The decision of the High Court of Australia in Director of Public Prosecutions (Cth) v JM handed down on 27 June 2013 contains important observations on the ambit of the market manipulation provisions. The decision will need to be taken into account in relation to future IPO market stabilisation arrangements.
The High Court decision
The High Court allowed an appeal by the DPP regarding answers given by the Court of Appeal of the Supreme Court of Victoria to questions of law that arose before JM's trial on charges of market manipulation and conspiracy to commit market manipulation in breach of section 1041A of the Corporations Act.
Section 1041A provides as follows:
1041A Market manipulation
A person must not take part in, or carry out (whether directly or indirectly and whether in this jurisdiction or elsewhere):
- a transaction that has or is likely to have; or
- 2 or more transactions that have or are likely to have;
the effect of:
- creating an artificial price for trading in financial products on a financial market operated in this jurisdiction; or
- maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products on a financial market operated in this jurisdiction."
The High Court expressed a broad view of the ambit of section 1041A that can be shortly summarised as follows:
- The references in s 1041A to a transaction which has, or is likely to have, the effect of creating an "artificial price", or maintaining the price at a level which is "artificial", include a transaction where the on-market buyer or seller of listed shares undertook it for the sole or dominant purpose of setting or maintaining the price at a particular level.
- Such a transaction can be characterised as at least likely to have the effect of creating or maintaining an artificial price for trading in the shares. It is not necessary to demonstrate, whether by some counterfactual analysis or otherwise, that such a transaction did create or maintain an artificial price.
- It is also not necessary to proffer some additional proof that the such a transaction went on to affect the behaviour of genuine buyers and sellers in the market in order to demonstrate that the transaction had, or was likely to have, the effect of creating or maintaining an artificial price.
- Proof of a sole or dominant purpose of setting or maintaining a price is not a separate element of this offence, but merely one way of demonstrating that a transaction was at least likely to have the effect of setting or maintaining an artificial price.
The High Court rejected the much narrower view of the majority in the Victorian Court of Appeal that, having regard to the legislative history of market manipulation prohibitions in Australia, section 1041A should be construed as directed to market manipulation by conduct of the type typified by American jurisprudential concepts of cornering and squeezing. The High Court also adopted a broader view of the prohibition than that adopted by the minority judgement in the Victorian Court of Appeal, and arguably than in earlier cases applying the prohibition.
Application to market stabilisation activities
Market stabilisation activities in connection with an IPO are invariably conducted with the benefit of a statement of no-action from ASIC given on stated conditions, because of the risk they might be regarded as involving market manipulation within division 2 of Part 7.10 of the Corporations Act. However, there have always been reasonable arguments that IPO market stabilisation, if undertaken in compliance with the ASIC conditions and conditions in the trading approval from ASX, are not in fact manipulative within the relevant provisions.
The case that market stabilisation is not market manipulation is most difficult in relation to section 1041A, and has become weaker following the High Court decision. On the one hand, market stabilisation activities properly conducted can be said to serve a purpose of rebalancing supply and demand for the entity’s securities following the creation of a free float of securities after the offer and allocation imperfections arising from the bookbuild process. However, based on the High Court’s decision, stabilisation trades would in part or whole be contrary to section 1041A if it could be shown they were undertaken for the sole or dominant purpose of setting or maintaining the price of the securities at a particular level.
This is obviously unhelpful in terms of the arguments used to support the legality of IPO market stabilisation, but perhaps part of the reasoning in the High Court judgement provides a window for continuing to defend that legality. The High Court did in several places quote with approval from the judgement of Mason J (with whose reasons in this respect the other judges agreed) in the 1981 decision of the High Court in North v Marra Developments Ltd. That earlier decision concerned section 70 of the Securities Industry Act 1970 (N.S.W.), which was a predecessor to section 1041B of the Corporations Act (the origins of section 1041A can be traced back to section 130 of the Futures Industry Act (1986)(Cth)). The High Court in the present case explained its view summarised in paragraph (3) above as follows:
‘Further, if a transaction is made for the sole or dominant purpose of setting or maintaining a price for listed shares, it is not necessary to proffer some additional proof that the impugned transactions "went on to affect the behaviour of genuine buyers and sellers in the market" in order to demonstrate that the transactions had, or were likely to have, the effect of creating or maintaining an artificial price. On-market transactions on the ASX (like the impugned transactions in this case) are made openly. Participants in the market can be (and are) informed of the transactions which occur. Participants in the market are entitled to assume that the transactions which are made are made between genuine buyers and sellers and are not made for the purpose of setting or maintaining a particular price. Hence, as Mason J explained in North v Marra, "in the absence of revelation of their true character [as transactions to set or maintain a particular price] they are seen as transactions reflecting genuine supply and demand and having as such an impact on the market". They have, or at least are likely to have, the effect of setting or maintaining an artificial price for the shares in question.’
It is possible to argue that where there is ‘revelation of the true character’ of stabilisation trades through the transparency requirements imposed by the ASIC and ASX in connection with IPO market stabilisation (essentially pre-disclosure of the proposed arrangements, ‘flagging’ of stabilisation trades, and daily disclosure of the levels of stabilisation trading), market participants are no longer entitled to assume stabilisation transactions reflect genuine supply and demand, and the prosecution would need to also prove the transactions ‘went on to affect the behaviour of genuine buyers and sellers’. In other words, the transparency of the stabilisation activity breaks the inference of an artificial price effect or likely effect.
However, the judgement will, if anything, mean it is even more important to get ASIC no action relief in connection with IPO market stabilisation in the future, and in providing that relief when it is next sought ASIC will no doubt need to consider the arguments briefly canvassed above.