Baillie v Oriental Telephone and Electric Company Ltd {1915] 1 Ch 503

Federal Court of Australia|1995-01-27|Before: Gummow J, Black CJ, Cooper JJ

NEW SOUTH WALES DISTRICT REGISTRY "No. NG3479 of 1994

Application for leave to appeal from the judgment of Gummow J.

First Applicant (Respondent on the Application for leave to appeal)

Second Respondent (Applicant on Application for leave to appeal)

Third Respondent (Applicant on Application for leave to appeal)

JUDGES MAKING ORDER : BLACK CJ, VON DOUSSA AND COOPER JJ

The application be relisted in Sydney at 12.00 noon on Monday 30 January 1995 to

receive submissions as to the orders to be made for the disposal of the appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY )

Application for leave to appeal from the judgment of Gummow J.

First Applicant (Respondent on the Application for leave to appeal)

First Respondent (Applicant on Application for leave to appeal)

Second Respondent (Applicant on Application for leave to appeal)

Place: Sydney Date : 27 January 1995 REASONS FOR JUDGMENT

NRMA Limited ("the Association") is a company limited by guarantee and not

having a share capital. It was incorporated in 1920 under the Companies Act 1899 (NSW)

'as National Roads & Motorists' Association Limited. As its objects make clear, the Association was formed to promote the interests of motorists and other road users and to

provide services to motorists, including an emergency or breakdown road service and

insurance. As at 31 August 1994 there were in excess of 1.8 million members of the

Association. As at 31 March 1994 the Association wholly owned or was the majority

shareholder in eight companies and had assets under its management of $457m.

NRMA Insurance Limited ("Insurance") is also a company limited by guarantee and not having a share capital. It was incorporated on 7 July, 1926 under the Companies Act 1899 (NSW). Insurance has carried on business as an insurer and provider of financial services. It has 1.3 million members who are both members of the Association and policyholders. It owns or has the majority interest in ten companies and as at 31

March 1994 had assets of $4.401b, under management.

NRMA Holdings Limited ("Holdings") is a public company limited by shares. It was incorporated by registration under the Corporations Law ("the Law") on 15 July 1994. Holdings was incorporated as part of a plan approved by the majority of each of the

boards of directors of the Association and Insurance for Holdings to acquire ownership

and_ control of the Association and Insurance from the members of each company in

exchange for "free shares" in Holdings, or, through the sale of those shares, a money sum in lieu of shares. In August 1994-Holdings.was--admitted-.as.-a member..of both the

On 23 August 1994 Holdings and Perpetual Trustee Company Ltd issued a booklet entitled "PROSPECTUS". The booklet, to which we shall refer as "the prospectus", was sent to members of the Association by mail in a clear. plastic cover. Included in the booklet were notices of general meetings of the Association and of Insurance to be held on 19 October 1994. On top of the prospectus, visible through the plastic cover, was a coversheet bearing the words "Important Information Inside". It was accompanied by a second sheet on which there were printed proxy voting papers for the general meetings.

These two sheets, to which we refer in more detail later, were referred to in argument as

On 22 September 1994 Ms Fraser and Mr Talbot filed an application seeking declaratory and injunctive relief in relation to the contents of the prospectus and the holding of the proposed general meetings on 19 October 1994. Ms Fraser and Mr Talbot are directors and members of the Association and are opposed to the proposal to "demutualize" the Association and Insurance. In the present context "demutualization" occurs when a company operated for the mutual benefit of its members, and usually limited by guarantee, changes its status and becomes a corporation limited by shares and seeking to make profits and distribute them to its shareholders. Such a change involves a fundamentally different approach to corporate organisation. Holdings, the Association and

Insurance were respectively the first, second and third respondents. It is convenient to

continue to refer to Ms Fraser and Mr Talbot as the applicants and to the companies as the

On 5, 6 and 7 October 1994 Gummow J heard argument on separate issues raised

on the pleadings and on 13 October 1994 made the following declaration and orders:

By distributing to members of the second and third respondents the documents copies of which are Exhibits A, B and C, the first respondent, in trade or commerce, engaged in conduct which is misleading or deceptive or likely to mislead or deceive.

Q) The respondents, by themselves, their servants and agents, and the servants and agents of each of them, be restrained from distributing to members of the second and third respondents copies of the documents Exhibits A, B and Cc.

(2) The second respondent, by itself, its servants and agents, be restrained from, without the leave of the Court, proceeding with any business at the general meeting of members, iaentified in the Notice of General Meeting, a copy of which is contained in Exhibit C, other than by the taking of such steps as are necessary or appropriate to adjourn the meeting.

(3) The third respondent, by itself, its servants and agents, be restrained from, without the leave of the Court, proceeding with any business at the general meeting of members, identified in the Notice of General Meeting, a copy of which is contained in Exhibit C, other than by the taking of such steps as are necessary or appropriate to adjourn the meeting.

(5) The respondents pay the costs of the applicants of the proceeding up to and including 13 October 1994.

(6) | Order (1) be suspended until noon on 14 October 1994, and the proceeding stand over to 9.30 a.m. on 14 October 1994 for the parties to speak to the form of orders (1), (2) and (3).

(7) The proceeding otherwise stand over to 9.30 a.m. on 25 October 1994 for

directions as to the further conduct of the balance of the proceeding which remained after the order under 0.29 r.2 made 27 September 1994."

Exhibits A and B were the front page of the onsert and the members proxy form

On 14 October 1994 his Honour made further orders as follows:

Order (2) of the orders pronounced 13 October 1994 be amended by inserting after 'Exhibit C' the words 'and from relying upon any proxies obtained or given in respect of that meeting'.

Order (3) of the orders pronounced 13 October 1994 be amended by inserting after 'Exhibit C' the words', and from relying upon any proxies obtained or given in respect of that meeting'.

Order (7) be varied by adding at the end thereof 'and to consider variation of order (5) to provide for costs on a solicitor/client basis'.

Any affidavits in support of the costs application be filed and served on or before 20 October 1994,

The declaration be amended by deleting the words 'the first respondent' and

The respondents have sought leave to appeal from the declaration and orders made.

Leave to appeal is required because the orders made do not dispose of the whole

proceeding brought by the applicants; they are interlocutory in nature. In the

circumstances, the Court heard full argument on the merits of the appeal during the course

of the application for leave to appeal. Mr Rares, Senior Counsel, instructed by the

Australian Securities Commission ("the ASC"), sought and was granted leave to appear on

We mentioned earlier that the prospectus had a cover sheet bearing the words "Important Information Inside". It also carried the words, printed in red' in large type, "How to Vote!" and "How many shares you will be given!". On the back of the cover sheet, opposite a marginal heading "What the enclosed form is and why you should fill it

"It is proposed that NRMA change its status and: issue Free Shares* to members. The NRMA Boards are recommending that you vote in favour of this and take the Free Shares. Details about the proposed resolutions and the reasons for the Boards' recommendations are explained in the enclosed prospectus."

The asterisk after "Free Shares" referred the reader to a marginal note at the foot of

"The Free Shares. (or cash alternative) are in exchange for membership under the Articles of each of NRMA Ltd and NRMA Insurance Ltd. Whether you accept the Free Shares or the cash alternative, Road Service and policies continue as usual."

Behind the "Important Information Inside" cover sheet in the package sent to members there was a second sheet. On one side of the second sheet was a members' proxy voting paper for the members meeting of the Association on 19 October 1994, Beneath it was a form headed "Acceptance of Free Shares". The form asked members to "Cross a box to tell us if you want the shares or the cash alternative". The form also contained particulars completed for each addressee of the prospectus and in each case the form specified the number of shares in Holdings to which the addressee was said to be 'entitled", and stated what the directors estimated as the approximate market value of those shares. On the other side of the second sheet was a policyholder's proxy voting

paper for the members' meeting of Insurance on 19 October 1994.

The trial judge observed, and we agree, that the booklet was, in a visual sense, attractively presented and: well laid. out.- "It-was-a~substantial..booklet,.divided .into nine sections and containing in total 100 pages, together with an eight page application form for shares in Holdings. It also contained on page 18, towards the end of Section 1, a

'notice of general meeting of the Association to be held at 10.00 am on Wednesday, 19 October 1994 at the Sydney Convention and Exhibition Centre, Darling Harbour, Sydney. On the following page there was a similar notice. of general.meeting for. Insurance, this meeting being called for 3.30 pm on the same date and at the same place as that proposed for the Association. Section 1 of the prospectus was entitled "Information to Members"

and was stated as being provided by the boards of the Association and Insurance.

Prominently on page 1 of the prospectus appeared the following statement:

THE BOARDS * The Boards of the Association and NRMA RECOMMEND Insurance recommend that:

members of each of the Association and NRMA Insurance vote in favour of the

members of the Association choose the Free Shares.

Later in the "Information for Members", at p.15, it is disclosed that the

recommendation was that of the majority of each board.

On page 3 of the prospectus there appeared a letter from the President of NRMA Holdings Ltd addressed to "Dear Member". The opening paragraphs of the letter read:

As a member of the NRMA you are facing one of the most important decisions in the proud history of the organisation.

The NRMA, like many other mutual organisations, has reached a crossroads. It is time to decide:

whether we continue to operate within our current structure - which has been successful but which does not permit the members to share in the wealth and financial successes of the organisation; or

' whether we adopt a new structure which will build on the current successes and permit members to share in the wealth and future financial successes of the

In short, the proposal is to unlock the wealth of the organisation by giving members Free Shares: The Proxy Voting Paper that came on the outside of this prospectus will have told you the number of Free Shares you will receive and an estimate of their value. The proposal and its implications for you are detailed in Section 1 of this prospectus. If the proposal is adopted, members' financial ownership of the NRMA will be formalised. The Boards of the Association and NRMA Insurance have each considered the options and have concluded that the share issue is in the best interests of members and policyholders.

The restructure will not affect the way we operate. The NRMA will continue to provide efficient Road Service and competitive insurance. There will be no change in the road patrols. The restructure will however give us. greater flexibility in developing businesses for the benefit of all members and policyholders.

The Boards therefore strongly recommend that you vote in favour of the proposal and accept the Free Shares..."

It will be seen that "the proposal" was described in the President's letter as being, in short, to "unlock the wealth of the organisation by giving members Free Shares". The expression was further explained on the first page of the section "Information for

Members" which followed the President's letter. Under the heading "THE PROPOSAL"

"Members have the opportunity to become shareholders of NRMA Holdings Ltd, a new company which will own the NRMA businesses.

If you were a member of the association on 16 March 1994, you are being offered

Free Shares in NRMA Holdings Ltd. You may choose to take the Free Shares or to take the cash alternative. If you choose to take your Free Shares, you will

The frequent use in the prospectus of the expressions "Free Shares" and "Free Share" should be mentioned at this point. The phrases appeared throughout. the prospectus. In the first 31 pages, "Free Shares" and "Free Share" together appeared 100 times. In the prospectus as a whole they appeared 117 times. On the proxy form and the

"Important Information Inside" leaflet, they appeared 13 times.

The causes of action tried before Gummow J were confined to the alleged

contraventions of s.52 of the Trade Practices Act 1974 ("the TPA"). Broadly stated, the applicants alleged that the prospectus, the notices of general meeting and the forms of proxy did not put members in possession of information appropriate to enable them to make an informed and critical assessment of the proposal, or to make an informed decision as to their response. The applicants alleged that if proper regard were had to what was said and left unsaid, contraventions of s.52 were demonstrated. In his reasons his Honour noted that the proceedings did not turn directly upon a failure to distribute what might be described as a "no" case, but pointed out that had the Association and Insurance been corporations limited by shares with members who were shareholders the proposal, insofar as it included offers by Holdings to allot shares, might be characterised as one to acquire the shares of the Association and Insurance in exchange for shares in

Holdings or a cash alternative. His Honour observed that if the proposal had, as a matter

of law, been framed in that way there could have been no suggestion that the shares in Holdings .were. free shares. and, .furthermore,..the...proposal would. have .attracted the provisions of Part 6.12 of the Law which required the issue of, among other statements, a Part B statement. Clause 1 of Part B requires that the Part B statement set out certain material including, in the case of each director of the target company, if the director desires to make, and considers himself or herself justified in making, a recommendation in relation to the offers, whether the director recommends the acceptance of offers made or to be made by the offerer or recommends against such acceptance and, in either case, the reasons for so recommending. His Honour also noted that whilst the applicants relied only on s.52 of the TPA, the whole complex of arrangements dealt with in the prospectus would have attracted the operation of s.995(2) of the Law, which relevantly provides that a person shall not in or in connection with any dealing in securities, or any prospectus issued in relation. to securities, "engage in conduct that is misleading or deceptive or is

The principal complaints of the applicants at trial fell into three groups. The first concerned alleged inadequate treatment of the Association and Insurance as distinct entities and included complaint about the statement in the prospectus that the interests of members of the Association and Insurance were "similar"; the second concerned allegations that what was on offer was not truly "Free Shares"; and the third concerned statements to the effect that there would be "business as usual" after the restructure, and no change in the nature of services presently provided to members. In addition, the applicants alleged that the treatment in the prospectus of the consequences of acceptance

of the proposal by persons in receipt of social security benefits, and of taxation

considerations for individual shareholders, were inadequate, but his Honour rejected each

In relation to the first group of principal complaints, his Honour said in his

"The applicants make the point, which I accept, that before members make their decision to choose to take the shares or cash,' and. to. further invest. in. Holdings; they would reasonably expect information dealing with the worth to them of their present membership of the mutual organisations. There is, after all, at issue the translation of a mutual form of ownership to that of a shareholding, each, no doubt, having benefits and detriments. It is only from some of the Notes to the report (e.g. Notes 8 and 11 at pp.74-75) that there may be discerned separate treatment of the investments of Insurance and the Association, and of the members' equity and reserves of each body.

Hence the importance to the reader of the prospectus who concentrates upon the 'Information for Members' of the statement in the first paragraph on p.12. This States:

'Members' approval will mean members of the Association and members of NRMA Insurance will no longer be members of those companies. The

Association presently controls NRMA Insurance _by appointing its Board. For an NRMA Insurance policyholder to be eligible to have become a

member of NRMA Insurance, the policyholder must have been a member of the Association. Members of the Association are, therefore, being offered an automatic entitlement to Free Shares, with an additional allocation if that membership was linked to an NRMA insurance policy (other than Life or Travel). For these reasons the Boards consider that_ members of NRMA Insurance have interests similar to those of the members of the Association.'

The applicants point to this passage as illustrative of the failure in dealing with the affairs of three corporations in the one document with no full identity of membership between them, to make to members an adequate disclosure which differentiates between the impact of the proposal. They make the following points, which I accept:

(i) That the Association appoints the Board of Insurance may mean that for some statutory purposes it 'controls' Insurance but the ultimate control of Insurance rests with the members 75% of whom must -

agree to a change in the memorandum or Articles; indeed, it is the favourable exercise of that ultimate control which is solicited from members.of Insurance by the prospectus. itself.

(ii) The circumstance that any member of Insurance must be a member of the Association does not mean that the interests of the two bodies of members are relevantly similar, because, as the facts show, not all members of the Association are members of Insurance and the information later given at p.75 shows that the total members' equity of Insurance exceeds that of the members of the Association in a ratio of about 7.5:1.

(iii) In the present context, it is likely to mislead for the Boards to state that they consider that the two bodies of members have interests which are 'similar' without going on to make clear whether the Boards consider that the similarity of interest extends to the purposes and effects of the proposed restructuring outlined in the prospectus.

The applicants also complain of the treatment in the prospectus of the criteria used by the Boards for the differing scales of entitlement to Free Shares as between membership of the Association and membership of Insurance. They say that the criteria inadequately. reflect. the value of the assets and: undertaking of Insurance and the rights of members of Insurance and the value of their membership.

The criteria (pp. 8-9) favour long-standing members, as a reward for their loyalty and on the footing that they tend to have more business with the organisations. The criteria expressly do not contain any weighting in favour of those members of the Association with many vehicle subscriptions; as I have said, 85% of all members have only one car covered by their membership. The allocation of shares is doubled in respect of those members with one or more policies (with Insurance) not being Travel or Life policies; there is no weighting in favour of those members with multiple policies. The reasoning which led to the adoption of these criteria is explained.

It may be that the applicants are correct in taking the next point that the criteria of issue to members of Insurance are inadequate because they do not make allowance for the comparative value of the assets of Insurance and the Association. Nor, it is said, is allowance made to reflect adequately the rights of members and the value of their membership of Insurance. I have referred earlier to the apparent disparities between the 'wealth' of Insurance and the Association to which they point. The applicants submit that the prospectus suggests that the criteria which are used are adequate, contrary to the true situation. That, it is said, involves contravention of

It is unnecessary to decide this point. What is important is that the apparent discrepancy to which the applicants point would properly be a matter of interest and concern to those members of the Association who were also members of Insurance. Counsel for the respondents says that this should not be so because the

body of policyholders is a fluctuating one and terms of policies may vary. That may be so, but the scheme for the offering of Free Shares to certain policy holders who are members operates by linkage'to-length-of membership of-the Association.

The point taken by the applicants is a significant one, and whether it be correct or not, it is a subject upon which members would expect disclosure to enable them to

make a properly informed judgment as a step: to deciding whether to accept the proposal. It is in this sense that, in my view, there is a contravention of s.52, by

the dissemination of the prospectus in its present form."

His Honour had earlier expressed the. view that the statement in the prospectus that

the Association "presently controls NRMA Insurance by appointing its Board" in its

context was at best a half truth and, as such apt to mislead or deceive.

In relation to the use of the phrase "free shares", his Honour said:

"No doubt one adjectival use of 'free' is to describe that which is provided without, or not subject to, a charge or payment. Counsel for Holdings submits that that is what is meant in the prospectus with the use of the phrase 'Free Shares'. He pointed, in particular, to the use, on p.21, the first page of Section 2, of the

'Details of the Members Free Offer and the Sale Offer.'

But, as I have indicated, the particular phrase is 'Free Shares' and this is used in the prospectus on many occasions. In particular, as counsel for the applicants pointed out, the first two Sections of the prospectus are replete with use of 'Free Shares' which is not in any apposition to the 'Sale Offer'.

Rather, the phrase is used to identify and attract the reader by suggesting there are available for acquisition dividend yielding shares at no outgoing to the member. This accords with another adjectival use of 'free', to identify that which is given without consideration and as a gift. 3

It is true that in several places in Exhibits A, B and C, including the passage identified by the asterisk on the leaflet headed 'Important Information Inside' and on p.12 of the prospectus, it is said that the 'Free Shares' are in exchange for membership or that membership is to be given up on condition of the offer of the

Nevertheless, the effect of the persistent reiteration of the phrase 'Free Shares' is to engender in the reader the notion that the shares may be acquired without any significant-loss or outgoing to-the-offeree who accepts-them.

Counsel for the respondents pointed to the provisions in the memoranda of Insurance and the Association which would deny the members a distribution of assets on a winding-up. That, as I understood the submissions, was used to support the submission that, in truth, there could be no significant consideration moving from the members, so that the shares were 'free'.

I have referred earlier to what might be called the ultimate control of Insurance by the members, notwithstanding the manner in which the Board is appointed. The Board of the Association is in a different position, it. being responsible for its election to the members. Furthermore, Article 26 of the present Articles of the Association obliges the Board on the written requisition of 200 or more members forthwith to convene a meeting of members to be held as soon as practicable and, in any case, not later than 2 months after the date of the requisition.

The relinquishment of membership thus, in a legal 'sense, involves the relinquishment of significant rights to the control of the affairs of the two corporations. Further, 'demutualization' removes the possibility of further enjoyment of the advantages described earlier in these reasons.

A basic question for members to decide, as pointed out earlier in. these reasons, is whether they will be better off remaining as. members. or becoming-shareholders or recipients of the proposed cash distribution in lieu of shares. It is a matter of weighing the respective advantages and disadvantages of each course of action. In that setting, in my view it is likely to mislead or deceive to describe repeatedly in

the prospectus, particularly in the passages most likely to be studied by the ordinary reader, that which is offered to members in connexion with their consent

In their application for leave to appeal the respondents submitted that the statements in the prospectus of which his Honour was critical in these passages from his reasons were correct, and, as statements of colloquial and plain English they correctly reflected the underlying legal position. It was submitted that it was istated on the back of the "onsert", in the notices of meeting and at page 12 of the prospectus that what was to occur was the giving up of membership of the Association and Insurance in exchange for

shares to be issued in Holdings or for cash in lieu of shares. Thus, it was submitted,

nobody could be mislead that the shares offered were free in the sense that nothing had to be given up for the shares. ~ Additionally, -it-was-submitted that the-rights of-membership - were in an economic sense valueless so that little, if anything, was being given up by a

member in relinquishing the rights which attached to membership of either the Association

The respondents' submissions do not. challenge. the. correctness of observations made by his Honour in the course of his reasons as to the principles to be applied where a contravention of s.52 of the TPA is alleged. After referring to Demagogue Pty Lid v Ramensky (1992) 39 FCR 31 at 32, 40-41, Warner v Elders Rural Finance Limited (1993) 41 FCR 399 at 401-402 and Beach Petroleum NL v Johnson (1993).43 FCR.1 at. 44-45, his Honour observed that a partial disclosure of a state of affairs may contravene s.52; so also may. silence itself if the circumstances are such as to give rise to a reasonable expectation that silence would be broken if particular matters exist. Later in his reasons

"The fundamental issue is whether by reason of what was said and left unsaid in the prospectus, there was, in all the circumstances, a contravention of s.52.

In that regard, members of the Association and of Insurance were entitled, in relation to such a significant proposal, reasonably to expect that what was put

before them involved no 'half-truths' and contained a full and fair disclosure of matters to enable them to make a properly informed judgment on the proposal."

Mr Rares made submissions on questions of law relating to the application of s.52 to the circumstances of this case. He submitted that in considering whether a contravention of s.52 had been established the Court should take a substantially similar

approach to that which it would take were the claim based on s.995 of the Law. Mr Rares

submitted that to achieve this end established principles of company: law and provisions of the Law~insofar as they may 'affect the-characterisation of the conduct complained of, should be taken into account in determining whether any contravention of s.52 of the TPA or s.995 of the Law had been established. It was submitted that applicants should not be able to avoid an unfavourable construction of s.995 in connection with a dealing in securities by resorting to s.52. With that submission we agree and we do not understand anything said by the learned trial judge to. suggest otherwise. As Brennan J said in

Parkdale Custom Built Furniture Pty Lid v Puxu Pty Lid (1982) 149 CLR 191 at 225:

"Section 52 operates in a milieu of the external legal order, so that the character of conduct which falls for consideration under s.52 is to be determined by reference to the external legal order as it exists when the conduct is engaged in."

That observation is equally applicable to s.995. At the trial it was conceded that the conduct of the respondents in question was conduct which occurred "in trade or commerce". That is not a requirement of s.995, but s.995 in its operation is confined to the circumstances prescribed by paragraphs (a) and (b) of s.995(2); whereas s.52 in the case of corporations is a section of much wider application. In the circumstances of the present case each section had application. In each section the relevant proscription is expressed in identical terms, and had the applicants sought to rely on s.995(2) the issues for determination would have been substantially the same. The scope of the remedies available under ss.1005, 1323, 1324 and 1325 of the Law in the event of a contravention of s.995 may be greater than in the case of s.52 of the TPA but that difference is not

Mr Rares also questioned whether his Honour, in saying that members of the

a full and fair disclosure, was intending to apply the concept of reasonable expectation

introduced by s.1022 of the Law. That section relevantly provides:

"1022(1) In addition to the information required by section 1021 to be included in a prospectus in relation to securities of a corporation, such a prospectus shall, subject to subsection (2), contain all such information as investors and their professional advisers would reasonably require, and reasonably expect to find-in the prospectus, for the purpose of making an informed assessment of:

(a) the assets and liabilities, financial position, profits and losses, and prospects of the corporation; and

1022(2) The information to be included by virtue of this section is. such of the information mentioned in subsection (1) as is known to:

(a) if the prospectus is a primary prospectus - any person referred to in any of paragraphs 1006(2)(b) to (h), inclusive; or

or such of the information so mentioned as it would be reasonable for such a person to obtain by making enquiries.

1022(3) In determining what information is required to be included in a prospectus by virtue of this section, regard shall be had to:

(a) the nature of the securities and of the corporation;

(b) the kinds of persons likely to consider subscribing for or buying the securities;

(c) the fact that certain matters may reasonably be expected to be known to professional advisers of any kind whom those persons may reasonably be expected to consult;

(d) whether the persons to whom the offers or invitations are to be made or issued are the holders of shares in the corporation and, if they are, to what extent (if any) relevant information has previously been given to them by the corporation under any law, any requirement of the business rules or listing rules of a securities exchange, or otherwise; and

(e) any information known to investors or their professional advisers by virtue of any Act, State Act or law of a Territory."

Although the issues tried before Gummow J were 'confined to - alleged contraventions of s.52 of the TPA, one of the particulars of alleged contravention read: -

"The prospectus does not comply with the requirements of Section 1022 of the

Corporations Law, The Applicants rely on sub-sections 1022(1)(a) and (b), (2) and

(3)(a) and (b), the Prospectus' contents, and the composition, nature. and size of and widely held membership of the Association and Insurance."

His Honour in his reasons made no reference to s.1022. For the purpose of s.1022(1) "the corporation" to which the prospectus related was Holdings. The complaints made by the applicants related not to disclosures about Holdings, but to the information relating to the Association and Insurance and the disclosures relevant to the resolutions proposed in the notices of general meetings of. members of those two corporations. The provisions of s.1022 were not relied on by counsel for the applicants before this Court, and in any event do not appear to be relevant to the complaints made by the applicants. It is

understandable that his Honour has not referred to s.1022 of the Law.

His Honour, by the references in particular to Demagogue, Warner, and Beach Petroleum, made it clear that he was intending only to apply the statements of principle in those decisions, and that the reasonable expectation to which he referred was one arising out of the particular factual circumstances of the case. Those decisions, and Rhone

Poulenc Agrochimie SA v UIM Chemical Services Pty Lid (1986) 12 FCR 477 at 490 to

which his Honour also made reference, emphasise that in determining disputes arising

under s.52 of the TPA, to inquire whether an independent "duty to disclose" has arisen is to digress from the-application of -the-terms of 6.52. -His.Honour.-had earlier observed .in Demagogue (at p.40) that the use of the term "duty" was apt to suggest a necessary connection with the general law which does not necessarily exist and is not required by s.52. Nevertheless a particular relationship between the parties, where that relationship gives rise to fiduciary or other duties under the general law, may assist in. determining whether in the circumstances of the case s.52 is contravened by a. failure to give information, or by the provision of information only to a limited extent. It was in this context that his Honour referred to the general law requirement that directors make to members what Latham CJ described in Peters' American Delicacy Co. Lid. v Heath (1939) 61 CLR 457 at 486 as a "proper and accurate disclosure", and to Chequepoint Securities Limited v Claremont Petroleum NL (1986) 11 ACLR 94 at 96-97. Each of those decisions approved the following statement as to the duties of directors by Long

Innes CJ in Eq. in Bulfin v Bebarfalds Lid (1938) 38 SR NSW 423 at p.440:

" .when directors are advising or urging a particular action or course of conduct upon members, or a particular class of members, of the company, the authorities previously mentioned establish, in my opinion that they are under a duty to make full disclosure of all facts within their knowledge which are material to enable the

members, or class of members, to determine upon their action."

His Honour in referring to these decisions was not postulating that s.52 created an

independent "duty" to disclose information based on a notion of reasonable expectation.

A duty to make disclosure of relevant information arises as part of the fiduciary

duties of the directors to the company and its members in relation to proposals to be

considered in general meeting and under s.1022 of the Law in respect of the contents of a prospectus. "The fiduciary duty -is'a duty to-provide such-material.information as. will fully and fairly inform members of what is to be considered at the meeting and for which their proxy may be sought. The information is to be such as will enable'members to judge for themselves whether to attend the meeting and vote for or against the proposal or whether to leave the matter to be determined by the majority attending and voting at the meeting: Jackson v The Munster Bank Ltd (1884) 13 LR Ir 118 at..136-137; Tiessen v Henderson [1899] 1 Ch 861 at 866-867, 869-871; Peel v London and North Western Railway [1907] 1 Ch 5 (CA) at 12-14, 16-17, 31; Baillie v Oriental Telephone and Electric Company Limited [1915] 1 Ch 503 (CA) at 514-515, 518; Pacific Coast Coal Mines Lid v Arbuthnot [1917] AC 607 (PC) at 618; Goldex Mines Ltd v Revill (1974) 54 DLR (3d) 672 (Ont CA) at 679 and the cases there cited. Examples of a failure to provide sufficient information to enable a member to make an informed decision as to the worth or otherwise of a proposed reconstruction or amalgamation can be found in Garvie v Axmith (1962) 31 DLR (2d) 65; Re National Grocers Co. Ltd [1938] 3 DLR 106; Re N Slater Co. Lid [1947] 2 DLR 311. A proper discharge of the duty may require that the directors take reasonable steps to ascertain relevant information for communication to members if that information is not known to the board. Directors must not consciously refrain from seeking relevant information or turn a blind eye to relevant material in order to avoid placing before members information which may contradict or qualify any particular position taken or

Although s.52 gives rise to no duty to provide information, when information is in

fact given in purported discharge of the fiduciary duty, s.52 requires that the information

given is not misleading or deceptive or likely to mislead or deceive. Additionally, the section 'requires: that the conduct: of the directors.:in-withholding. certain information. is. not itself conduct which is misleading or deceptive or likely to mislead or deceive. It is in the area of the proper discharge of the fiduciary duty to. provide relevant information that there is an overlap between discharge of the duty and the operation of s.52: .a failure properly to discharge the duty may itself constitute a contravention of s.52 as well as a contravention of s.995 of the Law. Thus, the Ontario Court of Appeal in Goldex Mines

"In Charlebois et al v. Bienveau [1967] 2 OR 635 at p 644, 64 DLR (2d) 683 at p 692, Fraser J., held that the holding of an annual meeting and the election of directors after the sending out of a misleading information circular was.a breach of the directors' fiduciary duty to the company. We hold that such an act is also breach of duty to the other shareholders. If the directors of a company choose, or are compelled by statute, to send information to shareholders, those shareholders

have a right to expect that the information sent to them is fairly presented, reasonably accurate, and not misleading."

Examples of the courts' intervention where incomplete and misleading information was given or the notice and accompanying circular could be described as "tricky" can be ~

found in Jackson v The Munster Bank Lid and Baillie v Oriental Telephone and Electric

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.

In the present case the membership of Association to whom the prospectus and accompanying documents were addressed comprised some 1.8 million people, a large proportion of the adult population of New South Wales and the Australian Capital Territory. The common bond between them is that they are motorists. It is difficult to envisage a wider cross-section of the community and in determining the likely effect of conduct that is alleged to be misleading or deceptive it is of course relevant to consider the class of persons likely to be exposed to that conduct. As the learned trial judge observed, the addressees of the prospectus may be expected to include significant numbers of people who, whilst quite astute in dealing. with their day to day financial affairs, have no experience in dealing with shares, with corporate reorganisation, 'or with a prospectus. Moreover, "demutualization" is an unusual form of corporate reorganisation, even to many experienced investors. It is also relevant to note that the addressees may be expected to include not only those who have no experience in dealing with shares or with corporate reorganisation, but also people in that category who are, as well, less astute, less intelligent or less well-informed than the average member of the community: see Parkdale Custom Built Furniture Pty. Lid. v Puxu Pty. Ltd. (1982) 149 CLR 191 at 199; Taco Co. of Australia v Taco Bell Pty. Lid. (1982) 42 ALR 177 at 202. The question whether conduct is misleading or deceptive or is likely to mislead or deceive has to be judged objectively and we agree with the trial judge that the objective assessment required

is whether by reason of what was said and what was left unsaid there was in all the

This is not necessarily the same question as the one which would have arisen if the applicants had alleged breaches of directors' duties under the general law. For example, if the applicants had sought relief for a breach of the directors' duties described in Bulfin a question would have arisen whether the directors had knowledge or must be taken to have had knowledge of facts said not to be disclosed, whereas for the-purposes of s.52, if by reason of what was said and what was left unsaid the conduct of the corporation is misleading and deceptive or likely to mislead or deceive, a contravention would occur even if the corporation through its directors and officers did not have knowledge of the undisclosed facts which rendered the conduct in breach of s.52. A contravention of s.52 may occur without knowledge or fault on the part of the corporation, and notwithstanding

the exercise of reasonable care: Parkdale Custom Built Furniture Pty Lid v Puxu Pty Lid

Where the contravention of s.52 alleged involves a failure to make a full and fair disclosure of information, the applicant carries the onus of establishing how or in what manner that which was said involved error or how that which was left unsaid had the potential to mislead or deceive. Errors and omissions to have that potential must be relevant to the topic about which it is said that the respondents' conduct is likely to mislead or deceive. The need for an applicant to establish materiality is of particular importance in a case like the present one where the proposal is complex, and involves difficult questions of commercial judgment and matters of degree and conjecture as to the

future about which there is room for a range of honestly and reasonably held opinions. If

every possible formulation of the commercial objective of the proposal, and arguments for "and against every theoretical possibility, were set forth the total package of information to members would be likely to confuse rather than to illuminate the issue for decision, even for people having a familiarity with corporate law and commerce. The need to make full and fair disclosure must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed, and is likely to assist rather than to confuse: see Devereaux Holdings Pty Lid v Pelsart Resources NL (No.2) (1985) 9 ACLR 956 at 959; In re Dorman Long & Company Lid [1934] 1 Ch 635 at 665-666. In complex cases it may be necessary to be selective in the information provided, confining it to that which is realistically useful. Clearly the present case was one of this kind. However the proposal was formulated, and however the information to members was drafted, it is likely that some criticism could be levelled at it. For example, criticism is made that the prospectus incorporates'-notices of general meetings: of members of the Association and Insurance and fails adequately to recognise them as separate entities - it is said that there should have been a separate explanatory memorandum for each meeting. Yet if three separate documents had been produced it is not difficult to imagine that criticism could be made that the documents were repetitious with the result that the length of the total package was too great, and the interrelationship of transactions separately

discussed too difficult, to be understood by ordinary reasonable members.

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....It-will be.necessary

to return to this topic as the reasons of the learned trial judge are considered.

We tum now to consider the submissions of the respondents about his Honour's findings as to the inadequacy of the disclosures concerning the separate identities of the Association and Insurance, and the use of the phrase "Free Shares". It must; of course, be' remembered that the Association and Insurance, though having a close historical association, are in fact separate legal entities with distinct and separate assets and liabilities: Walker v Wimborne (1976) 137 CLR 1; ANZ Executors & Trustee Co. Ltd v

Quintex Australia Lid. (receivers and managers appointed) [1991] 2 Qd.R. 360 at 365.

At a glance

Court

Decision date

Before

Source

Judgment (431 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (20)

Cited By (2)