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[2021] FCA 772
Federal Court of Australia
2021-07-02
Jackson J
Original judgment source is linked above.
The plaintiff has given an undertaking to the court not to issue any securities during the currency of this proceeding.
JACKSON J: 1 This is an application for orders under s 1322(4) of the Corporations Act 2001 (Cth) to validate offers for sale and sales of shares that have been issued by the plaintiff, Gold Mountain Limited. There is a large number of such issues, stretching back in time to 2013. The need for validation arises because the share issues were not accompanied by cleansing notices permitting on-sales without disclosure under Part 6D.2 of the Corporations Act. 2 The application was heard on short notice on 2 July 2021. For reasons which emerged during the course of that hearing and will be described further below, Gold Mountain took the view that it should not press the application in relation to some of the relevant share issues at that hearing and in the case of one share issue, it decided not to press it at all. The court has adjourned the matter until 19 July 2021 so that the question of whether to validate the remaining share issues can be addressed then. But it was appropriate to grant relief in relation to the balance of the share issues, and I did so at the hearing of 2 July 2021. These are my reasons for having done so.
Background and evidence 3 The application relied on the affidavit of Eric Kam and the facts below are drawn from that affidavit. Mr Kam is an experienced accountant and has been Gold Mountain's company secretary since 9 July 2014. 4 Gold Mountain is a copper and gold exploration company which operates in Papua New Guinea. Since 30 August 2011, its ordinary shares have been listed on the Australian Securities Exchange (ASX). The company has just over 1,000 shareholders. 5 The application seeks validation of sales or offers to sell shares that were the subject of around 30 share issues, stretching back to 2013. They are referred to in the Schedule to these reasons. Mr Kam does not depose in detail to the circumstances of each issue. But he does describe relevant circumstances in relation to some four share issues which all took place in the 12 months preceding the application. The circumstances can be summarised together for all four issues. Each was a placement of shares that was announced to ASX. Each of them was made to investors to whom disclosure by way of prospectus or other required document was not required because of the 'sophisticated investors' exception in s 708(8) of the Corporations Act. Two of them were made with shareholder approval. The other two did not have specific shareholder approval, but were issued under the facility afforded by r 7.1A of the ASX Listing Rules for shareholders to approve the company's capacity to issue further securities in amounts up to 10% of the company's issued capital, on top of the 15% that is permitted without approval under r 7.1. For each of the four share issues, no cleansing notice was announced to the market or otherwise given. 6 It is convenient to depart from the evidence at this point to describe how a requirement to give a cleansing notice arises. A cleansing notice is an exception to requirements under Part 6D.2 of the Corporations Act for certain sales or offers of sale of securities to be accompanied by disclosure documents, such as a prospectus. Section 707(3) requires, relevantly, disclosure to investors in relation to sales or offers to sell which take place within 12 months of the issue of the securities, if that issue occurred without disclosure. By way of exception to this, s 708A(5)(e) provides that a sale offer of quoted securities does not need to be disclosed to investors if, relevantly, the offering body lodges with the market operator (here, ASX) a notice complying with s 708A(6), that is, a cleansing notice, before the sale offer is made. 7 A cleansing notice must, among other things, set out certain information defined as 'excluded information', if there is any. In broad terms, that is information which has not been disclosed to the market but which investors and their professional advisers would reasonably require for the purpose of making an informed assessment of the company and the rights and liabilities attaching to the relevant securities: s 708A(7). 8 So for each of the four issues, while there was no need for a disclosure document for the placement of the shares to sophisticated investors, those investors could not lawfully on-sell those shares in the 12 months following the issue unless some exception to s 707(3) applied. Assuming no other exception applied to an on-sale or offer to on-sell, cleansing notices were required. 9 To return to Mr Kam's evidence, he says that for each of the four issues just summarised, Gold Mountain was not aware of any excluded information at the time. He supports this by noting the next time after each share issue when the company disclosed market sensitive information, which in each case was a week later or more. This, the company submits, shows that the company was not holding back any excluded information at the time of the four issues. 10 Mr Kam's affidavit says that during his over 30 years of experience he has become familiar with the requirements under the Corporations Act for disclosures of offers of securities and the on-sale restrictions for securities issued under an exception to those requirements. However, his evidence about his knowledge of the requirements around cleansing notices at the time of each of the four issues was to the following effect: At the time I was aware that the Corporations Act required the giving of a cleansing notice under section 708A(5)(e) (cleansing notice) for share issues; however my understanding was that the notice was only required where securities (i.e. shares and options) were issued without shareholder approval and relying upon a company's 15% capacity under Listing Rule 7.1. I cannot explain why I had this understanding. 11 The present problem was discovered when Gold Mountain took legal advice and due diligence was conducted for the purposes of a capital raising. The details of the raising are currently confidential and incomplete, and it is not necessary to describe them in detail. Relevantly, the proposed raising includes an entitlement offer for which a prospectus would be required. 12 The company entered a trading halt for the purposes of the capital raising on 17 June 2021. When the terms of the raising were not finalised by 21 June 2021, the company requested a voluntary suspension from ASX. On 22 June 2021, the plaintiff retained Atkinson Corporate Lawyers to advise on the capital raising and to conduct due diligence for the purpose of the prospectus. 13 On 24 June 2021, Mr Kam participated in a conference call with the principal of that firm, Julian Atkinson, along with Tim Cameron, Gold Mountain's executive director, and an adviser of Gold Mountain. Mr Atkinson advised the others of the cleansing notice requirements and said that, during the course of the due diligence, he had noticed that at least two placements (on 30 December 2020 and 5 May 2021) were not accompanied by cleansing notices. Those placements are among the four share issues summarised above. Mr Atkinson advised that if any of the shares in those placements had been on-sold, the appropriate course was to apply to the court for orders validating any on-sales. 14 Mr Kam briefly reviewed Gold Mountain's share register during the call and determined that some of the shares in those two placements had been transferred after they were issued. Mr Atkinson was instructed to immediately notify the Australian Securities and Investments Commission (ASIC) and ASX about the failures to issue cleansing notices, and to make this application to the court. 15 After the call, Mr Kam determined that in addition to the two share issues Mr Atkinson had identified, another two, on 3 July 2020 and 7 October 2020 did not have cleansing notices, thus making up the four share issues I have described. 16 Mr Atkinson spoke to ASIC at about 2.30 pm on 24 June 2021 and to ASX at about 8.00 am the following morning. ASX confirmed that shares in Gold Mountain would remain suspended until orders were obtained from the court. 17 Mr Atkinson provided draft application papers to ASIC and ASX on the afternoon of Friday 25 June 2021. ASIC raised questions about whether other issues of shares, which took place more than 12 months ago without disclosure or a cleansing notice, should also be the subject of the application. 18 Mr Kam and Mr Atkinson then reviewed Gold Mountain's ASX announcements since it was listed in 2011 to determine whether other issues of securities had been made without disclosure and without a cleansing notice or a prospectus permitting sale offers and sales within 12 months to also be made without disclosure. They uncovered a large number of such issues. Together with the four issues already mentioned, the share issues of concern are listed in the Schedule. 19 Mr Kam briefly deposes to the varying circumstances of each of those historical issues. There were over thirty since Mr Kam became company secretary and I will not describe each one. Some of them were accompanied by cleansing notices. For a couple there was a prospectus, so no further disclosure was required. It would appear that others did not require cleansing notices because the issued shares were subject to escrow periods of 12 months or more, during which period no on-sales of those shares could occur. But for others, there have been defects in compliance with the requirements of the Corporations Act which are required to permit on-sales without disclosure. 20 Since Mr Kam became company secretary, a fairly regular pattern of non-compliance can be observed. Where the issue had specific shareholder approval, no cleansing notice was given. Also, where the issue was covered by shareholder approval in the sense that it was made under ASX Listing Rule 7.1A - that is, pursuant to prior shareholder approval of the issue of an additional 10% of shares - no cleansing notice was given. Where the issue of shares had no shareholder approval, because it was permitted under the 15% threshold mandated by ASX Listing Rule 7.1, a cleansing notice was issued. 21 I say that the pattern is fairly regular because there is a small handful of issues that do not follow it precisely. But I am satisfied that it is regular enough over a large number of share issues to support Mr Kam's evidence that the mistake he identifies in the paragraph from his affidavit quoted above was the cause of the multiple historical omissions to issue cleansing notices. 22 Significantly, the pattern also discloses that those omissions took place in a context where Mr Kam and the company made diligent efforts to comply, albeit on the basis of a misconception. For example, on 9 August 2016, the company issued 57,197,609 shares, some of which were issued under ASX Listing Rule 7.1 (no shareholder approval required) and some were issued under ASX Listing Rule 7.1A (covered by shareholder approval of the issue of an additional 10% of capital). A cleansing notice was issued, but only in relation to the shares issued under ASX Listing Rule 7.1, which did not need and did not have any kind of shareholder approval. This indicates that the company was not neglectful; it was making efforts to comply, but those efforts were based on a mistake. 23 However, the court is satisfied of the honesty of Gold Mountain's mistake on the basis of Mr Kam's direct evidence of his state of mind and his evidence about the circumstances surrounding the share issues which took place while he was the company secretary of Gold Mountain. The company also sought validation of five transactions which took place before Mr Kam's appointment in July 2014 (as well as one other which it has decided not to press). Those transactions were put before the court on the basis of the ASX announcements, but it appears that those who were responsible for those transactions are no longer with the company and there was no evidence of why the company did not comply with the cleansing notice requirements during that earlier period. 24 The court adjourned until later in the day on 2 July 2021 to give Gold Mountain an opportunity to address that issue. The company has produced to the court letters from ASX and ASIC indicating that they neither consented to nor opposed the application. But in the case of ASIC, that was subject to any orders of the court being in the same form as the originating process which was given to ASIC on 1 July 2021. After discussions with ASIC, Gold Mountain decided that on 2 July 2021 it should press only for validation orders in respect of the share issues that took place while Mr Kam was company secretary, with the others to be dealt with at a subsequent hearing. The company undertook to the court not to make any issues of securities while the proceeding remained on foot. I determined that it was appropriate to accept the undertaking as an extension of the court's power to make orders, including interlocutory orders, under s 23 of the Federal Court of Australia Act 1976 (Cth). Accordingly, these reasons relate only to the transactions where the company sought orders on 2 July 2021.
Principles 25 Gold Mountain seeks orders under s 1322(4)(a) and s 1322(4)(c) of the Corporations Act. Section 1322(4), s 1322(5) and s 1322(6) provide: (4) Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes: (a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation; (b) an order directing the rectification of any register kept by ASIC under this Act; (c) an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a); (d) an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding; and may make such consequential or ancillary orders as the Court thinks fit. (5) An order may be made under paragraph (4)(a) or (c) notwithstanding that the contravention or failure referred to in the paragraph concerned resulted in the commission of an offence. (6) The Court must not make an order under this section unless it is satisfied: (a) in the case of an order referred to in paragraph (4)(a): (i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature; (ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or (iii) that it is just and equitable that the order be made; and (b) in the case of an order referred to in paragraph (4)(c) - that the person subject to the civil liability concerned acted honestly; and (c) in every case - that no substantial injustice has been or is likely to be caused to any person. 26 So under s 1322(6), the court must not make an order under s 1322(4)(a) declaring an act not to be invalid unless it is satisfied of one of the three conditions in s 1322(6)(a). Here, Gold Mountain relied principally on the third of those, that it is just and equitable that the order be made. Since the company also sought orders under s 1322(4)(c) relieving anyone who on-sold the relevant shares from liability, the court was also required to be satisfied that those persons acted honestly. And in all cases, the court must be satisfied that no substantial injustice had been or is likely to be caused to any person: s 1322(6)(c). 27 In iCandy Interactive Limited, in the matter of iCandy Interactive Limited [2018] FCA 533; (2018) 125 ACSR 369, Banks-Smith J analysed the authorities on the application of those provisions in circumstances like the present. They are remedial in nature and are to be given a liberal interpretation: iCandy at [43]; and see also Re Wave Capital Limited [2003] FCA 969; (2003) 47 ACSR 418 at [29] (French J). The provisions can authorise the validation of non-disclosure by shareholders who on-sell shares, and have been used that way on a number of occasions: iCandy at [43]. The company whose shares were on-sold in breach of the Corporations Act is an interested party with standing to bring the application: iCandy at [46]. 28 In determining whether those concerned in or party to the breaches acted honestly, the court looks to the absence of evidence of dishonesty. The court is concerned only with whether those people acted honestly in the ordinary meaning of that term. The concept of honesty can embrace inadvertence: iCandy at [54]-[56]. The honesty of the shareholders who sell shares without disclosure is relevant; it is open to the court to readily infer that those shareholders have acted honestly in on-selling the shares: iCandy at [58]. However the court may also consider the honesty of those responsible for the failure of the company to lodge a cleansing notice, including company officers. The court takes into account whether the plaintiff has taken prompt action to remedy the error. That is so even where, as here, the relief sought under s 1322(4)(c) is framed only in terms of the contraventions committed by on-sellers: see iCandy at [54], [83], [87], [101]. 29 In considering whether it is just and equitable to validate the on-sales the court will generally focus on the interests and conduct of the shareholders: iCandy at [110]; and see EHR Resources Ltd, in the matter of EHR Resources Ltd [2018] FCA 997 at [7] (Colvin J). Consistently with that, the broad legislative policy reflected in s 1322 is that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements where the non-compliance is the product of honest error or inadvertence, and where the Court can avoid the effects of non-compliance without prejudice to third parties or to the public interest in compliance with the law: see Wave Capital at [29]. But evidence of a blatant disregard of the provisions of the Act or the constitution of the company may lead to refusal of relief: Wave Capital at [29]. 30 Even if the criteria in s 1322(4) and s 1322(6) are satisfied, the court has a residual discretion as to whether or not to make the orders: Re Wesfarmers Ltd; Ex parte Wesfarmers Ltd (No 2) [2018] WASC 357 at [35] (Vaughan J).
Consideration 31 I am satisfied that it is appropriate to make the orders sought here. On the basis of the description of the evidence given above, I am satisfied that the failures to give cleansing notices in the case of the share issues that are the subject of the proceeding were not the result of any dishonesty. They were the result of a mistaken understanding of the law. 32 While it is regrettable that an experienced accountant who is charged with the responsibility of helping to ensure compliance laboured under that misunderstanding for so long, there is no reason to think that the problem was any wider or deeper than that, at least during Mr Kam's time as secretary. Once the problem was discovered, Gold Mountain acted promptly to rectify it, and it has conducted an apparently thorough review of its ASX announcements to identify other share issues that were affected. 33 In that context, it is just and equitable to make the orders sought here. The focus of the court is on the interests of shareholders, provided that they can be protected without prejudice to third parties or to the public interest in compliance with the law. There is, once again, nothing to suggest that any of the shareholders, no doubt numerous, who on-sold affected shares, acted dishonestly, and the court will readily infer that they acted honestly. It is just and equitable here to protect their interests by removing any doubt about the validity of the share transactions they undertook. Gold Mountain, appropriately, is not seeking that it or its officers be relieved of any liability they might otherwise have: see Poseidon Nickel Ltd, in the matter of Poseidon Nickel Ltd [2018] FCA 1063; (2018) 129 ACSR 57 at [67]-[68] (Colvin J). 34 That is not to say, however, that the position of Gold Mountain is irrelevant. If the court were to find that the multiple failures to issue cleansing notices were the result of a broader culture of neglect of the company's compliance obligations, that could militate against validating the relevant share sales. But as I have indicated in my assessment of Mr Kam's evidence, I do not find that to be the case. Once again, the failures were the result of a specific mistaken belief about the law made in the course of apparently earnest attempts to comply. It is also relevant to note that Gold Mountain has appointed another person to act as joint company secretary with immediate effect and that the board has resolved to seek legal advice for every security issue by the plaintiff going forward, to ensure compliance with the Corporations Act. Those measures should reduce the risk of future non-compliance. 35 There is no suggestion in the evidence that making the orders will cause substantial injustice. Mr Kam deposes to being unaware of any prejudice suffered by shareholders or others as a result of Gold Mountain's failures to ensure compliance with the Corporations Act, and says that the company is in compliance with its continuous disclosure obligations. The historical nature of many of the failures suggests that prejudice would be unlikely. But it is appropriate to make an order, as Gold Mountain proposes, providing for a period during which potentially affected persons may apply to vary or set aside the orders: see iCandy at [116]. 36 Thus the preconditions for relief under s 1322(4)(a), and for relief under s 1322(4)(c), are satisfied here. There is no reason apparent on the materials to exercise the residual discretion against granting relief. The orders sought will be made. 37 In the circumstances of this case, and in light of the difficulties concerning costs orders in these cases which Banks-Smith J identified in iCandy (at [131]-[133]), there will be no order as to costs. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackson.
Associate: Dated: 7 July 2021 SCHEDULE OF SHARE ISSUES