COMPANY directors - particularly, those of Australian Stock Exchange (ASX) listed companies - will find it hard to ignore the recent explosion of investor activism and judicial decisions relating to shareholder rights.

These recent decisions - together with the courts' favourable view of litigation funding arrangements - have heightened the risk of liability for directors, officers and advisors of companies.

This article considers some recent decisions that highlight the evolving powers of shareholders.

New developments in shareholder rights arose in the recent Concept Sports case. When Concept Sports Limited (Concepts) issued a prospectus, it included profit forecasts that were not achieved. Cadence Asset Management Pty Ltd (Cadence) acquired an interest in shares issued under the prospectus, but later sold the shares
at a loss.

Following the sale of the shares, Cadence instituted proceedings against Concepts, its directors and auditors to recover the loss (difference between the subscription price and the proceeds of sale) by relying on the prospectus provisions in the Corporations Act 2001 (Cth) (Act).

The Court initially dismissed this claim on the basis that the prospectus provisions in the Act normally apply to existing shareholders. Cadence, however, appealed the decision and was successful.

The parties settled this matter prior to trial. However, directors, officers, auditors and legal advisors (Relevant Parties) need to be mindful of several things when preparing matters of this nature for trial.

They include:

One of the first cases to award damages to a shareholder (of an ASX-listed company) who sold shares prior to a share price increase was the recent decision in the Jubilee Mines case (Jubilee). In this case, the court considered Jubilee had material information in its possession that should have been disclosed to the market in a timely manner.

The information in question concerned drilling results, which (at the time of receipt of the information by the company) was potentially of economic significance to Jubilee and its shareholders (Relevant Information).

After receipt of the Relevant Information, but prior to Jubilee disclosing it to the market, a shareholder sold his shares in the company. Following the sale of the shares, Jubilee announced the Relevant Information to the market and the share price in Jubilee increased.

The shareholder sued Jubilee for breaching its continuous disclosure obligations and the shareholder successfully asserted that, had he been privy to the Relevant Information, he would not have sold his shares.

The Western Australian Supreme Court awarded $1.8 million in damages to the shareholder, representing the loss suffered as a result of the disposal of the shares.

Similarly, Sons of Gwalia (Sons) and the pending Multiplex case illustrate that a company's failure to announce its true financial position to the market in a timely manner can result in costly litigation instituted by disgruntled shareholders.

Interestingly, in the Sons case, a shareholder successfully claimed that the company's failure to meet its continuous disclosure obligations amounted to misleading and deceptive conduct.

This case is important for directors because it is the first time a shareholder has been elevated to rank equally with other unsecured creditors.

Now that the High Court has upheld the shareholder's claim, the scene has been set for other disgruntled shareholders, involved in the class action, to stake their claim as unsecured creditors and erode the traditional barriers between shareholders and the company.

Due to the significant ramifications associated with the High Court's decision in Sons, the Parliamentary Secretary to the Treasurer, Chris Pearce, announced in February that he has referred issues arising from decision to the Corporations and Markets Advisory Committee (CAMAC) for consideration and advice.

The findings of the CAMAC report - due to be released in June - will be of the utmost importance for directors, officers, creditors and company advisors.

Increased investor activism, coupled with recent judicial support for shareholder actions, should alert directors, officers and advisors of companies that the powers of shareholders are evolving. Proper company conduct within the context of this evolving body of law will substantially reduce the risk of legal liability.