Key Points:

ASIC presumably hopes that one clear message from this case is that being offshore doesn't give you practical immunity from the Corporations Act.

There are worse things than divestment.

Divestment is a traditional remedy for non-disclosure of shareholdings in listed companies: ASIC sells the offending shares on-market and remits the proceeds to their former owner.

In a novel development, the Federal Court has ordered that, rather than selling the shares, the appropriate remedy was their cancellation.

Background

Craigside Company Limited (incorporated in the British Virgin Islands and operating from

Hong Kong) had held more than 5% of Northwest for almost ten years. Its substantial holder notices stated that it was the legal and beneficial owner of the shares.

In 2011, ASIC served a beneficial ownership tracing notice on Craigside. This was apparently related to the Project Wickenby task force investigation into participation in arrangements of an international character which potentially breach laws relating to financial markets and corporations, amongst other things.

In response to the notice, Craigside said that it was only a nominee. It provided the names of two individuals who, it said, had relevant interests in the shares or who had given voting directions in relation to them.

ASIC sent beneficial interest tracing notices to those two individuals. They responded that they did not have a relevant interest in the shares and did not know who did.

ASIC then went to the Federal Court to obtain remedies under the Corporations Act. The Act allows the Court to make remedial orders where, in response to a beneficial tracing notice, a person states that they do not know who has a relevant interest in shares.

Deterioration

It appears that ASIC originally considered asking the Federal Court to order divestment of Craigside's holding in Northwest (which was now 7%). However, by September 2013, Northwest's financial position had started to deteriorate. It announced that it needed capital to pursue a major project, but that it would have problems raising that capital in the current market. As a result, it would have to re-evaluate its approach to the project. Subsequently, its share price declined from 4.1 cents to 1.5 cents.

The effect of divestment and a forced sale of 7% of its share capital in these circumstances was obvious: finding buyers at a reasonable price on market could be a lengthy process. This would adversely impact on any attempts by Northwest to raise new equity capital.

Accordingly, ASIC and Northwest agreed to ask the Court to order the cancellation – rather than divestment – of the shares registered in Craigside's name.

The order

The Court considered all of these factors.

It also took into account the other side of the coin – that a selective cancellation of 7% would boost the percentage holdings of Northwest's remaining shareholders. It thought that this raised two considerations:

  • would it be inappropriate to benefit Northwest's other shareholders in this way? The Court thought that, "in all the circumstances", the answer was No.
  • would cancellation of Craigside's 7% push any other shareholder over the 20% takeover threshold? The evidence indicated that that would not happen.

Accordingly, it ordered Northwest to cancel Craigside's shareholding.

Comment

Tracing beneficial ownership through foreign shareholders has always been problematic. ASIC is presumably hoping that one clear message from this case is that being offshore doesn't give you practical immunity from the Corporations Act.

At the same time, it has to be admitted that cancellation is an unusual outcome. Nevertheless, apart from the Project Wickenby aspects, the facts regarding Northwest are not that unusual in the current economic environment. It will be interesting to see if other companies or shareholders are emboldened to seek similar remedies in respect of beneficial ownership tracing notices issued by the company or (in the case of shareholders) by ASIC at the request of shareholders.