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21-128MR ASIC commences civil proceedings against shipbuilder Austal Limited for continuous disclosure breach
ASIC has today commenced proceedings in the Federal Court against Austal Limited (ASX:ASB) (Austal) and its former CEO, David Singleton, for alleged breaches of the Corporations Act (the Act) and ASIC Act.
ASIC’s proceedings involve an alleged failure by Austal to immediately disclose to the market a material change in its prior earnings guidance. Austal had represented that it expected its US shipbuilding business would be profitable in FY2016, but subsequently became aware that it would likely generate a significant loss.
On 10 December 2015, Austal provided earnings guidance and represented that it expected its US shipbuilding business to be profitable in FY2016. Austal represented that it expected its US shipbuilding EBIT (Earnings Before Interest and Tax) margin to be in the range of 4.5% - 6.5% in FY2016 and to see margin improvement on its approximately $3.5 billion US Navy LCS warship program. The US shipbuilding EBIT margin is a measure of operating profit as a percentage of revenue from Austal’s US shipbuilding business. The company affirmed its earnings guidance on 23 February 2016.
ASIC alleges that from at least 4 June 2016 (a Saturday), Austal was aware that it was likely that a writeback was required of at least US$90m, which would generate a significant loss to Austal USA and/or Austal in FY2016.
Before market open on 4 July 2016, Austal announced that it would report a US$115m (AU$156m) writeback of work in progress on the LCS program and record a statutory group EBIT loss in the range of AU$(116) – (121)m in FY2016.
ASIC alleges that Austal breached its continuous disclosure obligations under s674(2) of the Act between 6 June and 4 July 2016 by failing to disclose that a writeback of at least US$90m was likely required and that this would generate a significant loss. ASIC also alleges that Austal engaged in misleading or deceptive conduct in breach of s1041H(1) of the Act and/or s12DA of the ASIC Act by failing to correct or withdraw its previous guidance.
ASIC alleges Mr Singleton, Austal’s CEO at the time of the alleged misconduct, contravened sections 180(1) and 674(2A) of the Act for his involvement in Austal’s continuous disclosure contravention and by failing to exercise reasonable care and diligence as a director of Austal.
ASIC is seeking declarations and pecuniary penalties from the Federal Court.
Austal is a listed Australian shipbuilding company that operates globally, including in the USA and Australia with its head office in Henderson, Western Australia.
In FY2016, when ASIC alleges the relevant contraventions occurred, Austal derived 80–85% of its total annual revenue from its wholly-owned US subsidiary Austal USA, LLC (Austal USA). At that time, Austal USA had two major shipbuilding contracts with the US Navy, including the construction of eleven fully aluminium warships known as the Littoral Combat Ship (LCS) program. The LCS program was in the early stages of construction with the first of the LCS vessels delivered in August 2015 and a second vessel delivered in late FY2016. The other LCS vessels were at various stages of construction with some being constructed concurrently.
ASIC wishes to acknowledge the assistance of US Securities Exchange Commission for their cooperation during this investigation.
The first case management hearing has been listed for 8 July 2021.
Editor's note 2:
A further case management hearing has been listed for 8 October 2021.