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01 Aug 2011

Shareholders seeking access to a listed company’s books: Smartec Capital Pty Ltd v Centro Properties Ltd

by Michael Legg, Nicholas Mavrakis

Smartec was really only able to seek access to the information that Centro Properties Group had provided to the ASX for the ASX to reach its conclusion.

It has been widely publicised that Centro Properties Group (also referred to as CNP) experienced significant financial difficulties in the wake of the global financial crisis due to extensive use of debt to acquire commercial properties, mainly in the form of shopping centres, located in Australia and the United States. As part of a proposal to address its financial difficulties, Centro Properties Group sought to engage in a restructure, which in essence would involve the sale of its US assets and a debt for equity swap in relation to its Australian assets and Centro’s senior debt.

In compliance with its obligations under the Australian Securities Exchange (ASX) Listing Rules and the Corporations Act 2001 (Cth), Centro Properties Group made announcements to the ASX in relation to the proposed transactions. On 1 March 2011, the announcement included a reference to the various transactions being contingent on a number of events, including “relevant stakeholder approvals”. Smartec had discussions with Centro Properties Group in relation to the US asset sale and whether security holder approval was required. Centro Properties Group advised that the ASX had taken the position that no such approval was required in relation to the US transaction, as the ASX Listing Rules 11.1, 11.2 and 11.3 dealing with changes to an entity’s main undertaking were not applicable to Centro’s sale of its US assets. As a consequence, a further ASX announcement was made on 6 April 2011, advising the market that security holder approval was not required for the sale of its US assets.

Smartec’s concern was that the ASX announcement on 1 March indicated that stakeholder approvals would be sought and it then subsequently came to light that those stakeholder approvals would not be sought as they were not necessary in relation to the US asset sale.

In Smartec Capital Pty Ltd v Centro Properties Ltd, [1] Barrett J observed that (at 79):

"It is, I think, unfortunate that the March announcement conveyed a message about securityholder approval that was, at best, ambiguous and, at worst, wrong. The subsequent statements that securityholder approval was not required under ASX listing rules for the US assets sale was, on the basis of ASX’s advice to CNP, the correct message and should have been conveyed in unambiguous terms from the outset."

Smartec sought access to Centro’s books in relation to the US asset sale by relying on section 247A, which provides:

"(1) On application by a member of a company or registered managed investment scheme, the Court may make an order:

(a) authorising the applicant to inspect books of the company or scheme; or …

The Court may only make the order if it is satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose."

Smartec raised a number of other issues on which it sought to ground its application under s 247A, but these were subsidiary to the above concern and were rejected by Barrett J.

Barrett J addressed (at [64]) the requirements for satisfying section 247A by relying on the following propositions stated by Debelle J in Acehill Investments Pty Ltd v Incitec Ltd [2] and approved by Goldberg J in Re Style Ltd; Merim Pty Ltd v Style Ltd: [3]

"1. The requirement that the applicant is acting in good faith and that the inspection is to be made for a proper purpose expresses a composite notion and the court will determine whether each has been demonstrated by applying an objective test.

2. The onus is on the applicant to demonstrate that he is acting in good faith and that the inspection is for a proper purpose.

3. The section operates where the applicant seeks to protect some specific or a personal right by the making of the order. Examples are where a shareholder contemplates proceedings under s 233 of the Corporations Act (the statutory successor of s 320 of the Companies Code) … or where a shareholder reasonably takes the view that a transaction could adversely affect his investment and he seeks to investigate the transaction for the purpose of determining what action he should take … or where a shareholder seeks to ascertain facts for the purpose of considering a takeover offer …

4. If the applicant’s primary or dominant purpose is a proper purpose, it is not to the point that an inspection may be of benefit to the applicant for some other purpose …

5. The rights provided by s 247A should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the courts to challenge a managerial decision made by or with the approval of the directors.

6. Since every shareholder has a right to apply under the section for an inspection order, it is no answer to an application that, if an order is made, the applicant may acquire information not available to other shareholders and thereby be in a more advantageous position than those shareholders.

7. Applicants do not necessarily lack a proper purpose merely because (a) they are hostile to other directors; or (b) they will, after inspection, have more information than other members.

8. The procedure under s 247A is not intended to be a process as wide-ranging as the process of discovery of documents so that, as a general rule, inspection will be confined to, say, the results of decisions of directors rather than all the documents such as board papers leading to decisions … I emphasise that this is a general rule. There may be occasions where it is proper to admit inspection of board papers …

9. Even where an applicant is acting bona fide and has shown a proper purpose, the court has a discretion whether to order inspection."

His Honour then went on to highlight the following matters.

  • The information that a shareholder is entitled to inspect is that information which relates to matters that it, as a shareholder, ought to be informed of by the company; however, the scope of information is broader than a company’s pre-existing legal duties to inform its shareholders.
  • The desire of a shareholder to assess the value of its shares has been seen as a proper purpose for section 247A, but that needs to be considered in the context of the continuous disclosure regime when dealing with an ASX listed company as the continuous disclosure regime sets out the information that should be disclosed to shareholders, as well as exceptions to that disclosure.
  • Where the applicant might seek to assert that a listing rule should be interpreted in a particular way and needs information to support that argument, it needs to be borne in mind that the ASX has considerable discretion under the Listing Rules to both interpret and apply the Listing Rules to particular situations. As a result, if the ASX has exercised its discretion then the ability of the applicant to argue for a different interpretation is limited.

Barrett J held that Smartec was able to access Centro Properties Groups “books” on the following basis (at [43]):

"Smartec’s submission that it has a genuine need of access to CNP’s books for purposes related to the applicability of listing rules 11.1.2 and 11.2 boils down to an assertion that it should be given such access so that it may investigate whether CNP has failed to give accurate and complete information to ASX for the purposes of ASX’s decision-making."

Further, as a result of the inconsistency between the March and April ASX announcements (at [80]–[81]):

"Smartec was understandably distrustful of what was, on the face of things, a radical change of position by CNP on this aspect. Smartec chose, as it was entitled to do, to make submissions of its own to ASX. It did so, however, without knowledge of the content of the submissions made by CNP itself and, of course, without knowledge of the terms of the sale agreement.

I am of the opinion that Smartec may, in the circumstances, properly pursue a purpose of seeking to be informed of the basis on which ASX reached its expressed conclusion about listing rules 11.1.2 and 11.2 and, to that end, of obtaining from CNP the documents that passed between CNP and ASX on the matter."

In short, Centro Properties Group’s apparent change of position in relation to stakeholder approval and the limited ability to challenge the advice provided by the ASX meant that Smartec was really only able to seek access to the information that Centro Properties Group had provided to the ASX for the ASX to reach its conclusion.

Barrett J then defined the “books” that Smartec was able to inspect as being (at [83]):

"… correspondence between CNP (or its advisers) and ASX on the question of the applicability or application of listing rules 11.1.2 and 11.2 to the US assets sale transaction, but that this authority should be on terms as to the maintenance of confidentiality to be determined by the court after hearing further submissions … There will be no access to the sale agreement itself or any associated documents beyond the CNP–ASX correspondence."

Barrett J tailored the order for the books that Smartec was able to access by reference to the purpose that it sought to advance, but also with consideration of the nature and the state of advancement, or lack thereof, of the particular transaction.

This article was first published in Inhouse Counsel, Vol 14 No 9, August 2011

[1] Smartec Capital Pty Ltd v Centro Properties Ltd [2011] NSWSC 495. [back]

[2] Acehill Investments Pty Ltd v Incitec Ltd (2002) 223 LSJS 97; [2002] SASC 344 at [29] [back]

[3] Re Style Ltd; Merim Pty Ltd v Style Ltd (2009) 255 ALR 63; [2009] FCA 314 [back]

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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.