Weinstock v Beck

COLVIN J: 1 Once again, a listed company seeks orders in respect of share trading that has occurred despite the third party offeror failing to comply with the disclosure obligations under Part 6D.2 of the Corporations Act 2001 (Cth). Under the disclosure provisions in Part 6D.2 of the Act, a company may place shares with sophisticated investors (as described in s 708(8)) without disclosure. However, if that occurs and a sophisticated investor to whom the shares are placed subsequently offers those shares for sale within 12 months after their issue, then there is an indirect issue of shares that requires disclosure, unless the further sale itself is exempt from the disclosure provisions: s 707(3). 2 On the other hand, if a company places shares with sophisticated investors and complies with the disclosure requirements, then the shares may be offered for further sale by those investors without any disclosure by them. 3 In a number of cases, the Court has considered instances where a listed company has issued shares intending that the party with whom the shares are placed will be able to trade those shares within the next 12 months without providing disclosure, but through misunderstanding of the provisions, oversight, carelessness or inadvertence, has not complied with the disclosure obligations before placing the shares. As a result, the placement has proceeded and subsequent sales have occurred in breach of the disclosure obligations. 4 Some of the relevant cases were collected by Banks-Smith J in ICandy Interactive Limited, in the matter of ICandy Interactive Limited [2018] FCA 533 at [43]-[44]. 5 In such cases, there has been no contravention by the listed company, but there is a concern for the company because of the prospect that dealings in the company's shares may be invalid. Accordingly, relief is sought effectively in the interests of current holders of shares and in the interests of maintaining the integrity of future dealings in the shares in the company. In those circumstances, it has been found, and I accept in this case, that the company had sufficient standing to seek relief. 6 Relief under s 1322(4) has been granted in a number of such cases. Section 1322(4) is remedial in nature and is, therefore, to be given a generous interpretation: Weinstock v Beck [2013] HCA 14; (2013) 251 CLR 396. Orders can be made with retrospective effect: Re Golden Gate Petroleum Ltd [2010] FCA 40 at [42]. 7 However, care must be taken to confine relief in a manner which is consistent with the justification for the application. Ordinarily, it will not be appropriate for relief to be granted protecting those who have been involved in the breach of the disclosure provisions, unless it is necessary in order to protect the interests of current shareholders who hold shares. An order that any offer for sale or sale of shares is not invalid by reason of the failure to comply is of this character. In making such orders, there must be due regard for the interests of current shareholders who usually are not heard on the application due to the impracticality of giving separate notice to all such parties. 8 As to applications for relief of the kind sought in this case, s 1322 (6) of the Corporations Act provides: 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. 9 The circumstances in which relief is sought in the present case are as follows: (1) EHR Resources Limited was formally known as Cott Oil and Gas Limited. For a period of 154 days up until 4 August 2017 securities in the company were suspended while it changed from an oil and gas company to a mining company. It changed its name, raised capital and re-complied with the Australian Securities Exchange (ASX) Listing Rules. (2) In April 2018, EHR made arrangements for a share placement to sophisticated investors. On 18 April 2018, EHR issued and placed 19,500,000 shares. After convening a shareholders' meeting and obtaining the requisite approval, a further 1,611,111 shares were placed with directors. (3) In dealing with the disclosure requirements in Part 6D.2, the company's secretary, Sarah Smith, proceeded on the basis that a notice under s 708A(5)(e) (cleansing notice) was sufficient to compliance. However, that form of disclosure is only sufficient compliance if trading and securities in EHR have not been suspended for more than five days in the previous 12 months. (4) Considering only the period since its re-compliance from 4 August 2017, EHR met those requirements. Ms Smith mistakenly considered only the position in respect of EHR and failed to have regard to the period when the company has been known as Cott Oil and Gas. (5) Ms Smith became aware of her error when contacted by the ASX. On that same day, steps were taken to address the issue. A voluntary suspension in trading of securities in EHR was requested on 18 June 2018 and a trading halt has been in place since then. (6) There were 55 participants in the placement. Before the trading halt, four had sold their shares and seven had sold some of their shares. Total placed shares traded were 1,352,357 shares. None of the directors had sold their shares. (7) On 20 June 2018, a prospectus was lodged with the Australian Securities Investment Commission (ASIC) and the ASX. Therefore, there can now be trading in the securities in EHR in compliance with the disclosure obligations under Part 6D.2. 10 Having regard to these matters, I am satisfied that Ms Smith, as the relevant guiding mind of EHR as to compliance with the disclosure obligations, acted honestly, and the failure to comply was due to an error on her part, which has been explained. Further, on the evidence before me, breach by the placees was inadvertent, because I infer that they were proceeding on the basis that the cleansing notice was sufficient compliance with the disclosure obligations. An inference of this kind has been drawn in other cases: see, for example, ICandy at [58]. 11 It is just an equitable for orders to be granted to protect the injustice that may be suffered by those placees who have sold their shares and those who have purchased shares from placees because of the uncertainty associated with those dealings if orders are not made. 12 Further, for the following reasons on the material before me, no substantial injustice has been or is likely to have been caused to any person. 13 Jeremy King, a director of EHR deposes that there has been compliance with continuous disclosure obligations and that the prospectus that has now issued was only issued after reviewing the record of disclosure. Further, there has been no reason to make further disclosures since 19 June 2018 when the prospectus was issued. Ms Smith deposes that at the time of the placement of the shares, there was no excluded information (of the kind described in s 708A(7)) which would have required disclosure. In those circumstances, there is no suggestion that a market in securities at the relevant time was not adequately informed. 14 The issue here concerns the different form of disclosure which is available through a current prospectus. Disclosure by prospectus was not provided when it was required to be provided before there could be trading in shares the subject of the placement. Although there has been some trading in the shares the subject of the placement, it has been limited. Steps have now been taken to inform the market as to what has occurred in relation to failure to comply by appropriate notifications to the ASX and to issue the required prospectus. 15 I am informed today from the bar table that there are no matters in relation to the trading of shares since 18 April 2018 of which the company is aware, which would be characterised as unusual. On that basis, I am satisfied that there are no matters associated with the share price which need to be disclosed on the application because they may cause the Court to reach a conclusion that there may be injustice for parties as a consequence of making the orders sought, but have not been disclosed. 16 To the extent that notwithstanding these views any particular person may hold the view that they are affected by these orders, the proposed orders will afford any such person a period of 28 days in which to apply to vary or discharge the orders. The orders will be published on the ASX and notified to all placees. These steps will provide an opportunity for interested persons to raise any concerns. On that basis, I am satisfied that the orders sought should be made. 17 I note that ASIC and the ASX have been given notice of the application. ASIC has notified that it neither supports no opposes the application, and the ASX does not seek to participate or raise any matter. 18 Finally, I will make no order as to costs. I distinguish the present case from a case such as Re Wave Capital Ltd [2003] FCA 969 at [32], where there was a failure to meet a requirement in circumstances where there had been express statement in a prospectus that the requirement would be met. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Colvin.