#7358 - How Do We Regulate - Securities and Financial Services Regulation

Disclosure requirements applying to each document are set out in Pt 6D.2 Div 4

• For prospectuses is set out in s 710 which contains two components (general and specific disclosure)

• The operation of s 710 is modified in respect of offers of continuously quoted securities s 713

[General disclosure]

• S 710(1) provides that s.t. certain limiting factors a prospectus must contain all the information that investors and their professional advisers would reasonably require to make an informed assessment of the matters set out in table 1.

  • [Table] Table 1 basically includes the rights and liabilities attached to the securities, the A/L, financial position/performance, P&L and prospects of the issuing body (for offers to issue securities) and further specific requirements for other L/E interests in securities

  • [Limitations]

    • S 710(1)(a) provides prospectuses must contain the information “only to the extent to which it is reasonable for investors and their professional advisers to expect to find the information in the prospectus

    • S 710(1)(b) the prospectus must contain the information only if a person whose knowledge is relevant actually knows or ought reasonably to have obtained the information (in the latter case by making inquiries)

      • S 710(3) provides these people – the person offering securities, directors, underwriters, AFSLs, experts, IBs, lawyers

  • [Scope] s 710(2) says what to have regard to in terms of including material – the nature of the securities and of the body, the matters that likely investors may reasonably be expected to know, the fact that certain matters may reasonably be expected to be known to their professional advisers

[Carve out – continuously quoted securities] The policy behind these is that the information in Table 1 is already available to the general public

• Rights issues and some sale offers for continuously quoted securities needn’t satisfy the above requirements by virtue of ss 708AA, 708A

• Other quoted securities may require disclosure through a prospectus which is lesser than the obligations under s 710 because of s 713. This section shifts the emphasis from the information required by s 710 to disclosing the effect that the offer or sale of securities has on the issuer and making public any information about the issuer the disclosure of which hasn’t been required under their CDOs

  • [Scope] The reduced disclosure obligations apply to offers of continuously quoted securities [quoted ED securities for which the body satisfies certain criteria – See 184] of a body and options to acquire them

    • [Carve out] s 713(6) provides that ASIC may make a determination that s 713 cannot be relied upon if the issuer contravened key disclosure requirements

  • [Deeming provision] s 713(1) deems a prospectus to satisfy s 710 if it complies with s 713(2)-(4)

    • s 713(2) requires disclosure of all the information investors and their professional advisers would reasonably require to make an informed assessment of the effect of the offer on the body, the rights/liabilities attaching to the securities [and if options….]

    • s 713(3) the prospectus must draw attention to the body’s regular reporting and disclosure obligations

  • [Addressing the overlap] s 713(5) requires disclosure of both:

    • Information investors and their professional advisers would reasonably require ftpo making an informed assessment of the A/L, financial position/performance, P&L and prospects of the body (financial information) and the R/L attaching to the securities

    • Certain information excluded from the continuous disclosure requirements in accordance with the listing rule

      • The result is that any information which was excluded by ASXLR3.1A must be disclosed

      • ASXLR 3.1 provides that where an entity becomes aware of information that a reasonable person would expect to have a material effect on the price or value of the securities, it has to tell the ASX

      • ASLR 3.1A provides that if a reasonable person wouldn’t expect the information to be disclosed, the information is confidential and any of the following apply, the information needn’t be disclosed

        • It would be a breach of law to disclose it

        • It concerns an incomplete proposal or negotiation

        • It comprises matters of supposition or is insufficiently definite to warrant disclosure

        • It is generated for internal management purposes

        • It is a trade secret

[Specific disclosure]

• S 711(1) the prospectus has to set out the T&Cs of the offer such as the number of securities offered, the price, details of any underwriting arrangements

• S 711(2) requires disclosure of the nature and extent of the interests of certain people during the date leading up to the prospectus

• S 711(5) requires additional disclosure if the prospectus states or implies that securities offered will be capable of being traded on an AU or foreign financial market.

  • If they are already quoted – there has to be a statement to this effect.

  • If not, the prospectus has to state an application for admission has been made or will be in 7 days

• S 711(6) requires an expiry date no later than 13 months after the date stated on the prospectus and a statement that no securities will be issued after this

• S 711(7) it must include a statement that the prospectus has been lodged with ASIC

[Terminology] There are specific restrictions on the ability to describe something as a ‘debenture’ – certain criteria must be met before doing so (see 188)

[Short form prospectuses] These may be used with any offer

• S 712 allows information already lodged with ASIC to be referred to in a prospectus rather than being repeated (subject to certain reference requirements outlined on 189)

• S 712(3) deems the lodged document to form part of the prospectus ftpo of satisfaction of the requirement

[Clear, concise and effective] The information in a disclosure document must be presented in a clear, concise and effective manner’ (s 715A(1)) and failure to do so can subject the prospectus to a stop order

• [Scope] Each word qualifies the other and thus a clear document that is ineffective is not acceptable. RG 228 specifies that a prospectus will be considered to satisfy this section if it:

  • Highlights key information

  • Uses plain language

  • Is as short as possible

  • Explains complex information including technical terms

  • Is logically ordered and easy to navigate

The general law disclosure obligations operate alongside statute and potentially apply to an information memorandum or other document produced irt an offer of securities in cases where disclosure under 6D.2 isn't required

• Generally under the general law inducing investments by fraudulent misrepresentation was an action restricted to acts of commission but classes of case developed where non-disclosure results in half-truth, supervening falsity occurs or where there is a fiduciary relationship

[Statements needing qualification: half-truths and supervening falsity]

• Silence can be a misrepresentation where a positive representation is only a half-truth – e.g. a statement that a company has paid dividends regularly would be a misrepresentation where the latest dividend was paid from reserves of profits from previous years

• Silence can also be a misrepresentation if the statement is correct when it was made, but circumstances change to make it incorrect, and the person fails to correct the statement where circumstances give rise to an obligation to do so

[Fiduciary Relationship]

• [Existence] A fiduciary relationships may exist between the contracting parties where X places himself in relation to Y so that Y necessarily reposes confidence in X and as a result X has an influence over Y.

  • [Scope] Any advantages gained by the abuse of that confidence or exertion of the influence to gain an advantage at Y’s expense may not be retained by X (Tate v Williamson)

• [Application] Thus if X were to sell securities to Y having such an influence from their relationship, and does not tell Y information that X possesses, the transaction could be set aside or Y could be entitled to equitable compensation

• [Examples]

  • If a broker was employed to purchase shares on behalf of a client and the broker sold them shares, the broker would be under a duty not to withhold from the client any material facts about the shares of which it was aware and which it could not reasonably assume to be within the client’s knowledge already.

  • Sometimes proprietors of a company can owe a fiduciary duty to a interested purchaser of the company. Their duty will be important where the investor who is misled cannot recover from the company – in such a case the investor can obtain equitable compensation for breach of duty of a restitutionary nature (CBA v Smith)

  • Directors who invite subscription without providing adequate disclosure can be liable to indemnify an investor against loss where the relationship is fiduciary in character (Hill v Rose)

    • Such a relationship may only arise to investors who are in effect being invited to invest as proprietors in a quasi-partnership company

    • But if the relationship is commercial and the parties are at arm’s length and on equal footing such a relationship is unlikely to arise (Eighty Second Vocation v Parere)

[Contracts of utmost good faith]

• Silence will also be improper where there is a contract uberrimae fidei. This will arise in situations of insurance and family arrangements. This has not been extended to securities

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