FEDERAL COURT OF AUSTRALIA Thompson v ASIC [2002] FCA 512 CORPORATIONS LAW- stop order- power of Australian Securities and Investments Commission ("ASIC") to issue stop order in respect of an offer of securities under a disclosure document- where offer under the disclosure document had closed- consideration of Corporations Act 2001 (Cth) s 739 Corporations Act 2001 (Cth) ss 92(3), 700, 705, 706, 708, s 709(1), 710, 711, 712, 713, 714, 715, 724, 727(1), 728, s 739 Administrative Decisions (Judicial Review) Act 1977 (Cth) s 5 Acts Interpretation Act 1901 (Cth),ss 15AA, 15AB Okalahoma-Texas Trust v Securities and Exchange Commission (1939) 100 F2d 888 referred to In the matter of Globe Aircraft Corporation (1947) 26 SEC 43 referred to The Shorter Oxford English Dictionary, vol II. 3rd ed at p 2168 Gowers, The Complete Plain Words, 1980 at p 216 ANDREW PETER THOMPSON AND WORLDAUDIO COMMUNICATIONS PTY LIMITED (ACN 093 983 601) v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION AND INTERNATIONAL MEDIA MANAGEMENT (HOLDINGS) LIMITED (ACN 008 666 233) N311 OF 2002 BRANSON J 26 APRIL 2002 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N311 OF 2002 BETWEEN: ANDREW PETER THOMPSON FIRST APPLICANT WORLDAUDIO COMMUNICATIONS PTY LIMITED (ACN 093 983 601) SECOND APPLICANT AND: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION FIRST RESPONDENT INTERNATIONAL MEDIA MANAGEMENT (HOLDINGS) LIMITED (ACN 008 666 233) SECOND RESPONDENT JUDGE: BRANSON J DATE OF ORDER: 18 APRIL 2002 WHERE MADE: SYDNEY THE COURT ORDERS THAT 1. The application be dismissed. 2. The applicants pay the costs of the Australian Securities and Investment Commission. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N311 OF 2002 BETWEEN: ANDREW PETER THOMPSON FIRST APPLICANT WORLDAUDIO COMMUNICATIONS PTY LIMITED (ACN 093 983 601) SECOND APPLICANT AND: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION FIRST RESPONDENT INTERNATIONAL MEDIA MANAGEMENT (HOLDINGS) LIMITED (ACN 008 666 233) SECOND RESPONDENT JUDGE: BRANSON J DATE: 26 APRIL 2002 PLACE: SYDNEY REASONS FOR JUDGMENT INTRODUCTION 1 The issue raised by this proceeding is the proper construction of s 739 of the Corporations Act 2001 (Cth) ("the Act"). Section 739 authorises the Australian Securities and Investments Commission ("ASIC") in the circumstances outlined in the section to issue what is known as a "stop order" in respect of an offer of securities under a disclosure document. The applicants contend that ASIC's power to issue a stop order under s 739 comes to an end upon the closing of the offer under the disclosure document. ASIC, on the other hand, contends that there is no time limit as such on its power to issue a stop order or, in the alternative, if there is a time limit, that time limit does not come into effect until it is no longer possible for the person who is offering the securities to issue or transfer the securities. 2 The issue identified above is raised by an application brought pursuant to s 5 of the Administrative Decisions (Judicial Review) Act 1977 (Cth) ("the ADJR Act") for an order of review in respect of a decision of ASIC to issue an interim stop order under s 739(3) dated 8 April 2002 in respect of an offer of securities under a prospectus lodged with ASIC by the second respondent ("IMM"). background facts 3 The first applicant ("Mr Thompson") is the Managing Director of the second applicant ("WorldAudio"). Mr Thompson, together with his fellow director, Mr Graeme Logan ("Mr Logan"), are the only shareholders of WorldAudio. WorldAudio is a commercial radio broadcaster. 4 Pursuant to a share acquisition agreement ("the Agreement") dated 13 November 2001, Messrs Thompson and Logan agreed to sell to IMM all of the issued capital in WorldAudio and IMM agreed to buy that share capital. The acquisition of WorldAudio by IMM pursuant to the Agreement is part of a plan by IMM to raise $6.5 million by the issuing of 32.5 million ordinary shares at an issue price of $0.20 per share. The completion of the purchase of the WorldAudio shares is conditional on IMM raising the $6.5 million by its share issue. 5 IMM prepared a prospectus dated 1 March 2002 in respect of its proposal to raise $6.5 million ("the Prospectus") and lodged the Prospectus with ASIC. The Prospectus invited applications for the shares in IMM. The Prospectus stated that: "[IMM] reserves the right to reject any Application and/or to allocate to any Applicant fewer Shares than are applied for (and this may mean an Applicant is not allocated any Shares). In consideration of [IMM] agreeing to consider an Application, the Applicant agrees the Application is irrevocable and will not be withdrawn." The Prospectus reserved to IMM the right to vary the application list opening and closing dates. However, it showed an opening date of 6 March 2002 and a closing date of 28 March 2002. It disclosed that: "Company sponsored holding statements for the Shares issued pursuant to this Prospectus are expected to be dispatched from 5 April 2002." 6 The Prospectus provided the following additional information: "A total of 32.5 million Shares at an issue price of $0.20 per Share are offered under this Prospectus. The Shares offered under this Prospectus will constitute approximately 43% of the issued share capital of the Company following completion of the offer (on a post‑Reconstruction basis). … On 14 December 2001, the shareholders of the Company resolved to adopt a new constitution for the Company. The adoption of the new constitution is conditional upon all of the Conditions being fulfilled (or, where appropriate, waived), which includes the success of the Offer. As the Shares will only be issued if the Conditions are fulfilled (or, where appropriate, waived), the rights attaching to the Shares will be set out in the newly adopted constitution." 7 The glossary of terms forming part of the Prospectus contained, amongst others, the following definitions: "Reconstruction The consolidation of the 117, 424, 788 ordinary shares of the Company on issue prior to the Offer into a smaller number by consolidating every 13 of those shares into one Share (approved by the shareholders of the Company at a general meeting held on 14 December 2001), which will take effect upon the successful completion of the Offer. … Shares Ordinary shares in the capital of the Company offered for subscription under this Prospectus, after Reconstruction." 8 On 28 March 2002, IMM issued an Australian Stock Exchange ("ASX") announcement which advised that its offer to raise $6.5 million by the issue of 32.5 million shares at $0.20 per share under the Prospectus ("the Offer") had been fully subscribed and no further applications would be processed. The announcement further advised that the closing date for the Offer had been extended until 5 April 2002 to allow Directors to ensure that all conditions to the completion of the purchase by IMM of the shares in WorldAudio had been fulfilled before the Offer was finally closed and shares allocated and issued. 9 In fact, by an ASX announcement made on 2 April 2002, the Directors of IMM advised that, following confirmation of conditions relating to the purchase of the WorldAudio shares, they had resolved to close the Offer which had been oversubscribed. 10 After the announcement of 2 April 2002, ASIC apparently advised the Directors of IMM that it had received information which suggested that a third party had a prior claim in relation to a broadcast apparatus licence being used by WorldAudio. In response to a request from ASIC, the Directors undertook not to process the issue of any shares pursuant to the Offer while ASIC and the Directors investigated the claim. 11 The Directors took steps to investigate the claim of the third party. The Directors advised ASIC that they considered that the claim was not sufficiently strongly based to be adverse to the interests of investors. ASIC apparently took a different view. On 8 April 2002 ASIC issued an interim order ("the Order") in the following terms: "Pursuant to subsection 739(3) of the Corporations Act 2001 ("Act") the Australian Securities and Investments Commission ("ASIC") hereby makes an interim order under subsection 739(3) of the Act that no offers, issues, sales or transfers of securities be made where they relate to an offer of shares in International Media Management (Holdings) Limited ACN 008 666 233 as contained in a prospectus dated 1 March 2002 pending the holding of a hearing under subsection 739(2) of the Act." 12 Although there is evidence before the Court which establishes that, at the time that ASIC issued the Order, the Offer had been fully subscribed and IMM had announced that it would not process any further applications, the parties invited the Court to proceed on the basis that no contractual relationship has been entered into between IMM and the persons who applied for shares under the Prospectus. I understand this invitation to mean that it is conceded by the applicants that there is no evidence before the Court from which the Court could conclude that the reconstruction referred to in [7] above has occurred or that IMM has issued or allotted shares to any person in response to an application for shares under the Prospectus. the proceeding 13 The application for an order of review of the decision of ASIC to make the Order was filed in this Court on the afternoon of 16 April 2002. Evidence was placed before the Court that afternoon which demonstrated that unless the Order was lifted on or before 19 April 2002 it was likely that WorldAudio would breach an agreement which it had entered into to purchase another company. The breach, were it to occur, would result in the loss to WorldAudio of the deposit paid by it pursuant to the agreement to purchase the company. The evidence further disclosed that unless completion under the Agreement occurred within two weeks of 16 April 2002 "the financial position of WorldAudio will become very serious and the future of WorldAudio imperilled." The applicants sought an urgent hearing of their application. ASIC consented to the application for an order of review being heard on 18 April 2002. 14 The application was heard on 18 April 2002. At the end of the hearing I ordered that the application be dismissed for reasons to be later published. My reasons for dismissing the application are set out below. statutory scheme 15 Chapter 6D of the Act, which consists of ss 700- 741, is concerned with fundraising. Two central provisions of the chapter for present purposes are s 706 and s 727(1). Section 706 provides: "An offer of securities for issue needs disclosure to investors under this Part unless s 708 says otherwise." Section 708 does not say otherwise in the circumstances of this case. Section 727(1) provides: "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 6D.2 unless a disclosure document for the offer has been lodged with ASIC." 16 Section 92(3) of the Act defines "securities" for the purposes of Chapter 6D to include "shares in a body". Section 700(2) of the Act relevantly provides that, for the purposes of Chapter 6D, "offering securities for issue includes inviting applications for the issue of the securities". It is not disputed that the Offer was an offer of securities that needed disclosure to investors under Part 6D.2 of the Act. The type of disclosure document required by Chapter 6D in respect of the Offer was a prospectus (see s 709(1)). Sections 710 and 711 specify the information that the Prospectus was required to contain. 17 Section 728 is concerned with misstatements in, or omissions from, a disclosure document. The section is relevantly in the following terms: "(1) A person must not offer securities under a disclosure document if there is: (a) a misleading or deceptive statement in: (i) the disclosure document; or (ii) any application form that accompanies the disclosure document; or (iii) …; or (b) …; or (c) a new circumstance that: (i) has arisen since the disclosure document was lodged; and (ii) would have been required by section 710, 711, … or 715 to be included in the disclosure document if it had arisen before the disclosure document was lodged. (2) … (3) A person commits an offence if they contravene subsection (1) and: (a) the misleading or deceptive statement; or (b) the omission or new circumstance; is materially adverse from the point of view of an investor." 18 It is appropriate to set out s 739 of the Act in full. The section provides: "(1) If ASIC is satisfied that an offer of securities under a disclosure document lodged with ASIC would contravene section 728, ASIC may order that no offers, issues, sales or transfers of the securities be made while the order is in force. (2) Before making an order under subsection (1), ASIC must: (a) hold a hearing; and (c) give a reasonable opportunity to any interested people to make oral or written submissions to ASIC on whether an order should be made. (3) If ASIC considers that any delay in making an order under subsection (1) pending the holding of a hearing would be prejudicial to the public interest, ASIC may make an interim order that no offers, issues, sales or transfers of the securities be made while the interim order is in force. The interim order may be made without holding a hearing and lasts for 21 days after the day on which it is made unless revoked before then. (4) At any time during the hearing, ASIC may make an interim order that no offers, issues, sales or transfers of the securities be made while the interim order is in force. The interim order lasts until: (a) ASIC makes an order under subsection (1) after the conclusion of the hearing; or (b) the interim order is revoked; whichever happens first. (5) An order under subsection (1), (3) or (4) must be in writing and must be served on the person who is ordered not to offer, issue, sell or transfer securities under the disclosure document." consideration 19 The contention of the applicants that ASIC had no authority to make the Order is based on the following premises: "a. that section 739 does not authorise ASIC to make an order unless the person against whom the order is made is, at the time the order is made, either offering or proposing to offer securities under a disclosure document; and b. that IMM, on the date the order was made (8 April 2002), was not a person offering securities under a disclosure document." (Applicants' Outline Points of Argument) 20 The applicants drew attention to the fact that s 739 of the Act refers specifically to an offer of securities that would contravene s 728 and does not refer to an issue of securities under disclosure documents generally. They argued: "Once the proposed issuer of securities advises that the offer is closed such that it will not accept further applications then it ceases to be offering securities. That is, at that point in time, there is no ongoing contract to which section 728 applies. It follows therefore that section 739 cannot apply as there is no conduct to be stopped which is or will contravene section 728." 21 The applicants further argued that s 724 of the Act is intended to deal (and, as I understand them, deal exhaustively) with the circumstances in which securities are issued pursuant to a deficient disclosure document after the closure of the relevant offer. Section 724(1) relevantly provides, in effect, that if a person offers securities under a disclosure document and the person becomes aware that the disclosure document is, or has become, defective in a way that it materially adverse from the point of view of an investor, the person must deal with any application for securities made under the disclosure document in the way provided by s 724(2). Section 724(2) provides that the person must either: (a) repay the money received from the applicants; or (b) give the applicants certain supplementary documentation and one month to withdraw their application and be repaid; or (c) issue or transfer the securities to the applicants and give them the supplementary documentation and one month to withdraw their application and be repaid. 22 The predecessor provision of s 739 of the Act was s 1033 of the Corporations Law. As originally inserted into the Corporations Law, s 1033(1) and s 1033(2) provided: "(1) Where it appears to the Commission that any of the circumstances referred to in subsection (2) exist in respect of a prospectus lodged in relation to securities of a corporation, the Commission may, by order in writing served on the person by whom the prospectus was lodged, direct that no further securities to which the prospectus relates be issued. (2) The circumstances are: (a) the prospectus contravenes in a substantial respect any of the requirements of this Division; (b) the prospectus contains a statement, promise, estimate or forecast that is false, misleading or deceptive; and (c) the prospectus contains a material misrepresentation." 23 It is plain, in my view, that s 1033(1) of the Corporations Law, authorised ASIC to issue a stop order after an offer had closed provided that there remained securities available to be issued to which the prospectus related. Indeed, unlike s 739(1), the earlier section was directed solely to the prohibition of the issue of securities. 24 As the meaning of s 739(1) is ambiguous or obscure within the meaning of s 15AB of the Acts Interpretation Act 1901 (Cth), that section authorises the Court to give consideration to material, not forming part of the Corporations Act, which is capable to assisting in the ascertainment of the meaning of the provision. It appears that very limited relevant material is available. However, par 8.77 of the Explanatory Memorandum for the Corporate Law Economic Reform Program Bill 1998 ("the Explanatory Memorandum") stated: "When the Government announced the Corporate Law Economic Reform Program, it was noted that the project of rewriting the Law in order to simplify it would be subsumed within the Government's overall corporate law reform program. Accordingly, as well as implementing the CLERP proposals, the Bill will rewrite the fundraising provisions. As a result of this 'rewrite', a number of reforms have been made to modernise the existing provisions and ensure they are consistent with the earlier work on simplifying the Law. The key changes made as part of this process are set out below." The Explanatory Memorandum does not make any explicit reference to the proposed new s 739. Nothing in the Explanatory Memorandum suggests that any substantive change was sought to be effected by the redrafting of s 1033 of the Corporations Law. 25 Against that background, it is necessary to give consideration to the intended significance of the use of the word "would" in s 739(1). The reference in s 739(1) to an offer of securities that would contravene s 728 is infelicitous. Strictly speaking, an offer of securities can never itself contravene s 728; s 728 is directed to the conduct of persons (see [17] above). 26 I am doubtful that the use of the word "would" in s 739 is, as argued by ASIC, the result of the adoption by the drafter of the subjunctive mood. The opening words of s 739 do not seem to me to have been employed: "to denote an action or a state as conceived (and not as a fact) and therefore used to express a wish, command or exhortation, or a contingent, hypothetical, or prospective event" (see The Shorter Oxford English Dictionary, vol II. 3rd ed at p 2168) Nonetheless, it seems to me to be unlikely that the word was intended by the legislature to govern the ambit of the power given to ASIC by s 739(1) as it would do if it were found to carry a temporal connotation. 27 I incline to the view that the word "would" is used in s 739 for the reason described in Sir Ernest Gowers' The Complete Plain Words under the heading "Trouble with Verbs" and the subheading "Would and Should". At p 216 the distinguished author says: "'it would appear' and 'I should think' are less dogmatic, and therefore more polite, ways of saying 'it appears' and 'I think'." If I am right in this, the use of the word "would" in s 739(1) would seem to have no significance beyond, perhaps, a rectitude in the drafter with respect to ascribing to an administrative body the ability to judge whether a person has contravened a statutory provision the contravention of which may have involved that person in the commission of an offence. 28 Nonetheless, I do not consider that the submission advanced by ASIC that s 739(1) authorises ASIC to make an order at any time is correct. The United States authorities to which ASIC drew attention (eg Okalahoma Texas-Trust v Securities and Exchange Commission (1939) 100 F2d 888; In the matter of Globe Aircraft Corporation (1947) 26 SEC 43) concern legislation expressed in materially different terms from s 739 of the Act. The relevant United States provision considered in the above authorities provided: "If it appears to the Commission at any time that the registration statement includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, the Commission may, after notice … and after opportunity for hearing … issue a stop order suspending the effectiveness of the registration statement." (emphasis added) The differences between the above provision and s 739(1) mean, in my view, that the United States authorities provide little, if any, assistance with respect to the proper construction of s 739. 29 In considering the proper interpretation of s 739, it is appropriate to start from the premise that the section is a provision designed for the protection of potential investors. It seems to me that its inclusion in the Act reflects an appreciation by the legislature that s 724 may provide ineffective protection to an applicant for securities where the relevant disclosure document contains a material misstatement or omission. It would therefore seem logical for the ambit of s 739 to be at least co-extensive with that of s 724. Further, in my view, the terms of s 739(1) indicate that the power given by s 739 to ASIC in respect of an offer of securities under a disclosure statement lodged with it is not intended to come to an end until it becomes impossible for any stop order made by ASIC to operate according to its terms. That is, until it is no longer possible for any relevant offers, issues, sales or transfers of the relevant securities to be made. In particular, the fact that a stop order made by ASIC reaches to "transfers" of securities is an indication that Parliament intended ASIC to be able to issue a stop order to prevent securities from being issued without regard to whether the offer in respect of those securities had closed. It would not, in my view, promote the purpose underlying the Act to adopt a construction of s 739 which left what could be a critical aspect of a fundraising process (ie the issue of securities after the close of the offer) beyond the power of ASIC to issue a stop order. Nor, in my view, would it promote the purpose underlying the Act if s 739 were construed in a way which would allow a person who has offered securities under a suitably worded disclosure document to close an offer during the life of an interim order under s 739(3) thus preventing the making of an order under s 739(1). I do not consider it appropriate to so construe the section (see s 15AA of the Acts Interpretation Act 1901 (Cth)). 30 It seems to me that the power given to ASIC by s 739(1) is intended to come into effect upon the lodging of the relevant disclosure document with ASIC and to continue until it is no longer possible for any of the things that a stop order may interdict to take place in respect of the offer to which that disclosure document relates. I conclude that the opening words of s 739(1) are intended to express in a short‑hand way the requirement that ASIC be satisfied that an offer of securities made, or intended to be made, under a disclosure document lodged with ASIC is, was, or would be, an offer made in contravention of s 728. 31 To summarise, in my view, ASIC is authorised to act under s 739(1) of the Act where, and only where: (1) A disclosure document (see s 705) in respect of an offer of securities (see s 700) has in fact been lodged with ASIC; (2) ASIC is satisfied that an offer of securities under that disclosure document would contravene s 728 in the sense that ASIC is satisfied that there is: (a) a misleading or deceptive statement in: (i) the disclosure document; or (ii) any application form that accompanies the disclosure document; or (iii) any document that contains the offer if the offer is not in the disclosure document or the application form; or (b) an omission from the disclosure document of material required by ss 710, 711, 712, 713, 714 or 715 of the Act; or (c) a new circumstance that: (i) has arisen since the disclosure document was lodged; and (ii) would have been required by ss 710, 711, 712, 713, 714 or 715 to be included in the disclosure document if it had arisen before the disclosure document was lodged; and (3) It remains possible for an order under the subsection to operate according to its terms in the sense that an offer, issue, sale or transfer of securities under the disclosure document lodged with ASIC may still be made. 32 However, even where ASIC is authorised to act under s 739(1), it must, before making any order other than an interim order, hold a hearing and give a reasonable opportunity to any interested people to make oral or written submissions to ASIC on whether an order should be made (see s 739(2)). Where ASIC considers that any delay in making a stop order pending the holding of a hearing would be prejudicial to the public interest, it may make an interim order under s 739(3). 33 I reject the submission of ASIC that ASIC may make an interim order under s 739(3) in circumstances in which it would not be authorised to make an order under s 739(1). That is, in circumstances in which it is not satisfied that an offer of securities under a disclosure document would contravene s 728 in the sense discussed above but in which it holds a suspicion falling short of satisfaction that the offer would contravene s 728. In my view, if the legislature intended that ASIC should be able to exercise, even on an interim basis, the significant power of intervention in fundraising given to it by s 739 in circumstances less restrictive than those provided for by s 739(1), it would have said so explicitly. This approach does not deprive the hearing required by s 739(2) of utility. As a result of evidence adduced at the hearing, or of submissions made to ASIC, ASIC may find its earlier satisfaction undermined, or, even if it continues to hold the necessary satisfaction, it may form the view that it would not be an appropriate exercise of its discretion under s 739(1) to make a stop order. 34 In my view, before ASIC may issue an interim order under s 739(3) it must: (1) be authorised to act under s 739(1) (see [31] above); (2) have decided (subject to the outcome of the hearing under s 739(2)), to exercise the discretion given to it by s 739(1) in favour of making an order under s 739(1); and (3) consider that any delay in making an order under s 739(1) pending the holding of the hearing required by s 739(2) would be prejudicial to the public interest. It was not suggested in this case that any of the above criteria was not satisfied at the time that ASIC made the Order. conclusion 35 It was for the above reasons that on 18 April 2002 I dismissed the application in this matter and ordered the applicants to pay ASIC's costs. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Branson. Associate: Dated: 26 April 2002 Counsel for the 1st and 2nd Applicants: Mr T Bathurst QC with Mr A McGrath Solicitor for the 1st and 2nd Applicants: Atanaskovic Hartnell Counsel for the 1st Respondent: Mr N Hutley SC with Mr TD Castle Solicitor for the 1st Respondent: Australian Securities and Investments Commission Solicitor Advocate for the 2nd Respondent: Mr J Kriewaldt Solicitor for the 2nd Respondent: Blake Dawson Waldron Date of Hearing: 18 April 2002 Date of Judgment: 18 April 2002