Section 710 of Corporations Act, 2001 – Prospectus Requirements
Discuss about the Corporate Law of Austin Retail Ltd.
The issue in this case is false information has been provided by the prospectus of Austin Retail Ltd. particularly in view of the fact that the sales manager of the company, Bob Brown had suspected that the advice was incorrect. Still he failed to question the report or to make his own inquiries. At the same time, the liability of DB consultants or the liability of Dendy securities Ltd. also needs to be examined. At the same time, the rights and remedies available to the investors also need to be considered.
In this regard, section 710, Corporations Act, 2001 (Cth) mentions that a prospectus for entities’ securities should provide all information that is necessary for the investors and the experts to reasonably be an informed evolution of the matter. Therefore the law provides that when a company is willing to offer shares to the general public, such company can offer securities in the form of shares, debentures and options through an initial public offering (IPO) or ‘float’. Such duties can be offered in the form of listed or unlisted securities. However, in order to fulfill the legal disclosure requirements and also to inform potential investors where the money is going to be used by the company, the company is required to issue a prospectus. The corporations act requires that all the information required by the investors for making an informed decision should be provided by the prospectus. However, it is important that the investors should not be distracted by glossy pictures.[1] Therefore it is very important that the investors also to their own research before making the investment and unaware of the fact that where there money is going to be invested.
Therefore, according to the law, the prospectus should provide permission regarding the features of the securities that are being presented by the corporation, including how many securities for sale, how investors can apply to buy them, permission related with the company and its operations, the financial condition of the company as well as the risks related with the offer. Generally the front of the prospectus contains the section known as “investment overview” or “summary”. This part contains significant sex related with the company and the offer, including the key features of the business of the company, major risks and other financial information. This section also tells the investors where they can find more detailed information regarding these topics in the prospectus. However, it is recommendable that the investors should read the full prospectus as it helps in deciding if a particular company is suitable for their investment objectives.[2]
Disclosure Document Requirements
In this way, a disclosure document is necessary regarding a specific offer of securities. The common rule in this context is that prospectus should be made regarding the offer, if not for information statement can be utilized. However it needs to be granted that the prospectus is the principal and most common disclosure text even if there are several varieties of prospectus.[3] These include full prospectus, short form prospectus and a special prospectus. A full prospectus is required cases where, for example, the company wants the list on a stock exchange. In this regard, the Corporations Act provides a general disclosure requirement related with full prospectus according to which the prospectus should carry all information that may be reasonably needed by the depositors and the financial experts for making knowledgeable evaluation of the:-
- Rights and liabilities related with the securities offered; and
- The assets and liabilities, profits and losses, financial position and performance and the prospects of the body that is going to issue the securities.
In this it is necessary that the prospectus contained the above-mentioned information to the degree that the pertinent persons concerned with the making of the prospectus really know or should have attained the information by making inquiries. Apart from the general revelation requirements it is also required by the Corporations Act that there are several specific requirements related political information that needs to be disclosed. A short form prospectus is similar to the full prospectus and the only dissimilarity is that a short form prospectus incorporated certain texts that have already been lodged with the ASIC by allusion in the prospectus. Consequently, instead of mentioning all particulars in the prospectus, it merely refers to a document that has been lodged with the ASIC.[4] It is necessary that the government is adequately identified by the prospectus and at the same time, sufficient information is also provided regarding the contents of the document which allows a person to decide if it is required to acquire a copy of the paper or not.[5] A short-term prospectus is generally used for very large distributions to unsophisticated investors.
The law requires that while framing a prospectus, as the general public is invited for taking shares in the company on the faith of the representations made in the prospectus, it is very important that everything mentioned in the prospectus should past through strict and scrupulous evaluation. In this context, the general public is at the mercy of the corporation promoters therefore nothing should be mentioned in the prospectus as a fact if it is not so. In the same way, no fact should be omitted if the presence of suspects can have any effect on the nature or the quality of privileges and advantages that make it as an inducement for the investors. Therefore, the prospectus should reveal the true nature of the company’s venture.[6]
Types of Prospectus
On the other hand, a statement mentioned in the prospectus will be considered as untrue if such statement is misleading and form and in the context in which it was added in the prospectus. In cases where there is an omission of a matter from the prospectus and this has been done with a view to mislead the general public, it can be considered that the prospectus includes an untrue statement. Not only in case of the prospectus, a statement can also be considered as misleading even if it is present in any report or memory under that has been incorporated in the prospectus or issued therewith. The liability arises where any person has subscribed for shares or debentures by relying on the prospectus regarding any loss that may be suffered by such person due to the incorrect declaration present in the prospectus.[7]
In case of a misstatement made in the prospectus, the law provides that certain persons can be held liable for paying compensation to the persons who had subscribed for the shares or debentures by relying on the prospectus, for any loss that may be suffered by these persons due to the presence of an incorrect declaration in the prospectus. These persons include the directors of the corporation, promoters or even the corporation itself. It is worth mentioning that in this regard, it is immaterial if the director has seen the prospectus or not, it is sufficient that the director has authorized the issuance of the prospectus. The purpose behind imposing civil liability for misstatement in the prospectus is to protect the rights of the shareholders who have been deceived by acting on the wrong statement mentioned in the prospectus. As a result, the duties of the directors and other persons were elated with the issue of prospectus increase significantly. In this way, the statutory civil liability arises regarding an untrue statement present in the prospectus. The civil liability of a party may arise if:-
A prospectus was issued by the company inviting general public to subscribe for its shares or debentures;
An untrue statement is present in the prospectus;
The person claiming compensation for such untrue statement had subscribed for the shares on debentures offered by such prospectus;
The person has subscribed for the shares or debentures by relying on such untrue statement present in the prospectus; and
A loss has been suffered by such person after subscribing for the shares or debentures.
Protections for Investors
In this regard, the person acting as the director of the corporation, while the prospectus can be held liable. Similarly, every person authorized to be named and had been mentioned in the prospectus as the director for every person making as a promoter of the company or the persons who have authorized the issuance of the prospectus can be held liable.
At the same time, the Corporations Act also provides for the criminal liability regarding the misstatement made in the prospectus. This provision provides that every person who is authorized to issue a prospectus can be held liable for imprisonment if there is a misstatement present in the prospectus.[8] Therefore in such cases, once it has been established by the prosecution that a false statement has been made in the prospectus. That was signed by a director etc., the onus is on the defendant to establish either side statement was immaterial or that the person believed the statement to be true. However, the expert who is given consent for the prospectus will not be ipso facto considered as the person who has authorized the issue of prospectus.[9]
It also needs to be noted that there are certain defenses available regarding general liability. As a result, the law provides that director on any other person who had the responsibility for the prospectus shall not incur any liability regarding non-compliance with the requirements related with the issue of prospectus if:
- It is established that the person did not have any knowledge regarding the matter that was not disclosed in the prospectus;
- It is established that non-compliance or contravention was the result of an honest mistake of fact; or
- The non-compliance or the beach was related with the matters, which in the opinion of the Court were immaterial in context of the case or were such that in the opinion of the Court, keeping in view of the certain ounces of the case, reasonable to be excused.
However, it needs to be noted that recovery can be allowed under section 729 of the Corporations Act even if the person had not committed and was not involved in the contravention. In this way the strict liability imposed by the Act reveals that the investors are not required to establish reliance on particular person or statement made by such person. Therefore, it appears that reliance on a misstatement by one director, who for example will be sufficient to establish causation for the claims against all the directors, as well as the company and the underwriter.
In this regard, the Corporation Act, in silent regarding the measure of damages that can be awarded to the investors regarding the loss of the damage suffered by them for the breach of section 728. Therefore, in theory, the amount of damages awarded by the court should be the value between the “actual value” of the securities when they were allotted and the amount paid by the investors regarding these securities. However in reality, it is much difficult to ascertain what would have been the actual value of the securities at the time of allotment. The value of securities can be affected not only by the misstatement or the omission in the prospectus but also due to several other market factors. As a result, the real value of the security is difficult to decide, particularly in context of an IPO.
Liabilities related to False or Misleading Statements
The Civil Liability Act, 2002, the Competition and Consumer Act 2010 and the Corporations Act each provide a defense of proportionate liability concerning “apportionable claims”. Generally speaking, this means that in case of certain claims, the court enjoys the discretion to apportion liability between those persons whose acts or omissions have resulted in the proved loss or damage suffered by the plaintiff.
Section 731 provides the due diligence defense regarding prospectuses. It provides that the offense mentioned in subsection 728(3) is not committed by a person and that person is not liable under section 729 for the breach of sub-section 728(1). Because of misleading or deceptive statement present in the prospectus if it is established that they had made all the inquiries that was reasonable under the circumstances and after doing so, believed on reasonable grounds that the statement was not misleading or deceptive. At the same time, section 733 contains the general defenses for all disclosure documents.
In this regard, section 180(1), Corporations Act provides that a director is required to use their powers and discharge their duties. In the same way as any other reasonable person if the person was the director of the company under similar circumstances and occupied the same office as held by the directors with similar responsibilities.
Under section 1317E, the remedies for the breach of a civil penalty provision can be described as follows. If the court is satisfied that a suburban and the provision has been breached by a person, it should make a declaration of contravention of the section 1317E(1). A person who has contravened civil penalty provision can be ordered by the court to be a pecuniary penalty of up to $200,000. Under section 1317G.
Therefore in the present case, the Corporation Austin Retail Ltd. as well as the directors of the company and Dendy Securities that was named as the underwriter in the prospectus can be held liable towards the investors for the loss suffered by the investors on account of the misstatement made in the prospectus of the company.
Joanna Khoo “Civil Liability for Misstatements in Offer Documents: Striking the Right Balance” (2010) 6 Int’l L. & Mgmt. Rev. 49
Louis Loss and Joel Seligman Fundamentals of Securities Regulation (5th ed, Aspen
Lucian Bebchuk and Allen Ferrell “Rethinking Basic” (2014) 69 Bus. Law, 671
Michael Duffy “‘Fraud on the Market’: Judicial Approaches to Causation and Loss from Securities Nondisclosure in the United States, Canada and Australia” (2006) 29 MULR 621
Peter Fitzsimons “New Zealand Securities Commission: The Rise and Fall of a Law
Publishers, New York, 2004)
Reform Body” (1994) 2 WLR 87
Robert Austin and Ian Ramsay Ford’s Principles of Corporations Law (14th ed, LexisNexis, NSW, 2010)
Case Law
Bolitho v Banksia Securities Ltd [2014] VSC 8
Campbell v Back Office Investments Pty Ltd [2008] NSWCA 95
Leadenhall Australia Ltd v Peptech Ltd [2001] NSWCA 272
Legislation
Corporations Act 2001 (Cth)
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