Australian Securities &Investments Commission v Solution 6 Holdings Ltd

Background 7 Solution 6 is a company which has been listed on the Australian Stock Exchange ("ASX") since 1987 and which provides software and services to the accounting profession and other clients. On 8 January 1999, Solution 6 executed the Subscription Agreement with Thorney in order to raise an amount of $12,735,000 by way of share placements to Thorney. The agreement provided, among other things, for the issue and allotment of shares in Solution 6 to Thorney as follows: (1) The raising of an amount of $5,185,000 by way of allotment of 6,100,000 ordinary shares at 85 cents each; (2) The raising of $2,550,000 by allotment of 3 million ordinary shares of 85 cents each; and (3) The raising of $5 million by allotment of $4,545,455 converting to 8% preference shares at $1.10. 8 On 8 January 1999, the placement of 6,100,000 ordinary shares at 85 cents was effected. 9 It is a requirement of the Subscription Agreement that before the issue and allotment of the 7,445,445 shares can be effected, appropriate amendments must be made to the company's constitution and that Resolutions approving such steps should be passed by the company in general meeting. If these condition precedents are not satisfied then the obligations of the parties under the Subscription Agreement in relation to the issue of those shares are of no further force or effect. 10 On 5 March 1999, KPMG Corporate Finance furnished an Independent Experts Report in relation to the remaining proposed placements. This was called for by the ASIC Listing Policy Statement No 74. The opinion expressed by KPMG in that report was that the proposed transactions were fair and reasonable to the non-associated shareholders of Solution 6 and the Report formed part of the Statement which was issued by the directors on 10 March 1999 and provided to shareholders. 11 At the time of completion of its Reports on 5 March 1999, it is clear that KPMG was aware of the possibility of an imminent, one for two revocable rights issue by Solution 6 at a price of $2 per share, which would raise in the order of $47.3 million. On 10 March 1999, the Notice and Statement were sent to shareholders in relation to the placement fixing the meeting for 9 April 1999. Of the six Resolutions proposed only the first three are relevant to the present application. Of these Resolutions the first relates to amendments to the constitution of the company. The proposed Resolutions 2 and 3 concern the approval of the issue and the agreement to allot the shares to Thorney. On 12 March 1999, 2 days after the Notice and Explanatory Statement was sent out, Solution 6 notified ASX of an underwriting proposal in respect of the one for two rights issue. 12 The nature and extent of the present dispute is delineated in the following correspondence. On 15 March 1999, ASIC wrote to the solicitors for Solution 6, Corrs Chambers Westgarth ("Corrs"). The letter reads as follows: "I refer to the one for two rights issue announced by Solution 6 Holdings Limited ('SOH') on 12 March 1999 the prospectus for which will be dispatched to SOH shareholders prior to the date of the proposed meeting of the shareholders of SOH to be held on 9 April 1999, which will consider and, if thought fit, pass resolutions … … I now set out below what ASIC's would consider as essential minimum disclosure for SOH shareholders to enable them to assess the merits of approving Resolution 3 and make an informed decision on that resolution on 9 April 1999.

1. Comprehensive and prominent disclosure of a) the impact of the rights issue on Resolution 3 including, but not limited to, an opinion from KPMG Corporate Finance (NSW) Pty Ltd about the implications of the rights issue on the contents of their report dated 5 March 1999, and revised opinion taking into account the rights issue, and b) comprehensive additional disclosure of the impact of the rights issue on the information that was provided to shareholders in considering Resolution 3, and c) details of the impact of the rights issue on Thorney's entitlement to SOH shares, given that Thorney, is a sub-underwriter of the rights issue. In ASIC's view this disclosure must be in a document separate from the rights issue prospectus.
2. The offer of the opportunity to SOH shareholders who have sent in their proxies for Resolution 3 to withdraw their proxies. In the absence of the above its ASIC's view that it would be unreasonable to expect the shareholders of SOH to be able to cast properly informed votes on the proposed solutions. Please advise in writing by 5.00 pm on 16 March 1999 whether SOH agrees to provide to SOH shareholders the information outlined above. …" 13 On 16 March 1999, the prospectus relating to the case for rights issue was furnished to ASIC. 14 On 17 March 1999, Corrs stated in a facsimile to ASIC: "… We understand that while KPMG is prepared to confirm the details of the attached letter (in terms of the impact of the rights issue on Thorney's entitlement to ordinary shares) the directors do not believe that commissioning a new Independent Expert's Report (which is what will be required to obtain a revised opinion) is warranted in order for shareholders to cast properly informed votes of the proposed resolutions. This view is based on the fact that the placement to Thorney and the rights issue are two separate and distinct transactions, both of which require approval from shareholders to proceed and in which the shareholders have been properly informed. …" 15 On 22 March 1999, ASIC informed Corrs that: "… ASIC does not necessarily accept the contention that doubling the issued capital of Solution 6 does not affect the disclosure made in relation to the section 623 transaction, or that the two transactions can be considered without reference to the other. However, if the statement reflects the views of Solution 6 directors, those views must be disclosed to Solution 6 shareholders. It is not appropriate that Solution 6 shareholders are left to surmise or infer this from their directors' silence on the interaction of the two transactions…" 16 On 24 March 1999, KPMG wrote to Corrs saying: "We understand that the Australian Securities and Investment Commission has requested : • our opinion on the implications of the proposed Solutions 6 Holdings Limited ("Solution 6") rights issue (of approximately 23.7 million shares at $2.00 per share) in the context of our report dated 5 March 1999; and • a revised opinion (as contained in our report dated 5 March 1999) taking into account the proposed rights issue. In our view the proposed transaction which we considered in our report dated 5 March 1999 and the present proposed rights issue are two separate transactions. Each must be viewed against a background of a particular set of financial and operational circumstances faced by Solution 6 at that time. Further while we were aware of the possibility of a rights issue when we issued our report dated 5 March 1999, it is inappropriate for us to attempt to recast the opinion contained in that report in the context of the proposed rights issue having occurred as, firstly, it hadn't at the time our report was issued and, secondly, the overall circumstances of Solution 6 are likely to have changed in the intervening period. …" 17 On 31 March 1999, the prospectus for the rights issue was furnished to shareholders. 18 On the same day ASIC instituted the present proceedings in this Court.

Contentions 19 ASIC contends that the issue of the Explanatory Memorandum and the subsequent refusal to amend or supplement the KPMG Report was "conduct" in relation to the issue of securities within s 995(2)(b)(i) of the Law. It says that the express purpose of both the share placements and of the share rights issue were the same; namely, to enable the company to raise funds to assist it to develop market strength, particularly in the area of intellectual property which was part of its core business. The funds were required to allow the company to consolidate within the accounting software industry and to develop new methods and software in order to provide substantial economic benefits to its customers and the accounting market generally. 20 Specifically, it is said by ASIC that the Notice and Memorandum, including the KPMG Report, did not refer to the proposed one for two rights issue and did not explain or consider the implications of that issue with respect to the placement. In particular, it is said that the Report did not explain to shareholders the necessity for the proposed share placements to Thorney in the context of the proposal for the $47.3 million rights issue. This failure, it is said, was a material omission which made the Statement and Report misleading. 21 It is also submitted by Counsel for ASIC that even if the Explanatory Statement and Report were not misleading when issued on 10 March 1999 they became misleading after 12 March 1999 when the rights issue was announced and confirmed without any subsequent amendment or supplementary material being provided in respect of the 5 March 1999 KPMG Report. The KPMG Report, when discussing the question of funding, considered the potential use of debt but it did not consider any possibility of funds being provided by the imminent rights issue. 22 For Solution 6 it is said that the Statement and Report were complete and accurate at the time they were sent out on 10 March 1999 and that there was no statutory obligation on Solution 6 to send out further or varied material. There was no reason, it is said, why the rights issue should have been dealt with in the Statement or the KPMG Report. Further, it is submitted that the silence of KPMG and the directors as to the rights issue cannot be said to be material to the decision which the shareholders faced in relation to the placements. Counsel for Solution 6 submitted that all the shareholders needed to know in order to make an informed decision was that there was a rights issue at $2 a share. They would, so it is said, have also been aware that as recently as 7 April 1999 the shares were trading on the ASX at $3.25. The shareholders must be treated as well-informed shareholders. They had received a copy of the Rights Issue Prospectus in early April and also a letter from the Chairman of 19 March 1999 and they were, therefore, well able to properly consider the relevant issues in relation to the first three Resolutions on the agenda for 9 April 1999.

Interlocutory or final proceeding 23 A submission was made that the application was one for final, as opposed to interlocutory, relief and that it was not appropriate to deal with the application at this stage as a final hearing. Moreover, it was said that the standard requirements for an interlocutory injunction; namely, arguable case and balance of convenience were not the appropriate benchmarks against which to consider the application and the evidence. 24 During the course of the discussion which took place in the course of the hearing it was evident that ASIC does not press for any declaration at this stage. Presently ASIC seeks a restraint upon the consideration by the meeting of Resolutions 2 and 3 concerning issue and allotment in the event that Resolution 1 is passed. Of course Resolutions 2 and 3 could not be passed if Resolution 1 was not approved because the Articles would not provide for such shares. In my view the relief sought at this stage of the proceeding is interlocutory in character. The applicant does not seek any declaration nor does it make any determination of rights on a final basis. What is sought is a holding restraint until proper consideration can be given to the question as to whether there has been a contravention of the Law. Case law 25 In the course of argument reference was made to two decisions of the Court. These were Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, which was a decision of the Full Court and a decision of Tamberlin J in Pancontinental Mining Ltd v Goldfields Ltd (1995) 16 ACSR 463. 26 In Fraser's Case the Full Court considered the proposal to demutualise NRMA Holdings Limited with respect to a claim that there had been a contravention of s 52 of the Trade Practices Act 1974 (Cth) in the form of statements and silences which amounted to misleading and deceptive conduct. In that case, the Court emphasised that a practical and realistic approach should be taken. The Court said, at 468: "It is important that the adequacy of the information provided by the prospectus and supporting documents be assessed in a practical, realistic way having regard to the complexity of the proposal. In the circumstances the Court should not be quick to conclude that a contravention of s 52 has occurred because other information could have been provided that was not. The need for the applicants to establish the materiality of errors and omissions is an important step in the proof of their claims." 27 In the present case it is necessary for ASIC to establish that the failure to refer to or consider the implications of the rights issue is a material omission or failure in relation to the consideration of the proposals for placement of the shares. 28 At 467 their Honours said: "Whilst s 52 does not by its terms impose an independent duty of disclosure which would require a corporation or its directors to give any particular information to members asked to consider a motion in general meeting, where information for that purpose is promulgated, unless the information given constitutes a full and fair disclosure of all facts which are material to enable the members to make a properly informed decision, the combination of what is said and what is left unsaid may, depending on the full circumstances, be likely to mislead or deceive the membership." (Emphasis added) 29 In Pancontinental Mining an issue was raised about the need to issue supplementary information in order to prevent material becoming misleading or deceptive. In that case, one of the issues for consideration was whether disclosure ought to have been made of the fact that a prospectus had been withdrawn by the company after the ASIC had made it clear that the prospectus would not be registered in its original form. 30 At 487-488 Tamberlin J said: "There is no complaint that the statement was misleading when it was made or registered in this respect, but the allegation is that because of a subsequent change in circumstances, namely the withdrawal of the prospectus, the statement has now become misleading … … Furthermore, I think that the circumstances of the withdrawal and the attitude of the ASC to the prospectus are material information which ought be made known to the shareholders in Pancontinental. The complications and the surrounding circumstances which led to the 'withdrawal' of the prospectus would, if not disclosed, be a contravention of ss 750 and 995. However, in my view the matter is one which is capable of correction by supplementary statement disclosing and clarifying this aspect."(Emphasis added) 31 Where an expert opinion is expressed or a recommendation is made in relation to a decision to be made at a known future time and the party expressing that opinion or making that recommendation subsequently becomes aware of a matter which could materially affect that opinion, then it may be misleading conduct to fail to take steps to supplement or vary the report or recommendation as originally expressed. The Report is designed to operate at the time when the decision is to be made; namely, on 9 April 1999, and there is a clear possibility of inaccuracy or incompleteness arising from supervening events. 32 In the present case, the recommendation of the directors and the report of KPMG up to and including the time of the meeting on 9 April 1999 can arguably be characterised as an ongoing representation which carries with it a responsibility to qualify or vary, where appropriate, if circumstances materially changed after 10 March 1999 in order to prevent it becoming misleading: see for example With v O'Flanagan [1936] Ch 575 at 583 per Lord Wright and Traill v Baring (1864) 4 De G J & S 318 at 329 where Lord Justice Turner said: "I take it to be quite clear, that if a person makes a representation by which he induces another to take a particular course, and the circumstances are afterwards altered to the knowledge of the party making the representation, but not to the knowledge of the party to whom the representation is made, and are so altered that the alteration of the circumstances may affect the course of conduct which may be perused by the party to whom the representation is made, it is the imperative duty of the party who has made the representation to communicate to the party to whom the representation has been made the alteration of those circumstances…." 33 See also the observations of Fitzgerald J in Tiplady v Gold Coast Calton Pty Ltd (1984) 3 FCR 426 at 458-459. Also Banque Brussels Lambert SA v Australian National Industries Ltd (1991) 21 NSWLR 502 at 529. 34 In my view, in considering what amounts to misleading conduct, the substance of the above remark is apposite to the present case. 35 In order to determine whether conduct is misleading, the Court must focus on what the conduct or statement would give a shareholder to understand or what is to be taken from that conduct: see Wright v TNT Management Ltd (1989) 15 NSWLR 679 at 683 per Mahoney JA.

Arguable case In support of the application, ASIC relies on an affidavit from Mr Reading, a partner of Pricewaterhouse Coopers, who practises in the Financial Advisory Services Division. He has prepared a report of 31 March 1999 commenting upon the Report furnished by KPMG. He was not called to give any oral evidence, nor was he cross examined. No doubt this was because of the urgency of the matter. The thrust of his evidence is that the rights issue and the placement were closely interrelated in a number of important respects and that the rights issue would significantly impact upon the assessment of the placement made by KPMG. He considered that the indicative value for Solution 6 shares adopted by KPMG in its 5 March Report would be significantly varied by a one for two rights issue at $2 per share. The share value could increase from $1.05 to a figure in the order of $1.37. This latter figure was 38% above the discounted issue price to Thorney referred to in the KPMG Report. He considered that this aspect of rights issue should have been considered by KPMG and drawn to the shareholders' attention. He also pointed out that the placements would occur at amounts less than the net assets per share of the Company if the rights issue is taken into account. He considered that the funds raised by the rights issue would affect the ability of Solution 6 to complete its contracts without a placement. Several other matters were adverted to by Mr Reading including his opinion that the amount of the rights issue would have a significant impact on a full and proper consideration of the placement. 36 Clearly the Independent Expert Report of KPMG is, and was intended to be, of central importance to the consideration by shareholders of the proposed placement. Emphasis is naturally placed on it in the Chairman's letter to shareholders set out in the Notice and Memorandum of 10 March 1999. It is also pointed out there that the KPMG report has advised that the placement is fair and reasonable. The Directors' Recommendation makes reference to and emphasises the conclusions of KPMG. 37 The objective of the report is, of course, to fully and fairly inform the recipients of the merits or demerits of the placement so that they can exercise a properly informed judgment on the proposed Resolutions. Where circumstances change, in significant and material respects, between the date of the report and the date of the meeting, it is, in my view, reasonably arguable that it is misleading conduct to allow the report to remain unamended and a fortiori to refuse to amend it. The consequence of such a course of conduct is that shareholders might be led to make decisions on an understanding which is no longer accurate or comprehensive. As the case law referred to earlier indicates, statements and opinions which may not be misleading when made, if unamended, or not supplemented by reference to later events, may become misleading. 38 In circumstances where an announcement is made only two days after the Notice and Statement are sent out, to the effect that there will be a rights issue to shareholders at a price of $2 raising $47.3 million, such a statement appears prima facie to be both material and important to a decision whether to approve the placement. 39 It is not sufficient for the shareholders to simply be informed subsequently of the fact of the rights issue and, perhaps, to be aware of the current market behaviour of share prices in Solution 6. In order to prevent a misleading view being formed it is important, in my view, that the shareholders be informed of the views of the directors and KPMG as to the impact of the rights issue on the desirability of the placement and that these views be accurate at the time when the decision is proposed to be made; namely on 9 April 1999. 40 In approaching the above questions, it is important to bear in mind that the underlying policy of the Law is to ensure that the acquisition, issue, or allotment of securities takes place in an accurately informed market where shareholders are supplied with sufficient information to enable them to properly assess the merits of any proposal related to the acquisition of shares. This policy is reflected, for example, in s 731(c) of the Law. 41 I do not accept that the Thorney placements and the one for two rights issue can be regarded as separate and independent transactions with no inter-relationship calling for consideration of their interaction and co-existence. They are arguably inter-related in a number of material respects as evidenced by the Pricewaterhouse Coopers' Report. 42 It was also submitted by Counsel for Solution 6 that the present circumstances only demonstrate a difference of opinion between two professional accounting groups in relation to what ought to be done and that this is not, of itself, indicative that there is any contravention of the Act or does not support in any way a submission that there is an arguable case. In my view, in the circumstances of the present case, the views of Mr Reading in relation to the adequacy of the KPMG Report are important considerations to be taken into account. They represent not simply opinions on hypothetical questions but go directly to the importance of the inter-relationship between the two fund raising proposals represented by the placement and the rights issue. 43 I am persuaded, on the present state of the evidence, that there is an important temporal and financial inter-relationship which arguably requires further comment in order to prevent the statements made in the KPMG Report from being misleading by omission. In this respect I think that the refusal to deal with the rights issue in relation to the placement arguably does amount to misleading and deceptive conduct. Such a failure is, therefore, arguably in contravention of s 995. I am also satisfied that, subject to any arguments as to the balance of convenience, in the present case it is appropriate to grant an interlocutory injunction to restrain further distribution of material and to restrain the consideration of proposed Resolutions 2 and 3.

Balance of convenience 44 The meeting is due to be held tomorrow. It is said that for all practical purposes in the "real world" shareholders have all the information they need and that the balance of convenience requires that all proposed Resolutions should be put to shareholders at the meeting. It is also said that there is every indication, having regard to current market prices of the shares and the number of proxies which have been lodged, that the amendment to the Articles would clearly be rejected so that the resolution should be allowed to be put in order to resolve this question. In the course of submissions, Solution 6 indicated that it would agree not to allot the shares if the Resolutions 1 2 and 3 were passed, until the expiry of two business days from the resolution so that an opportunity would be provided for an injunction to be sought in order to restrain the issue and allotment of the shares. 45 In my opinion market fluctuations in the share price do not afford a reason why a meeting should be permitted to proceed on the basis of incomplete and arguably misleading material. Such a course would ignore the underlying purpose of the Law. 46 In any event, the difficulties raised in the balance of convenience arguments advanced for Solution 6 are largely overcome by the final proposed formulation of the relief sought by ASIC. The proposed relief now sought is to the effect that the further distribution of the 5 March 1999 material should be restrained. This clearly appears to be appropriate although, perhaps, of limited effect at this late stage. The relief sought permits the proposals as to amendment of the articles to proceed but adjourns consideration of the Resolutions to issue and allot the shares in the event that Resolution 1 is passed. This has the advantage that there will be no Resolutions passed approving the issue and allotments of the placement shares so that the rights of Thorney under the placement will not crystallise and enliven the Subscription Agreement. 47 In my view, these orders largely avoid any inconvenience in that the meeting can proceed and the other Resolutions can be considered and dealt with. The two relevant Resolutions which are proposed to be restrained can be adjourned for consideration at a later stage when the substance of the parties' arguments can be properly considered on completed evidence and a final decision can be made as to whether there is a contravention of the Law. 48 If the injunction were refused then the Resolutions would go before the meeting and it would proceed on the basis of conduct which arguably is misleading and deceptive and which may affect the shareholders' decision. This result is clearly inappropriate and undesirable. Accordingly, I am persuaded that the balance of convenience lies in favour of granting the injunction to restrain distribution of the material and consideration of Resolutions 2 and 3, in the event that Resolution 1 is passed. 49 I have already made orders in this matter.

I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin.

Associate: Dated: 14 April 1999 Counsel for the Applicant: T Lynch

Solicitor for the Applicant: Australian Securities and Investments Commission (In- house Counsel)

Solicitor for the Respondent: Corrs Chambers Westgarth

Date of Hearing: 7 April 1999 Date of Orders: 8 April 1999 Date of Judgment: 14 April 1999