Australian Securities and Investments Commission v National Exchange Pty Ltd [2003] FCA 955 | Case summary

REASONS FOR JUDGMENT 1 In a free enterprise system economic decision-making is decentralised. The allocation of goods and services is in large measure a function of consumer choice. Businessmen spurred by the desire to make profit compete for the consumer's custom. For this reason society has a strong interest in the free flow of commercial information. But the expectation of large profits can lead to abuse with the result that intelligent and well-informed decisions are often not possible. So legislation is enacted to protect those who do not know the market from the overreaching of those that do. Some of this legislation regulates dealings in securities. This is not new. In 1697 the English Parliament passed "[a]n act to restrain the number and ill practice of brokers and stock jobbers." The statute (8 & 9 Wm 3 ch 32) was aimed at unlawful conspiracies by jobbers to manipulate prices. It followed a report of a special commission (11 HCJ 595 (1696)) that had complained: "The pernicious Art of Stock-jobbing hath, of late, so wholly perverted the End and Design of Companies and Corporations, erected for the introducing, or carrying on, of Manufactures, to the private Profit of the first Projectors, that the Privileges granted to them have, commonly, been made no other Use of, by the First Procurers and Subscribers, but to sell again, with Advantage, to ignorant Men, drawn in by the Reputation, falsely raised, and artfully spread concerning the thriving State of their Stock." The current legislation, the Corporations Act 2001 (Cth), is very different but many of the problems remain the same. 2 The Australian Securities and Investments Commission has instituted this action for an injunction to prevent the dissemination by National Exchange Pty Ltd of offers to purchase shares in Onesteel Ltd. It alleges that the offers are false and misleading and therefore made in contravention of s 1041H of the Corporations Act. That section prohibits a person from "engag[ing] in conduct in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive". The Act defines a "financial product" to include "a security" (s 764A(1)(a)) which, in turn, is defined to mean, among other things, a share in a corporation (s 92(1)). The expression "engage in conduct" is broadly defined. There is a definition in s 9, ("(a) do an act; or (b) omit to perform an act") which may be read in combination with the examples of engaging in conduct in relation to a financial product given in s 1041H(2). When so read, making an offer to buy a share plainly falls within the section. 3 Onesteel is a listed public company. It manufactures and distributes steel products. It has around 190,000 shareholders, approximately 95 per cent of whom hold 5,000 shares or less. On 25 July 2003 the closing market price for shares in Onesteel was $1.93. That day National Exchange sent written offers to 5,000 Onesteel shareholders offering to buy their shares for $2 each. Of these shareholders 4,114 held less than 4,000 shares. The offer was not a cash offer. The offer price was payable in fifteen equal annual instalments, with the first instalment to be paid on 3 September, 2004. 4 ASIC alleges that the offer was misleading in three respects. It says that on reading the offer document many shareholders were likely to believe: (1) That the offer price was payable in full upon acceptance of the offer; (2) That the financial value of the offer price (that is the present value of the right to receive $2.00 by fifteen equal annual instalments) was $2.00 per share; and (3) That the financial value of the offer price exceeded the closing market price on 25 July 2003. The second and third allegedly misleading representations are dependent on the first. If the first is made out then the second and third may follow, but they will not follow automatically. A shareholder who wrongly believes that the offer price will be paid in cash may have no view about the value of the offer, if that value is to be understood as something different from the offer price itself. The same may be said of a shareholder who knows that the offer is to pay the purchase price by instalments. 5 National Exchange has a simple defence. First, it points to the fact that the offer is a single page document in which the payment terms are clearly identified by the heading "Payment". Second, it says that the payment terms are unambiguous. They provide: "We will pay the Total Offer Price to you in fifteen equal instalments, paid annually on 3 September each year for fifteen years, commencing on 3 September next year. We will post a cheque to you each year for the amount of the instalment payment." Then it says that it is reasonable to expect that each offeree will read the offer in its entirety, including the payment terms. In the circumstances, so the argument goes, the offer can be neither misleading nor likely to mislead. 6 In the end the controversy must be resolved substantially by reference to the terms of the written offer. In this regard it is, of course, necessary to consider the whole document. For ease of reference I annex a copy to this judgment. This will enable me to summarise its essential features. Before turning to that task, it is convenient to set out the principles I intend to apply to decide this case. 7 First, in determining whether conduct is misleading or likely to mislead, the conduct must amount to a false representation. Whether it does or not is a question of fact for the court to decide, looking at the matter objectively: Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177, 202-203 and the cases therein cited. Second, while the question whether conduct is misleading is a question of fact, nothing turns on the intention of the defendant: Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216, 228. His conduct may be perfectly innocent, yet if he is guilty of a misrepresentation he will suffer the consequences. Notwithstanding that intent is irrelevant, commonsense demands that if the defendant engages in conduct with the intention of deceiving "it is [not] stretching the imagination very much to credit the man with occasional success or possible success": Slazenger & Sons v Feltham & Co (1889) 6 RPC 531, 538 per Lindley LJ. 8 Third, speaking generally, conduct is misleading only if it results in an erroneous assumption: Taco Co of Australia Inc v Taco Bell Pty Ltd 42 ALR at 200. Put another way, there must be a "sufficient nexus" between the conduct about which complaint is made and the erroneous assumption which it is said to induce: Campomar Sociedad, Limitada v Nike International Ltd (1999) 202 CLR 45, 83. This does not mean that there can be no contravention of s 1041H in the absence of proof of actual deception. In a case like the present it is sufficient to show that there is a likelihood, or a reasonable possibility, that the persons to whom the offer is directed will be misled. 9 The next point concerns the process of deciding whether conduct amounts to a misrepresentation. That process differs according to the nature of the case under consideration. In Taco Co of Australia Inc Deane and Fitzgerald JJ explained this by reference to two common situations. The first is where there is an express untrue representation made to identified individuals. In that circumstance Deane and Fitzgerald JJ said (at 202) that "the process of deciding [the question whether or not conduct amounts to a misrepresentation] may be direct and uncomplicated". The second situation is where the representation is not express and is made to the public at large or to a section of the public. Here the task is more complex. Deane and Fitzgerald JJ said that the court would be assisted if it adopted the following approach. The first step is to identify the relevant section of the public to whom the conduct is addressed. The second step is to consider the question by reference to all the persons who come within that class. Those members may "includ[e] the astute and the gullible, the intelligent and the not so intelligent, the well educated as well as the poorly educated, men and women of various ages pursuing a variety of vocations", citing from Puxu Pty Ltd v Parkdale Custom Built Furniture Pty Ltd (1980) 31 ALR 73, 93 per Lockhart J. The third step is to see whether there is any evidence that a person within the relevant section of the public has in fact formed an erroneous conclusion. The judges acknowledged that while this evidence was admissible it was not essential because the test is an objective one. The final step is to enquire why the proven misconception has arisen, that is, has it been caused by the impugned conduct? 10 To a large extent this approach was approved by the High Court in Nike International Ltd. I say "to a large extent" because there appears to be one area in which there is a significant difference between the views of the Full Federal Court and that of the High Court. In Taco Co of Australia Inc Deane and Fitzgerald JJ made it quite clear that when the impugned conduct is directed at a diverse group, that diversity must be taken into account when considering the likely effect of the conduct. It is not clear whether the High Court goes along with this approach. In Nike International Ltd the High Court said that, in cases where one is dealing with a representation to the public or to a section of the public, it is necessary to consider the effect of the conduct on the "ordinary" or "reasonable" member of the addressed section or class, and see whether he or she has been misled. For that purpose the High Court suggested (202 CLR at 85) that "it is necessary to isolate by some criterion a representative member of that class. The inquiry thus is to be made with respect to this hypothetical individual." No guidance is given about the selection of the criteria which this hypothetical representative will have. And it is by no means easy to determine what that criteria might be. As we are looking at the effect of conduct on the mind of the hypothetical individual, presumably the criteria must relate to the individual's capacity to understand and assimilate information. Rarely then will the sex of the individual be a consideration. On the other hand, the individual's knowledge of language, level of education, type of employment and so on are likely to be extremely important. But it is difficult to work out just how one is to go about identifying those criteria in the case of an extremely diverse group when the selection is being made for attribution to only one hypothetical individual, which is what the High Court seems to have mandated. Indeed, the mere fact that one will often be confronted with a diverse group suggests that the task is nigh on impossible. 11 Be that as it may, this case is not concerned with conduct which is directed either to the public at large or to a section of the public. The offers were sent to 5,000 identifiable shareholders. ASIC's task is to establish that the offer will induce some, but not necessarily all, of those shareholders to form the mistaken belief that they were being offered cash for their shares. It is to be noted that s 1041H will be contravened if only one shareholder has been deceived. On the other hand, for the purpose of deciding whether the offer has the potential to mislead I propose (at least in this case) to act on the basis that, looking at the matter objectively, if only a few shareholders are likely to be misled that would suggest the offer is not misleading. To the contrary, it might indicate that the mistaken view is just an extreme or fanciful conclusion, which would not see the section breached: Nike International Ltd at 86. This is not to imply that I agree with Wilcox J who in 10th Cantanae Pty Ltd v Shoshana Pty Ltd (1987) 79 ALR 299, 302 said it was necessary to establish that a "significant proportion" of readers must be mislead before a statement could be misleading. With respect I think that is going too far. 12 In the instant case, apart from a handful of shareholders with whom ASIC has had discussions, little is known about the shareholders save that they have a small shareholding in Onesteel. It is, however, appropriate to proceed on the assumption that the shareholders who received the offer include the educated as well as the uneducated, the thinking as well as the unthinking, the credulous as well as the cautious. Moreover, given their likely diversity, it is reasonable to act on the basis that many shareholders will not weigh each word of the offer as an educated or analytical mind might do. Nor will they necessarily subject the offer to close scrutiny. 13 This brings me immediately to the question whether an offer which is factually true in every respect may still be misleading. The answer must plainly be the affirmative: Hornsby Building Information Centre 140 CLR at 227. The most obvious case is where what is stated is a half-truth: that is, where the statement is removed from its context and the non-disclosure of the context renders the statement misleading: P Lorillard Co v Federal Trade Commission 186 F2d 52, 58 (4th Cir, 1950). It is also true where the statement is ambiguous in the sense that it has more than one meaning, one of which is deceptive: Federal Trade Commission v Sterling Drug Inc 317 F2d 669 (2nd Cir, 1963). A statement may also be literally true yet be framed in such a setting as to mislead or deceive: Bockenstette v Federal Trade Commission 134 F2d 369 (10th Cir, 1943); Rothschild v Federal Trade Commission 200 F2d 39 (7th Cir, 1952). The ultimate impression created by the statement must be considered and its effect gauged: Aronberg v Federal Trade Commission 132 F2d 165 (7th Cir, 1943). 14 Here, ASIC concedes that none of the statements in the offer are literally false, but it contends that the offer is presented in such a way that shareholders, especially those who are less than careful readers, might be misled. It refers to the following features of the offer which it says support this conclusion. First there is the large typeface in bold capitalised letters which states that the offer price is $2.00 a share. No mention is made of instalment payments. Second the offer price of $2.00 a share is repeated in the next line. Again there is no mention of instalment payments. Third there is the table which prominently shows the closing market price as at the date of the offer, namely $1.93, which a reader is likely to compare with the stated offer price of $2.00. There is also a comparison between the Total Market Price and the Total Offer Price. This tells the shareholder what he will receive if he sells on market, (in the example in the schedule that amount is $1833.50) and what he will receive on acceptance of the offer ($1900.00), the implication being that in each case the price will be received in cash. ASIC also says that the table creates the impression that the offer price is higher, and therefore financially more attractive, than the current market price. This impression is false because the present day value of the offer price is much less than the then current market price of the shares. Next ASIC contends that the payment terms are under-emphasised. They appear after administrative instructions about how to accept the offer. They are in smaller type than the headline offer price. The amount of each instalment payment (13.3 cents per share) is not set out. The date of the first instalment, 3 September 2004, is only referred to as "3 September next year". Finally, there is the standard share transfer form which is enclosed with the offer. It states the consideration based on the nominal offer price and it makes no reference to payment terms. The transfer form must be signed and returned. Indeed, the offer only becomes legally binding upon the execution and return of the transfer form. 15 To this point we have only looked at one side of the coin. A thorough examination of the offer suggests that not everything supports ASIC's argument. The offer document is headed (in capitals and in bold type): "This is an important document". The heading is immediately followed by the statement (also in capitals): "If you do not understand it, please consult your financial or legal adviser immediately". In addition in the box headed "Total Offer Price" there are the words "(see payment terms)" in relatively large text. They might draw the reader's attention to the section headed "Payment" and what is there written. There is also a section headed: "Other Information". This contains the following recommendation: "We recommend that you obtain independent advice before accepting the Offer. You may wish to compare the value to you of receiving the Total Offer Price in fifteen annual payments against the total market price." 16 In these circumstances National Exchange asks: What more could it do? It has identified the offer as an important document; it has suggested that the shareholder take advice if he has any doubt about its effect; it has clearly spelt out the terms of payment. Is this not sufficient, it says, to avoid the conclusion that it has engaged in misleading conduct? Is this not a case where the only shareholder who might be misled is one who is not careful in protecting his own interests? 17 It may be accepted that an educated and analytical reader of the offer document would not be misled by it. Yet even this conclusion should be qualified. I have the evidence of Mr Locke, the former company secretary of Onesteel, who holds 3,041 shares and whose wife holds 20,000 shares. Mr Locke received the offer and initially thought it was a cash offer. He was so surprised that he telephoned the present secretary and told him of the receipt of the offer, expressing the opinion that National Exchange must have been mistaken in offering $2.00 per share. Mr Locke thought that National Exchange had intended to offer $1.00 per share in accordance with its past practice of offering to purchase shares in publicly listed companies at a price well below the market price. Immediately after his conversation Mr Locke looked more closely at the offer and only then noticed that it was not for cash. If Mr Locke was mistaken about the terms so might other shareholders, many of whom may not re-examine the offer to discover the true position. 18 I appreciate that no other shareholder has come forward with a legitimate complaint that he has been misled, and only few shareholders have accepted the offer. Looked at in isolation these facts support National Exchange's submission that the offer document is not misleading. There are, however, two factors which throw a different light on the situation. The first is that shortly after the offers were dispatched ASIC issued a media release warning against acceptance of the unsolicited offer from National Exchange. It is reasonable to assume that many shareholders became aware of the release. The second factor is that the market price of Onesteel shares has risen above the offer price. As at 7 August 2003 the closing price for the shares was $2.10. So, by that time the offer was unattractive, even to those who believed it was for cash. 19 In resolving this case it is impossible to ignore the fact (and I find it to be the fact) that the offer has been purposely composed so that it will mislead shareholders. No reasonable shareholder appreciating the offer price is payable over 15 years would accept it. When I put this to counsel for National Exchange he suggested examples of a reasonable shareholder who might accept the offer. One was a shareholder who wished to "lock-up" his asset because he was an inveterate gambler. Another was a shareholder who wanted to obtain security (a promise to pay the price) against the possible collapse of Onesteel, a collapse which is surely speculative. A third was a shareholder who wished to purchase an annuity. In my view each example is fanciful. There are more orthodox means of achieving these ends. 20 In the end I am left with the clear impression that a number of shareholders will have wrongly formed the view that they had received a cash offer for their shares. I accept that they may be shareholders who did not stop to analyse the offer in detail, and were only influenced by the general impression of the offer document. It is that impression which is misleading, though the offer contains no specific false statement. That is enough to establish a contravention of s 1041H. The section is not there for experts; it is there to protect the general shareholding public, many of whom do not analyse offer documents in any great detail, but act on appearances and impressions. This cannot be characterised as unreasonable conduct on their part. It is just the natural order of things. 21 There will be a declaration accordingly, but not on the basis that the second and third alleged representations have been made out. I am not persuaded that any shareholder formed a view about the economic value of the offer. It is accepted that Mr Tweed, the second defendant, procured the sending of offers by National Exchange. There will also be a declaration to that effect. In addition ASIC asks for an injunction to restraint the defendants from sending any further offers in the form or to the effect of the offers dispatched to Onesteel shareholders. Such an injunction will go. At my suggestion ASIC formulated changes to the offer document which would, if incorporated, prevent it from being misleading. This was done so that I might fashion an order which would make it clear to the defendants what an appropriate form of offer might be. The defendants do not wish to have such an order, so I decline to make it. 22 I have mentioned that a handful of people have accepted the National Exchange offer. National Exchange is willing to allow these shareholders 28 days within which to revoke their acceptance. To this end I will require National Exchange to send to all accepting shareholders a letter giving them notice that any contract made on acceptance of the offer can be terminated at their election. In the meantime there will be an injunction restraining the defendants from lodging for registration any transfer of shares received from shareholders who have accepted the offer unless they do not within 28 days after the dispatch of the letter, revoke the contract. 23 Finally, there are the costs of the application. They must be paid by the defendants. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Australian Securities and Investments Commission v National Exchange Pty Ltd

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