ASX Shareholder Targets Former Directors in $14.4M CHESS Blockchain Fallout

Key Takeaways:

• Rosherville will be applying to court to sue former directors and officers of the ASX.
• The proposed action is related to the failed blockchain-based CHESS replacement.
• There are no allegations against the exchange itself, the stock exchange said in a statement.

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A director and former officer of the Australian Securities Exchange (ASX) is a shareholder who wants to once again raise concerns about its troubled blockchain initiative by filing a lawsuit against retired directors.

Rosherville Pty Ltd has advised the ASX of its plans to file a statutory derivative action in the Federal Court of Australia in copyright of ASX.

Rosherville’s proposed case would be brought under sections 236 and 237 of Australia’s Corporations Act 2001. The shareholder alleges that certain former ASX directors and officers breached their duties in connection with the previous CHESS replacement project.

ASX stressed that the allegations are not against ASX itself. The exchange also has not disclosed the names of the former officials involved or provided details of the specific conduct alleged by Rosherville.

The proposed action cannot proceed automatically. Rosherville must first convince the Federal Court that it should be allowed to bring proceedings on ASX’s behalf.

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A claim for a statutory action in the name of a company for an alleged wrong committed to the company.

The court must take into account a number of factors listed in Section 237 such as whether the applicant is pursuing the actions in good faith, whether the action is in the company’s best interests and whether there is a good cause to raise a serious question to be tried.

There is also a general requirement of writing notice to the company for at least 14 days prior to an application to court for leave.

The proposed case is about ASX’s prior attempt to replace its Clearing House Electronic Subregister System (CHESS) with a blockchain based system.

ASX started the process of replacing it in 2016, choosing distributed-ledger technology that it developed in conjunction with Digital Asset. The project was promoted as a major modernization of Australia’s financial-market infrastructure.

There were issues down the line. After an external review in November 2022 uncovered many of the proposed project’s shortcomings in design and fulfilling the exchange’s demands, ASX later suspended the project.

In 2023 the exchange dropped the blockchain-based strategy and started looking for other technology.

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The aborted project has already resulted in regulatory measures from the Australian Securities and Investments Commission (ASIC). ASIC had said that ASX had no basis to inform the market in February 2022 that the project is in good shape and still moving forward on the launch timeline.

ASX was found to have acted with misleading conduct related to the project and accepted that in 2026. The Federal Court then fined ASX for $14.4 million and directed it to contribute $2.1 million to the legal costs of ASIC.

That regulatory case is a different suit of derivative action than Rosherville’s proposal. The shareholder is only applying for permission to pursue claims against some of the former people, not against ASX.

ASX said it will continue updating the market as the matter develops under its continuous disclosure obligations.

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