Electro Optic Systems hit with $4m penalty for disclosure breach as ASIC action draws to a close

Canberra-based defence and space manufacturer Electro Optic Systems Holdings (ASX: EOS) has been ordered to pay a $4 million penalty for breaching continuous disclosure rules, bringing an end to regulatory action that has hung over the company for more than three years.

The Federal Court ordered the penalty after finding EOS failed to disclose a material downgrade to its 2022 revenue forecast for about 14 weeks between 25 July and 31 October 2022.

EOS had forecast revenue of $212.3 million or more for the 2022 financial year but became aware by late July that revenue was likely to be around $164 million, with a possible additional $27 million.

The company did not update the market until 31 October 2022, when it disclosed revised guidance of $100 million to $140 million, a gap of as much as $112 million from its original forecast.

Justice Ian Jackman accepted the agreed $4 million penalty as "sufficiently substantial” to act as a deterrent without being "oppressive or disproportionate” to the contravening conduct.

ASIC chair Joe Longo says the outcome reinforces the corporate regulator's commitment to enforcing the continuous disclosure regime.

“This result demonstrates that continuous disclosure is fundamental to keeping investors properly informed,” says Longo.

“When a listed company becomes aware of material changes to guidance, it must act promptly to disclose these to the market.

“Delays in correcting market-sensitive information undermine market integrity and investor confidence.”

The court ruling announced today brings to an end the matter that has weighed on the company through a period of significant strategic transformation.

“In recent years, the EOS board and executive leadership team have been focused on strengthening the foundations of the business for sustainable growth, including resolving legacy issues connected to the challenging conditions the company faced in 2022 and its market announcements in that year,” says EOS chairman Garry Hounsell in a statement to the ASX.

“The conclusion of the ASIC matter represents a key inflection point and enables greater focus on future growth and strategic priorities.”

While the penalty draws a line under ASIC's action against the company itself, the regulator has separately commenced civil proceedings against former CEO and director Dr Ben Greene for alleged breaches of directors' duties connected to the same conduct.

ASIC alleges Greene "knew or should have known" about the revenue downgrade, failed to adequately inform the board and voted to defer disclosure.

Greene is not a party to the $4 million settlement. He stepped down as CEO in July 2022 after 36 years leading the business.

EOS has undergone a major strategic pivot since the disclosure controversy, stepping up its counter-drone capabilities with a $228 million deal for Europe's MARSS Group announced earlier this year as it positions itself as a key supplier to Western defence forces.