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Austal (ASX:ASB) share price falls on ASIC action

The Austal Limited (ASX: ASB) share price has been hit with legal proceedings. What does this mean for the Austal share price?

Austal designs, manufactures and supports high-performance shipping vessels for commercial and defence customers worldwide.

ASB share price

Source: Rask Media ASB 2-year share price chart

Why ASIC has filed legal proceedings

The Australian Securities & Investments Commission (ASIC) announced it has commenced proceedings in the Federal Court against the company and its former CEO, David Singleton.

The proceedings relate to the alleged failure by Austral 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 FY16 but subsequently became aware that it would likely generate a significant loss.

Mr Singleton, who was the CEO at that time, is alleged to have contravened Sections 180(1) and 674(2A) of the Corporations Act 2001.

In non-legal terms, the alleged misconduct relates to Mr Singleton’s involvement in Austal’s continuous disclosure contravention and by failing to exercise reasonable care and diligence as a director.

What now for Austal?

The outcome of these proceedings may result in pecuniary penalties from the Federal Court and there is a range of outcomes.

If Austal is found to have breached Section 674(2A) (continuous disclosure) then it would also be in breach of ASX Listing rule 3.1.

According to this ASX listing rule, Austal may be liable for a civil penalty of up to $1 million. Austal may also be liable to pay damages to any person who suffers loss or damage as a result of the breach.

In the statement filed by ASIC in the Federal Court, it notes total shares of around $31 million were traded during the period of the alleged misconduct.

In such circumstances, the most prudent approach would be to obtain a legal opinion and assign probabilities to a range of scenarios. It seems the worst-case scenario could result in a civil penalty of $1 million and potential damages of $31 million.

I’m no legal expert but forecasting is an important skill to hone in investing as well as having a thesis.

This case reminds me of the importance of management quality, which is what I look for as part of the Rask Investment Philosophy.

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Rask's analyst has just finished a 7,500-word report, The Ultimate BNPL Sector Report, taking a deep dive into this booming ASX sector. It shines a spotlight on each of the major players. You can get the full analyst report for FREE by CLICKING HERE NOW.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned

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