28 Oct 2010

Equity capital raising with consent

A person who consents to the inclusion of a defective statement in a fundraising or takeover document may be liable for losses that the defect causes.

But what does "consent" actually mean?

This is an issue which has rarely been considered by Australian courts. However, it was a significant factor in the recent dismissal of the class action against Bendigo and Adelaide Bank.

In dispute was whether a company which shared some directors with another company must have "consented" to all the statements in a PDS issued by that other company.

A basic issue, therefore, was whether "consent", as used in relation to fundraising and takeover documents in the Corporations Act, is active or passive.

Bendigo and Adelaide Bank argued that there is a difference between "consent" and "acquiescence". It referred to a 1980 English case in which it was said that acquiescence can arise out of passive failure to do anything, but consent must involve "a positive demonstrative act, something of an affirmative kind":

The Australian Court agreed that this definition of "consent" was applicable to the relevant provisions of the Corporations Act:

"the provisions of the Act to which reference has been made indicate, in my view, that the word 'consent' is there being used in an active, rather than passive, sense, which connotes a requirement of a specific, positive act and not mere acquiescence or silence."

On this basis, a company's having some common directors with the issuing company did not, by itself, constitute consent to the statements in the issuing company's PDS:

"the 'mere' fact of common directorships, noting that the position was that the directorships were not entirely common as there were some directors who were directors of one company only, does not establish common knowledge, common control or common liability."

This is a useful clarification of a potentially significant legal issue in fundraising. Unfortunately, the news isn't all good for fundraisers.

Another question before the Court was whether it could make orders against someone who wasn't the fundraiser.

The investors were suing GSMAL, the issuers of a PDS, for damages for an allegedly defective PDS (under section 1022B). They were also suing Bendigo and Adelaide under another section, section 1022C. Section 1022C allows a Court, in an action under the primary section (section 1022B), to make such orders "as it thinks are necessary to do justice between the parties". The investors wanted orders requiring Bendigo and Adelaide to repay them the money they had borrowed to invest in the product offered under the PDS.

Bendigo and Adelaide argued that the secondary section (section 1022C) didn't empower the Court to make orders against someone who wasn't a party to the primary (section 1022B) action. The Court disagreed:

"[It is] significant that section 1022C makes provision for and empowers the court to make orders to do justice between 'the parties', a term which is not defined; and rather than by reference to the expression 'liable person', which is provided for and, in effect, defined by sub-section 1022B(3). In view of this disparity, it appears that the legislature may have intended section 1022C to have a broader operation and to have been intended to empower courts to make orders binding 'third parties' where necessary to do justice arising out of an action under section 1022B."

Fortuitously for the bank, the Court had already decided to strike out the investors' claim on other grounds.


One of the bugbears for issuers, underwriters and securities lawyers in the equity capital markets space is that, while the Corporations Act provisions are complex, there isn't a lot of judicial guidance on how they work in practice. Market participants must, therefore, proceed on the basis of guidance from regulators and lawyers, as well as market practice.

This decision is a useful addition to the ECM knowledge base, particularly because it provides useful guidance on the meaning of "consent", a concept which, as the Court noted, lies at the heart of many of the liabilities which can arise out of a fundraising or takeover.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.