Weinstock v Beck

SIOPIS J: 1 The plaintiff, TV2U International Limited, is a company whose shares are listed on the Australian Securities Exchange (the ASX). 2 On 14 December 2016, I made orders under s 1322(4) of the Corporations Act 2001 (Cth) validating trading in shares issued by the plaintiff on 28 June 2016 and 26 October 2016 respectively, and relieving the sellers of those shares from civil liability. These are my reasons for making those orders. 3 The plaintiff's shares were first listed on the ASX on 7 June 2007. The plaintiff previously carried on business in the oil and gas industry. However, in July 2015, the plaintiff acquired the issued capital in a company in the information technology business, TV2U Worldwide Pty Ltd, and now operated in that industry. 4 On 28 June 2016, the plaintiff issued about 3 million shares to holders of convertible notes. On 26 October 2016, the plaintiff issued 43 million shares to a number of brokers in consideration of the services provided. The plaintiff did not issue a prospectus in relation to the issue of these two share issues. 5 Instead, the plaintiff purported to issue notices, called "cleaning notices" under s 708A(5) of the Corporations Act, which would allow the persons to whom the shares had been issued to sell their shares, without first issuing a prospectus. However, the plaintiff was not qualified to issue the cleansing notices. 6 A number of persons to whom the shares had been issued under each of the June 2016 and October 2016 issues, sold those shares, without having issued a prospectus, and the purchasers of those shares may have on-sold those shares to other persons, without issuing a prospectus. In so doing, the sellers and on-sellers of the shares failed to comply with s 707(3) and s 727(1) of the Corporations Act. 7 The plaintiff, as an interested party, has brought this application to validate the trades in the affected shares, and relieve the sellers and on-sellers of civil liability arising from the contraventions of s 707(3) and s 727(1). 8 It is necessary to set out the statutory context in which the application in this Court was made by the plaintiff.

statutory background 9 Section 707(3) of the Corporations Act provides that an offer for sale of shares in a company, within 12 months after they have been issued, needs disclosure to investors if the company itself issued the shares without disclosure to the investors, and the persons to whom the shares were issued, acquired them for the purpose of selling or transferring the shares; and s 708 or s 708A of the Corporations Act "does not say otherwise". 10 Section 708A(5), relevantly, provides that the offer for sale of the shares referred to in s 707(3) does not need disclosure to investors, provided that the prescribed conditions applied and the company gave the ASX a notice which complies with s 708A(6) before the offer for sale was made. As mentioned, this notice is referred to as a "cleansing notice". 11 Relevantly, among the prescribed conditions in s 708A(5) for a company to qualify to give a cleansing notice to the ASX, were the conditions set out at s 708A(5)(a) and (b), namely: (a) the shares are in a class of securities that were quoted securities at all times in the 3 months before the date on which the relevant securities were issued; and (b) trading in that class of securities had not been suspended…for more than a total of 5 days during the shorter of the period during which the class of securities were quoted, and the period of 12 months before the day on which the relevant securities were issued. 12 Thus, in essence, if a company, qualified under s 708A(5), makes a share issue without having issued a prospectus, and that company gives a valid cleansing notice, the persons to whom the shares have been issued may then offer to sell the shares without themselves issuing a prospectus. 13 Section 708A(6) sets out the requirements for a valid cleansing notice. That section states that the cleansing notice must be given within five business days after the day on which the relevant securities were issued by the company, and, also, relevantly, for this case, that the notice must set out "any information that is excluded information as at the date of the notice". 14 Section 708A(7) of the Corporations Act defines "excluded information" as follows: For the purposes of subsection (6), excluded information is information: (a) that has been excluded from a continuous disclosure notice in accordance with the listing rules of the relevant market operator to whom that notice is required to be given; and (b) that investors and their professional advisers would reasonably require for the purpose of making an informed assessment of: (i) the assets and liabilities, financial position and performance, profits and losses and prospects of the body; or (ii) the rights and liabilities attaching to the relevant securities. 15 Section 708A(11) of the Corporations Act is also relevant. That section provides, relevantly, that a sale offer does not need disclosure to investors if the shares issued are in a class of shares that are the quoted shares of the company, and a prospectus is lodged with the Australian Securities and Investments Commission (ASIC) on or after the day on which the relevant shares were issued, but before the day on which the sale offer was made, and the prospectus is for an offer of shares issued by the company that are in the same class of shares as the shares that were issued. The prospectus referred to in s 708A(11) is widely referred to as a cleansing prospectus. 16 It is also necessary to mention s 727(1) of the Corporations Act. That section states: A person must not make an offer of securities, or distribute an application form for an offer of securities, that needs disclosure to investors under Part 6D.2 unless a disclosure document for the offer has been lodged with ASIC.

the relevant facts The June 2016 issue 17 On 28 June 2016, the plaintiff issued a total of 3,035,714 shares to holders of convertible notes. 18 Also, on 28 June 2016, Ms Sarah Jane Smith, who is the company secretary of the plaintiff, caused to be loaded on to the announcement platform of the ASX (the ASX platform) a cleansing notice purportedly issued under s 708A(5) of the Corporations Act, and another document, headed, Appendix 3B, and immediately, thereafter, a document headed, Appendix 3Y, which reported that Mr Tony Chong, a director of the plaintiff, had on that day, acquired 737,500 options for a total value of $737.50. 19 The ASX platform records the purported cleansing notice to have been released at 18:41 (AEST) and the Appendix 3Y document to have been released at 18:47 (AEST). In her affidavit, Ms Smith said she could only assume that the six minute time difference between the release of the June cleansing notice on the ASX platform and the release of Appendix 3Y, was due to the time that it took the platform to upload that document. 20 There was evidence that during the period 28 June 2016, until the plaintiff's shares went into a trading halt on 31 October 2016, six of the persons who had been issued shares under the June issue had traded those shares on the market. The evidence showed that during that period, more than 2.5 million of the shares issued under the June issue had been traded on the market.

The October 2016 issue 21 On 26 October 2016, the plaintiff issued a total of 43 million shares to 10 entities. The issue of the shares was said to be in consideration for broking services provided to the plaintiff. 22 On 26 October 2016, just prior to 17:51 (AEST), Ms Smith caused to be released to the ASX platform, a notice which purported to be a cleansing notice under s 708A(5) in respect of the issue of the 43 million shares earlier that day. 23 On 27 October 2016, the day after the issue of the shares, the plaintiff through Ms Smith, released an announcement to the ASX entitled: "Heads of agreement with Bodyworks International". This announcement (the Bodyworks announcement) stated that the plaintiff had concluded a heads of agreement with a company, Bodyworks International Ltd. This announcement was released on to the ASX platform at 08:26 (AEST) on 27 October 2016. 24 From 27 October 2016 to the trading halt on 31 October 2016, four beneficiaries of the October share issue, sold the shares on-market. The total number of affected shares that they sold was 13.4 million. 25 The plaintiff caused inquiries to be made by the company that provides it with share registry services, as to whether there had been any off-market transactions in respect of the June share issue, on 28 June 2016; and, in respect of the October share issue, before the Bodyworks announcement was made on the morning of 27 October 2016. These inquiries did not reveal that there were any June or October issue shares sold off-market during the relevant periods. 26 On 31 October 2016, the plaintiff's shares went into a trading halt. On that same day, the plaintiff received a letter from the ASX. In that letter, the ASX referred to the fact that the company had purportedly issued a cleaning notice in respect of the share issue on 26 October 2016, and then had issued the Bodyworks announcement on the following morning. The ASX letter went on to refer to s 708A(6) and to the definition of "excluded information" in s 708A(7), and sought an explanation from the company as to whether there had, in those circumstances, been compliance with the requirement that the notice set out any "excluded information". 27 On the receipt of the ASX letter, the plaintiff sought legal advice from its solicitors. 28 The plaintiff then responded to the ASX to the effect that it had been advised that it had not been entitled to issue cleansing notices in respect of either the June 2016 or the October 2016 share issues because it had not satisfied the condition stipulated in s 708A(5)(b). This is because the plaintiff's shares had been suspended from trading for more than a total of five days during the preceding 12 months in respect of both share issues. The ASX was informed that the plaintiff did not, therefore, rely upon the cleansing notices as valid cleansing notices. 29 On 1 November 2016, the ASX advised the plaintiff that its shares would be suspended from trading pending the plaintiff's lodging of a cleansing prospectus under s 708A(11) and the obtaining of Court orders validating the on-sale of all securities issued under the notices purporting to be cleansing notices in June 2016 and October 2016. 30 On 4 November 2016, the plaintiff issued a cleansing prospectus under s 708A(11) of the Corporations Act. 31 On 14 November 2016, the plaintiff commenced this application in this Court.

application for relief under s 1322(4) OF THE CORPORATIONS ACT 32 The plaintiff applies, as an interested person, under s 1322(4) of the Corporations Act for orders that: (a) any offer for sale, or sale, of the shares issued pursuant to the June 2016 and October 2016 share issues were not invalid by reason of the failure by the persons who have sold the shares to comply with s 707(3) and s 727(1) of the Corporations Act; and (b) that each of the sellers of those shares be relieved from any civil liability in respect of a contravention of those provisions. 33 Section 1322(6) of the Corporations Act provides as follows: 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. 34 The fact that, in selling their shares the subject of the June and October share issues, the sellers, as well as any on-sellers of those shares, have failed to comply with s 707(3) and 727(1), has arisen from the fact that the plaintiff, although purporting to issue a cleansing notice under s 708A(5) of the Corporations Act in respect of each share issue, subsequently discovered that it was not qualified to do so. 35 The relief sought validating the share sales, relates to the offers for sale, or the sale, of any of the impugned shares before the cleansing prospectus was issued on 4 November 2016. 36 The plaintiff contends that it was through no fault of the sellers (and the on-sellers) of the issued shares, that they failed to comply with the Corporations Act. The plaintiff goes on to say that, in those circumstances, orders should be made under s 1322(6)(a) validating the offers for sale, and sale, of the shares which occurred in contravention of the Corporations Act, and, under s 1322(6)(c), relieving the sellers of civil liability in respect of their failure to comply with s 707(3) and s 727(1).

relief under s 1322(4)(a) 37 The plaintiff contends that the conditions referred to in ss 1322(6)(a)(i), (ii) and (iii) are to be read disjunctively; and that relief is available by reference to s 1322(6)(a)(iii) because it is just and equitable that the orders be made; and that no substantial injustice has been, or is likely to be, caused to any person. 38 In my view, the orders should be made for the following reasons. 39 First, the approach adopted towards making orders sought under s 1322(4) is that the section is remedial in nature and is to be given a generous interpretation (Weinstock v Beck (2013) 251 CLR 396). 40 Secondly, it is the sellers of the shares that were issued in June and October (and the sellers who on sold those shares) who have unwittingly contravened s 707(3) and s 727(1) by offering for sale, or by selling, the shares in question. It is reasonable to expect, and I am satisfied, that none of those sellers would have been aware that the plaintiff was not qualified to issue a cleansing notice, and that, in the circumstances, it was necessary to issue a prospectus before offering to sell, or selling, the issued shares. 41 Thirdly, one of the reasons why the plaintiff was not qualified to issue a cleansing notice was that there was "excluded information" at the time of the announcement of the cleansing notice in respect of both the June and October share issues. 42 In June 2016, the excluded information was the fact that Mr Tony Chong, a director of the plaintiff, had recently acquired options in the plaintiff. In October 2016, the excluded information was the fact that the plaintiff had entered into the Bodyworks heads of agreement. 43 However, in respect of each occasion, the excluded information was released to the market before any on-market trading in respect of the issued shares occurred. Thus, in relation to the June share issue, the excluded information was released on the ASX platform, when the market was closed for trading, six minutes after the notice purporting to be the cleansing notice was released on the ASX platform. 44 In relation to the October share issue, the Bodyworks announcement was released to the ASX platform the next morning at 08:26 on 27 October, 14 hours or so after the release to the ASX platform of the purported cleansing notice. As mentioned, the plaintiff caused inquiries to be made as to whether there were any off-market transactions in respect of any of the shares which were part of the tranche of the June or October share issues; and the evidence of the share registry officer, who made the inquiries, was that he was unable to find any evidence of any such off-market transactions. 45 Accordingly, on the evidence, there were no share transactions which were affected by the fact that the two items of information had not been released prior to the issue of the cleansing notice. 46 In my view, it is just and equitable, for the reasons given above, that validating orders be made. 47 Further, in my view, on the evidence before me, it is apparent that no substantial injustice has been caused, or is likely to be caused, to any person by reason of the contraventions in question in this case. But, in any event, provision has been made by order 7 for any person who claims to have suffered, or is likely to suffer, substantial injustice, to apply within 28 days, from the date of reinstatement by the ASX of the class of securities "TV2U" and the publication of the orders on the ASX website, for those orders to be discharged.

relief under s 1322(4)(c) 48 The plaintiff also seeks relief under s 1322(4)(c) of the Corporations Act that each of the sellers of the shares comprising the June share issue and the October share issue be relieved of civil liability in respect of the contraventions of s 707(3) and s 727(1) of the Corporations Act. 49 It is necessary for the Court to be satisfied before making an order under s 1322(4)(c) that the persons subject to the civil liability acted honestly. For the reasons which I have given at [40] above, I am satisfied that this condition has been fulfilled. 50 The Court must also be satisfied that no substantial injustice has been caused, or is likely to be caused, to any person by reason of the contraventions by the sellers of the shares. For the reasons given above, I am also satisfied in this respect as well; and, further, as mentioned, it will be open to any person who claims to have suffered, or likely to suffer, substantial injustice by the orders, to apply within the abovementioned 28 day period to discharge the orders. 51 Accordingly, I will make the orders sought by the plaintiff relieving the sellers of civil liability in respect of the contraventions of s 707(3) and s 727(1) of the Corporations Act. 52 Finally, I observe that, I ordered that ASIC and ASX appear by counsel at the hearing. At the hearing, neither counsel for each of these parties opposed the making of the orders sought by the plaintiff. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.