In the matter of Recce Pharmaceuticals Ltd [2021] NSWSC 1316

Affidavit evidence

1. Recce relies on several affidavits, which provide a comprehensive account of relevant events. Recce relies on the affidavit dated 11 October 2021 of Mr McKeough, who is the solicitor acting for Recce in this application and also has involvement with the Automic Group of companies which provides, broadly, company secretarial services to Recce. Mr McKeough notes that Recce is an Australian public company listed on the Australian Securities Exchange ("ASX") which had, between 8 and 12 October 2021, a share capitalisation in the range $159-$161.6 million. Its shares have been listed on ASX since 15 January 2016 and it operates in the pharmaceuticals, biotechnology and life sciences sector. Mr McKeough is Recce's company secretary, although he is assisted by staff in the Automic Group in performing that role.
2. Mr McKeough in turn outlines matters which have come to his attention, as a result of his inquiries of other persons within the Automic Group. A monthly reconciliation of the share records of Recce performed on 1 October 2021 indicated that 10,000 shares in Recce had been issued, without Recce issuing a cleansing notice under s 708A of the Corporations Act. That issue of shares followed the exercise of 10,000 unlisted options by an option holder on 2 September 2021, where that option holder had acquired those options, it appears, from the lead manager of an earlier placement. Mr McKeough's affidavit indicates that no cleansing notice was issued under s 708A of the Act as a result of an administrative oversight, and he explains that oversight at some length, by indicating the processes which would ordinarily be adopted by Recce and the Automic Group in respect of the issue of securities.
3. Mr McKeough also refers to the steps which have, appropriately, been taken since the issue was identified, including notification of the issue by the Automic Group to Recce, the retainer of legal advisors to bring this application, a request for a trading halt made to ASX, and a suspension of trading in shares in Recce today, which it is expected will be lifted if this application is successful and the relief sought by Recce is ordered by the Court. Recce has also released a public announcement to ASX disclosing the relevant matters and, appropriately, has advised the Australian Securities and Investment Commission ("ASIC") of these issues. Mr McKeough's evidence is that ASIC has indicated that it does not seek to be heard on the application. Mr McKeough indicates that he has since given directions to members of the Automic staff about the steps to be taken in respect of future security issues, to avoid a recurrence of the oversight which occurred in this case. That is, of course, appropriate, but one should also bear in mind that human fallibility and the history of the case law in this area indicates that errors of this kind will from time to time happen, notwithstanding the efforts that are directed to putting appropriate compliance mechanisms in place.
4. Ms Miller, who is a Customer Success Manager employed by the Automic Group, in turn gives evidence by her affidavit dated 11 October 2021 of the circumstances of the exercise of the options which gave rise to the error to which I have referred above. Ms Niewidok, who is employed as a company secretary and general associate by Automic, although the former title does not carry its usual meaning, refers to the circumstances in which the issue of the shares in Recce was identified and the steps which were taken and the investigations which disclosed the failure to issue the cleansing notice when the options were exercised and the 10,000 shares issued. Ms Slaughter, who is also a company secretary employed by Automic, with that term again not having its usual meaning, also refers to the same matters.

The applicable legal principles

1. I summarised the relevant provisions, which are somewhat complex, in my decision in Re Kollakorn Corporation Ltd above and Williams J in turn referred to them in her decision in Re Airtasker Ltd above. They are also addressed in level submissions made by Mr Sirtes, with whom Mr Smorchevsky appears, on behalf of Recce. Broadly, s 707 of the Act requires disclosure under Pt 6D.2 in respect of an offer of securities for issue in specified circumstances. Section 708 specifies circumstances in which offers of securities do not require disclosure and s 708A in turn specifies circumstances in which a sale offer (as defined) does not require disclosure. Those provisions provide, inter alia for a process by which a company may give ASX a cleansing notice under s 708A of the Act before an offer is made. Section 727 in turn prohibits a person from making an offer of securities, or distributing an application form for an offer of securities, that needs disclosure to investors under Pt 6D.2 of the Act, unless a disclosure document has been lodged with ASIC.
2. The relevant provisions form part of Ch 6D of the Act which seeks "to ensure that investors are provided with all information that they and their professional advisors would reasonably require to make an informed assessment in connection with securities offered or issued for sale": Re Golden Gate Petroleum Ltd above at [24]. The purpose of the relevant provisions is to prevent the policy of Ch 6D of the Act being circumvented by the issue of securities to a party to whom disclosure is not required under s 708 or s 708AA of the Act, and that party then offering those securities for sale to investors without disclosure: Golden Gate Petroleum Ltd above at [27]; Re Austpac Resources NL [2010] NSWSC 1438.
3. The decisions to which I have referred above, and several other decisions to which Mr Sirtes referred in submissions, indicate that there are, from time to time, occasions on which the disclosure requirements of Ch 6D of the Act are not complied with, by oversight. The Court has the power to grant relief under s 1322(4) of the Act where a contravention of that section arises, if the noncompliance results from an honest and reasonable error and there is no prejudice to third parties or the public interest in compliance with the Act: Re Golden Gate Petroleum Ltd above; Re iCandy Interactive Ltd (2018) 125 ACSR 369; [2018] FCA 533; Re Kollakorn Corporation Ltd above at [24]. The Court also has other powers under 1322 of the Act, on which Recce relies in this application.

Recce's submissions and determination

1. Turning now to the submissions made by Mr Sirtes on Recce's behalf, he provides a detailed outline of the chronology of events in respect of the exercise of the option which led to the issue of the 10,000 shares in Recce, the identification of the fact that those shares had been issued without compliance with the requirement to issue a cleansing notice before that occurred, the circumstances in which that matter came to Mr McKeough's attention on 5 October 2021, and the steps then taken to bring about a trading halt in respect of trading in shares in Recce on ASX, and the subsequent suspension of trading in shares to which I referred above. Mr Sirtes in turn refers to the evidence of the relevant Automic Group employees which explain the circumstances in which the error occurred. He points out, rightly, that the error related to a small number of shares, by reference by Recce's total share capitalisation, being 10,000 shares out of the total of more than 173 million shares on issue, and occurred as a result of a misunderstanding by a relatively junior employee of Automic Group of the practice that should have been adopted in respect of the issue of the shares. That error was in turn identified, relatively promptly, by the standard compliance checks undertaken by the Automic Group in respect of Recce's shares on issue on a monthly basis. Mr Sirtes submits, and I accept, that the noncompliance in respect of the failure to issue the cleansing notice was, on the evidence, honest and arose through inadvertence and mistake, rather than by any disregard of Recce's disclosure obligations under the Act, or any lack of sufficient procedures to comply with those obligations.
2. Mr Sirtes in turn refers to the scope of s 707 of the Act, to which I have referred above, and to the availability of the process to give a cleansing notice as a means of satisfying disclosure requirements in respect of the shares under 708A(5) of the Act which could have been, but by inadvertence was not, adopted here. Mr Sirtes in turn points to the difficulty, which Recce now seeks to avoid, that a failure to lodge a cleansing notice that in the time permitted under 708A(6) of the Act would expose persons dealing in the shares to disclosure obligations under 707(3) of the Act, which they would not ordinarily expect to have in respect with dealing with shares in a listed company.
3. Mr Sirtes in turn addresses the requirements for relief under s 1322 of the Act. He submits, and I am satisfied, that Recce is an interested person for the purposes of 1322 of the Act, so far as a listed company plainly has an interest in the ability of its shareholders to trade in relevant shares, freely and without compliance with disclosure requirements which would not have applied if a cleansing notice were issued. Mr Sirtes points out that Recce seeks, first, a declaration regarding the validity of any offers of sale, or any sales, of shares since they were issued. He notes that such an order has been made in several previous cases in similar circumstances, including Re Golden Gate Petroleum Ltd above, Re Kollakorn Corporation Ltd above and Re Airtasker Ltd above. I am satisfied that, as Mr Sirtes points out, that order is within the scope of s 1322(4)(a) of the Act, because any such offer or sale would be an act, matter or thing purporting to have been done in relation to a corporation, which could have contravened the disclosure requirements in ss 707 and 727 of the Act, unless relief is given. I am satisfied that the evidence establishes that the lack of disclosure here was by inadvertent error or misunderstanding, to which I am referred above. I am also satisfied that for the purposes of s 1322(6) of the Act, the persons involved acted honestly, and alternatively that it is just as equitable that the relevant order may be made and that no substantial injustice has been or is likely to be caused to any person for the purposes of s 1322(6) of the Act. Indeed, as is often the case in applications of this kind, any injustice would more likely arise, so far as third party shareholders are concerned, if the relief sought was not available.
4. Second, Recce seeks an order relieving any person who made an offer of sale of the shares from any civil liability arising out of any contravention of ss 707 or 727 in respect of the lack of disclosure regarding the shares. An order of that kind was also made in the cases to which I have referred above. It is again appropriate to make such an order, for the same reason that an order of that kind was made in those cases where persons who engaged in sales or offers of the shares would reasonably have done so on the basis that the shares were tradeable without any requirement for disclosure under s 707 of the Act. I am again satisfied, for the purpose of s 1322(6) of the Act, that the persons concerned acted honestly and that no substantial injustice has been or is likely to be caused by any person in the relevant circumstances.
5. Third, Recce seeks an order extending the time in which cleansing notice under s 708A(5) should be given, where that notice was required to be given within five business days after the day on which the relevant securities were issued by it, namely by 9 September 2021. The cleansing notice was not given until 8 October 2021, after the issue of the relevant shares had been identified. Again, an order of this kind has been made in similar circumstances in the cases, including in Re Pilbara Minerals Ltd [2021] WASC 330, to which Mr Sirtes refers. I am satisfied that, for the reasons set out at some length by Mr Sirtes in submissions, that order is also appropriately made in the relevant circumstances.
6. Fourth, Recce seeks an order, which it characterises as consequential on the preceding orders, that the cleansing notice given by it under s 708A of the Act on 8 October 2021 be deemed to take effect from and including 2 September 2021. It is not entirely clear to me that such an order is necessary, where the Court will have extended the time for the giving of the cleansing notice to 8 October 2021, the date on which it was in fact given. However, I recognise that such an order was made, possibly out of an excess of caution, in Re Austpac Resources NL above, and more recently in Re Imdex Ltd [2020] WASC 298 and Re Pilbara Minerals Ltd above. It is also perhaps understandable that Recce should seek to be cautious, where this application is brought for the benefit of shareholders who have traded in the shares in the period. For that reason, although it is not clear to me that such an order is necessary, I will make it on the basis that it is properly ancillary to the orders which have been made under s 1322 of the Act.
7. Fifth, Recce seeks further orders, which are consequential on the orders that I have made, which provide for giving of notice of these orders to ASIC, ASX and persons to whom relevant shares have been issued. Those orders are plainly appropriate, so far as they will give notice of the orders made to the relevant regulators and shareholders whose interest may be affected in circumstances that ASIC and ASX have previously had notice of the application that will be brought. I will, as Recce seeks, also reserve liberty to apply to persons affected by the making of these orders.
8. For these reasons, I make orders in accordance with paragraphs 1-8 of the Originating Process filed by Recce on 11 October 2021. I also make a further order that these orders be entered forthwith.

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