Robbing Peter to pay Paul? Shareholder compensation for violations of continuous disclosure obligations in New Zealand securities law

but equally harmful loss which results from non-disclosure in the form of reduced market confidence. Given that an efficient market requires confident investors, any loss in confidence harms market efficiency and thus should be prevented. In the context of information disclosure, investor confidence can be maintained in two ways; firstly by preventing disclosure violations happening in the first place, and secondly by providing a remedy to those who suffer as a result of a 216 A Evans “The Investor Compensation Fund” (2007) 33 J CORP L 223 at 235. 217 Goshen and Parchomovsky, above n 162, at 713 218 Easterbrook and Fischel above n 157, at 619, footnote 13. 219 One example of this is Smartshares, which offers a number of pre-diversified portfolios of NZX listed companies: . 220 Easterbrook and Fischel above n 157, at 619, footnote 13. 221 Ibid, at 641. 51 violation after the fact. The following discussion will assess the contribution of both mechanisms to investor confidence, and suggest how securities law should best give effect to these objectives. 4.5 Preventing violations of continuous disclosure The most effective way to instil investor confidence is to provide an appropriate level of deterrence against non-disclosure. Such deterrence can be best achieved through a legal framework which penalises the company and its directors for the harm to market confidence caused by their non-compliance. Put another way, the company must internalise the harm which it does to the market as a result of non-disclosure. Determining the extent of such an abstract harm is inherently difficult. However, it is clear is that the social harm resulting from a loss in market confidence is largely distinct from the out of pocket losses incurred by investors. The law must therefore provide a penalty mechanism which approximates the harm that a violation does to market confidence, and thus adequately deters non-disclosure. The current public enforcement regime under the Securities Markets Act 1988 is arguably sufficient to achieve these deterrent objectives. As discussed in chapter one, the civil penalty regime allows the FMA to impose pecuniary penalties on both the company and individuals involved in continuous disclosure violations. In this sense, the Act already provides a means of internalising the harm of non-disclosure and in doing so ensures investor confidence is maintained. Furthermore, companies that repeatedly offend can be delisted from the NZX, and persistently offending directors can be banned from managing a company. These severe penalties provide an appropriate backstop for when market confidence is so damaged by non-disclosure that those complicit in the harm must be removed from the market. 222 Langevoort, above n 161, at 654-657. 223 Alexander, above n 207, at 1489. 224 See above at 1.2. 225 NZX Listing Rules, rule 17.15. 1. 226 Securities Markets Act 1998, 43F. 52 One potential improvement to the current enforcement regime is the implementation of ‘infringement penalties’ for minor violations of continuous disclosure obligations. These penalties are comparable to ‘speeding fines’ and consist of a relatively small fine which can be imposed by the public regulator without involving the courts. Because a strict liability standard applies for continuous disclosure violations, at times infringements may occur that do not warrant judicial action. Under the status quo, the FMA are essentially powerless to deal with this type of low level offending, meaning small violations may go unpunished. This has the dual harm of encouraging complacency on the part of companies and their directors, and negatively affecting market confidence by creating a perception amongst investors that smaller violations can ‘slip under the radar’ of the FMA. In Australia, ASIC is empowered to unilaterally issue infringement notices for violations of the continuous disclosure regime. Whilst the new Financial Markets Conduct Bill proposes to empower the FMA to issue infringement notices for conduct that violates certain provisions, continuous disclosure has not been included as one of these. In my view extending their coverage to the continuous disclosure regime would provide a positive addition to the existing enforcement framework. Some commentators have also argued that private enforcement of penalties should be available as a supplement to public enforcement. Langevoort for example, envisages capping damages for disclosure violations but leaving them open to private enforcement. Such a mechanism could provide a backup to public enforcement in circumstances where the FMA does not have the will or resources to pursue action itself. The benefit of capped damages as opposed to compensation is that they are aimed at restoring the loss in investor confidence resulting from non-disclosure, rather than the out-of-pocket loss suffered by investors. Their size reflects this objective, resulting in penalties that are likely to be far lower than the out-of-pocket loss suffered by investors. 230 227 Corporations Act 2001, ss 1317DAA-1317DAJ. See also: J Coffey, “Enforcement of Continuous Disclosure in the Australian Stock Market” (2007) 20 AJCL 301 at [4.3]. For an overview of process for issuing an infringement notice see: ASIC “Continuous disclosure obligations: infringement notices” (Regulatory Guide 73, May 2004). 228 Financial Markets Conduct Bill 2011 (explanatory note) at 9. 229 Langevoort, above n 161, at 641-643. 230 This assumes, however, that the damages payment is equal to the loss in market confidence. Whilst this is unlikely to ever be perfect due to the nature of such a loss, fixed