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.