In the recent Federal Court decision of Stratford Sun Limited v OM Holdings Limited [2011] FCA 1275, a shareholder of OM Holdings Limited (OMH), Stratford Sun Limited (SSL), unsuccessfully claimed that meeting materials provided by OMH in relation to a global offering of OMH shares and proposed dual listing of OMH on the Hong Kong Stock Exchange (HKSE) were misleading and in breach of the ASX Listing Rules. The Court's decision offers some useful guidance on the level of disclosure required in meeting materials for share offerings, particularly where allottees have not been identified at the time of the offer.
The key messages for companies and advisers are:
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where, at the time of a share offering, a corporation does not know who will be alloted shares, it is enough to satisfy ASX Listing Rule 7.3.4 that the meeting materials relating to that share offering clearly set out the process by which they will be allotted (including, if it is the case, that shares will be allotted at the discretion of the directors of the company);
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a voting exclusion statement (in the terms required by ASX Listing Rules 7.3.8 and 14.11), which specifies that the company will disregard the votes of those persons who "may participate in the proposed issue and any person who might obtain a benefit" is not ambiguous (and therefore not misleading and deceptive), even where the shareholders who will participate in the placement have not been identified and no decision has been made about the allotment of the shares;
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a corporation is not required, in meeting materials for a share offering, to provide detailed breakdowns of how the net proceeds from the offering will be allocated between planned uses of those proceeds;
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general risks and disadvantages of a share offering or dual listing that would be obvious to a shareholder with the requisite skills and information (e.g. that a strategic investor may become involved in the company, or that a transaction would impact the future share price of a company) do not need to be spelled out in full in meeting materials. Failure to mention such risks and disadvantages does not render meeting materials misleading or deceptive. |
The facts
SSL claimed that a Notice of Meeting and Explanatory Statement circulated to OMH shareholders for OMH's annual general meeting (the Meeting Materials) inadequately explained and failed to properly inform OMH shareholders about resolutions relating to a global offering of OMH shares and dual listing of OMH on the HKSE. SSL alleged that:
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by circulating the Meeting Materials, OMH engaged in misleading and deceptive conduct in relation to a financial product in breach of section 1041H(1) of the Corporations Act 2011 (Cth) and contravened rules 7.3.4, 7.3.6 and 7.3.8 of the ASX Listing Rules; and
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the relevant resolutions were not validly passed at the AGM and were of no effect. |
At the time of the trial (and at the time of the AGM), the identity of the allottees of the shares under the offering was not known. Applications to subscribe for shares in OMH under the offering had not been made, nor had a decision been made by the joint global co-ordinators and directors of OMH as to how and when the OMH shares would be issued.
Court's Findings
How much is needed to properly specify the basis on which proposed allottees will be identified?
OMH was obliged by ASX Listing Rule 7.3.4 to specify in the Meeting Materials the basis upon which allottees of shares under the offering would be identified or selected in the future. OMH's Meeting Materials provided that the allotees would be selected at the discretion of the directors of OMH, in consultation with the joint global co-ordinators. This, SSL argued, was insufficient to satisfy the ASX Listing Rules, since it did not amount to a satisfactory objective specific criterion as to the basis on which allottees would be identified.
The Court disagreed. Foster J found that the statement providing that the decision about the selection of allottees would be at the discretion of the directors of OMH, in consultation with the joint global co-ordinators, made "perfectly clear" the basis on which the decision would be made for the purposes of ASX Listing Rule 7.3.4 and did not contravene that rule.
Is it necessary to provide a breakdown of the use of net proceedings from a proposed share offering?
SSL claimed that the Meeting Materials contravened ASX Listing Rule 7.3.6 because OMH had not stated the specific amount, or percentage, of the net proceeds from the share offering that it would apply to each of the planned uses for the proceeds specified in the materials. The Court rejected this argument. There was no evidence that any final decisions had been made by OMH about the particular allocation of funds between the particular uses specified in the Meeting Materials. The Court also noted that the final amount to be raised was not known with certainty and could have varied by as much as $98 million.
The voting exclusion statement required by ASX Listing Rules 7.3.8 and 14.11 is not ambiguous or misleading
ASX Listing Rule 7.3.8 required OMH to include a voting exclusion statement in its Meeting Materials, the detail of which is set out in ASX Listing Rule 14.11. SSL alleged that the description of the class of excluded persons in the voting exclusion statement used by OMH was ambiguous (and therefore misleading) because OMH's shareholders could not determine who could and could not vote on the relevant resolutions at the AGM.
The Court found that OMH had faithfully reproduced the language used in ASX Listing Rule in 14.11 in its voting exclusion statement and had thereby complied with the Listing Rule. Further, while the Court accepted that there was difficulty in interpreting the voting exclusion due to the use of the words "may" and "might" appearing in the first two lines of the statement, it was not the case that the voting exclusion statement was misleading or deceptive. "May" was used in the sense of a prediction that a person will participate based on more than speculation or mere possibility; this reading was consistent with the interpretation commonly used by the ASX itself. Additionally, the Meeting Materials had made plain that allottees would be determined by the joint global coordinators, in conjunction with the directors of OMH, in their absolute discretion, so that shareholders knew there was no guarantee they could participate and therefore that their shareholding might be diluted.
General risks and disadvantages of a proposed issue of shares, or impact of dual listing, do not need to be spelled out in meeting materials
SSL referred to confidential documents OMH had prepared for the HKSE listing application which suggested that OMH had considered various risks and disadvantages of the resolutions before putting them to the OMH shareholders, which were not expressly set out in the Meeting Materials.
Foster J regarded the risks described in the confidential listing application documents as being general risks that would have been obvious to any shareholder "who had the skills and information of the hypothetical shareholder called upon to consider Resolution 6". Such general statements did not need to be "spelled out" in the Meeting Materials.
SSL additionally claimed that OMH's failure to detail the impact of the involvement of a strategic investor in the Meeting Materials was misleading and deceptive. The Court also dismissed this allegation. Foster J said that the potential for a strategic investor to become involved "would have been very obvious to any sensible shareholder" and "did not need to be spelled out in terms".
The Court also rejected SSL's allegation that OMH had failed to disclose the impact on shareholders of the HKSE Listing Rules, and the Hong Kong Takeover Codes, on similar grounds: that impact was a subject matter that "would have been alive in the minds of the sensible shareholder" and there was nothing within those topics that required specific information in the Meeting Materials.
Gilbert + Tobin acted for OMH in the proceedings.