A series of four recent Federal Court cases serve as a timely reminder for issuers and investors of the importance of managing the technicalities of the on-sale prohibitions and complying with associated disclosure requirements under the Corporations Act (FE Limited, in the matter of FE Limited [2017] FCA 1642; Wangle Technologies Ltd, in the matter of Wangle Technologies Ltd [2018] FCA 864; Pursuit Minerals Limited, in the matter of Pursuit Minerals Limited [2018] FCA 1127; and Poseidon Nickel Ltd, in the matter of Poseidon Nickel Ltd [2018] FCA 1063).
The on-sale prohibitions – a quick refresher
In all of these cases the on-sale prohibitions (and the applicable exceptions) were either not understood or overlooked.
Generally an offer of an issuer's securities for sale within 12 months after their issue needs disclosure to investors, unless a relevant exception applies. It is an anti-avoidance provision designed to prevent the avoidance of disclosure requirements by, for example, the issue of securities to a party to whom disclosure is not required and that party then offering the securities for sale to investors without disclosure
So, if a private placement of securities by an ASX-listed issuer is made to a sophisticated or professional investor without a prospectus or other disclosure document and the investor wishes to freely trade the shares following their issue, an exemption to the on-sale prohibitions needs to apply.
Exceptions include circumstances where a "cleansing notice" or "cleansing prospectus" is issued.
A "cleansing notice" is a market announcement by the issuer setting out (among other matters) any information that has been excluded from the issuer's continuous disclosure requirements because of an exemption in the listing rules (for example, because it is confidential and concerns an incomplete proposal). The notice must be given within five business days after the day on which the securities are issued.
The cleansing notice exception can be relied upon only if the securities are quoted continuously during the three months before the issue of the new securities and their trading has not been suspended for more than five days during the shorter of the period during which the class of securities were quoted and the period of 12 months before the day on which the securities were issued (the "five day rule").
Consequences of breaching the on-sale prohibition
In each of these cases the contravention of the on-sale prohibitions resulted in the companies having to issue a cleansing prospectus and to suspend trading in their shares for an extended period, while they sought relieving orders from the Federal Court.
On the issuer's application the court generally exercised its discretion under section 1322 of the Corporations Act to validate prior trading in the shares, and to relieve subsequent innocent sellers of the shares from civil liability in respect of contraventions of the on-sale prohibitions. However, the relief from civil liability did not extend to the issuer or its officers and further, in the case of Poseidon, the court declined a request for relief sought for the initial investors involved in the contravention.
FE Limited, Wangle Technologies and Pursuit Minerals
In FE Limited, Wangle Technologies and Pursuit Minerals the shares were issued without a cleansing notice. In some instances the issuer was not qualified to issue a cleansing notice because it did not satisfy the five day rule. In any event, no valid cleansing notice was issued which meant that any on-sales of the issued shares contravened the on-sale prohibition.
In the cases of FE Limited and Pursuit Minerals the court accepted evidence from the issuer that the contravention had been inadvertent and that all the parties concerned had acted honestly. In Wangle Technologies, while the court found that the evidence presented a "reveal a cavalier attitude to compliance", it did not find that the parties concerned had acted dishonestly
Having concluded that there had been no dishonesty (or that it was just and equitable that the order be made) and that no substantial injustice was likely to be caused, in each case the court granted orders under section 1322(4) of the Corporations Act. The orders validated the subsequent sales of the company's shares and relieved the relevant sellers from civil liability for the prohibited on-sales.
Poseidon
In this case Poseidon Nickel Limited had conducted 40 securities issues between 17 December 2013 and 1 December 2017.
The securities were issued pursuant to a number of transactions, including under separate agreements with the global investment banking firm Jefferies LLC and the stockbroking firm Petra Capital and Pershing Australia Nominees Pty Ltd (which settled trades arranged by Petra Capital).
In each case the agreements contained a provision requiring Poseidon to ensure that each share issued would be freely tradable without restriction on the day of issue and that a cleansing notice (or a cleansing prospectus) be issued.
In respect of most of the share issues no cleansing notice was issued, and in respect of some of the share issues the company did not satisfy the five day rule, and so it was not qualified to issue a cleansing notice. As was the case with FE Limited, Wangle Technologies and Pursuit Minerals, any on-sales of the relevant issued shares therefore contravened the on-sale prohibition.
The court found that both Jefferies and Petra Capital had actual knowledge of the disclosure requirements under the Corporations Act, and in particular, the need for a cleansing notice or a prospectus, that both entities failed check that Poseidon had provided the required disclosure, and that they should have undertaken those checks.
Therefore, unlike in FE Limited, Wangle Technologies and Pursuit Minerals, the court did not extend relief from civil liability arising from the contravention of the on-sale prohibitions to Jeffries or Petra Capital (or its nominee Pershing) on the basis of the evidence presented by Poseidon. Accordingly, Jefferies, Petra Capital and Pershing remained exposed to claims against them in respect of the contraventions of the on-sale prohibition, unless and until they were able to successfully seek relief under section 1322 themselves.
Takeaway messages
The facts of FE Limited, Wangle Technologies, Pursuit Minerals and Poseidon serve as a timely reminder that a failure to manage the on-sale prohibition and disclosure obligations associated with even small share placements can have significant adverse consequences for issuers and investors.
Poseidon also serves as a reminder to sophisticated and professional investors that reliance on the contractual promises of the issuer to take the steps necessary to ensure that shares are tradeable is not a complete answer, and that investors should actively seek to ensure that the issuer has taken those steps.
Thanks to David Mansberg for his help in writing this article.