AMI v King
[2002] NSWSC 1033
•4 November 2002
Reported Decision:
43 ACSR 270
New South Wales
Supreme Court
CITATION: AMI v KING [2002] NSWSC 1033 CURRENT JURISDICTION: Equity Divisiion FILE NUMBER(S): SC 5365/02 HEARING DATE(S): 01/11/02 JUDGMENT DATE: 4 November 2002 PARTIES :
Australian Mining Investments Limited - Plaintiff
Gerry King - First Defendant
Ron McCullough - Second Defendant
Alliance Investments Pty Limited - Third Defendant
Lodestar Investments Pty Limited - Fourth Defendant
Pandora Nominees Pty Limited - Fifth DefendantJUDGMENT OF: Barrett J
COUNSEL : Mr M R J Ellicott - Plaintiff
Mr A Mutton, Solicitor - DefendantsSOLICITORS: Hagan & Co
Phillips FoxCATCHWORDS: CORPORATIONS - alleged insider trading - whether grantee of option to purchase shares at price significantly below market price possesses price sensitive information - exception for information concerning own proposed or actual transactions - takeovers - alleged acquisition of shares in contravention of 20% threshold - effect of pari passu allotment and prospectus allotment exceptions LEGISLATION CITED: Corporations Act 2001 (Cth)
Corporations LawDECISION: Interim injunction granted
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
BARRETT J
MONDAY, 4 NOVEMBER 2002
5365/02 – AUSTRALIAN MINING INVESTMENTS LIMITED v KING & ORS
JUDGMENT
1 After court hours on Friday evening, I heard an urgent application by Australian Mining Investments Limited, which I shall call “AMI”, for an interim injunction restraining three companies, being the third, fourth and fifth defendants, from disposing of shares in AMI until 10am on the following Tuesday, 5 November. Such shares are listed for quotation on the stock market of the Australian Stock Exchange.
2 By its summons filed in court when the matter came before me, AMI seeks various relief by reference to, first, alleged breaches by the first and second defendants of their duties as directors of AMI by virtue of occurrences in 1999 and perhaps 2000 and, second, those occurrences themselves, involving alleged breaches of both the insider trading provisions and the takeover threshold provisions of the Corporations Law as then in force.
3 Mr Ellicott of counsel appeared for AMI to seek interim relief ex parte, together with an order for abridgement of time for service. In the course of Mr Ellicott’s submissions, Mr Mutton arrived in court and announced an appearance for all five defendants. Submissions were then made for the defendants as well. At the conclusion of submissions, I had the impression that the parties might be able to reach some common ground over the weekend. Upon Mr Ellicott indicating that there was no real apprehension of shares being disposed of until the stock market opened at 10 o’clock this morning, I adjourned the application to 9.15 am today, indicating that if Mr Ellicott then pressed for the interim order he sought, I would give judgment on his application. He does so and I therefore proceed to deal with his application for interim injunctive relief.
4 The first basis on which AMI founds its case for such relief is that certain of the defendants engaged in insider trading contrary to statutory provisions for the time being in force when, in October 1999, they became the grantees of options to purchase shares in AMI in circumstances where the exercise price under each option was a fraction of one cent (i.e. 0.22 cent) but the shares were trading on the stock exchange at prices in the general vicinity of 4 cents per share and continued to trade at that price after the grant of the options. The parties to the option transactions, it was said, were in possession of the information that they proposed to deal and did deal, by way of the taking of the options, on a basis that ascribed to the shares a very substantially lower value than was indicated by the market price. That information, it was said, was of the price sensitive kind with which Division 2A of Part 7.11 of the Corporations Law in force in October 1999 was concerned (that is, the kind of information referred to in s.1002G(1)(a)) and, furthermore, the parties to the option transactions knew that the information was not generally available, thus satisfying the condition in s.1002G(1)(b). That being the case, so the argument runs, the parties to the option contracts, by entering into those contracts, contravened s.1002G(2). A corresponding argument is advanced in relation to the exercise of each option in early 2000, with exercise occurring at the stipulated price of 0.22 cent per share, when the market price was of the order of 7.5 cents.
5 An immediate and obvious problem with this analysis, it seems to me, arises from s.1002Q as in force at relevant times. I shall not go into the section in detail. It is sufficient to say that its effect was to make a body corporate’s own knowledge that it proposed to enter into or had entered into a transaction or agreement in relation to particular securities irrelevant in determining whether the body corporate possessed knowledge relevant to the operation of s.1002G(2). In addition, the fact that the body’s officers possessed information about its proposed or actual agreements and transactions in relation to the relevant securities did not count for s.1002G purposes as regards the body corporate’s transactions and agreements with respect to those securities.
6 Mr Ellicott submitted that this section did not cause to be left out of account the terms and other characteristics of a proposed or past transaction or agreement. According to that submission, it is only the fact that some transaction or other is proposed or has taken place – that is, a transaction viewed in isolation from its terms and characteristics – that is to be disregarded.
7 I do not accept this submission. The fact that a particular person proposes to enter into or has entered into some transaction or other – in other words, the mere fact that an undefined transaction is proposed or has taken place – is, of its nature, not of the price sensitive character with which s.1002G is concerned. The matter may be tested this way. Assume it is generally known that A holds a large number of shares in Company B. If the market were told A proposed to enter into some undefined and unspecified transaction in relation to shares in Company B and that was the full extent of the information the market received, there is no logical reason why the market should react in any way at all. Will A be a seller or a buyer, or perhaps a mortgagor or a scrip lender? No one knows. Will the foreshadowed transaction involve a million shares, a thousand shares or a hundred? No one knows. If it is a sale or a purchase, will it be at a price above, below or in line with the market. No one knows. Absent information on additional and essential matters of this kind, the fact of a proposed or past transaction or agreement cannot be price sensitive.
8 The most likely outcome on this aspect of the case at a final hearing is that the s.1002Q exception will be found to have put the taking of the October 1999 options outside the s.1002G(2) prohibition, to the extent that the grantees’ knowledge about their own transaction is put forward as information activating the s.1002G(2) prohibition. The same analysis will hold good if the same argument is run in relation to exercise of the option.
9 Let it be assumed, however, that the conduct of the grantees of the options in October 1999 or the subsequent exercise of the options or both did entail a contravention of s.1002G. On what basis can AMI now assert, as a consequence, a claim to restrain dealings in the shares that the defendants came to own by virtue of the exercise of the options? Mr Ellicott points to s.1325 of the Corporations Act 2001 as presently in force. He did not take me to transitional provisions causing past contraventions of the former s.1002G of the Corporations Law to be susceptible now to the operation of the present s.1325 in the same way as contraventions of the present s.1043A as inserted by the Financial Services Reform Act 2001. For the purposes of this application, however, I am content to assume, without deciding, that the present s.1325 is capable of applying in that way.
10 If AMI were to seek to rely on a past contravention of s.1002G(2) in relation to the acquisition of shares as a ground for invoking s.1325 as a source of a right to compensation, it would have to establish that it had suffered or was likely to suffer loss or damage “because of” that past contravention, that is, the contravention that attended the acquisition of the shares. The only basis on which Mr Ellicott sought to make that connection related to potential sale now, or in the near future, of some or all of the shares acquired in the past. His submission was that if persons who acquired shares under an unlawful transaction entered into two or three years ago were to sell them now in such a way as to reduce potential demand for shares that the company might have it in mind to offer widely for subscription (and I am prepared to assume, for the purposes of the submission and without wishing to make any finding, that such a plan may be to some extent in contemplation), the company will suffer, or is likely to suffer damage because of the unlawful transaction in 1999 or 2000, being the transaction that put the person in possession of the shares they are now about to sell.
11 This, to my mind, stretches “because of” beyond acceptable limits. If, in the postulated circumstances, the company suffers or is likely to suffer damage “because of” anything done by the person, it is the sale today, not the purchase or acquisition two or three years ago. The argument that s.1325 would avail AMI in such a case is accordingly very weak. Added to this, I do not think that either the legislation or the general law would, in the particular circumstances, regard a party who acquired shares in breach of the insider trading rules as holding them in any sense for the benefit of the issuer company, except perhaps where the party’s acquisition was by way of allotment by that issuer company. Such an argument might conceivably be constructed in that case; but that, on any version of the facts, is not the case before me here. I am therefore of the view that there is no serious question to be tried on the insider trading issue.
12 I move next to the aspect of AMI’s claim based on supposed breach of the 20% takeover threshold provision which, at relevant times, was s.615 of the Corporations Law as it existed before the changes made in March 2000 by the Corporate Law Economic Reform Program Act 1999. In summary terms, s.615 prohibited acquisition – a term taking its meaning from s.51(1) – of shares by a person if, immediately after the acquisition, any person entitled to 20% or less of total shares (or not entitled to any shares at all) would be entitled to more than 20%.
13 This part of AMI’s case is based on the fact that, shortly after notifying the substantial shareholding arising from each option to purchase to which I have already referred, each holder of such an option notified an increase in substantial shareholding, being an increase to an aggregate level greater than 20%. The increase, in each case, was said in the relevant notification to be attributable to subscription for a rights entitlement. The evidence shows that AMI undertook a rights issue of shares in the period September/October 1999. In one case – the case of the third defendant – the option shares were shown in the substantial shareholding notification as shares in which a relevant interest was held by the third defendant and the additional shares coming from the rights entitlement were shown in the same way, with the third defendant itself having apparently been the subscriber under the rights entitlement, although how this would be so when the third defendant did not actually hold the shares generating the entitlement (that is, the shares it had an option to purchase) is not at all clear. In that case, therefore, the available inference is that there was an acquisition, in s.51(1) terms, by the third defendant of the additional shares generated by the rights issue and that, immediately thereafter, the third defendant had a relevant interest in more than 20%.
14 In the other case, being the case of the fourth defendant, the substantial shareholding notices show that the fourth defendant was the grantee of the option to purchase the originally notified shares and that the rights entitlement subscription was made by the fifth defendant and resulted in the fifth defendant obtaining a relevant interest in the additional shares and the fourth defendant becoming entitled to them. In that case, therefore, it may be inferred that the s.51(1) acquisition under the rights entitlement was made by the fifth defendant and that, immediately afterwards, the fourth defendant was entitled to more than 20% of total shares. The evidence suggests some connection between these two companies, although it is not possible at this point to say exactly what it is. Nor does the evidence show that the fifth defendant had any shareholding at the time of the rights issue, so that there is no apparent basis on which it could have participated in that issue.
15 The apparent absence of a basis for participating in the rights issue on the part of both the third defendant and the fifth defendant is important in view of the question of the availability of certain of the exceptions to the s.615 prohibition. The first is the exception in s.621 headed “Acquisition as a result of pari passu allotment”. That section protects from s.615 acquisitions of shares occurring by virtue of the acceptance by a person of an offer made as one of a series of offers made to all (or effectively all) registered holders of shares on a pro rata basis. Status as a registered shareholder is also important to the potential operation of the s.622 exception “Acquisitions pursuant to prospectus”. The prospectus for the rights issue is in evidence. It set a record date of 20 September 1999 for determining shareholders who were to participate in the issue. Neither the third defendant nor the fifth defendant seems to have been a shareholder at that date at least to the extent sufficient to generate an entitlement to more than 4 million shares in the one for two basis on which the issue proceeded.
16 There is, to my mind, a serious question to be tried as to whether the third, fourth and fifth defendants, or any of them, contravened the provisions of s.615 of the Corporations Law by reason of the circumstances giving rise to the relevant interests that became the subject of substantial shareholding notifications by the third and fourth defendants in consequence of the rights issue of September/October 1999.
17 If there was a contravention of s.615, the present s.1325A, reflecting the then s.737, would make AMI a competent applicant for such order as the court thinks appropriate, including a remedial order as defined by s.9. Those orders include orders designed to dissipate voting power and ownership influence acquired beyond the permitted 20% level. They also include an order directing a person not to dispose of securities. The injunction now sought on an interim basis is thus capable of operating in support of an order that the statute allows to be made being, I might add, an order that AMI also seeks in its summons.
18 At this stage, I am asked to grant an injunction of very limited duration only. It has not been suggested on behalf of any defendant that a short restraint will entail undue hardship. I therefore regard the balance of convenience as favouring such an order of very limited duration.
19 Upon the plaintiff by its counsel giving to the court the usual undertaking as to damages, I make order 1 in the form of order which I initial and date.
20 Time for service of the summons and the affidavit of Patrick Flint is abridged to 12 noon today. Service on Phillips Fox on behalf of all defendants will be good service.
21 The proceedings are stood over to 10am on Tuesday, 5 November 2002 before the Duty Judge in the Equity Division.
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