New South Wales Supreme Court CITATION : CHAOXS PTY LIMITED v ECO AIR LIMITED [2000] NSWSC 638 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2807/2000 HEARING DATE(S) : 20/06/00, 21/06/00 JUDGMENT DATE : 21 June 2000 PARTIES : CHAOXS PTY LIMITED v ECO AIR LIMITED JUDGMENT OF : Mason P at 1 COUNSEL : M F Galvin (Plaintiff) A J L Bannon SC/J Stephenson (Defendant) SOLICITORS : Whittens (Plaintiff) Watson Mangioni (Defendant) CATCHWORDS : Corporation - Information Memorandum - whether misleading or deceptive - s995, s611 and s1324(1) Corporations Law. DECISION : Summons dismissed with costs THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION SC 2807/2000 MASON P Wednesday 21 June 2000 CHAOXS PTY LIMITED v ECO AIR LIMITED JUDGMENT 1 MASON P: This summons came on for hearing urgently. It relates to a meeting fixed to take place at 10 o'clock tomorrow morning. I heard it yesterday and reserved judgment. 2 There is a particular matter that has been troubling me and the matter was accordingly listed for further argument, which resulted in further evidence being called this afternoon. Because of the urgency of the matter it is not an available option to reserve the matter. 3 The plaintiff is a member of the defendant. The defendant (ECO) is a publicly listed company on the Australian Stock Exchange. Its present business is involved with air conditioning. However, there is no present prospect of it being able to pay its debts as and when they fall due other than that offered by the proposed transaction to which I shall now turn. The directors of the defendant wish to take the company in a new direction, as the provider of e-commerce technology including the development of virtual shopping malls. 4 Conditional upon the approval of its shareholders, the defendant has entered into a Share and Option Sale Agreement with Advanced Shopping Centre Management Pty Ltd (ASCM) and the shareholders and option holders of that company. It is dated 18 May 2000. Under that Agreement: (a) ECO will acquire ASCM through the acquisition of ASCM's securities; (b) The ASCM shareholders will be issued (in aggregate) 71 million ECO shares and 71 million ECO options; (c) As a result of the acquisition of 71 million ECO shares, the ASCM shareholders and their associates will (in aggregate) hold approximately 74% of the total issued shares of ECO. In other words there will be a substantial dilution of the interest of the existing shareholders of ECO; (d) If the 71 million ECO options (exercisable into shares in ECO at $1 per share) are exercised then, in the absence of any other relevant dealings the ASCM shareholders and their associates will (in aggregate) hold approximately 83% of the total issued shares of ECO. 5 ASCM has cash reserves in excess of $5 million and the acquisition of this fund is critical to ECO's capacity to continue in business and, hopefully, to diversify into the new field of e-commerce. 6 The acquisition is expressly conditional on a number of matters, including ECO obtaining all necessary shareholder approvals by 30 June 2000, including approvals under s611 of the Corporations Law and under Listing Rules 7.1 and 11.1. Cf s609(7). 7 ECO shares were suspended from trading on 3 March 2000 at the request of its directors. 8 On 18 May 2000 ECO sent to its members a Shareholder Information Memorandum (the Information Memorandum) providing information relating to the proposed transaction. In the Information Memorandum the directors of ECO seek the approval of ECO shareholders at a general meeting fixed for 22 June 2000. 9 The plaintiff seeks a declaration that the Information Memorandum is misleading and deceptive and an order restraining the holding of the meeting until further order. It also seeks an order that a supplementary Information Memorandum be issued containing experts' reports and valuations prepared by independent experts prior to any holding of a meeting of shareholders. 10 The condition in the Licence Agreement as to shareholder approval reflects ECO's obligations under the Corporations Law and the Listing Rules. As to the former, the proposed share and option issue would contravene s606 unless the acquisition were first approved by a resolution passed at a general meeting of ECO (see s611, item 7). An essential precondition is that: …(b) the members of the company [are] given all information known to the person proposing to make the acquisition or their associates, or known to the company, that was material to the decision on how to vote on the resolution, including the information specifically identified in item 7(b). 11 Listing Rule 7.1 requires the approval of ECO shareholders because the proposed share and option issue exceeds more than 15% of ECO's capital. It is not suggested however that the Listing Rule, standing alone, gives rise to a presently enforceable legal right. In any event, nothing turns upon this because the Listing Rule does not in terms expand the directors' duty of disclosure and because shareholder approval is required under s611 in any event. 12 Listing Rule 11.1 is not relevant to the issues before the Court. 13 For a time, the plaintiff sought also to rely upon clause 10.10.2 of the Listing Rules in support of a submission that the Information Memorandum was defective for want of a particular report from an independent expert and for alleged antecedent deficiencies in the existing experts' procedures. In this context some reference was made to certain ASIC Practice Notes. There were several procedural and substantive difficulties with this line of attack on the Information Memorandum and it was not pressed. 14 At the end of the day the plaintiff took its stand upon two partially over-lapping bases. The Information Memorandum was said to be deficient because of noncompliance with the requirement embodied in that portion of Item 7(b) of s611 which has been set out above; and because in the Information Memorandum is misleading or deceptive or is likely to mislead or deceive, contrary to s995. 15 The Court's power to grant the injunctive relief sought in these proceedings stems from s1324(1). The issues of relief are always distinct from those of breach, in cases such as the present particularly so. The object of the court would be to determine whether the Information Memorandum was, at the date of its issue, 18 May, defective in any of the respects contended for by the plaintiff. If it is satisfied that any defect has been made out, the question of appropriate relief is discretionary having regard to the breach found and obviously having regard to the circumstances as they present themselves to the Court at this point of time. 16 It was not in dispute that the directors of ECO have a fiduciary duty to give ECO shareholders full information on all material matters which are necessary for the shareholders to make an informed decision on the matter to be decided at the meeting (Bulfin v Bebarfald's Ltd (1938) 38 SR(NSW) 423). In Buttonwood Nominees Pty Ltd v Sundowner Minerals NL (1986) 10 ACLR 360 at 362, Young J discussed this and other leading cases before concluding that: …although there is the obligation to give full information, it is quite clear that this does not require the directors of a company to give to the shareholders every piece of information which might conceivably affect their voting. The obligation is to indicate the information which they consider the shareholders should have, plus that information which it would be obvious to the average commercial man in the street that they should have …. 17 Implicit in these formulations of the directors' duty is the notion of materiality which is referred to explicitly in Item 7(b) of s611. It must however be observed that Item 7(b) emphasises the entitlement of the members of the company, in circumstances where that item is engaged, to be given "all information known … that was material to the decision on how to vote on the resolution". 18 Translated to the present context, that Item 7(b) requires the ECO members to be given all information known to ASCM or its "associates" or known to ECO "that was material to the decision on how to vote on the resolution". The onus is of course upon the plaintiff alleging breach of this obligation to establish that omitted information (i) exists, (ii) is known to the persons identified and (iii) is material to the decision on how to vote on the proposed resolution. 19 There is a most useful set of general guidelines on the concept of materiality in the context of take-over bids in the judgment of Tamberlin J in Pancontinental Mining Ltd v Goldfields Ltd (1995) 16 ACSR 463 at 466-8. Included in the propositions stated by his Honour was the following (at 467): The object is to put shareholders in possession of the information required to enable them to make an informed and critical assessment of the offer and an informed decision whether to accept it. Information is material which could affect the shareholders' assessment of whether the offeror is likely to improve its offer, the prospects of a competing offer, and the prospects of the shares if retained. A relevant question is whether the information would assist shareholders to assess critically the attractiveness of the offer. 20 See also ICAL Ltd v County Natwest Securities Aust Ltd (1988) 13 ACLR 129 at 137 per Bryson J. 21 Making relevant adjustments for the fact that those cases involved takeover bids, I consider these principles to be applicable to the interpretation and application of s611 Item 7(b). 22 Section 995 is obviously derived from s52 of the Trade Practices Act 1974 (Cth). No submission was based upon s765 which partially replicates s51A of the Trade Practices Act, albeit without reversal of onus of proof since 13 March 2000. 23 There is a body of case law discussing the limited circumstances in which silence may constitute misleading or deceptive conduct. In NRMA Ltd v Morgan (1999) 31 ACSR 435 at 788 Giles J said: Silence may constitute misleading conduct as part of all relevant circumstances constituted by acts, omission, statements or silence, for example if the circumstances are such as to give rise to the reasonable expectation that if a particular state of affairs exists it will be disclosed. Put another way, if the silence gives rise to an inference that the state of affairs does not exist, a failure to disclose that it exists may be misleading conduct. It is sufficient to refer, among the many cases on the subject, to Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; 110 ALR 608; and Warner v Elders Rural Finance Ltd (1993) 41 FCR 399; 113 ALR 517. Where the circumstances include that the existence of the state of affairs involves a judgment or an opinion, that it does so must be taken into account in determining whether the silence constitutes misleading conducts. That is so because in the circumstances as a whole the silence may itself be an expression of judgment or opinion by the silent party, to be tested for its misleading nature according to whether the judgment or opinion represented an honest opinion with a rational basis (cf Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82 at 88; 55 ALR 25; Bateman v Slatyer (1987) 71 ALR 553 at 559; 8 IPR 33;), and because the other party's expectation or inference may be affected by his recognition that the silent party is exercising judgment or expressing an opinion. That, however, will only be part of the overall circumstances. This summary was recently applied by Santow J in a further NRMA case (see NRMA Ltd (Application of); NRMA Insurance Ltd (Application of) [2000] NSWSC 408 at [135]. See also Arbest Pty Ltd v State Bank of New South Wales (1996) ATPR ¶41-481 per Kirby ACJ at p41,979-80. 24 The Information Memorandum is a composite document containing a Chairman's letter; an Explanatory Memorandum; Directors' Recommendation; and Independent Expert's Report; a Valuation; the formal Notice of Meeting and a Proxy Form. 25 As might be expected, the Information Memorandum explains the proposed transaction both in substance and detail as well as providing its historical background and encouraging members to support the proposal. The directors make no bones about the fact that entry into the transaction (with immediate access to the $5 million cash reserves of ASCM) is essential to the capacity of ECO to continue in business. Indeed there are clear statements to the effect that, without the proposed transaction, there will be no return to shareholders in a liquidation of the company. I do not understand this present reality to be in dispute. In recording this, I am not suggesting that the fact that the proposed transaction offers the only ray of sunshine (however diluted) in a presently gloomy atmosphere would excuse non-compliance with obligations stemming from s611 and s995. After all, the members of ECO have an interest in driving a harder bargain with ASCM. The solvency issue may, however, impact upon any remedial response, including a response that would in effect permit the resolution to be put to a meeting before 30 June subject to the provision of supplementary information. 26 ASCM is described as holding a worldwide exclusive development licence from Activeworlds.com.Inc (Activeworlds) which is described as "an Over The Counter Bulletin Board traded stock in the United States progressing a NASDAQ SmallCap Market listing". Activeworlds is said to be the provider of advanced inter-active, 3D Internet technology. Through the licence agreement between Activeworlds and ASCM, ASCM will seek to develop business-to-business interactive 3D technology that is hoped to enable shopping centre owners to establish "transaction-capable virtual shopping malls" on the internet. The Information Memorandum provides an overview of the Activeworlds' technology in what to me is technobabble no doubt as opaque as much legal discourse is to the legal layman. 27 The Development and Licence Agreement has a number of functions. They include Activeworlds' obligation to develop the existing software in accordance with the ASCM requirements and to establish development over three stages occurring during this year. 28 The evidence of Mr Anderson, to which I shall refer later, indicates that Stage I was completed without incident and that the other two stages are in progress in a satisfactory form. There is no suggestion of any time or quality performances in delivery to date. The Licence Agreement also provides as a core provision the licensing of the software and other intellectual property to ASCM that is an aspect of the Activeworlds package. 29 It is convenient to address the substance of the plaintiff's attacks upon the Information Memorandum before returning to their legal conceptualisation. 30 The attack falls into three broad areas: (1) the valuer's reliance upon cashflow forecasts from ASCM directors; (2) non-disclosure of certain details relating to an off-market share transfer involving Mr Bloomfield's company Spinzaro Pty Ltd (Spinzaro) and (3) non-disclosure of the information in a memorandum from Mr Cox to ECO. The valuer's reliance upon the ASCM directors for a cashflow forecast 31 Part of the Information Memorandum is an Expert's Report prepared by an independent expert, Mr Robert Bell of Vouris and Bell. The Report is dated 18 May 2000. Mr Bell expresses the opinion that the proposed transaction is fair and reasonable having regard to the interests of the shareholders (par 2.1) adding the following: 2.3 The benefits of remaining a shareholder in ECO, if the proposed transaction is approved, are mainly contingent and not certain. The introduction, and establishing, of new operations as represented in ASCM's forecasts are dependent upon future sales which are not certain. 2.4 If the proposed transaction is not approved then the shareholders may be faced with the prospect that ECO may not continue as a going concern. The proposed transaction offers the shareholders the potential of improving their current financial position. 2.5 In forming our opinion we have considered information available at the date of this report, the terms of the transactions which would result from passing the resolutions which form the basis of the Restructuring Proposal, and the expected financial effect of the Restructuring Proposal on ECO. 32 Mr Bell's stated sources of his information include ASCM's Licence Agreement and a legal opinion relating to the same; audited financial statements of ASCM as at 31 December 1999; a four year profit and loss and cashflow forecast prepared by ASCM and pro-forma consolidated balance sheets for ASCM/ECO pre and post acquisition. The expert also refers to discussions he had with senior executives of ECO and ASCM and other bases of information. 33 Also mentioned as a principal source of information is an independent valuation dated 31 March 2000 by John F Shute, Chartered Accountant. That valuation addresses specifically the Development and Licence Agreement between Activeworlds and ASCM. The valuation also forms part of the Information Memorandum. 34 The expert explains the restructuring proposal and discusses its potential impact on ECO. He compares the likely advantages and disadvantages for the non-associated shareholders if the proposal is agreed to, with the advantages and disadvantages to those shareholders if it is not. Paragraphs 9.2-9.4 make it plain that the expert addressed a range of relevant considerations and that he had regard, inter alia to the value of the assets being acquired from ASCM as well as the absence of any alternative offer. 35 The value of the ASCM assets is addressed specifically in par 14. It is noted that ASCM's two major assets are its cash reserves and its intellectual property based upon the Activeworlds Development and Licence Agreement. The expert noted that the latter asset had been valued by the ASCM directors at approximately $17,325,000 by reference to the John Shute valuation but that the directors had discounted such valuation by 50%. It was noted specifically (par 14.6) that the Shute valuation was based on the cashflow projection prepared by ASCM and that this valuation had been relied upon by the expert in determining the value of ASCM. 36 Paragraph 17 of the Expert's Report analyses the fairness and reasonableness of the restructuring proposal before moving to the opinion that: 17.5 … The Restructuring Proposal now being put to the shareholders represents an opportunity for existing shareholders to retain an equity interest, albeit significantly reduced in percentage terms, in the future prospects of ECO which may add value to their existing financial position in ECO. 17.6 If the Restructuring Proposal is not accepted by shareholders and ECO was not able to raise further equity to fund working capital, the secured lenders may be forced to act on their security by appointing a Receiver and Manager or Voluntary Administrator. It is realistic to expect that no amount would be available for distribution to existing ordinary shareholders should ECO and its subsidiaries, in their current form, be the subject of a formal administration. 17.7 We have formed the view that, having regard to all the circumstances described above, there is a significant net benefit to the shareholders. 17.8 Having regard to the above, we are of the opinion: . The issue of 71 million ordinary ECO shares each fully paid to the shareholders of ASCM; and . The issue and potential exercise by the shareholders of ASCM of 71 million options to acquire 71 million ordinary ECO shares each fully paid, at an exercise price of $1 per share; are fair and reasonable having regard to the interests of the non-associated shareholders. 37 Paragraph 19 reiterates that the opinion is based partly on Mr Bell's consideration of the four year projections of the proposed operations of ASCM. It was noted that: The projections may approximate actual results, however the assumptions about circumstances and events that have not yet taken place can be subject to fluctuation and variations that may arise as future events occur . 38 The Shute Valuation summarises ASCM's Development and Licence Agreement with Activeworlds. It notes that there are no comparable 3D Internet applications to match its speed, reliability, animation, scalability, functionality and ease of use. The technology is currently being used extensively worldwide. The Valuation then explains the notion of internet shopping malls and summarises the technology available to ASCM under the Licence Agreement. There is analysis of the potential market and the advantages of the ASCM product which is described as "unique in the marketplace". 39 The valuer states his sources of information, to which I shall return. He then outlines several valuation methodologies (discounted cashflow, capitalisation of earnings and net tangible assets). Having regard to the absence of historical trading data, the current stage of development of ASCM and based on the information available to him, including detailed cashflow projections, the valuer considered that the appropriate method to be applied was that of valuing the asset on a discounted cashflow basis. No criticism is offered as to the methodology or its general application. 40 The Valuation addresses an appropriate discount rate having regard to the risk of future cashflows and the return required from an investment to generate the future cashflows. Various matters are taken into account (see pp 66-67) including the ability of ASCM's directors to implement and maintain effective marketing strategies and the strength of the Development and Licence Agreement. Based upon the various assumptions the valuer calculated a low risk discount rate of 20% and a high risk discount rate of 35%. Applying this methodology to the information at hand the valuer arrived at valuations of $31.781 million (minimum) and $37.516 million (maximum). 41 The valuer is quite explicit in his partial reliance upon four year cashflow projections prepared by the directors of ASCM. These are by no means the only matters relied upon, but they are identified as a "key assumption" on page 68. 42 The plaintiff submits that the Valuation (and therefore the Expert's Report and therefore the Information Memorandum as a whole) is defective because the valuer conducted no independent analysis of the ASCM directors' cashflow projections. There is no merit in this submission. The information was clearly relevant and would have been overlooked at the valuer's peril. It was necessarily predictive and patently so. The persons making the projections were identified and information provided as to their experience. The valuer addressed the issue of the validity of the Licence Agreement, citing a legal opinion from the United States indicating that it was valid and enforceable under the laws of the Commonwealth of Massachusetts and the federal laws of the United States of America. The plaintiff did not suggest by evidence or submission what alternative method might have been adopted to verify the financial projections in this highly unchartered ocean. 43 I reiterate that those projections were one aspect of the matters taken into account weighed with the other matters identified by the valuer. Furthermore, there are several passages in the Information Memorandum, including the Valuation, in which the predictive and essentially non-verifiable aspect of the cashflow projections were emphasised (see at pages 13, 14, 57, 67). Most importantly, in a critical passage in his report the valuer states: I have considered and relied upon information provided by the Directors of ASCM. I consider, on reasonable grounds, that this information is reliable, complete and not misleading. I have no reason to believe that any material facts have been withheld but I have not taken any steps to verify the accuracy, completeness or fairness of any date provided. I do not warrant that my enquiries have revealed all of the matters which an audit or extensive investigation might disclose. The independent information sourced has been utilised and relied upon to the extent of providing external evaluation and insight to the assumptions, forecasts and assertions made by the Directors in ASCM documentation, as provided. The statements in this report are given in good faith and in the belief that such statements and opinions are not false or misleading. 44 Bearing in mind what must be established to make out misleading or deceptive conduct this branch of the plaintiff's case fails. The Information Memorandum fairly discloses what the valuer took into account. There is nothing misleading nor any suggestion of a half-truth in his thought processes as revealed in the valuation. At its highest the plaintiff's submission amounts to a contention that the valuer should have done more. This does not establish a breach of s995. Nor does it establish any material omission by ECO within Item 7 of s611. (2) Partial non-disclosure of details relating to Spinzaro share sale 45 The second broad area in which the Information Memorandum is said to be deficient concerns what may be termed the partial non-disclosure of information relating to Mr Colin Bloomfield and his company Spinzaro Pty Ltd. Mr Bloomfield had been a director of ECO between January 1997 and November 1998. He is currently a shareholder and director of ASCM. These matters are clearly stated on page 12 of the Information Memorandum. The extent of his ASCM securities and of his proposed holding in ECO shares and ECO options are also set out. 46 Elsewhere (at page 50) Spinzaro is shown as the leading shareholder of ECO as at 16 May 2000 with a holding of 5.2 million shares representing 19% of the issued capital. Spinzaro is, as I have indicated, a company associated with Mr Bloomfield. 47 Since trading on the stock exchange was suspended on 3 March, prior to the issue of the Information Memorandum, it is clear that there has been an off-exchange trade. Indeed, the plaintiff got onto this from the Information Memorandum itself. When trading was suspended the last sale was at $0.61. 48 As I understand its case, the plaintiff does not suggest that the Information Memorandum is misleading or deceptive in this connexion. But the omission of information about the consideration paid in this off-market transaction is said to be a material omission. 49 In my view this matter was put to rest by the affidavit of Robert Edward Lees sworn 20 June 2000 that was filed late in the proceedings. That affidavit reveals that Spinzaro acquired its 19% stake of 5.2 million shares in ECO for $52,000 on 27 March 2000, having acquired those shares from John Urch an ECO director who is proposing to resign and not continue under ASCM. The consideration was one cent per share. 50 This transfer from Mr Urch (an existing ECO director) was done in order to achieve ASX spread requirements. The transaction was foreshadowed at a meeting between representatives of ECO and the ASCM shareholders. The matter was disclosed to ASX and no objection was indicated. The trading price of ECO shares before 3 March would be no reflection on their current value which would seem to be nil, particularly in the light of the material disclosed in the Information Memorandum itself. The price of one cent per share is above the likely value of shares if the ASCM transaction does not go ahead. 51 In the circumstances the details of this transaction (to the extent that they were not disclosed in the Information Memorandum) were of no materiality. (3) The Cox Memorandum 52 The third and most difficult aspect of the plaintiff's attack was the attack which questioned in certain respects the viability of Activeworlds itself with reference to its capacity to deliver and perform under the Licence Agreement. As confined by the particulars, the attack was based on certain paragraphs in a submission sent from Mr Michael Cox, the sole director of the plaintiff, to ECO on 28 March 2000. 53 The submission refers to a public announcement by Activeworlds relating to the ASCM Licence Agreement. It then poses the question: "So how reliable is Activeworlds.com?". Information about Activeworlds is then stated and sourced, the principal attributed source being a document issued by the Securities and Exchange Commission of the United States on 16 March 2000. That information was current at the time of the Cox memorandum but two months prior to the issue of the Information Memorandum. 54 The SEC document which eventually got into evidence is in the nature of a prospectus issued by Activeworlds in relation to a public issue of stock connected with a borrowing of about US$5 million. Extracts from that document which are quoted or summarised by Mr Cox indicate that Activeworlds was, at the time of his memorandum, itself dependent upon the public issue to raise sufficient cash for its ongoing operations. However the evidence indicates that the borrowing from the public was achieved in very short time in early May 2000 prior to the publication of the Information Memorandum (see Exhibit 4 and the evidence of Mr Anderson). 55 In the light of that evidence it is not, I understand it, suggested by the plaintiff that Activeworlds is in any financial difficulties or that shareholders of ECO should have been given information to that effect. 56 This matter was listed for urgent final hearing in circumstances where, to put it neutrally, the plaintiff had waited until pretty near the last hour before commencing these proceedings and in circumstances where I understand the plaintiff for very understandable reasons was not anxious to proffer any undertaking as to damages which would have been the price of interlocutory relief. 57 The quid pro quo was that the plaintiff was required to state with particularity the case which it wished to bring and it did so in the form of very helpful submissions prepared by Mr Galvin. They identify three portions of the Cox memorandum, portions of which at least are said to be information which was material and should have been brought to the attention of the ECO members in the Information Memorandum. 58 The portions are: As a result, since our senior management is comprised only of our chief executive and financial officers, our personnel, management systems and resources are being strained, with no assurance that the implementation of our programs will result in increased revenue. We may have difficulty hiring qualified employees with technical or sales experience. There is significant competition for qualified employees in the computer programming and internet industries and in the area of sales and we have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. We cannot be certain that we will be able to recruit and retain employees to meet our technical staffing or sales needs. We do not have any patent protection for our software, and we may not be able to protect our intellectual property rights. Although we have registered a version of our source code with the United States Copyright Office, we have no patents on our software products, and we rely primarily on our nondisclosure agreements with our employees and others to whom we have provided technical proprietary information for protection of our software code. We also rely on licensed software products in our operations. However, the steps we have taken may not protect our intellectual property rights, and it is possible that third parties may infringe upon our proprietary rights. 59 When pressed to indicate the substance of the disclosure which should have been made, counsel for the plaintiff put it in terms of a disclosure that the continued development of software by Activeworlds was contingent upon Activeworlds' capacity to hire qualified employees and the patent/copyright protection touching the intellectual property the subject of the Licence Agreement. 60 No evidence was led by the plaintiff as to the materiality of the non-disclosed information. The plaintiff submits (and is undoubtedly correct in doing so) that certain information on its face has such credibility and relevance that the Court can discern its materiality. The plaintiff's submission is that the portions of the Securities and Exchange Commission Registration Statement (SEC Statement) that are extracted in the portions of the Cox memorandum which I have set out above are of that nature. 61 It is relevant to weigh the issue against the other evidence that was led in the proceedings. That evidence consists primarily of the SEC Statement as a whole (Ex 2) and the evidence of Mr Anderson given orally today. Mr Anderson is the managing director of ASCM. He has an obvious interest in the venture going ahead and I am therefore cautious in accepting his evidence. Nevertheless, I see no reason to reject so much of his evidence as indicated that Activeworlds is a presently active and apparently viable organisation and that it has delivered and shows every sign of being able to deliver under the Licence Agreement. 62 When one looks at the statements extracted by Mr Cox in his memorandum in their context in the SEC Statement, it becomes apparent that they are part of a litany of risk factors disclosed in broad and in detail as part of the statutory obligations attending the type of borrowing that is in question. They are none the worse for that because one would expect that material information would be brought to the attention of borrowers in the United States. Nevertheless, they bear some of the hallmarks of cautious overdisclosure and they are obviously related to the particular context of a $5 million borrowing which the United States market supplied in very quick time in early May. 63 Reading the Cox memorandum one would get the impression that these qualifications or disclosures were a very significant and concerning aspect of the prospectus issued by Activeworlds. But reading them in the context of the SEC Statement they do not have anything like that flavour and there is indeed one aspect where a material portion of a paragraph of the SEC Statement is not set out in Mr Cox's abstract of it. 64 I will not set out the whole of the part of exhibit 2. But when one reads pp 5 and following of the SEC Statement it is apparent that these are but a minor aspect of a number of matters of disclosure and that in their context they are a very cautious statement of what would be a fairly obvious aspect of this type of market in its United States context. 65 Mr Anderson's evidence is also relevant to show that the question of how Activeworlds conducts its business as a whole is not coterminous with the question of Activeworlds' capacity to deliver under the Licence Agreement. In part, that capacity turns simply upon the intellectual property that is the subject of that agreement. In part there is obviously a human factor but that human factor does not strike me as being the sort that cannot be acquired for money in the labour market in the United States if there is demand. And to the extent of demand and it is quite clear that ASCM has pressed the foot to the floor and is demanding and achieving performance from Activeworlds. 66 On the evidence before the Court and the absence of evidence from the plaintiff as to the connection between the disclosures abstracted in the Cox memorandum and the subject matter of the Information Memorandum I am not persuaded that the omissions have materiality according to the principles that I have endeavoured to summarise above. For those reasons I reject the attacks upon the Information Memorandum and dismiss the summons with costs. ********** Last Modified: 03/13/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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