 17 June 2005. Chemeq gave discovery of documents in August 2005. ASIC was directed to give limited discovery in December 2005. Other pre-trial directions were then given. In February 2006 the time limits for variation of these steps were extended. 48 In the event the parties reached a compromise. ASIC filed a further amended statement of claim reducing the number of contraventions alleged to two, the first relating to non-disclosure of cost overruns on the construction of the Rockingham facility and the second relating to incomplete disclosure of the commercial relevance of the US patent rights obtained in relation to the Chemeq Product. Chemeq admitted these contraventions. 49 ASIC submitted that the appropriate penalties under the Act should be as follows:

In respect of the first contravention, 75% of the relevant maximum, being $150,000. 2. In respect of the second contravention, 35% of the relevant maximum, being $350,000. Chemeq accepts that these are appropriate penalties. The contraventions 50 The first contravention alleged against Chemeq related to the non-disclosure of the Rockingham facility cost overruns. ASIC sought a declaration, which in terms set out the particulars of the alleged contravention thus: 'Between 10 February 2003 and 30 April 2004 the defendant: (a) being a listed disclosing entity within the meaning of the Act; (b) having information, being the Rockingham Cost Increase Information referred to in paragraph 17 of the further amended statement of claim, that by r 3.1 of the ASX Listing Rules ("Rule 3.1"), it was required to tell the Australian Stock Exchange Limited ("ASX")' (d) did not notify ASX of the Rockingham Cost Increase Information in accordance with Rule 3.1, when the Rockingham Cost Increase Information was throughout the period referred to: (d) not generally available; (e) information which a reasonable person will expect to have a material effect on the price or value of the fully paid ordinary shares in the defendant.' 51 Paragraph 17 of the further amended statement of claim described the Rockingham Cost Increase Information thus: 'Throughout the period from 10 February 2003 to 30 April 2004: (a) the information that Chemeq expected the construction costs of the Rockingham facility to be: (i) by February 2003, in the order of $35 million; (ii) by August 2003, in the order of $45 million; (iii) by September 2003, in the order of $50 million; and (iv) by December 2003, in excess of $50 million ("the Rockingham Cost Increase Information"), was information that a reasonable person would expect to have a material effect on the price or value of the fully paid ordinary shares of Chemeq;…' 52 The second contravention alleged was in the following terms: 'Between 10.22am AEST on 6 October 2004 and 3.36pm AEST on 7 October 2004, the defendant: (a) being a listed disclosing entity within the meaning of the Act; (b) having information being the US Patent Office information referred to in paragraph 24 of the further amended statement of claim, that by Rule 3.1 of the ASX Listing Rules ("Rule 3.1"), it was required to tell the Australian Stock Exchange Limited ("ASX"); (c) did not notify ASX of the US patent information in accordance with Rule 3.1, when the US patent information was throughout the period it referred to: (d) not generally available; (e) information which a reasonable person would expect to have a material effect on the price or value of the fully paid ordinary shares in the defendant.' 53 The "US Patent Information" referred to in the asserted contravention was defined in par 24 of the further amended statement of claim in the following terms: 'The relevant US patent was to the knowledge of Chemeq's management not material to Chemeq in the context of the whole of its intellectual property portfolio because: (a) the relevant US patent protected a particular method of formulating the Chemeq Product but not the Chemeq Product itself; (b) it is difficult to detect an infringement of the intellectual property rights conferred by the relevant US patent and therefore difficult to enforce those rights, and by reason of those matters Chemeq's management knew that the issue of the relevant US patent did not represent any material change in Chemeq's commercial position ("the US Patent Information").' 54 ASIC seeks a declaration of each contravention under s 1317E. Admissions as to the contraventions 55 The statement of agreed facts filed in these proceedings include agreements as to the factual elements of each of the contraventions. 56 Throughout the period from 10 February 2003 to 30 April 2004: '(a) the Rockingham Cost Increase Information was information that a reasonable person would expect to have a material effect on the price or value of the fully paid ordinary shares of Chemeq; (b) the Rule 3.1 Exception Circumstances were not satisfied, in relation to the Rockingham Cost Increase Information; (c) Chemeq was therefore required by Rule 3.1 to tell ASX the Rockingham Cost Increase Information.' 57 Throughout the period from 10 February 2003 to 30 April 2004 the Rockingham Cost Increase Information: '(a) was information which would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of fully paid ordinary shares in Chemeq. (b) was not information that consisted of readily observable matter; (c) was not information that had been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities such as fully paid ordinary shares in Chemeq; (d) did not consist of deductions, conclusions or inferences made or drawn from either or both of: (i) information that consisted of readily observable matter; (ii) information that had been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities such as fully paid ordinary shares in Chemeq.' 58 The agreed statement of facts contained admissions in virtually identical terms in relation to the non-disclosure of the US Patent Information in the period from 10.22am AEST on 6 October 2004 to 3.36pm AEST on 7 October 2004. This period was referred to in the agreed statement of facts as 'The Trading Period'. 59 At par 41 of the agreed statement of facts it was said: 'Chemeq admits that by failing to tell ASX the Rockingham Cost Increase Information between 10 February 2003 and 30 April 2004, Chemeq contravened sub-section 674(2) of the Act and such contravention was serious for the purposes of section 1317G(1A)(c)(iii) of the Act.' 60 At par 61 of the agreed statement of facts, Chemeq made an admission of contravention in relation to the US Patent Information thus: 'Chemeq admits that by failing to tell ASX the US Patent Information at any time during the Trading Period Chemeq contravened sub-section 674(2) of the Act and such contravention was serious for the purposes of section 1317G(1A)(c)(iii) of the Act.' Chemeq and its shares 61 At 31 December 2002 Chemeq's market capitalisation was approximately $265 million. By 31 December 2003 that had increased to approximately $474 million. These figures come from its half yearly reports released 24 February 2003 and 11 February 2004 respectively. 62 The Chemeq annual report for 2002 disclosed that as at 12 September 2002 the company had 3,119 shareholders of whom 2,045 held less than 5,000 shares. The annual report for 2003 shows that as at 29 August 2003, it had 5,573 shareholders, of whom 4,234 held less than 5,000 shares. It appears from the annual report of 2004, that as at 23 September 2004, Chemeq had 7,807 shareholders, of whom 5,964 held less than 5,000 shares. 63 Relevantly to the Rockingham Cost Increase Information, Chemeq had 78,342,085 fully paid shares on issue on 10 February 2003. During the period from 10 February 2003 to 30 April 2004: '(a) Chemeq raised $25,185,895 by the issue of 4,707,644 shares at $5.35 per share on or about 7 July 2003 which increased the number of fully paid ordinary shares Chemeq had on issue to 83,049,729; (b) Chemeq raised $20,890,000 by the issue of 3,883,668 shares at $5.15 per share on or about 30 December 2003 which increased the number of fully paid ordinary shares Chemeq had on issue to 86,944,561; and (c) 39,978,393 fully paid ordinary shares in Chemeq were traded on the ASX, at a value of $217,692,115.' 64 The ASX Time Series Report from 6 October 2004 to 7 October 2004 disclosed that: 'On 6 October 2004: (a) 13,600,509 shares in Chemeq (of which 67,421 were traded before the 6 October Announcement) were traded at an average price $2.409; (b) the share price closed at $2.82; (c) the highest price before the 6 October Announcement was $1.78.' On 7 October 2004, 13,687,976 ordinary shares in Chemeq traded on ASX at an average price of $3.052. During the Trading Period the following fully paid ordinary shares in Chemeq were traded on the ASX: '(i) Number of shares traded: 26,821,595 (ii) Value of shares trade: $73,295,736' During that period approximately 7,000 individual trades in Chemeq shares were executed. Changes in Chemeq management 65 During the periods relevant to the contraventions the following persons held office as directors of Chemeq: (a) Dr Graham Hamilton Melrose (b) Mr Russell Chilton Barnett (c) Mr Graeme Alexander Major (d) Mr Raymond Victor Steffanoni (e) Mr Paul Grujic (appointed 16 August 2004) 66 Since that time there has been a significant change in the composition of the Board: (a) Messrs Barnett, Major and Grujic resigned from the Board in November 2005, November 2004 and December 2004 respectively; (b) Messrs John Nichols and Anthony Davies were appointed as independent directors in May 2005; (c) Mr David Williams was appointed to the Board as Managing Director in August 2005 (d) Dr Melrose ceased acting as Chairman in January 2006 and remains as a non-executive director; and (e) Mr John Hopkins was appointed a non-executive director and Chairman in January 2006. 67 The Executive Management has changed as follows: (a) Dr Melrose resigned as CEO in August 2005 and ceased acting in any Executive capacity in September 2005; (b) Mr Williams became CEO and Managing Director in August 2005; (c) Mr Andrew Dwyer resigned as Company Secretary and Corporate Finance Manager in January 2004 and left the employ of the company entirely; (d) Mr Ian Purdy was Chief Financial Officer between May 2004 and December 2004. He left the company in December 2004. Mr Brian Mangano commenced as Chief Financial Officer in May 2005; (e) Mr Adam Deane was Company Secretary between January 2004 and April 2005. He left the company in April 2005. Mr Mangano commenced as Company Secretary in May 2005. (f) Mr Ben Ritchie was Financial Controller between October 2002 and May 2005 and Interim Company Secretary between April and May 2005. He left the company in June 2005. Ms Colleen Baillie commenced as Financial Controller in July 2005. Adoption of corporate governance and disclosure compliance systems 68 Chemeq's Corporate Governance Policies and Principles were reviewed by Henry Bosch, a former National Companies and Securities Commission Chairman who, since 1990 has practised, inter alia, as a Corporate Governance Consultant. Mr Bosch was the Chairman of the Standards Australia Committee on Corporate Governance in 2002 and 2003. He was asked by Chemeq's solicitors to provide independent expert evidence for the proceedings in this Court on the practices and principles adopted by Chemeq in the context of its general continuous disclosure obligations. 69 In his report Mr Bosch reviewed the Statements of Corporate Governance Practices adopted by the Board of Chemeq in 2002, 2003 and 2004 together with extracts from the Annual Reports of the company for those years and other documents relating to its governance practices. The history of Chemeq's governance statements and practices was outlined in the report. It showed something of an evolution. 70 On 5 February 2002 the Board of Chemeq adopted a Statement of Corporate Governance Practices. The Board decided that at each Board meeting the directors would consider: '(a) any matters that have arisen since the last Board meeting which may require the Company to make an appropriate disclosure pursuant to the Corporations Law and the Listing Rules; (b) whether appropriate steps have been taken to implement any disclosure decisions made since the last Board meeting.' The Board also then decided to set up an Audit Committee to assist it to fulfil its corporate governance obligations. Among the key obligations of that Committee was the requirement that it assist the Board where appropriate to discharge its responsibility to exercise due care, diligence and skill in relation to compliance with applicable laws and regulations. The Board also decided to take a number of steps to minimise risks which included reporting and internal controls, monitoring of compliance activities and establishing and monitoring 'policies directed to ensuring that CHEMEQ complies with the law and conforms with the highest standards of financial and ethical behaviour'. 71 The Annual Report of Chemeq for 2002 included a Corporate Governance Statement. This reflected the practice and policies set out in the statement adopted on 5 February 2002. 72 In 2002 the ASX established a Corporate Governance Council consisting of the major business groups. In March 2003 that Council produced a detailed Statement of Principles of Good Corporate Governance and Best Practice Recommendations. 73 On 25 August 2003 Chemeq's Corporate Governance Committee met and reviewed its Statement of Corporate Governance Practices to ensure that they complied with current laws and recommendations and that the practices were being adhered to. The Committee was satisfied with the practices and their adherence. On the same day, the Board adopted a new Corporate Governance Statement which later appeared without significant change in its 2003 Annual Report. It differed substantially from that adopted in 2002 and indicated, in Mr Bosch's opinion, that the Board had taken account of the ASX principles and recommendations published five months before. The statement outlined 'Corporate Governance Practices of Chemeq' and made clear that many but not all of the 28 recommendations in the ASX statement were being followed. The Board's statement defined, as a function of the Board, that it ensure that shareholders were kept fully informed on developments affecting the company through: 'Compliance with Australian Stock Exchange's continuous disclosure requirements (and subsequent shareholder announcements) …' It should be noted that the obligation to make continuous disclosure does not serve only the existing shareholders of publicly listed companies, but also the market for shares which includes prospective or potential purchasers of shares. 74 Chemeq reviewed its Standard Operating Procedure concerning ASX announcements on 10 October 2003. This covered the procedures to be covered if it became necessary to make an ASX announcement but did not identify the process by which a decision was to be made as to whether, and when, to make an announcement. 75 The Audit and Risk Management Committee of Chemeq met on 27 September 2004 noting the update of the Corporate Governance Statement for the annual report. It received advice that a consultant had been appointed to assist Chemeq with corporate governance issues. Part of that assistance was a review of the Audit and Risk Committee Charter. 76 On 26 October 2004, the Chemeq Board met and approved a Corporate Governance Principles and Practices Manual which comprised a number of separate documents. One of them set out policy and procedure for continuous disclosure and ASX announcements. Several statements made in the separate documents comprised in the Corporate Governance Principles and Practices Manual deal with the company's continuous disclosure obligations. They appear in the Board Charter, the Guidelines Covering Board Operation, the Board Code of Conduct and, of course, the Continuous Disclosure and ASX Announcements - Policy and Procedure. 77 A copy of the Continuous Disclosure & Communications Policy was annexed to Mr Bosch's report. It set out the following procedures, inter alia: '(a) Directors and Senior Management must immediately notify the CEO and Company Secretary as soon as they become aware of information that should be considered for release to the market (material information); (b) the CEO will: (1) review the material information reported by Senior Management; (2) determine, in consultation with the CEO and other relevant members of the Executive, whether any of the material information is required to be disclosed to the ASX; and (3) coordinate the actual form of disclosure with the relevant members of management and its release to the ASX (as set out in item 4.3 below). (c) Induction of Directors and Other Key Personnel All Directors and Senior Management of Chemeq are to be briefed on the following issues: . the type of information that needs to be disclosed; . the roles and responsibilities of Directors, Officers and Employees of Chemeq in the disclosure context, in particular, who has the primary responsibility for ensuring that the company complies with its disclosure obligations and who is primarily responsible for deciding what information is disclosed; . safeguarding confidentiality of corporate information to avoid premature disclosure; . media contact and comment; . measures for seeking to avoid the emergence of a false market in the company's securities; . external communications such as analyst briefings and responses to shareholder queries. The induction will be conduct by the Company Secretary. (d) Documents to be Provided All Directors and key personnel of Chemeq are to be provided with a copy of the Guidance Note 8 of the ASX Listing Rules, which highlights the general principles and obligations set out in Chapter 3 of the ASX Listing Rules - Continuous Disclosure.' 78 The policy went on at par 2.2 thus: 'Your obligations As soon as you become aware of information that: . is not generally available (ie the information in question has not been included in any Annual Report, ASX Release or other publication of the Company); and . which may be price sensitive (ie it is likely to have a financial or reputational impact upon the Company that may be considered material), you must provide to the CEO and Company Secretary the following information: . a general description of the matter; . details of the parties involved; . the relevant date of the event or transaction; . the status of the matter (eg final/negotiations still in progress/preliminary negotiations only); . the estimated value of the transaction; . the estimated effect on Chemeq's finances or operations; and . the names of any in-house or external advisers involved in the matter.' 79 The policy set out the disclosure obligations under ASX Listing Rule 3.1 and explanations of the terms used in it. Exceptions to ASX disclosure obligations were set out in par 3.3. The circumstances in which contravention could arise were set out in par 5, together with a statement of the penalties for such contraventions which could be imposed upon the company and its officers. Mr Bosch's opinion of the Corporate Governance and Disclosure Systems 80 Mr Bosch made the point that Chemeq is a small listed company which employed 15 people in 2002 and 29 in 2003. He said that from 2001 to 2004 the resources available to the company for considering fast changing governance matters or establishing and maintaining increasingly complex compliance procedures were very limited. He expressed the opinion that the company's compliance and governance performance had to be considered against that background. 81 Mr Bosch described the statement adopted by the Board on 5 February 2002 as a valuable step forward in the circumstances of the time particularly considering the size of the company. The minutes of the meeting of the Corporate Governance Committee of 25 August 2003 demonstrated a continuing attention to corporate governance matters and the desire to comply with the new ASX principles and recommendations. He described the Corporate Governance Statement adopted on 25 August 2003 as 'a substantial improvement in the governance of the company'. 82 Mr Bosch pointed to the review of the Standard Operating Procedures concerning ASX announcements in October 2003 as a demonstration of Chemeq's concern about compliance in the area of continuous disclosure. In relation to the Corporate Governance Manual of 26 October 2004 he said: 'The corporate governance Manual, which was adopted on 26th October 2004, and which presumably was produced with the assistance of the consultants, includes a number of separate documents. In my opinion they are thorough and detailed and, allowing for Chemeq's size and nature, cover the matters in the ASX Recommendations appropriately. While not fully complying with all the 28 Recommendations of the ASX they set out a high standard of corporate governance. The statement "Continuous Disclosure & ASX Announcements - Policy and Procedure" makes clear the Board's commitment to compliance, the responsibilities of individuals and the processes to be followed.' Mr Bosch described the documents adopted in October 2004 as practical and workable. The statement on continuous disclosure in the Annual Report was 'clear, reflected appropriately the Company's obligations, and was likely to give confidence to shareholders and potential investors.' 83 Mr Bosch pointed out that the ASX website showed that Chemeq had made numerous statements between 2001 and 2004 in compliance with its continuous disclosure obligations. The numbers of statements thus characterised were as follows: 2001 33 statements 2002 73 statements 2003 54 statements 2004 76 statements The culture of compliance 84 In considering the appropriate penalty for the contravention by a corporation of a regulatory requirement, whether it be a requirement imposed by the Act or the Trade Practices Act 1974 (Cth) or other regulatory frameworks, it is relevant to consider whether the corporation has in place policies and procedures designed to achieve compliance with such requirements. 85 The Court will consider the form and content of the policies and procedures and also the measures adopted by the corporation to ensure that they are understood and applied. A well drafted set of policies and procedures will mean little if there is no follow up in terms of training of company officers (including directors) and, where appropriate, refresher training. In the present case there is provision for induction training but no clear evidence of follow-up and refresher training. 86 Compliance policies and procedures will not be effective unless there is, within the corporation, a degree of awareness and sensitivity to the need to consider regulatory obligations as a routine incident of corporate decision-making. This kind of general sensitivity to the issues underpins what is sometimes called a 'culture of compliance'. It does not require a risk averse mentality in the conduct of the company's business, but rather a kind of inbuilt mental check list as a background to decision-making. This may be more difficult to achieve where, as in the present case, there is a positive obligation that is not related to any particular decision. The conduct of corporate business may involve consideration of the many shifting circumstances that make up a dynamic business environment. To identify those matters, including changes in circumstance, which attract the obligation of continuous disclosure, may not always be a straightforward exercise. There will be clear cases, and not so clear cases. There should be some process for ensuring that changes in circumstances or market information requiring disclosure are identified. Absent a positive monitoring mechanism, the company's compliance system may leave open the risk of non-disclosure by oversight. 87 It must be accepted that there will be differing opinions in particular instances about what requires disclosure and what does not. From the point of view of proper risk management against the possibility of contravention, a conservative approach which favours disclosure is to be preferred. Certainly those who play calculated risk games of non-disclosure in the shadow of the Rules cannot expect indulgence from the courts if their assessments are not accepted. 88 As appears from par 11 of the ASX Guidance Note 8 entitled 'Continuous Disclosure: Listing Rule 3.1': 'The integrity of the market is enhanced if continuous disclosure is carried out in the "spirit" of the Listing Rule.' This is also reflected in Listing Rule 19.2. 89 I am satisfied that, since the contraventions to which it has admitted, Chemeq has made substantial efforts to upgrade its compliance systems relating to continuing disclosure. It may be however that consideration should be given to some mechanism for providing internal early warning to officers of the company of material information or change in circumstances that may require disclosure. The principles informing penalty 90 The pecuniary penalties which the Act applies are punitive in nature. Their character is not adequately described by the rather anodyne term 'protective' - Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at [35] - [37], [41] - [43] and [99]. Consistently with the characterisation as punitive the object of the penalties is general and specific deterrence. That is the deterrence of those who might be tempted not to comply with the law and the deterrence of the particular contravenor who might be tempted to re-offend - Australian Securities and Investments Commission v Donovan (1998) 28 ACSR 583 at 608 (Cooper J), Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 at 114 (Santow J). 91 In Donovan Cooper J was concerned with the application of penalties under s 1317EA(3)(b). He said of the section that: 'Its purpose in an appropriate case is to punish, but principally imposition of a pecuniary penalty is to act as a personal deterrent and a deterrent to the general public against a repetition of like conduct.' The same approach was adopted by Santow J in Adler in which his Honour said (at [125]): 'It is well established that the principal purpose of a pecuniary penalty is to act as a personal deterrent and a deterrent to the general public against a repetition of like conduct.' 92 In the context of competition law in Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2) (2002) 190 ALR 169 (at 174 [17]) Finkelstein J said: 'In antitrust cases retribution has no real role to play. Nor does rehabilitation, but for different reasons. Those who view retribution as an appropriate theory of punishment hold that the offender must be given some punishment because he "ought" to be punished: the "an eye for an eye, a tooth for a tooth" approach to criminality. The proponents of this view see some social satisfaction in a "just" punishment, perhaps because it can be regarded as repayment to society for the violation. It might also be justified as suppressing acts of private vengeance. However, society is moving away from using a punishment for retribution even in purely criminal cases and, to my mind, it has no role to play in relation to the punishment of a corporation. One difficulty is that if punishment is to be regarded as an exercise of morality, presumably there must be some relationship between the harm intended by the criminal act and the harm inflicted on the offender. But as there is no measurable relationship between the two types of harm, there is no reasonable basis for choosing a particular penalty. Rehabilitation is a concept that has no useful role to play regarding corporations for one cannot rehabilitate a legal fiction. So, if the purpose of antitrust laws is to define certain socially intolerable conduct, deterrence must be the means by which a corporation is to be hindered from engaging in that conduct.' The general approach thus outlined is also relevant to the imposition of penalties for breach of the Act particularly as in this case, breaches of provisions designed to maintain an informed market. 93 The deliberateness of a corporation's contravening act or omission may be taken into account as a factor relevant to the risk of that corporation reoffending. That is relevant to particular deterrence. When a corporation takes a calculated risk by intentionally or recklessly failing to disclose material information to the market, it may be inferred that there is a corporate culture which encourages or, at least, tolerates or permits decision-making which expressly or implicitly weighs the benefit of non-compliance against the risk if non-compliance is detected. For such deliberate conduct, the risk associated with re-offending must be set at a high level by high penalties. It is not necessary or useful to tread upon the shifting sands of moral denunciation in having regard to issues such as intention or recklessness in fixing penalty - cf however, the helpful and comprehensive discussion of the issue, albeit with a different perspective, in the context of competition law penalties by Yeung K in Securing Compliance :A Principled Approach (Hart Publishing, 2004, at Chapter 4). 94 Where non-disclosure conduct amounts to fraud by the deliberate non-disclosure of information calculated to affect decision-making by potential investors or creditors, the Court should not hesitate, as an incident of its penalty fixing process, to identify the unacceptable character of such conduct. However the continuous disclosure obligation imposes a duty not limited to abstention from intentional breach, or the avoidance of recklessness or carelessness. Its possible contraventions will cover a wide range of conduct. In such a case it is preferable to find a common principle applicable to the full range of conduct by reference to considerations of deterrence rather than super-added qualitative considerations of uncertain provenance relating to the morality of the particular contravenor's actions. Factors relevant to the imposition of penalty 95 The factors relevant to the level of penalty for contravention of the continuing disclosure provisions of the Act may be identified in part by reference to the elements of the contravention set out in the Act where those elements accommodate a spectrum of possibilities affecting its seriousness. The greater the seriousness of the contravention when measured by reference to those elements, the greater the harm that will be done if like re-offending should occur and the higher the penalty that should be imposed to minimise that risk. Issues of deliberation, recklessness and negligence are also relevant to risk of recurrence and what is necessary to deter such conduct by the particular company and others in the future. 96 The presence or absence of compliance systems is of importance. It is desirable also that the Court, in fixing penalty, is made aware of the reasons for the contravention. This may enable it to determine whether there were inadequate compliance systems or whether the contravention involved aberrant disregard by an individual of relevant policies and procedures. The seniority of those in the company who were involved in the contravention is also relevant because it goes to the risk of recurrence and the extent to which their conduct is likely to be noticed by subordinates within the company and by others in the wider corporate community. The degree of damage, if any, inflicted on the market by the non-disclosure is relevant as part of the exercise of assessing the seriousness of the contravention and so the level of risk associated with re-offending. 97 The acknowledgment by a corporation that it has contravened the law, its cooperation with the regulator in that regard, the steps it has taken internally to avoid repetition and relevant changes in the composition of the board or senior management should also be taken into account in the kind of risk assessment that informs a deterrent approach to punishment. 98 It may also be relevant to consider the impact, if any, on shareholders when a penalty is sought against a corporation. Penalties imposed on officers of the corporation for their part in such contraventions affect those officers alone. Penalties imposed on the corporation may affect shareholders including those who have become shareholders on a set of assumptions induced by the very non-disclosure complained of. In some cases it is possible also that creditors may be affected. Who then is being deterred when only the corporation is penalised? I am not sure that there is a satisfactory answer to this concern within the present statutory scheme. One might imagine that if a penalty is to be significant to a corporation it will also be significant to its shareholders in its impact on the capital which backs their shares. In a company with capitalisation as high as that of Chemeq, the impact on individual shareholders may be insignificant. The penalties that count most are likely to be those imposed on the responsible individuals. Nevertheless the law as presently framed requires the assumption that the contravening corporation is a person distinct from its shareholders and that it can be deterred by the imposition of appropriate penalties. 99 From the preceding discussion I extract the following factors relevant to the level of penalty for contravention of the continuous disclosure provisions. The list is non-exhaustive:

The extent to which the information not disclosed would have been expected to and (if applicable) did affect the price of the contravening company's shares (s 674(2)(c)).
The extent to which the information, if not generally available, would have been discoverable upon inquiry by a third party (s 676(2)).
The extent (if any) to which acquirers or disposers of the company's shares were materially prejudiced by the non-disclosure (s 1317G(1A)).
The extent to which (if at all) the contravention was the result of deliberate or reckless conduct by the corporation.
The extent to which the contravention was the result of negligent conduct by the corporation.
The period of time over which the contravention occurred.
The existence, within the corporation, of compliance systems in relation to its disclosure obligations including provisions for and evidence of education and internal enforcement of such systems.
Remedial and disciplinary steps taken after the contravention and directed to putting in place a compliance system or improving existing systems and disciplining officers responsible for the contravention.
The seniority of officers responsible for the non-disclosure and whether they included directors of the company.
Whether the directors of the corporation were aware of the facts which ought to have been disclosed and, if not, what processes were in place at the time, or put in place after the contravention to ensure their awareness of such facts in the future.
Any change in the composition of the board or senior managers since the contravention.
The degree of the corporation's cooperation with the regulator including any admission of contravention.
The prevalence of the particular class of non-disclosure in the wider corporate community. The role of the Court where proposed orders are agreed 100 When a regulator brings action to enforce the provisions of a public statute and agreed orders and penalties are proposed, it is not the role of the Court merely to rubber stamp them. In this respect what I said in Australian Competition and Consumer Commission v Real Estate Institute of Western Australia (1999) 161 ALR 79 is relevant in the present case (at 79]: 'As a general principle fair and appropriate settlements are encouraged to reduce the burden of litigation on both public and private resources. Courts are frequently asked to play their part by accepting formal undertakings or making orders by consent which prohibit parties from certain conduct or require them to do certain things. Sometimes they are asked to impose agreed pecuniary penalties. In carrying out those functions, courts are conscious of the public interest in the settlement of cases. They must also be conscious, however, that the laws they apply are public laws. It is in the public interest that, in considering agreements between parties requiring orders of the court, the court does not act as a mere rubber stamp. What is proposed must always be scrutinised to determine whether the undertakings or consent orders are within power and are appropriate.' 101 In relation to proposed pecuniary penalties, Burchett and Kiefel JJ said in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 (at 291): 'There is an important public policy involved. When corporations acknowledge contraventions, very lengthy and complex litigation is frequently avoided, freeing the courts to deal with other matters, and investigating officers of the Australian Competition and Consumer Commission to turn to other areas of the economy that await their attention. At the same time, a negotiated resolution in the instant case may be expected to include measures designed to promote, for the future, vigorous competition in the particular market concerned. These beneficial consequences would be jeopardised if corporations were to conclude that proper settlements were clouded by unpredictable risks. A proper figure is one within the permissible range in all the circumstances. The Court will not depart from an agreed figure merely because it might otherwise have been disposed to select some other figure, or except in a clear case.' 102 In Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd [2002] FCA 619, Weinberg J referred to what he considered to be the 'somewhat undesirable practice on the part of the ACCC in presenting this Court with a specific figure as an 'agreed pecuniary penalty'' (at [32]). While acknowledging that both the ACCC and Colgate had accepted that the figure proposed was in no way binding upon the Court, his Honour could not find a single instance when the Court had not in the past endorsed such a figure. His Honour went on (at [34]): 'It is difficult to imagine that the parties would propose a pecuniary penalty that is so clearly beyond the permissible range that the Court will depart from it. As the authorities presently stand, the Court is bound to impose an agreed pecuniary penalty, save in such circumstances.' His Honour acknowledged the importance of the principles enunciated in NW Frozen Foods and, in particular, the need for corporations to have certainty of outcome if they were to be encouraged to engage in negotiated settlements. He was bound by those principles and the well-established line of authority to accept that the Court would not depart from an agreed figure merely because it might otherwise have been disposed to select some other figure. His Honour said: 'However, there are dangers associated with this approach. The Court may be seen, perhaps not altogether incorrectly, to act as a 'rubber stamp' in simply approving a decision taken at an executive level by a body charged with investigating and prosecuting contraventions of the Act, but having no role in actually imposing particular sanctions for those contraventions. Negotiated settlements are an important vehicle for resolving complex matters such as those involving the present case. It must be borne in mind, however, that there is a public interest in ensuring that corporations that engage of behaviour of the kind that occurred in this case are dealt with appropriately, and that proper recognition is given to the need for specific and general deterrence. There are important parallels between the fixing of a pecuniary penalty under s 76, and the ordinary sentencing process which is quintessentially a matter for the courts.' His Honour made clear that he was not critical of a joint submission between regulator and contravenor about what might be the appropriate range of pecuniary penalties to be imposed. A submission couched in those terms could assist in achieving a measure of certainty and consistency of treatment with other like cases. 103 I agree, with respect, with the remarks of Weinberg J. In the end, however, no 'agreed penalty' can bind the Court. Consistently with NW Frozen Foods the Court will apply a principle of judicial restraint in deciding whether or not to make orders in the terms proposed by the parties. But that principle of judicial restraint is not a self imposed constraint equating the role of the Court to one of judicial review of a sentencing discretion. Such a self imposed limitation could amount to an abdication of the duty that the Court has to exercise the jurisdiction which is invoked and the powers conferred upon it by the Parliament. NW Frozen Foods does not, in my opinion, confine the Court to the imposition of a penalty differing from the agreed penalty only where the agreed penalty would be outside the range of penalties which could be imposed in the proper exercise of a sentencing discretion. The restraint which is applied by the Court to regulatory settlements is informed by practical considerations which differ from the principles and criteria informing its judicial review function or the exercise of its appellate jurisdiction in relation to discretionary judgments. 104 In this case, ASIC and Chemeq have proposed that certain penalties would be appropriate. Such a proposal, in my opinion, leaves it open to the Court to determine that some other penalty might be more appropriate. In so deciding, the Court would apply the restraint principle to which I have already referred and not lightly come to a different outcome. Whether the penalties proposed are appropriate 105 ASIC submitted that the first contravention ought to be considered as one of the most serious possible contraventions of a listed company's continuous disclosure obligations. It pointed to the significance of the construction of the Rockingham facility to Chemeq's principal activity. That activity is the production and sale of the Chemeq Product. Chemeq could not produce commercial quantities of the product and therefore achieve sales until it had completed the construction. Moreover, its main physical asset was at all material times the Rockingham facility. 106 ASIC submitted that Chemeq specifically represented to the market the expected costs of construction of the 20 tonne facility in April 2002 as being $25 million and in September 2003 as being $35 million. As at 31 December 2002 its total assets were approximately $16 million and as at 31 December 2003 its total assets were approximately $72 million. ASIC submitted that Chemeq's market capitalisation combined the value attributed by investors to its intellectual property, its physical assets and its ability to sell the Chemeq Product at a profit in the future. During the relevant period Chemeq announced its intention to upgrade the facility. It continued to make announcements about the progress of construction. However, it did not announce the increased costs of the 20 tonne facility despite the statements regarding the costs of the facility referred to earlier. 107 The statement to the market in September 2003, referred to in the statement of agreed facts, was incomplete and failed to fully inform the market of the true position at that time. ASIC submitted that, by way of contrast, during the relevant period, Chemeq frequently used ASX announcements to provide positive news for the market. In the result, investors were informed of the potential value of the Chemeq Product and of its plans for the future but not of substantial cost overruns in the Rockingham facility. They were serious and involved an increase in cost to build the facility from 40% to 100% over the amount previously announced to the ASX. 108 The cost incurred in building facilities before Chemeq could start producing commercial quantities of its product were important factors that investors needed to know when deciding whether to acquire Chemeq shares. That cost represented the initial investment required which investors needed to weigh up against the expectation of a future income and the risks associated with that expectation. Moreover, ASIC submitted, the fact that Chemeq was experiencing significant cost overruns would have been relevant to investors' assessment about its ability to deliver on key milestones and on its planning and management capabilities. The consequence was that the price of Chemeq shares during the relevant period may have been higher than it would have been if the information had been disclosed. The uninformed market in Chemeq shares lasted for a period of approximately fourteen and a half months. 109 ASIC pointed out that during his period Chemeq raised approximately $40 million from investors for the purpose of funding upgrades and expansion of its manufacturing facilities. 32,389 trades were executed on ASX from 10 February 2003 to 40 April 2004 with a total of 39,978,393 shares traded. Chemeq had and has few, if any, institutional shareholders but attracted many small shareholders as investors. 110 ASIC submitted that to give full effect to principles of specific and general deterrence the contravention required a penalty at or close to the maximum amount provided by the law in force prior to 1 July 2004. It demonstrated a disregard of the requirements of the ASX Listing Rules and s 674(2). It was submitted that it is appropriate to demonstrate to Chemeq and to other listed companies that such disregard of their obligation will not be tolerated. 111 It was submitted on behalf of Chemeq that it was reasonable to infer that at least some of the trading in its shares at least since its admission to the S & P ASX 200 Index was index driven rather than because of any appreciation of its individual situation. There was no allegation that Chemeq or any of its directors or officers acted dishonestly or sought to profit or gain from the contravention. Chemeq has not previously been found to have contravened the Act. Its failure to appreciate that it should have disclosed the construction cost overrun was said to be one of a lack of understanding, rather than a calculated attempt to deceive the market. 112 Having regard to the facts outlined earlier, I am satisfied that:

There is no evidence as to the prevalence of the particular class of non-disclosure in the wider corporate community. 113 In the circumstances, I am satisfied that a penalty at the higher end of the range is appropriate. Given the absence of any dishonesty, the cooperation of the corporation with ASIC, the review of its compliance systems and the change in composition in the Board and senior management, I am satisfied that the penalty as proposed, fixed at 75% of the applicable maximum, is appropriate. 114 In relation to the Second Contravention, ASIC submitted that it ought to be considered as 'moderately serious'. ASIC submitted that the disclosure obligation arose as a result of Chemeq's own announcement of 6 October 2004 overstating the significance of the relevant US patent. That overstatement can be seen by comparing the admitted facts as to the commercial significance of the patent with the message conveyed by the 6 October announcement. There was a significant increase, in the order of 58% in the market price of Chemeq's shares and the overstatement was likely to have contributed to that increase. 115 Chemeq was required to make the announcement of 7 October 2004 in order to clarify the true position about the significance of the US patent. It only made that announcement after a query from the ASX on 7 October 2004. It did not immediately seek to rectify the position despite the obvious market response to its first announcement. 116 ASIC pointed out that the Second Contravention continued for almost two full trading days. During that time about 7,000 trades were executed and 26,821,595 shares were traded. By way of contrast, on 5 October only 522,680 Chemeq shares were traded. Following Chemeq's announcement on 7 October 2004 its share price fell substantially in the order of 15%. 117 ASIC submitted that the principles of specific and general deterrence required a penalty at, or close to, 50% of the maximum amount provided by the law in force after 1 July 2004. It submitted that the events of 6 and 7 October demonstrated a continuing carelessness by Chemeq with respect to the accuracy and completeness of its disclosures to ASX. It demonstrated a slowness to correct misapprehension of the significance of the grant of the US patent. 118 Chemeq submitted that in considering the effect of the information on the market value of its shares it was necessary to take account of the fact that it had finalised the issue of 8,478,155 new shares on 6 October 2004 and that share price volatility commenced prior to the contravention. There was also other information contained in the 6 October 2004 announcement. Nevertheless Chemeq accepted, for the purposes of these proceedings, that some trading may have occurred as a result of its failure to promptly tell the market the US patent information. Chemeq also pointed to the absence of dishonesty in relation to the announcement and its admission of the contravention. It responded to the ASX query regarding the US patent within the timeframe stipulated by the ASX, which response 'cured the contravention'. 119 In my opinion, the matters referred to by ASIC in its submissions, which I accept, has justified a penalty at the level for which it contends. The same mitigating factors to which I referred in relation to the First Contravention apply in relation to the Second Contravention. In the circumstances, a penalty for the Second Contravention of $350,000, being 35% of the relevant maximum is appropriate. Conclusion 120 For the preceding reasons, I will make the declarations sought by ASIC and the penalties proposed by the parties. The Chemeq cross-claim will be dismissed. There will be an order that Chemeq pay ASIC's agreed costs of $170,000. I certify that the preceding one hundred and twenty (120) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.