There have been a number of recent cases which have illustrated the readiness of the Federal Court to protect the interests of the shareholders as well as the integrity of the market in situations where shares have been issued and on-sold with defective disclosure.
In Re Wangle Technologies Ltd and Re Poseidon Nickel Ltd, each of the companies issued shares without correct disclosure under the Corporations Act 2001 (Cth) (Act) either:
- without a cleansing notice or cleansing prospectus; or
- with a cleansing notice in circumstances where a cleansing notice was not permitted (eg, where th relevant shares had been suspended from trading for more than 5 days in previous 12 months).
Colvin J (who heard both cases) emphasised that in cases like these, the Court’s key concerns are:
- the protection of the interests of the current holders of shares, and those who participated innocently; and
- maintaining the integrity of the market.
In both cases, Colvin J granted orders under section 1322(4) of the Act validating the subsequent sale of those shares within 12 months of their issue in breach of the on-sale restrictions in the Act, and protecting those shareholders from potential civil liability.
His Honour declined to make such orders in relation to certain Poseidon institutional investors (finding that such relief should be considered if and when they seek relief on their own behalf). However, Colvin J did find that the position in relation to those investors was materially different because a higher standard applies to experienced parties like them who should be aware of the disclosure requirements and should have made enquiries to ensure that such requirements had been met.
In finding a lack of ‘dishonesty’ as required under section 1322(6)(ii), Colvin J found that:
- the Wangle company secretary had shown a “cavalier attitude” to compliance with the disclosure requirements but the evidence did not disclose behaviour that was dishonest; and
- the Poseidon company secretary did not act in blatant or flagrant disregard of the disclosure provisions; and
- the shareholders who made offers or on-sold their shares within the 12 month period did so on the assumption that no disclosure was required by them and did not act dishonestly in selling the shares unwittingly in contravention of the disclosure requirements.