Companies preparing for an initial public offering (IPO) that have directors who do not understand English or are not familiar with the Australian regulatory requirements for a prospectus should take note of the Court's findings in ASIC v Sino Australia Oil and Gas Limited (in liq)1 (Sino case).
The message from the Sino case is clear:
- drafts of the prospectus and other important documents (including due diligence materials such as due diligence questionnaires and reports) should be translated for any non-English speaking directors as part of the prospectus preparation process; and
- all directors, overseas-based or otherwise, need to inform themselves of the prospectus disclosure requirements and be actively engaged in the process.
Directors of a company that issues a prospectus for an IPO are liable for any misleading or deceptive statements in the prospectus.2 Directors can be relieved of statutory liability if they can prove that they placed reasonable reliance on information given to them by another person (other than their employee or agent).3
Although directors may rely on others to provide advice and guidance in the prospectus preparation process, they are expected to participate in and be actively engaged in the process.4 In addition, directors have duties to act with due care and diligence.5
In August this year, the Federal Court declared that the former Chairman of Sino Australia Oil and Gas Limited (Sino), Mr Shao, contravened his director’s duty of care and diligence in connection with (amongst other things) an IPO prospectus and supplementary prospectuses (together, referred to as the Prospectus) issued by Sino.
In 2013, Sino raised $12.8 million under its Prospectus and was listed on the Australian Securities Exchange in December 2013. The Court found that the Prospectus contained a number of statements that were misleading or deceptive and therefore in breach of the Corporations Act, including statements about the patents its subsidiary claimed to have held and the questionable existence of a number of service contracts identified as material contracts in the Prospectus.
Mr Shao admitted that he did not understand English and did not obtain a full Chinese translation of the Prospectus before signing it or authorising its release. The Court found that the failure by Mr Shao to ensure that he could understand, even in the most basic sense, the content of the documents he was signing was a breach of his director’s duties. The Court said that as a director, Mr Shao was required to inform himself fully and comprehensively about the content of the Prospectus to ensure that the information contained in it was accurate.
It was also alleged that Mr Shao did not have any, or sufficient, knowledge of the prospectus disclosure requirements of the Corporations Act. In his defence, Mr Shao claimed he received and relied on the advice given to him by the two Australian directors of Sino and professional advisers. Mr Shao said:
I was completely dependent to the two Australian directors and I depended on their profession to manage this and I don’t really know the Australian policies about disclosure and I was totally dependent on the two directors. If our company didn’t do a perfect job please understand I was not a master of the Australian legal system, the language or the culture…
The Court found that the fact that Mr Shao was not an English speaker or writer and did not understand Australian legal requirements did not mean that he could just leave it all to others and did not excuse him from performing his own duties with reasonable care and diligence. By failing to inform himself of the disclosure requirements, Mr Shao breached his director’s duty of care and diligence.