Australian Securities and Investments Commission (ASIC) v Merkin Investments Ltd
[2001] VSC 211
•25 July 2001
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 7481 of 2000
In the matter of BLIGH VENTURES LIMITED
| AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION | Plaintiff |
| v | |
| MERKIN INVESTMENTS LIMITED | First Defendant |
| and | |
| RUBICON NOMINEES PTY LTD | Second Defendant |
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JUDGE: | Mandie J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 30 November 2000, 23 February 2001; written submissions: 16 March 2001, 30 March 2001, 11 May 2001. | |
DATE OF JUDGMENT: | 25 July 2001 | |
CASE MAY BE CITED AS: | ASIC v Merkin Investments Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2001] VSC 211 | |
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CORPORATIONS - contraventions of provisions of Corporations Law relating to substantial shareholding and tracing of beneficial ownership of shares - degree of knowledge of relevant interests - whether contraventions should be excused - orders including remedial orders under s.1325A Corporations Law
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R. Strong | Australian Securities and Investment Commission |
| For the 1st Defendant | Mr M. Heaton QC with Mr N. Wallace | Baker & McKenzie |
| For the 2nd Defendant | Ms. R. Peavey | Blake Dawson Waldron |
| For Bligh Ventures Ltd | Mr R. Peters | Mallesons Stephen Jaques |
HIS HONOUR:
By originating process dated 2 November 2000, the plaintiff (ASIC) seeks orders pursuant to s.1325A of the Corporations Law ("the Law"), in relation to 680,000 ordinary shares in Bligh Ventures Ltd (Bligh) held by the second defendant (Rubicon) as nominee or trustee for the first defendant (Merkin). The orders are sought as a result of alleged contraventions of the Law.
Bligh, a listed public company, was incorporated in Queensland on 12 July 1966.[1] Merkin is an "international company" registered in the Republic of Vanuatu under its International Companies Act 1992 and has a registered address at International Building, Port Vila. The directors of Merkin are Orion Inc (Orion) and Oak Limited (Oak) and its secretary is Zenith Inc (Zenith). Rubicon was incorporated in Queensland on 1 April 1971. Rubicon is entered in the register of members of Bligh as the holder of 1,219,599 ordinary shares in Bligh. On 15 September 2000, Techniche Ltd announced a takeover offer for all the shares in Bligh. On 2 and 5 October 2000, in response to a notice under s.672A (1)(b) of the Law, Rubicon named Merrill Lynch Canada Ltd (Merrill) as having a relevant interest in a parcel of 680,000 shares in Bligh held by Rubicon. On 17 October 2000, in response to another such notice, Merrill named Merkin as having a relevant interest in the said parcel of 680,000 shares.
[1]The operative or applicable law was thus the Corporations Law of Queensland.
On 18 October 2000, ASIC faxed another such notice to Merkin requiring Merkin to disclose within 2 business days, in accordance with s.672B (1) & (2) of the Law, full details of its relevant interest and the circumstances which gave rise to it and, to the extent to which it was known to Merkin, the name and address of each other person who had a relevant interest together with the like details, and the name and address of each person who had given Merkin relevant instructions in relation to the shares and full details of the instructions. Merkin replied from Vanuatu by fax dated 19 October 2000. The writer was Sue Phelps (Phelps), apparently an authorised signatory. Phelps stated that "[a]t this time we are unable to provide any information since Merrill… are refusing to acknowledge that we purchased any shares in [Bligh]."
By letter to Merkin dated 20 October 2000 ASIC demanded the information requested and pointed out that 680,000 voting shares constituted 9.43% of the issued share capital of Bligh and that s.671B of the Law required a substantial shareholder notice where any person had a relevant interest in 5% or more of the voting shares. I note that, in fact, no such notice had been lodged in relation to this parcel of shares in Bligh. On 23 October 2000 Merkin replied, saying that answers would be provided within the next few days.
ASIC also acquired a copy of a letter from Merkin to Merrill dated 1 August 2000, and signed by Phelps which stated, inter alia:
"Merkin…was incorporated on 16 September 1991, as an investment holding company. The directors and secretary are corporate entities as provided for under Vanuatu legislation."
Merkin's letter to Merrill went on to detail the transaction in which Merkin had purchased 500,000 Bligh shares in January 1992 and referred to other dealings.
As was subsequently disclosed by affidavit, Merkin wrote letters on 23 October 2000 to its shareholders, Teak Ltd (Teak) and Pine Ltd (Pine). Merkin's letters were signed on behalf of Oak, as a director of Merkin, by one Bradley Karae (Karae) as the "duly authorised officer" of Oak.
Merkin's letters to Teak and Pine both read as follows:
"We have been requested by (ASIC) to file a relevant disclosure in respect of being a substantial shareholder of a listed company in Australia.
The Australian Act requires that we disclosed the beneficial ownership of this company if it is controlled by any other body. As you hold 50% of the issued capital, your company comes within the definition of a substantial shareholder of our company.
Please advise by return if you are holding shares in our company beneficially or if not, for whom are you holding the shares?..."
Merkin's letterhead disclosed the following information: address-International Building, Lini Highway, Port Vila, Vanuatu; postal address - P.O. Box 301, Port Vila, Vanuatu; telephone number - (678) 24106; fax number - (678) 23405; e-mail - [email protected]. Merkin's letter to Teak was addressed to P.O. Box 301 (the same box number). Merkin's letter to Pine was addressed to P.O. Box 45, Port Vila, Vanuatu.
Teak's reply to Merkin was dated 2 November 2000 and was addressed to Merkin at P.O. Box 45 (not P.O. Box 301). Teak's letterhead bore the same address, fax number and e-mail address as Merkin's -- only the telephone number was slightly different.
Teak's reply, signed by Singlair Rakau, as authorised signing officer, said:
"... although we do not hold our shares (sic) in your company beneficially, we are unable to tell you for whom we are holding the shares..."
Pine's reply to Merkin was dated 10 November 2000 and was addressed to Merkin at First Floor, International Building (etc). Pine's letterhead bore the same address, fax number and e-mail address as Merkin's. Although Merkin's letter to Pine was postally addressed to P.O. Box 45, Pine's letterhead bore a postal address of P.O. Box 301 (the same as Merkin's).
Pine's reply, signed by one Singo as authorised signing officer, said:
"We respond to your letter to us of 23 October 2000 wherein you sought to determine whether we hold our shares (sic) in your company beneficially or for some other party. We do not hold shares beneficially, but we are not in a position to advise you for whom we are holding the shares. If this situation changes, we will advise you."
On 2 November 2000, this Court granted an ex parte interim injunction restraining the defendants from disposing of the Bligh shares. This injunction was subsequently continued. On 10 November 2000, the Court ordered Merkin to disclose to ASIC the matters set out in s.672B of the law in relation to the Bligh shares as referred to in the Notice of 18 October 2000. On 14 November 2000, the solicitors for Merkin faxed to ASIC a response from Merkin, dated 13 November 2000, to the Notice dated 18 October 2000, stating that Merkin "believed" that it owned the 680,000 Bligh shares "beneficially", and to the question as to other persons with a relevant interest answered: "None to our knowledge." The response was signed on behalf of one director (Orion) by Phelps as authorised signatory and on behalf of the Secretary (Zenith) by Karae as authorised signatory. ASIC responded pointing out deficiencies in the response, the failure since 1992 to lodge a notice under s.671B (formerly s.709) of the Law, and stressing the wide definitions of "relevant interest" in s.608 (1)-(8) of the Law.
The statement of "None to our knowledge" in Merkin's response dated 13 November 2000 in answer to the question as to other persons with a relevant interest in the Bligh shares appears not to have taken into account the letter from Teak dated 2 November 2000 and the letter from Pine dated 10 November 2000, although it may be that Merkin at this stage did not appreciate the width of the definition of relevant interest and had not conveyed the contents of its shareholders' letters to its legal advisers.
By letter faxed on 16 November 2000, the solicitors for Merkin said that Merkin asserted that it was the beneficial owner. The solicitors attached a chronology dealing with the acquisition of the shares in Bligh which may be summarised as follows:
DATE
BUY/SELL
AMOUNT
HOLDING
ON OWN ACCOUNT
FOR ANOTHER
30/1/92
Buy
500,000
500,000
300,000
200,000*
4/6/92
Buy
148,000
148,000
48,000
100,000*
11/8/94
Buy
42,000
690,000
42,000
-
24/8/95
Sell
-30,000
660,000
-30,000
-
30/10/95
Buy
20,000
680,000
20,000
-
[* The moneys lent to "a borrower" by Merkin for the purchase of 300,000 shares were not repaid and Merkin became beneficial owner of these shares in March 1994.]
The letter from Merkin's solicitors went on to say that Merkin had two shareholders, each of which held 50% of the shares in Merkin (one share each) – Pine Limited (Pine) and Teak Limited (Teak), two Vanuatu companies, and that Pine and Teak had a relevant interest in the Bligh shares. Again, it would seem that Merkin's solicitors had not yet been apprised of the letters to Merkin from its shareholders, of 2 and 10 November 2000.
By this stage ASIC had accumulated the following information about some of the entities involved with Merkin:
Oak Limited: (a Vanuatu company and a director of Merkin)
Directors:
Orion Inc
a "service company"
Zenith Inc
a "service company"
Shareholders:
Pacific International Trust Co Ltd ("PITCO")
999 shares
Pine Limited
1 share
Orion Inc: (an "international company" and a director of Merkin)
Directors:
Nauru Nominee Corporation
Aiwo, Nauru
Initial Holding Limited
Aiwo, Nauru
Shareholders:
Teak Limited
Zenith Inc
Oak Limited
Pine Limited
Teak Limited: (a Vanuatu company and a shareholder in Merkin)
Directors:
Orion Inc
Oak Limited
Shareholders:
PITCO
1 'A4' share
Thomas M. Bayer
1 'A4' share
Pine Limited: (a Vanuatu company and a shareholder in Merkin)
Directors:
Orion Inc
Zenith Inc
Oak Limited
Shareholders:
PITCO
999 'A4' shares
Thomas M. Bayer
1 'A4' share
PITCO: (a Vanuatu company, registered 19 May 1972)
Directors:
Charles S. Kleiman
Noeline Lulu
Thomas M. Bayer *
Stephen Frederick Bayer*
Robert M Bohn *
Orion Inc*
Sue Phelps*
[Issued shares: 650,000 'A' shares @ 50 cents (Australian)]
Shareholders:
Orion Inc
"A4 shares value [$] 325,000"
Thomas M. Bayer
1 'A4' share
(* shown as directors in March 2000 annual report)
The evidence indicates that PITCO, a shareholder in Oak, Teak and Pine, is a large trust company in Vanuatu. It has a number of nominee companies and is "one of the main service providers to the Vanuatu Finance Centre". PITCO has a web site and a number of "pages", available through the Internet. These pages describe the services provided by PITCO, including the incorporation of companies and administration services after incorporation, including the following optional services:
" …
·Provision of Nominee Shareholder(s) - used if a beneficial owner does not wish to appear on the register of members.
·Provision of Director(s). - The directors run the company. If we provide the directors, all decisions must be taken by the directors. They will consider suggestions of the owners but, at law and in practice, the directors are responsible for the operation of the company. Generally, the owners nominate themselves or their managers as directors but there are times when the owners request us to provide directors.
·Provision of Company Secretary. This officer is responsible for ensuring that the company complies with its statutory obligations and often acts as second signatory to contracts. …"
ASIC replied on the same day to Merkin's solicitors' letter of 16 November 2000. ASIC noted that the directors of Merkin were companies which appeared to be associated with, and in all probability were controlled by, PITCO. ASIC suggested that PITCO controlled Merkin and had a relevant interest in the Bligh shares.[2] Further, ASIC suggested that as Pine (a 50% shareholder in Merkin) was virtually a wholly-owned subsidiary of PITCO, PITCO controlled Merkin and had a relevant interest in the Bligh shares by that route.[3] ASIC suggested that Teak and Pine might own their shares in Merkin on behalf of a client of PITCO and it was likely that a client of PITCO had a relevant interest in the Bligh shares.[4]
[2]ASIC referred to ss.608 (4)(5) and (3)(b) of the Law.
[3]ASIC referred to ss.608 (3)(a) and 610 of the Law.
[4]ASIC referred to s.609 of the Law.
On 17 November 2000, the Court ordered Merkin to comply with each and all of the requirements of s.671B of the Law with respect to the Bligh shares and to provide an affidavit as to a number of specified matters.
On 21 November 2000, an affidavit of Karae was sworn herein, in his capacity as authorised officer of Oak, and having, as such, the administrative responsibility for Merkin. Karae deposed that Merkin carried on business as an investment company holding both shares in companies and works of art. The affidavit explained the difficulties and delays encountered in looking for records relating to the purchase of the shares in Bligh, which was handled by an individual, one Simeon Revo, who "handled this matter on behalf of Merkin during 1992 to 1996" and who "left Merkin in about 1998".
Karae went on to depose that a detailed review of the files maintained by Merkin in relation to the Bligh shares had now been commenced and was continuing. He said that Merkin had some difficulty in determining the precise nature of its interest in the Bligh shares as it did not generally hold files for more than six years and no one who was involved with the acquisition was currently working for Merkin.
Karae deposed that from "the reviews of the files and of enquiries which have been undertaken by Merkin in relation to the Bligh shares", he believed that the shares had been acquired in the manner which I have earlier set out.[5]
[5]See para [16] above.
Karae did not disclose whether he (or Phelps) knew, or whether the files disclosed, who the person or persons were that gave instructions to Revo to purchase the Bligh shares for Merkin in the first place.
Karae then deposed as follows:
"Confidentiality
28. In my capacity as an authorised officer of Oak Limited, I am familiar with the laws of the Republic of Vanuatu which regulate the disclosure of information by entities such as Merkin. Pursuant to those laws, I believe that it is a criminal offence for Merkin to disclose information concerning the shareholding in or the beneficial ownership of any shares in a company, the management of such company or any of the business, financial or other affairs or transactions of the company and any person doing so is guilty of an offence. Now produced and shown to me and marked "BK- 10" is a true copy of an extract from the Vanuatu International Companies Act, No 32 of 1992 showing section 125 that Act.
29. The penalty for contravention of section 125 of the Vanuatu International Companies Act includes a $100,000 fine or a custodial sentence of up to 5 years.
30. I believe that section 125 prohibits Merkin from disclosing information in relation to its shareholding."
Section 125 of the Vanuatu International Companies Act provides:
"SECRECY
125 (1) Any person who, except when required by a court of competent jurisdiction, with respect to any company otherwise than for the purposes of the administration of this Act or for the carrying on of the business of the company, in Vanuatu or elsewhere, divulges, attempts, offers or threatens to divulge or induces or attempts to induce other persons to divulge any information concerning or respecting:
(a) the shareholding in, or beneficial ownership of any share or shares in a company;
(b) the management of such company; or
(c) any of the business, financial or other affairs or transactions of the company;
shall be guilty of an offence.
(2) Any person who contravenes the provisions of subsection (1) shall, on conviction, be liable to a fine not exceeding $100,000 or to imprisonment for a term not exceeding five years or to both such fine and imprisonment."
Karae did not expressly state that he or Phelps were or were not in possession of any relevant information, which they were prevented from disclosing by this statutory provision. There was no evidence as to the complete legislation or concerning the proper interpretation of the provision under Vanuatu law. No submissions were subsequently made as to the scope of the words "otherwise than … for the carrying on of the business of the company in Vanuatu or elsewhere…". In the end, as I understood it, it was not positively contended that Merkin was prevented by Vanuatu law from complying with the Corporations Law but rather that Merkin had disclosed all that it knew.
Karae went on to depose that he believed that Teak and Pine held their shares in Merkin "on behalf of another party or parties" but that Teak and Pine were "unable" to advise who those parties were. He deposed that he believed that Teak and Pine held their shares in Merkin as nominees or bare trustees for an undisclosed beneficiary or beneficiaries and that, accordingly, Teak and Pine did not have a relevant interest in Merkin's shares.[6] He said that Merkin did not know of any other person who may have a relevant interest in Merkin's shares. Karae deposed that the following persons were associates of Teak and Pine: Zenith, Orion, Oak, PITCO, Thomas M. Bayer of Port Vila, Stephen F. Bayer of Philadelphia, Pennsylvania, USA, Sue Phelps, Robert M. Bohn of Vanuatu, and Pacific International Technology Corporation of Vanuatu.
[6]See s.609 (2) of the Law.
On 22 November 2000, Merkin lodged a notice pursuant to s. 671B of the Law with the Australian Stock Exchange as a substantial holder and beneficial owner of the shares in Bligh since March 1994, the shares being registered in the name of Rubicon. The relevant date was said to be 15 March 1994 because Merkin became entitled to the additional 300,000 shares on that date when the owner (Fendalton Ltd),[7] a borrower from Merkin, had defaulted. The notice also confirmed that Teak and Pine held their shares in Merkin as nominees or trustees for a third party or parties. Karae deposed in a further affidavit sworn on 22 November 2000 that "as far as he was aware" Merkin was not aware of the proportion of the issued capital held by it in Bligh until it was informed by ASIC on 20 October 2000. This statement is of course irrelevant to the existence of a contravention and, given Karae's state of knowledge, provides evidence of little or no weight in relation to the issue of inadvertence or mistake (see s.1325D(4)(a) of the Law).
[7]See para [16] above.
Argument was heard in this proceeding on 30 November 2000 and 23 February 2001. In relation to the Techniche takeover offer, certain orders were made in November 2000 which need not be mentioned further, because that offer did not in the end proceed. Subsequently, additional submissions in writing were filed by the parties in March and in May 2001.
Contravention of "old" s.709.
It was common ground that Merkin had contravened the provisions of s.709 of the Law, as the Law stood prior to 12 March 2000.[8] The contravention was the failure by Merkin, as a substantial shareholder in Bligh, to give a written notice to Bligh in the form required by s.709, within two business days after the day upon which Merkin became aware of the relevant interest or interests because of which Merkin was a substantial shareholder. It is to be noted that the trigger is the awareness of a relevant interest or interests. It is not required that there be an awareness of the fact of the substantial shareholding itself for the notification obligation to arise. Merkin said that the contravention occurred in March 1994 when it became beneficial owner of the 300,000 shares purchased for Fendalton Ltd, whereas ASIC contended that the contravention occurred in 1992. In my opinion it does not matter for the purposes of this proceeding whether the contravention occurred in 1992 or in 1994 and I am content to assume that it occurred in 1994.
[8]On that date s.709 was replaced by s.671B of the Law.
Merkin conceded that the contravention continued until 13 March 2000 when s.709 was repealed. Merkin also conceded that, by virtue of s.109E of the Law, the Court had "jurisdiction over the contravention of s.709 … and that the appropriate provision dealing with "penalty" is s.1325A of the … Law."
It was thus accepted by the parties that the Court has power under s.1325A(1) of the Law to "make any order or orders (including a remedial order)[9] that it considers appropriate" as a result of Merkin's contravention of "old" s.709.
[9]See s.9 of the Law for the definition of a remedial order.
ASIC also made some submissions about the effect of s.1488 of the Law dealing with continuing obligations under Parts 6.7 and 6.8 of the old Law, but ASIC ultimately submitted that it was unnecessary for the Court to reach a concluded view upon the operation of s.1488. In my opinion, by virtue of ss.109E and 1314 of the Law, Merkin's contravention of s.709 continued until it gave its notice dated 22 November 2000.
Contravention of s.672B.
It was also common ground that Merkin had contravened s.672B of the Law by failing to comply with the direction by notice from ASIC, given pursuant to s.672A(1) of the Law and dated 18 October 2000, within two business days after Merkin was given the direction. Again, Merkin accepted that the Court had power under s.1325A(1) of the Law in relation to this contravention.
Compliance with s.672B.
Section 672B(1), which appears in Part 6C.2 of the Law headed "Tracing Beneficial Ownership of Shares", provides, so far as relevant:
"A person given a direction under section 672A must disclose to the person giving the direction:
(a) full details of their own relevant interest in the shares …; and
(b)the name and address of each other person who has a relevant interest in any of the shares … together with full details of:
(i) the nature and extent of the interest; and
(ii)the circumstances that give rise to the other person's interest; and
(c)the name and address of each person who has given the person instructions about:
(i) the acquisition or disposal of the shares …; or
(ii)the exercise of any voting or other rights attached to the shares; or
(iii) any other matter relating to the shares …;
together with full details of those instructions …
A matter referred to in paragraph (b) or (c) need only be disclosed to the extent to which it is known to the person required to make the disclosure."
(emphasis added)
ASIC submitted that Merkin was in continuing contravention of s.672B(1) because it had not disclosed all that was known to it concerning the matters referred to in s.672B(1)(b) and (c).
The basis for ASIC's submission was elaborated in a written submission dated 30 March 2001 (paras. 6 to 10) as follows:
"6. The evidence as a whole supports the following inferences:
(a)Merkin is managed by [PITCO] in the course of a business of supplying and managing offshore companies on behalf of other persons ('clients');
(b)the directors, secretary and shareholders of Merkin are all companies controlled by PITCO and supplied by it as such as part of the services which it provides;
(c) there is in existence a person or persons ('the client'), who:
(i)engaged the services of PITCO to supply and manage Merkin, complete with directors, a secretary and nominee shareholders;
(ii) pays PITCO to provide those services;
(iii)instructed PITCO that they desired Merkin to acquire the Bligh … shares the subject of this proceeding;
(iv)financed or procured the finance for the acquisition of those shares;
(v)instructed PITCO as to their wishes with respect to Merkin's acceptance of the takeover offer by Techniche;
(vi)could at any time have instructed PITCO that they desired Merkin to dispose of the shares or any of them and expect such instructions to be carried out;
(vii)could at any time have called upon PITCO to cause Teak … and Pine … to transfer their shares in Merkin to a person or persons nominated by them (i.e. the client);
(d)The human beings who actually manage the business of PITCO are aware of the identity of the person or persons who give them instructions about Merkin and the transactions which that person or those persons desire Merkin to enter into or carry out. Ms. Sue Phelps, a director of PITCO and an authorised officer of each of the officers of Merkin, is one of those human beings.
(e) The client is the real directing mind and will of Merkin.
7.If the inferences set out in paragraph 6 are drawn, as ASIC submits they should be, then it would follow that:
(a) the client referred to:
(i)has a relevant interest in the shares which Teak … and Pine … hold in Merkin [ss.608(1)(c) and 608(2)] and, therefore, a relevant interest in the Bligh shares held by Merkin: s.608(3)(a);
(ii)further or alternatively, controls Merkin [ss.608(4) and 608(5)] and, therefore, has a relevant interest in the Bligh shares held by Merkin: s.608(3)(b); and
(iii) knows who he or she is;
…
9.The evidence led by Merkin about its state of knowledge is limited to the affidavit of Mr. Karae sworn on 21 November 2000 … . He swears that affidavit as an 'authorised representative' of Oak ..., one of the directors of Merkin. He is not a director of Merkin, nor of Oak … . He has 'administrative responsibility' for Merkin. However, his affidavit and the correspondence from Merkin to ASIC make it clear that Ms. Phelps also has considerable 'administrative responsibility' in relation to Merkin, and is in a position to give directions to Mr. Karae in relation to Merkin matters. Mr. Karae on occasion deposes to knowledge or belief that Merkin had. In view of the relatively short duration of his involvement with Merkin and his apparently inferior position, the Court should not accept this evidence as establishing anything other than Mr. Karae's belief.
10.Even if the Court were disposed to accept that evidence and also to assume that no one in PITCO knows who PITCO's client is, all that would demonstrate is that Merkin is being run by puppets who do not know the identity of their puppet master. That does not mean that the puppet master is not working the strings. How can Merkin assert that it is ignorant of the identity of its own directing mind and will, which ex hypothesi is not Ms. Phelps or Mr. Karae or anyone else at PITCO."
In my opinion the evidence supports the factual matters and inferences set out in para 6 (a) and (b) of ASIC's submission quoted above. As to para 6(c), I am satisfied on the balance of probabilities that there is an ultimate "client or clients" in existence providing instructions to PITCO, but whether the client or clients communicate directly with PITCO, or through an intermediary or intermediaries, is unknown. The ultimate client or clients who "control" Merkin, and who control Teak and Pine vis-a-vis Merkin, is an unidentified person or persons who at all relevant times probably gave and continues to give instructions concerning Merkin, directly or indirectly, to PITCO or to PITCO's relevant nominee companies. The client or clients may or may not be known to the corporate directors and shareholders of Merkin and may or may not be known to PITCO.
The client probably has the power to dispose of, or control the exercise of the power to dispose of, the shares in Merkin held by Teak and Pine – see s.608(1)(c) of the Law. Section 608(1) goes on to provide that:
"It does not matter how remote the relevant interest is or how it arises. If 2 or more people can jointly exercise one of these powers, each of them is taken to have that power."
The client therefore has, through Teak and Pine, a relevant interest in the Bligh shares (see s.608(3)(a) of the Law).
Additionally, the client probably has the capacity to determine the outcome of decisions about Merkin's financial and operating policies and therefore controls Merkin (see ss.608(3) and (4) of the Law). The client therefore has a relevant interest in the Bligh shares (see s.608(3)(b) of the Law).
However, the evidence does not enable the Court to conclude that the knowledge of the unknown client or clients is the knowledge of Merkin. Evidence as to the chain of command or the precise relationships involved is not before the Court and I am not satisfied, in the absence of such evidence, that knowledge of the identity of the person or persons having relevant interests (whom I have described as the client or clients) should be attributed to Merkin. Submissions were made in relation to the concepts of "the directing mind and will"[10] and the attribution of knowledge of that directing mind and will to the company, but it seems to me that the evidence here is insufficient to invoke those concepts.
[10]H.L. Bolton (Engineering) Co Ltd v T.J. Graham and Sons Ltd [1957] 1 QB 159, 172; Donato v Legion Cabs (Trading) Cooperative Society Ltd [1966] 2 NSWR 503; Tesco Supermarkets Ltd v Nattrass [1972] AC 153, 170; Brambles Holdings Ltd v Carey (1976) 15 SASR 270; Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, 506.
For the foregoing reasons, I do not find that Merkin has contravened s.672B of the Law, other than by failing to comply with the direction from ASIC within two business days.
Other bases for orders under S.1325A.
ASIC made passing reference to s.1325A(1)(c) which empowers the court to make orders if a person states in a notice under s.672B about securities that they do not know particular information about the securities or about someone who has a relevant interest in, or has given instructions in relation to the securities.
However Counsel for ASIC conceded that the only statements by Merkin about not knowing particular information of this kind were not in a "notice" under s.672B (that is to say, a response under s.672B) but in other material, including an affidavit filed herein.
ASIC also submitted that the Court had power to make orders under s.1325A(1)(a) if any person had contravened Chapter 6C, whether or not that person was a party to the proceeding, so that contraventions by the unknown client or clients were sufficient to enliven the Court's power. I find it unnecessary to determine that question.
Application that contraventions be excused.
Merkin sought that its contraventions be excused pursuant to s.1325D(3) and (4) of the Law which provide:
"(3)If the Court is satisfied that in all the circumstances a contravention of a provision of Chapter 6, 6A, 6B or 6C ought to be excused, the Court must not make an order under section 1325A, 1325B or 1325C other than:
(a) an order restraining the exercise of voting or other rights attached to securities; or
(b) an order that an exercise of voting or other rights attached to securities be disregarded.
(4)In determining whether or not a contravention of a provision by a person ought to be excused, have regard [sic] to the contravention being caused by any of the following:
(a) the person's inadvertence or mistake
(b) the person not having been aware of a relevant fact or occurrence
(c) circumstances beyond the control of the person.”
In my opinion, neither of Merkin's contraventions should be excused.
In relation to the contravention of "old" s.709, there is insufficient evidence as to the circumstances in which the Bligh shares were purchased to assess whether in or between the years 1994 and 2000 there was any inadvertence or mistake by reason of which the notice was not given. For all the evidence shows, the failure may have been intentional. Karae's evidence does not assist Merkin in this regard. For most of the period involved, there is no reason to think that Revo, and hence Merkin, was not aware of the relevant facts, and the evidence from Karae about the state of Merkin's files is vague and unsatisfactory. It was the responsibility of Merkin as a purchaser of shares in an Australian listed company to comply with this important provision of the Corporations Law and it has failed to provide any satisfactory explanation for its failure to do so. Ultimately, of course, it did comply, but only after the commencement of this proceeding and after a court order.
In relation to the contravention of s.672B, Merkin submitted that its failure to comply with ASIC's directions within the required time was due to "the uncertainty of its entitlement to the shares and the dispute with Merrill Lynch". I am not persuaded by that submission. In my opinion, there is insufficient evidence before the Court, either to show that Merkin's sources, information and records were such that it had no sound knowledge of its beneficial ownership of the Bligh shares, or to make out any of the criteria referred to in s.1325D(4) of the Law or to explain the delay in response to ASIC's direction.
Orders under s.1325A.
ASIC submitted that orders should be made, including remedial orders, to the effect that the Bligh shares should be vested in ASIC, that the Bligh shares should then be sold by tender, that ASIC should retain out of the proceeds of the sale of the Bligh shares, the costs and expenses of sale and its costs of this proceeding on an indemnity basis, and that any profit remaining to Merkin (after these deductions) should be paid, not to Merkin, but to Bligh. If these orders were made, Merkin would receive at the end of the day, at best, no more than it had laid out in the purchase of the Bligh shares. These orders, it was submitted, would uphold the primary policy objective of the provisions contravened which was the maintenance of an informed market,[11] and also deter non-compliance with such provisions by Merkin and by others. Merkin would also be deprived of any profit derived from holding the Bligh shares while not complying with the legislation.
[11]Re North Broken Hill Holdings Ltd (1986) 10 ACLR 270, 282, 286 per Fullagar J.; Brunswick NL v Blossomtree Pty Ltd 10 ACSR 542, 549; Meridian Global Funds Management Asia Ltd v Securities Commission, supra fn 10, at 511; ASIC v Terra Industries Inc (1999) 31 ACSR 186, 206-8 and cases therein cited.
In my opinion, there is an important factor, in addition to the direct circumstances of the two contraventions themselves, which should be taken into account in considering what orders should be made under s.1325A. The fact that Merkin does not know the names of the persons by whom its shares are beneficially owned, and who therefore have a relevant interest in the Bligh shares, is a factor in favour rather than against the making of appropriate remedial orders. The legislation itself makes clear, as ASIC submitted, that ignorance of such matters can be a basis for appropriate orders (s.1325A(1)(c)). If it were otherwise, the legislation could easily be set at naught and the objective of an informed market frustrated. This factor shows in my opinion that, in full context, the contraventions were not just technical breaches which now have been cured, as Merkin would have it.
I consider that orders which provide for the vesting of the Bligh shares in ASIC and their sale by tender, and for the deduction from the net proceeds of ASIC's (and Bligh's) costs on an indemnity basis, are reasonable and appropriate orders to be made in this proceeding, in order to uphold the policy of the legislative provisions and to encourage compliance with them. In my opinion, the making of such orders would not be unfair to Merkin (or any other person) in the circumstances, so far as disclosed. I accept ASIC's submissions to that extent. However in my view it would be unduly punitive in all the circumstances to deprive Merkin of the profit (if any) remaining after all such costs have been deducted and I do not think it appropriate to deprive Merkin of any such profit in favour of Bligh, as ASIC sought. Subject to any further submissions as to the precise mechanics of the orders which any party may wish to make, I propose to make orders generally in accordance with the minutes provided by ASIC, save that (as I have said) all of the moneys remaining, after the costs of sale and the legal costs to which I have referred have been deducted, shall be paid to Rubicon on behalf of Merkin. If any party wishes to make any further submissions as a result of the commencement of the Corporations Act 2001 (Cth) ("the Act") on 15 July 2001, it may do so. As I understand it, the Act now governs this proceeding but there has been no relevant substantive change in the legislation. The orders outlined above will now be made pursuant to s.1325A of the Act.
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