This is the first in a 4-part series I am publishing to assist publicly listed companies, and those who represent them, when there has been a failure to lodge a cleaning notice or prospectus (or multiple such failures), and thus a need to seek curative Court orders. The series will explain the relevant law, and what needs to be done. I appeared at the hearing of such an application in the Federal Court in January this year, which was successful. The Court's ex tempore reasons have not been reduced to writing and published (though there are no suppression orders). By the first 3 parts of this series, I am sharing extracts drawn from my written submissions, excluding the parts specific to my case. In parts 1 and 2 I will identify the legislative provisions relevant to such applications and provide an up-to-date distillation of the applicable principles from the authorities. The series in part 3 will be illustrative, providing case summaries of recent and/or useful reported cases where public companies have failed to lodge cleansing notices. In the final part of the series, I will run through the steps that should swiftly be taken at an early stage, to successfully achieve the orders needed. My thanks and due credit for the success of our recent application goes to my high calibre instructing solicitors, Emma Cook (corporate) and Scott Guthrie (litigation), partners with Thomson Geer in Brisbane.
Introduction
There are two sets of legislative provisions (and ASIC instruments and class orders) and associated principles which must be considered in taking instructions and bringing a Court application to cure failures to lodge cleansing notices. The first set is Part 6D.2 of the Corporations Act 2001 (Cth) (Corporations Act or Act). The second is ss 1322(4) and (6) in Part 9.5 of the Act, s 1322 being a provision which empowers the Court to cure irregularities.
This part 1 of the series provides an overview relevantly of the first set – the statutory framework of the disclosure regime for public companies, including as to when cleansing notice may be required for different types of shares issues.
It should be noted that a failure by the company to observe its disclosure obligations has ramifications for shareholders of the affected shares for the next 12 months. This is both as to the validity of on-sale transactions involving affected shares, and as to the exposure of on-selling shareholders themselves to liability for civil penalties. This is so even though the original disclosure failure was that of the company, and shareholders on-selling the affected shares are likely to have assumed in good faith that the company’s share issue had been properly compliant. It follows from these ramifications for shareholders that trading in shares of such companies should be suspended upon discovery of such a problem, and curative orders are needed. The speed and manner in which key actions should be taken will be discussed in the final part of this series (part 4).
STATUTORY FRAMEWORK – DISCLOSURE REGIME
Part 6D.2 of the Corporations Act 2001 (Cth)
Broadly, part 6D.2 of the Corporations Act requires the provision of information to investors about securities when an offer to issue or sell them is made. It is designed to ensure that investors are provided with information that they and their professional advisors would reasonably require to make an informed assessment in connection with securities offered for issue or sale.
The following outline is drawn from the judgment of Goodman J in Re Austpac Resources NL [2023] FCA 108; (2023) 16 ACSR 1 (Austpac Resources)[1], who explained that the following parts of Part 6D.2 are salient, for present purpose and ignoring inapplicable exceptions.
First, as a general proposition:
(1) an offer of securities for issue needs disclosure unless ss 708 or 708AA provide otherwise: s 706; and
(2) a person must not make an offer of securities that needs disclosure under Part 6D.2 unless a disclosure document for the offer has been lodged with the Australian Securities and Investments Commission (ASIC): s 727.
Secondly, the offers of securities that require disclosure under Part 6D.2 are only those for which disclosure is required by s 707(2), (3) or (5): s 707(1).
Thirdly, s 707(3) provides –
(3) an offer of a body’s securities for sale within 12 months after their issue needs disclosure to investors under this Part if:
(a) the body issued the securities without disclosure to investors under this Part; and
(b) either:
(i) the body issued the securities with the purpose of the person to whom they were issued selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; or
(ii) the person to whom the securities were issued acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them;
and section 708 or 708A does not say otherwise.
Fourthly, s 708A provides some exceptions to the requirement of disclosure prescribed by s 707(3). In so far as is presently relevant, s 708A provides:
708A Sale offers that do not need disclosure
(1) This section applies to an offer (the sale offer) of a body’s securities (the relevant securities) for sale by a person if:
Sale offers to which this section applies
(a) but for subsection (5), (11) or (12), disclosure to investors under this Part would be required by subsection 707(3) for the sale offer; and
(b) the securities were not issued by the body with the purpose referred to in subparagraph 707(3)(b)(i); and
(c) a determination under subsection (2) was not in force in relation to the body at the time when the relevant securities were issued.
…
Sale offers of quoted securities – case 1
(5) The sale offer does not need disclosure to investors under this Part if:
(a) the relevant securities are in a class of securities that were quoted securities at all times in the 3 months before the day on which the relevant securities were issued; and
(b) trading in that class of securities on a prescribed financial market on which they were quoted was not suspended for more than a total of 5 days during the shorter of the period during which the class of securities were quoted, and the period of 12 months before the day on which the relevant securities were issued; and
(c) no exemption under section 111AS or 111AT covered the body, or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and
(d) no order under section 340 or 341 covered the body or any person as director or auditor of the body, at any time during the relevant period referred to in paragraph (b); and
(e) either:
(i) if this section applies because of subsection (1) – the body gives the relevant market operator for the body a notice that complies with subsection (6) before the sale offer is made; or
(ii) if this section applies because of subsection (1A) – both the body and the controller give the relevant market operator for the body a notice that complies with subsection (6) before the sale offers I made.
(6) A notice complies with this subsection if the notice:
(a) is given within 5 business days after the day on which the relevant securities were issued by the body; and
(b) states that the body issued the relevant securities without disclosure to investors under this Part; and
(c) states that the notice is being given under paragraph (5)(e); and
(d) states that, as at the date of the notice, the body has complied with:
(i) the provisions of Chapter 2M as they apply to the body; and
(ii) sections 674 and 674A; and
(e) sets out any information that is excluded information as at the date of the notice (see subsections (7) and (8)).
(7) For the purposes of subsection (6), excluded information is information:
(a) that has been excluded from a continuous disclosure notice in accordance with the listing rules of the relevant market operator to whom that notice is required to be given; and
(b) that investors and their professional advisers would reasonably require for the purpose of making an informed assessment of:
(i) the assets and liabilities, financial position and performance, profits and loss and prospects of the body; or
(ii) the rights and liabilities attaching to the relevant securities.
(8) The notice given under subsection (5) must contain any excluded information only to the extent to which it is reasonable for investors and their professional advisors to expect to find the information in a disclosure document.
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Sale offer of quoted securities – case 2
(11) The sale offer does not need disclosure to investors under this Part if:
(b) either:
(a) the relevant securities are in a class of securities that are quoted securities of the body; and
(i) a prospectus is lodged with ASIC on or after the day on which the relevant securities were issued but before the day on which the sale offer is made; or
(ii) a prospectus is lodged with ASIC before the day on which the relevant securities are issued and offers of securities that have been made under the prospectus are still open for acceptance on the day on which the relevant securities were issued; and
(c) the prospectus is for an offer of securities issued by the body that are in the same class of securities as the relevant securities.
…
Fifthly, the making of an offer of shares that needs disclosure under Part 6D.2 absent the lodging of a disclosure document with ASIC is a contravention of s 727 of the Act: s 727(1) and (6) (subject to the operation of s 727(5)).
Finally, a person who contravenes s 727 is exposed to proceedings for relief under s 1325 of the Act: s 1325 (and in particular s 1325(1), (5) and (7)(d)).
As to the documents commonly referred to as “cleansing notices” and “cleansing prospectuses”, these were further explained in Re Structural Monitoring Systems PLC [2022] FCA 473 (Structural Monitoring) by Anastassiou J[2] –
Cleansing notice exception – s 708A(5) – the seller does not need to comply with the disclosure requirements of Part 6D.2 if the issuer provided a cleansing notice in relation to the securities. The cleansing notice must have been given by the issuer to the ASX within 5 days of the issue of the securities, and before the sale offer was made. Sub-section 705A(6) sets out the maters which must be included in the cleansing notice, the most important of which are that the company must state that, as at the date of the notice, it has complied with its financial reporting obligations in Chapter 2M of the Act and its continuous disclosure obligations in s 674 of the Act, and the notice must include any ‘excluded information’, defined as information that has been excluded from a continuous disclosure notice in accordance with the exceptions in the ASX Listing Rules. In addition, to fall within the cleansing notice exception, s 708A(5) sets out a number of other requirements, including that the company’s securities have not been suspended from trading for more than 5 days in the 12 months prior to the issue of securities that were on-sold;
Cleansing prospectus exception – s 708A(11) – the seller does not need to comply with the disclosure requirements of Part 6D.2 if the issuer lodged a cleansing prospectus in relation to the securities with ASIC. The cleansing prospectus must be lodged on or after the day on which the relevant securities were issued, but before the day on which the sale offer is made. The cleansing prospectus must be an offer for securities issued by the entity that are in the same class of securities as the relevant securities that have been issued and are to be on-sold. Unlike the cleansing notice exception, suspension from trading does not prevent reliance upon the cleansing prospectus exception.
As to the question of the liability of on-sellers where there has been a failure of disclosure by a company upon issue of relevant shares, s 707(3) is set out above. Section 727 relevantly provides as follows –
(1) A person must not make an offer of securities, or distribute an application form for an offer of securities, that needs disclosure to investors under Part 6.2D unless a disclosure document for the offer has been lodged with ASIC.
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(6) A person contravenes this subsection if the person contravenes subsection (1), (2), (3) or (4).
Note: This subsection is a civil penalty provision (see section 1317E).
When Cleansing Notices are Required for Particular Types of Share Issues
*Credit for this section goes to Emma Cook, corporate law Partner at the firm of my instructing solicitors, Thomson Geer, Brisbane Office.
(1) SPP Issues
For a Share Purchase Plan (SPP) Issue of shares, whereby shares are offered to existing shareholders, ASIC Corporations (Share and Interest Purchase Plans) Instrument 2019/547 (SPP ASIC Instrument) and ASIC Regulatory Guide 125 apply. ASIC gives relief under the SPP ASIC Instrument to allow ASX listed companies to offer shares to existing holders under a share purchase plan without a prospectus, so long as the offer complies with the provisions of the SPP ASIC Instrument.
Where an SPP to existing shareholders is being conducted in conjunction with a share placement, an issuer need not issue a further Cleansing Notice for the SPP offer when it follows a placement, and the issuer has lodged a Cleansing Notice under s708A(6) or s 1012DA(6) not more than 30 days before the SPP offer is made: RG 125.42, ASIC Regulatory Guide 125.
However, where an offer under an SPP is made as a stand-alone offer (i.e. it is not offered in conjunction with a placement), a Cleansing Notice must be lodged with ASX within a 24-hour period before the SPP offer is made: RG 125.37, ASIC Regulatory Guide 125.
(2) Placements to sophisticated investors, professional investors and senior managers pursuant to ss 708(8), (11) and (12)
For a Placement Issue (i.e. to sophisticated investors, professional investors or senior managers), listed companies are required to issue compliant Cleansing Notices in accordance with section 708A (5)(e) and (6) of the Act. A Cleansing Notice is required to be given within 5 business days after the day that any shares under a placement are issued by the company, and must set out other relevant information as mandated by those provisions.
A Cleansing Notice is not however required where shares under a Placement Issue are not being on-sold for a period of 12 months following their issue and this is documented by way of some form of escrow agreement. This is because s 707(3) will not be considered to apply to the Placement Issue, because for a 12 month period post issue they were not able to be on-sold, therefore within that period:
- the body could not be considered to have issued the securities with the purpose of the person to whom they were issued selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them; and
- the person to whom the securities were issued could not be considered to have acquired them with the purpose of selling or transferring the securities, or granting, issuing or transferring interests in, or options over, them.
(3) Incentive Plan Issues
Prior to it taking effect from 1 March 2023, ASIC Class Order [CO 14/1000] Employee incentive schemes: Listed bodies provided relief from the on-sale provisions of the Act in certain circumstances for incentive plan issues of shares. It provided that a listed body that made an offer under an employee incentive scheme covered by the Class Order did not have to comply with Part 6D.2, 6D.3 or Part 7.9 of the Act in relation to the offer (clause 5). Further, the Class Order provided that a person who made a sale offer of an underlying eligible product within 12 months after issue of the product did not have to comply with Part 6D.2, 6D.3 or Part 7.9 of the Act in relation to the sale offer where the product was issued to an eligible participant under an employee incentive scheme and the person has no reason to believe the employee incentive scheme is not covered by the Class Order (clause 7).
A new employee share scheme regime was introduced in 2022 as follows:
- New employee share schemes (ESS) provisions introducing an amendment to Division 1A in Part 7.12 of the Act commenced on 1 October 2022 (ESS Division); and
- a new legislative instrument ASIC Corporations (Employee Share Schemes) Instrument 2022/1021 came into effect on 20 December 2022 (ESS Instrument). The ESS Instrument expands the regulatory relief under the ESS Division. Importantly, the ESS Instrument modifies section 1100ZD (regulatory relief for certain subsequent sale offers of ESS interests) so that the disclosure requirements under Part 6D.2, 6D.3 and Part 7.9 of the Corporations Act do not apply in relation to financial products that are in a class that is able to be traded on a financial market.
- In addition to the ESS Instrument, on 16 December 2022 ASIC issued ASIC Corporations (Amendment) Instrument 2022/1022 (Amendment Instrument) to provide guidance on the continuing application of ASIC Class Order 14/1000 (CO 14/1000). The Amendment Instrument provides that relief under CO 14/1000 and CO 14/1001 may continue to apply to ESS interests offered on or prior to 1 March 2023 and accepted before 1 April 2024: paragraph 5.
For issues of ESS interests (including shares) that occurred before 1 March 2023, listed companies could avail themselves of these provisions, subject to compliance with CO 14/1000 and ASIC Regulatory Guide 49, meaning that a Cleansing Notice was not required to be issued following the issue of shares under an employee incentive plan.
However for ESS interests offered on or after 1 March 2023, the new regime under the ESS Division and ESS Instrument applies.
For a listed company to be able to avail itself of the relief from the on-sale provisions afforded by the new regime on or after 1 March 2023, and not have to lodge a Cleansing Notice, an offer of shares would need to be made under an employee incentive plan which complied with the obligations introduced in the amendments to Division 1A of Part 7.12 of the Act and in ASIC Corporations (Employee Share Schemes) Instrument 2022/1021. If the incentive plan had not been amended in light of the new scheme and so did not so comply, a Cleansing Notice would be required.
(4) Exchangeable Share Acquisition Issues
As with Placement Issues, for an Exchangeable Share Acquisition issue of shares (which is a term that has been applied for a specific type of contractual share issue), listed companies are required to issue compliant Cleansing Notices in accordance with section 708A (5)(e) and (6) of the Act. A Cleansing Notice is required to be given within 5 business days after the day that any shares under a placement are issued by the company, and must set out other relevant information as mandated by those provisions.
(5) Convertible Securities Agreement or Convertible Note Issues
Again, similar to a Placement Issue, once shares are issued by a public company on conversion of a Convertible Note, unless a Cleansing Notice has been issued under section 708A(12C)(e) of the Act (as notionally inserted by ASIC Corporations (Sale Offers: Securities Issued on Conversion of Convertible Notes) Instrument 2016/82) within 2 business days before the first day on which the convertible notes were issued, the company is required to issue a compliant Cleansing Notice in accordance with section 708A (5)(e) and (6) of the Act, and such Cleansing Notice must be given within 5 business days after the day that any shares were issued.
If there are any shares issued up-front under such an arrangement, namely, not on conversion of a convertible note, then such issue will require the issue of a compliant Cleansing Notice in accordance with sections 708A (5)(e) and (6) of the Act, and such Cleansing Notice must be given within 5 business days after the day that any shares were issued.
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[1] At [4]-[10].
[2] At [11], adopting this summary his Honour drew from the written submissions for the Plaintiff, written by my colleague at the Victorian Bar and fellow member of List G Barristers, Brad K Holmes.