FEDERAL COURT OF AUSTRALIA Australian Securities & Investments Commission v Craigside Company Limited (No 2) [2014] FCA 371 Citation: Australian Securities & Investments Commission v Craigside Company Limited (No 2) [2014] FCA 371 Parties: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v CRAIGSIDE COMPANY LIMITED BVI COMPANY NUMBER 74124 and NORTHWEST RESOURCES LIMITED (ACN 107 337 379) File number: VID 1440 of 2011 Judge: JAGOT J Date of judgment: 11 April 2014 Legislation: Corporations Act 2001 (Cth) ss 258(3), 1325A Cases cited: ASIC v Bank Leumi Le-Israel (Switzerland) (1996) 69 FCR 531; [1996] FCA 825 ASIC v Terra Industries Inc (1999) 92 FCR 257; [1999] FCA 525 Flinders Diamonds Ltd v Tiger International Resources Inc (2004) 49 ACSR 199; [2004] SASC 119 New Ashwick Pty Ltd v Wesfarmers Ltd (2000) 35 ACSR 263; [2000] SASC 289 Date of hearing: Decided on the papers Place: Sydney Division: GENERAL DIVISION Category: No Catchwords Solicitor for the Plaintiff: M Pangbourne of Australian Securities and Investments Commission Solicitor for the Fourth Defendant: A Kelly of DLA Piper IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION VID 1440 of 2011 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff AND: CRAIGSIDE COMPANY LIMITED BVI COMPANY NUMBER 74124 First Defendant NORTHWEST RESOURCES LIMITED (ACN 107 337 379) Fourth Defendant JUDGE: JAGOT J DATE OF ORDER: 11 APRIL 2014 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to s 1325A of the Corporations Act 2001 (Cth) (the Corporations Act), the 15,000,000 ordinary shares in Northwest Resources Limited ACN 107 337 379 (NWR) registered in the name of Craigside (the Craigside Parcel) be cancelled, such cancellation being taken to be a reduction in NWR's share capital authorised by s 258E(3) of the Corporations Act. 2. Within 5 days of the date of these orders, NWR direct its share registry to: (i) take all steps necessary to give effect to order 1, including recording the cancellation of the Craigside Parcel in the share register; (ii) inform NWR and ASIC as to (a) when it completed the steps, and (b) what steps it has taken. 3. The proceedings otherwise be dismissed. 4. Each of the plaintiff, first defendant and fourth defendant bear its own costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION VID 1440 of 2011 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff AND: CRAIGSIDE COMPANY LIMITED BVI COMPANY NUMBER 74124 First Defendant NORTHWEST RESOURCES LIMITED (ACN 107 337 379) Fourth Defendant JUDGE: JAGOT J DATE: 11 APRIL 2014 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This matter involves an application by the Australian Securities and Investments Commission (ASIC) seeking various orders in respect of a parcel of 15,000,000 shares registered in the name of the first defendant, Craigside Company Limited (Craigside), in the fourth defendant, Northwest Resources Limited (NWR). On 5 December 2012, Craigside filed a submitting notice in the proceeding, save as to the question of costs. On 28 November 2013, the proceedings were dismissed against the second and third defendants. 2 ASIC and NWR have agreed on the terms of orders that should be made and provided me with joint written submissions and a statement of agreed facts. Craigside consents to the orders proposed by ASIC and NWR, which include an order that the remaining parties bear their own costs. 3 The agreed facts are as follows: The relevant conduct [5] On 9 December 2003, NWR was incorporated in Western Australia. [6] On 30 July 2004, Craigside and NWR entered into a share sale agreement whereby Craigside agreed to sell to NWR a 65 per cent indirect interest in a parcel of mining tenements and assets in Western Australia and in return NWR agreed to allot Craigside 15 million ordinary shares and 7.5 million options in NWR. [7] On 27 September 2004, NWR issued a prospectus for the offer of 11.25 million shares at an issue price of 20 cents per share (together with 5.625 million options) to raise $2.25 million. [8] On 2 December 2004, NWR was admitted to the official list of the Australian Securities Exchange (ASX) and became a listed company within the meaning of Chapter 6C of the Corporations Act. [9] On 6 December 2004, NWR issued 15 million shares in NWR comprising the Craigside Parcel to Craigside. This represented 50 per cent of NWR's issued share capital at the time of its listing. [10] On 10 December 2004, Craigside lodged a substantial holder notice pursuant to s 671B of the Corporations Act with respect to the Craigside Parcel (the 2004 Craigside Notice). In that notice, Craigside stated that it was the legal and beneficial owner of the Craigside Parcel. [11] At all times since the Craigside Parcel was acquired in 2004, it has represented at least 5 per cent of NWR's voting shares, and is therefore a substantial holding within the meaning of the Corporations Act. The Craigside Parcel comprises approximately 7.1 per cent of NWR's issued capital as at 12 March 2014. [12] On 29 November 2011, ASIC served a direction on Craigside pursuant to s 672A(1)(a) of the Corporations Act with respect to [the] Craigside Parcel (Direction 1). [13] On 1 December 2011, Craigside responded to Direction 1 (Response 1). In Response 1, Craigside stated that it was a nominee shareholder and was aware of two persons who had relevant interests in the Craigside Parcel or who had given instructions about voting or other rights attached to the Craigside Parcel: John Lindsay Merity, formerly the second defendant, and Anthony Nedderman, formerly the third defendant. [14] On 2 December 2011, ASIC served a direction on Mr Merity pursuant to s 672A(1)(b) of the Corporations Act with respect to the Craigside Parcel (Direction 2). [15] On 6 December 2011, Mr Merity responded to Direction 2 (Response 2). In Response 2, Mr Merity stated that he did not have a relevant interest in the Craigside Parcel, he did not know the name of any person other than Craigside with such an interest and no one had given him instructions about the acquisition or disposal of the Craigside Parcel, the exercise of any voting or other rights attached or matters relating to the Craigside Parcel. [16] On 6 December 2011, ASIC served a direction on Mr Nedderman pursuant to s 672A(1)(b) of the Corporations Act with respect to the Craigside Parcel (Direction 3). [17] On 12 December 2011, Mr Nedderman responded to Direction 3 (Response 3). In Response 3, Mr Nedderman stated that he did not have a relevant interest in the Craigside Parcel, did not know the address of each other person who had a relevant interest in the Craigside Parcel and had no recollection of any person giving him instructions about the acquisition or disposal of the Craigside Parcel, the exercise of any voting or other rights attached to the Craigside Parcel. [18] On 14 December 2011, ASIC informed Mr Nedderman that it considered he had only partially complied with the direction. Mr Nedderman provided an amended response on 14 December 2011. The amended response was the same except Mr Nedderman now stated he did not know the name of each other person who had a relevant interest in the Craigside Parcel. [19] On 16 December 2011, when interim relief was granted by the Court with the consent of the parties, ASIC issued a media announcement which stated that it had obtained interim relief and that the final relief that it sought included an application for an order that the Craigside Parcel be vested in ASIC. The current financial and operational position of NWR [20] NWR is the owner of mining tenements in the Nullagine region of Western Australia. For a number of years, it has been pursuing a project to develop and operate a mine at these tenements to extract gold and antimony which it called the "Blue Spec Shear Gold‐Antimony Project" (the Project). [21] In September 2012, NWR released the results of a scoping study and preliminary economic assessment of the Project. [22] From September 2012 to September 2013, NWR prepared a feasibility assessment of the Project. During the course of 2013, the gold price fell significantly. [23] On 30 September 2013, NWR issued its annual financial report for the year ended 30 June 2013 to its members which stated that, while NWR had sufficient funds to settles its debts as and when they become due and payable, the ability of NWR to continue as a going concern was dependent upon one or a combination of alternatives which may include undertaking further capital raisings, entering into joint ventures for the potential development of projects and obtaining debt or alternative forms of finance. This statement resulted in an "emphasis of matter" in relation to going concern in the audit opinion of the auditors of the financial statements. [24] On 30 September 2013, NWR announced to its shareholders, by way of a letter from the chairman of NWR's board of directors, that: (a) the advice received by NWR was that in the current financial market, it would not be able to raise the required debt or equity capital to take the Project forward in the development scenario evaluated in the scoping study in such a way as to ensure appropriate returns for shareholders; (b) NWR believed that it was prudent to defer completion of the current feasibility assessment to enable NWR to focus on evaluating different strategies to realise the Project, including evaluating lower capital cost options and investigating opportunities to introduce a partner to the Project. [25] As at 12 March 2014, the market capitalisation of NWR was approximately $3 million. [26] From 1 August 2013 to 12 March 2014, there were approximately 12.78 million shares in NWR traded on the ASX. During that period, the closing price at which NWR shares have traded on the ASX has declined steadily from 4.1 cents per share on 1 August 2013 to 1.5 cents per share on 12 March 2014. [27] If the Craigside Parcel could be sold for the closing price on the ASX on 12 March 2014 of 1.5 cents per share, then $225,000 would be realised from the sale, before deductions for the costs of sale. [28] Given the financial and operational position of NWR and the size of the Craigside Parcel, it will be difficult, and may not be possible, to dispose of the Craigside Parcel at all or for a reasonable price. The size of the Craigside Parcel exceeds the total number of shares traded in NWR in the period 1 August 2013 to 12 March 2014. [29] During the period in which the Craigside Parcel was being disposed of, NWR is likely to find it more difficult than it otherwise would to raise additional equity through the issue of new shares in NWR. [30] If the Craigside Parcel was cancelled, the effect of doing so would be to increase proportionally the ownership interest of all other holders of NWR shares, because cancellation would reduce the total shares in NWR from approximately 212 million to approximately 197 million. 4 The joint submissions are as follows: SUBMISSIONS ON RELIEF [31] Section 671B of the Corporations Act, relevantly, requires a person who begins to have a substantial holding in securities in a listed company to give certain information to the company and to each relevant market operator (in this case, the ASX). A person has a substantial holding if they have a relevant interest in 5 per cent or more of the voting shares in the company. "Relevant interest" has the meaning given by ss 608 and 609 of the Corporations Act. In effect, a person has a relevant interest if they have the power to control the exercise of voting rights in, or the disposal of, shares. [32] Section 672B of the Corporations Act, relevantly, requires a person who receives a direction issued by ASIC pursuant to s 672A to disclose to ASIC full details of their own relevant interest and the circumstances giving rise to the interest, the name and address of each other person with a relevant interest and the name and address of any person who has given instructions about the exercise of voting rights in, or the disposal of, shares. [33] These obligations are contained in Part 6C.2 of Chapter 6C of the Corporations Act. Their legislative purpose, common with the other disclosure obligations in Chapter 6C, is to ensure that the sale and purchase of listed securities occurs in an efficient, competitive and fully informed market and people cannot conceal their control of substantial parcels of listed securities from other market participants: ASIC v Bank Leumi Le-Israel (Switzerland) (1996) 69 FCR 531[; [1996] FCA 825] at 535 – 536, 544 - 546, per Lehane J (Lockhart and Foster JJ agreeing); ASIC v Terra Industries Inc (1999) 92 FCR 257[; [1999] FCA 525] at [97] per Merkel J; New Ashwick Pty Ltd v Wesfarmers Ltd (2000) 35 ACSR 263[; [2000] SASC 289] at [32] per Wicks J; Flinders Diamonds Ltd v Tiger International Resources Inc (2004) 49 ACSR 199[; [2004] SASC 119] at [63] per Prior, Debelle and Bleby JJ. [34] Section 1325A subsection (1)(c) of the Corporations Act, relevantly, provides that when the Court finds that a person states in a notice under s 672B in response to a direction under s 672A that they do not know particular information about the shares or about someone who has a relevant interest in them, then the Court may make any order including a remedial order. [35] Section 258E of the Corporations Act expressly provides that any reduction in a company's share capital because of an order under s 1325A is authorised by this subsection, and is therefore a permissible capital reduction under the Corporations Act. [36] The Court's discretion to make an order under s 1325A(1) of the Corporations Act is available in this case by reason of s 1325A(1)(c) because: (a) Mr Merity in Response 2; (b) Mr Nedderman in Response 3; stated that they did not know particular information about the Craigside Parcel. [37] Cancellation of shares in a company as a form of relief under s 1325A is expressly contemplated by s 258E of the Corporations Act. [38] It is submitted that making the order for the Craigside Parcel to be cancelled is appropriate because: (a) the Craigside Parcel is a substantial holding in NWR; (b) in the 2004 Craigside Notice, Craigside stated that it was the legal and beneficial owner of the Craigside Parcel; (c) in 2011, in Response 1, Craigside stated that it was a nominee shareholder only in respect of the Craigside Parcel; (d) no person has lodged a substantial shareholder notice disclosing a relevant interest in the Craigside Parcel and no other party claiming any relevant interest in the Craigside Parcel has sought to be joined to this proceeding, despite the proceeding being on foot since December 2011; (e) the purpose of the Court's power in s 1325A is to provide the broadest remedial power possible to address circumstances such as this one, where as a result of the inconsistent disclosures in subparagraphs (b) and (c) above by Craigside, a significant parcel of shares in a publicly traded entity are held in a manner which casts doubt on whether all relevant interests in the Craigside Parcel have been properly disclosed to the market; (f) as matters stand, the person (or persons) who may have relevant interests in the Craigside Parcel has not been identified and, but for the interim relief granted in this proceeding, such persons would, subject to the cooperation of Craigside, be able to exercise control over the voting rights, and or disposal, of the Craigside Parcel; (g) the cancellation of the Craigside Parcel will correct the inconsistent disclosure as to relevant interests by Craigside in the Craigside Parcel that has occurred and would be consistent with the legislative purpose of Chapter 6C of the Corporations Act which requires certain disclosures by holders of substantial holdings in listed entities; and (h) the cancellation of the Craigside Parcel would also be in furtherance of one of ASIC's objectives, being its objective to promote the confident and informed participation of investors and consumers in the financial system: s 1(2)(b) of the Australian Securities and Investments Commission Act 2001 (Cth). [39] If the financial and operational position of NWR had not substantially deteriorated, the vesting in ASIC and sale of the Craigside Parcel would have been the relief sought by ASIC in these proceedings consistent with the usual position of ASIC. However, since 30 September 2013, the financial and operational position of NWR has substantially deteriorated and this has been reflected in the price at which NWR shares have traded on the ASX. [40] In these circumstances, the parties jointly submit that the appropriate order is for the Craigside Parcel to be cancelled rather than vested in ASIC for subsequent sale because: (a) there is a real question whether the Craigside Parcel would be able to be sold for a reasonable price and within a reasonable timeframe given the current financial and operation position of NWR and the recent trading history of NWR shares; (b) in order to fund its ongoing activities, NWR is considering issuing further shares and there is a real question whether it will be able to do so at all or at a price which will realise significant additional funds while the Craigside Parcel is being disposed of; and (c) while the effect of cancellation will be to increase proportionally the ownership interest of all other holders of NWR shares and thereby provide a benefit to these holders, this is not inappropriate in this case in all the circumstances, including because it does not appear that cancellation will have the effect of moving any holder of NWR shares beyond the 20 per cent threshold for acquisitions outside of a takeover created by Chapter 6 of the Corporations Act. [41] The parties are agreed that the appropriate order as to costs as between them is that there be no order as to costs and each party pay its own costs. [42] If the orders jointly sought by the parties are made, the proceedings can otherwise be dismissed. 5 I am persuaded for the reasons set out in the joint submissions that the factual circumstances are such that an order under s 1325A(1) of the Corporations Act should be made and, accordingly, make the proposed orders. I certify that the preceding five (5) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate: Dated: 11 April 2014