In the matter of Weebit Nano Limited [2023] NSWSC 43

Affidavit evidence

I will first outline the relevant affidavit evidence, and in doing so will identify the chronology of events. WNL relies, first, on an affidavit dated 27 January 2023 of its solicitor, Mr Morris, which was filed on the commencement of the proceedings. Mr Morris notes, by way of background, that WNL is a developer of semiconductor memory technology, which appears to conduct its business from Israel although it is listed on the Australian Securities Exchange ("ASX"). On 21 December 2022, an executive director of WNL, Dr Nissan-Cohen exercised 80,000 performance rights, which had been granted to him by WNL, and WNL issued 80,000 ordinary fully paid shares in it to him. On 22 December 2022 Dr Nissan-Cohen exercised a further 120,000 options and WNL then issued 120,000 ordinary fully paid shares to him. In each case, a cleansing notice was not given for the reasons I will note below. On 30 December 2022, Dr Nissan-Cohen sold the shares that he had been issued, to a financial intermediary, which subsequently onsold those shares to third parties. In January 2023, WNL recognised that cleansing notices should have been, but were not, issued, and WNL then requested a trading halt in respect of its shares. On 27 January 2023, WNL released an announcement to ASX disclosing these matters and also issued a cleansing notice of the kind that ought to have been issued in respect of the share issues on 21 and 22 December 2022, which had effect both at the date of issue of the shares and as at 27 January 2023.
WNL also reads the affidavit of its chief executive officer, Mr Jacob Hanoch, which refers to the company's history and to the matters which have given rise to this application, although Mr Hanoch was not personally involved in the administrative steps relating to the issue of the shares. Mr Hanoch addresses the exercise of Dr Nissan-Cohen's performance rights and options and the issue of those shares, consistent with the outline of those events in Mr Morris's affidavit. His evidence is that on 16 January 2023, Ms Felder, who is WNL's chief financial officer, advised him of her belief that WNL had not issued a cleansing notice under s 708A(5) of the Act in relation to the share issues, and he sets out the steps that were subsequently taken by WNL to address that issue, including WNL's taking legal advice from its Australian legal advisors and making the announcements to ASX and issuing the cleansing notice to which I referred above. Mr Hanoch also made inquiries as to how the issue had arisen, including seeking an explanation from Acclime Australia ("Acclime"), which provides company secretarial services to WNL in Australia and undertook the administrative steps involved in the issue of the shares, and inadvertently failed to cause the relevant cleansing notices to be given. I will address the evidence led by Acclime's representatives in this application below.
Mr Hanoch also indicates that, appropriately, Dr Nissan-Cohen was advised of this issue and of WNL's intention to make this application. He also refers to correspondence with ASX and with the Australian Securities Investments Commission ("ASIC") which indicated WNL's intention to bring the application. I will refer to ASIC's position in relation to the application below. Mr Hanoch also outlines the steps taken by WNL to satisfy itself, at the time of the issue of that notice on 27 January 2023, that that notice could properly be issued as at 21 and 22 December 2022 and on 27 January 2023, on the basis that WNL had not withheld any material information from disclosure on the basis of an exception to the continuous disclosure regime.
Mr Hanoch also refers to (and Mr Williams, with whom Mr Atkin appears for WNL, draws attention to) two previous occasions on which WNL had made errors of a broadly similar kind. The first related to directors' participation in a placement, in 2017, nearly four years ago, where shareholder approval had not been sought. That error was addressed at the time by disposal of the shares and the directors donating the net proceeds to charity. The second concerned an inadvertent disclosure of an incomplete negotiation on 1 September 2021. I note these matters, which are properly drawn to the Court's attention, but they do not prevent the making of an order under s 1322 of the Act in WNL's favour in a proper case.
WNL also relies on the affidavit dated 30 January 2023 of Mr Michael Sapountzis, who is a corporate governance manager at Acclime, which provides corporate services to WNL and other companies in the Asia Pacific region. Mr Sapountzis notes that he assists Mr Licciardo, who is also associated with Acclime and is WNL's company secretary, in the provision of company secretarial services. Mr Licciardo was on leave at the time the relevant events occurred. Mr Sapountzis outlines the circumstance of the issue of shares to Dr Nissan-Cohen, which I have addressed above, and explains the failure to issue the cleansing notices, which occurred because Mr Sapountzis was under the erroneous impression that a cleansing notice was not required by reason of ASIC Class Order 14/1000, in its application to the issue of shares under WNL's employee share plan. It appears that class order did not apply to an issue of shares to WNL's directors under the employee share plan, because WNL had made an earlier election not to rely on the class order in that respect. Mr Sapountzis fairly recognises that the information which was available to him would have disclosed the fact of that earlier election, and in particular, he had access to earlier legal advice which had been obtained by WNL which indicated that a cleansing notice would be required, rather than WNL relying on the class order, when directors were exercising options. Mr Sapountzis' evidence is that he had not recognised that matter at the time the cleansing notices were not issued in relation to the share issues on 21 and 22 December 2022.
Mr Sapountzis notes that, had he realised on 21 December 2022 or 22 December 2022 that WNL could not rely on the class order in relation to the shares it issued to directors under the employee share plan, because it had previously elected not to do so, he would have prepared a draft cleansing notice in relation to the shares and provided it to WNL's directors for review and for lodgement with ASX. I accept that evidence, which is consistent with the probabilities, where WNL was readily able to issue a cleansing notice, albeit late, when the need to issue that notice was recognised.
WNL also relies on the affidavit dated 30 January 2023 of Mr Licciardo who is, as I noted above, its company secretary and is the managing director of Acclime's listed services division. He also addresses the relevant circumstance, although he was on leave when the error occurred, and addresses the steps which were taken, when the error was recognised, to address it. An affidavit dated 31 January 2023 of Mr Schroder, also a solicitor acting for WNL, refers to correspondence with ASIC and ASX in respect of these matters. By letter dated 1 February 2023, ASIC notes that it has been provided with the Originating Process by which relief is sought by WNL, the affidavits relied on by WNL and its submission in respect of the application, and that it does not seek to appear at the hearing and does not support or oppose the application. In effect, ASIC's position is that it is a matter for the Court whether relief should be granted in the relevant circumstances.

[4]

Applicable legal principles

I turn now to the applicable legal principles, which are well established, where many applications of this kind have been considered in this Court and other Australian Courts.
First, I should note that ASIC Class Order 14/1000, to which I referred in dealing with the evidence above, deals with the position in respect of employee share plans. The Corporations Act was amended, from 1 October 2022, to introduce Pt 7.12 Div 1A, dealing with employee share plans, by the Treasury Laws Amendment (Cost of Living Support and Other Measures) Act 2022 (Cth), and ASIC CO 14/1000 has also been amended in consequence. Mr Williams rightly points out that the amended class order provides that a listed body which makes an offer under an employee incentive scheme covered by the instrument does not have to comply with specified parts of the Act, provided that the offer is made before 1 March 2023. I need not address that matter further, because (as I noted above) WNL had elected not to rely on that class order in respect of share issues to its directors, and therefore needed to issue a cleansing notice (as noted below) in respect of the share issues that are in issue here.
The statutory provisions dealing with disclosure in share issues under Pt 6D.2 of the Act, are relatively complex and have been summarised, inter alia, in Re Kollakorn Corporation Limited [2020] NSWSC 1549, Re Airtasker Ltd [2021] NSWSC 629 and Re Recce Pharmaceuticals Ltd [2021] NSWSC 1316 ("Recce Pharmaceuticals"). 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, a process by which a company may give a cleansing notice under s 708A of the Act to ASX before an offer is made. That is the process which, on the evidence, WNL would have invoked at the time the shares were issued on 21 and 22 December 2022, but for the inadvertent failure to recognise the need to do so. 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. The purpose of these provisions has been recognised in the case law as to ensure that investors are provided with all the information that they and their professional advisors would reasonably require to make an informed assessment in connection with securities offered or issued for sale; and to prevent that underlying policy being circumvented by the issue of securities to a person to whom disclosure is not required under s 708 or 708AA of the Act, with that party then offering those securities for sale to investors without disclosure: Re Golden Gate Petroleum Ltd [2010] FCA 40; Recce Pharmaceuticals at [24].
Where the disclosure requirements of Ch 6D of the Act have not been complied with, the Court has power to grant relief under s 1322(4) of the Act, if the non-compliance results from an honest error and there is no prejudice to third parties or the public interest in compliance with the Act: Re Golden Gate Petroleum Ltd [2010] FCA 40; Re iCandy Interactive Limited [2018] FCA 533; Kollakorn; Recce Pharmaceuticals.

[5]

WNL's submissions and determination

I have pointed above to the circumstance in which the relevant error occurred, and I am satisfied, having regard to the evidence, that that resulted from inadvertence and, in particular, from Mr Sapountzis' failure to recognise, or recall, that WNL did not rely on CO 14/1000 in respect of the issue of securities to directors, as distinct from employees, where Mr Licciardo was then on leave. I also recognise (as earlier cases have also recognised) that WNL's failure to give a cleansing notice, unless remedied by the kind of relief that is now sought, would have adverse consequence for persons dealing with the shares that were issued to Dr Nissan-Cohen, and have subsequently been sold to third parties, who would potentially be subject to disclosure obligations under s 707(3) of the Act, which they would ordinarily not expect to have in dealing in shares in a listed company.
I am satisfied that WNL is an interested person for the purpose of s 1322 of the Act, so far as a listed company plainly has an interest in its shareholders' ability to trade its shares, freely and without compliance with disclosure requirements which would not have applied had it issued a cleansing notice at the time those shares were issued; Recce Pharmaceuticals at [11].
I noted above that, first, WNL seeks an order extending the time in which a cleansing notice under s 708A(5) of the Act 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, on 21 and 22 December 2022, but was not in fact given until 27 January 2023, after the error in respect of the failure to issue the cleansing notice had been identified. Orders of that kind have been made in similar circumstance in the case law, including in Re Pilbara Minerals Ltd [2021] WASC 330 and in Recce Pharmaceuticals. I am satisfied that such relief should be granted, having regard to the evidence to which I have referred above and the matters addressed by Mr Williams and Mr Atkin in submissions, particularly the fact that WNL's error (through Acclime) was an honest error, and that the extension of the time sought will bring about no prejudice to third parties\
Second, WNL seeks a declaration that the cleansing notice given to ASX in respect to the shares, on 27 January 2023, is deemed to take effect as if it had been given to the ASX on the date of the issue of the shares by WNL. I noted, in Recce Pharmaceuticals at [14], that it was not entirely clear to me why such an order is necessary, once a Court has extended the time for the issue of a cleansing notice under s 1322(4) of the Act. However, I also recognise, as I did in Recce Pharmaceuticals, that such an order had been made, possibly out of an excess of caution, in previous cases, including Re Austpac Resources NL [2010] NSWSC 1448, Re Andex Ltd [2020] WASC 298 and Re Pilbara Minerals Ltd above. Where the application brought by WNL will benefit shareholders who have traded the shares in the relevant period, including Dr Nissan-Cohen, the financial intermediary which purchased shares from him and the third parties to whom those shares were sold and who may have later dealt with those shares, I will make that order on the basis that that order is properly ancillary to the orders which have been made under s 1322 of the Act, notwithstanding that it is not clear to me that that order is necessary,
Third, WNL seeks a declaration that any offer for sale or sale of the relevant shares, from the date of their issue to the date of these orders, is not invalid by reason of non-compliance with the relevant provisions. Such an order has again been made in previous cases, including Golden Gate Petroleum, Kollakorn Corporation, Airtasker, and Recce Pharmaceuticals. I am satisfied that 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 have noted above that I am satisfied that the lack of the cleansing notice here resulted from inadvertent error or misunderstanding, and I am satisfied that the persons involved acted honestly. It seems to be plain that it is just and equitable that the relevant order be made and that no substantial injustice will be caused to any person for the purposes of s 1322(6) of the Act by making that order. As has been noted in earlier case law, it is more likely that injustice would arise, not from the making of the order, but from declining that relief, so far as third party shareholders might then be exposed to disclosure obligations which would not apply to them if a cleansing notice had been given. For those reasons, I will also make that order.
Fourth, an order is sought that any sellers of the shares be relieved from any civil liability arising under these provisions, in respect of a lack of disclosure regarding the shares. Again, such an order is commonly made in cases of this kind. It is appropriate to make that order, where persons who have sold the relevant 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 purposes 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 to any person by granting the relief, and indeed any injustice would likely arise from withholding it in these circumstances.
WNL also seeks an order for service of the orders on ASIC and for the steps which are to be taken in respect of giving notice of them to affected parties, and also seeks an order which protects the interest of third parties, reserving liberty to apply to any third person who claims to have suffered substantial injustice or is likely to suffer substantial injustice by the making of the order. I will make that order, although, for the reasons I have noted above, it is difficult or impossible to see that any such person would suffer injustice by the making of the orders as distinct from their being withheld in the relevant circumstances.
For these reasons I make orders in accordance with the short minutes of order initialled by me and placed in the file.

In the matter of Weebit Nano Limited [2023] NSWSC 43 - NSWSC 2023 case summary — Zoe

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