In June 2024, Justice McEvoy delivered judgment in ASIC's case against iSignthis and its former director Mr Karantzis. Amongst other findings, the Court held that iSignthis breached its continuous disclosure obligations by failing to disclose to the ASX that:

• approximately $3M of revenue earned by iSignthis in 2018 comprised one-off revenue instead of recurring revenue;
• iSignthis had incurred approximately $2.85 million in one-off costs; and
• VISA had terminated its relationship with iSignthis and the reasons for that termination.

The judgment provides some useful takeaways for companies in their consideration of whether information is "material" requiring disclosure under section 674 of the Corporations Act and the ASX Listing Rules. Those takeaways are outlined below.

Materiality analysis does not need to be overcomplicated

 Section 674(2) of the Corporations Act (at the relevant time) provides that information requires disclosure if a reasonable person would expect, if it were generally available, to have a material effect on the price or value of that entity's securities. The Court held that in general, the materiality assessment should be straightforward: it simply requires an objective, ex ante (before the event), consideration of the language set out in section. It is ultimately a commercial common-sense analysis, which may be informed by expert evidence (although in some cases it may not be strictly necessary).

Relevantly, an ex post statistical analysis of share price movements after the event may not provide a suitable means of assessing whether the information was material (but may be relevant as a cross-check exercise). Readers will be familiar that ex post analysis such as an 'event study' is often relied upon by parties in shareholder class actions to assist in the assessment of materiality and quantum.

Lay evidence is important and useful in considering whether information is material

Specifically, in relation to the one-off revenue information, ASIC argued that the lay evidence of iSignthis' directors clearly showed that it was of particular interest to market participants. This was because, among other things, Mr Karantzis was made aware of its importance through specific and directed questions asked of him by analysts on this issue, and other directors had accepted that they knew the proportion of one-off and recurring revenue was important to the market.

iSignthis submitted that lay evidence on a technical subject matter such as materiality does not assist the Court and that the Court's attention should be directed to the expert evidence on materiality instead. The Court emphatically rejected this submission. While the Court acknowledged that expert evidence may be relevant to the question of materiality, the lay evidence provided a useful, real-world counterpoint to the observations made by the experts – and in that sense – was highly instructive to the materiality exercise. The Court further observed that Mr Karantzis's behaviour surrounding an analyst conference was telling:

• prior to the conference, Mr Karantzis received specific questions from an analyst asking about the breakdown of one-off revenue versus recurring revenue – to which he did not respond;
• on the day of the conference, iSignthis disclosed that one off fees were less than 15% of revenue;
• after he had finished presenting, Mr Karantzis was asked a further question about the percentage of one-off revenue versus recurring revenue – he responded that iSignthis had "cited a figure in the pack of less than 15%"; and
• following the conference, an analyst published a research note on iSignthis stating that "recurring business activity constituted ~85% of revenues, with the balance being one-off integration related revenues" – this research note was forwarded to Mr Karantzis.

Based on the above, the Court was prepared to make a finding that, on a rational and common-sense basis, the one-off revenue information was material, and Mr Karantzis knew this.

Suspension of trading does not suspend the continuous disclosure obligations

Another central issue in the case was the question of materiality in relation to the ASX's suspension of iSignthis' shares. The question was whether a disclosure of VISA's decision to terminate its relationship with iSignthis would have materially affected iSignthis' share price – when iSignthis shares were already suspended from trading. iSignthis argued that a reasonable person would not expect the VISA termination information to have a significant impact on its share price under these non-trading conditions.

Justice McEvoy determined that the suspension of trading is not a defence against an alleged contravention of section 674(2) of the Corporations Act, noting that 'a market-sensitive event that occurs even during a period of suspension from trading can have an effect on underlying value. The fact of suspension does not, in any event, suspend the operation of the Listing Rules and the ongoing applicability of a company’s disclosure obligations’. Further, Justice McEvoy noted that off-market trades of iSignthis shares occurred, and experts were able to analyse the situation, regardless of the suspension.

Negotiations to resolve an ongoing dispute (in certain circumstances) may satisfy the exception in Listing Rule 3.1A

While the Court noted that this was a finely balanced question, it accepted that negotiations between iSignthis and VISA after the date on which VISA first decided to terminate its relationship with iSignthis (i.e. 17 April 2020) constituted an incomplete negotiation that was continuing and therefore did not require disclosure. However, the Court's decision and reasoning was highly dependent on the facts.

After 17 April 2020, VISA continued to review documents provided by iSignthis and continued to engage in an ongoing dialogue with iSignthis in relation to the termination issue. In light of this conduct, the Court found that the parties were effectively negotiating about the legitimacy of VISA's decision to terminate. The Court also accepted that if the exception in Listing Rule 3.1A applied to parties negotiating in respect of the establishment of a business relationship, "it is no stretch to conclude that the exception extends, in an appropriate case, to negotiations intended to resolve a dispute so as to preserve a business relationship."

The Court found that disclosing the dispute would have been premature and may have misinformed or misled the market. On that basis, as long as VISA continued to engage with iSignthis in the way that it did, VISA's “decision” lacked finality for the purposes of the ASX Listing Rules. Once iSignthis received a letter from VISA on 12 May 2020 informing it of the finality of VISA's decision to terminate, it was obliged to disclose this to the ASX on or shortly after 12 May 2020.

In 2021, the "reasonable person test" in section 674 (that information requires disclosure if a reasonable person would expect, if it were generally available, to have a material effect on the price or value of that entity's securities) was updated by a new section 674A which requires plaintiffs in civil penalty proceedings to establish that an entity either knew, or was "reckless or negligent" with respect to whether, information would have a material effect on the price or value of that entity's securities (i.e. a fault element). This is a higher threshold. Due to the date of the contravening conduct, this section was not applicable to iSignthis, but given the Court held that iSignthis' directors held actual knowledge that the information was material, we query whether this higher threshold would have in fact posed a difficulty for ASIC.

In any event, in light of the susceptibility to civil penalty proceedings as well as ASIC infringement notices or prosecution risk for companies and officers for criminal offences in contravention of the continuous disclosure rules, as a matter of prudence directors and officers should continue to consider applying the lower threshold "reasonable person test" when deciding if a market disclosure is necessary and appropriate. Justice McEvoy's comments in this regard provide helpful guidance.

For further queries or if you would like to discuss continuous disclosure obligations in more detail, please contact us.