The old joke was that a prospectus was the fat bit in front of
the share application form. A more modern version might be that a
product disclosure statement is the fat thing that stops your car
insurance renewal fitting into your letterbox.
What is not a joke is that yet another group of self-funded
retirees look set to lose big on a bad investment. The collapse of
property financier Wickham Securities reportedly puts 300 such
investors in danger of losing $27 million. They join the 16,000
investors who lost $650 million in the collapse of Banksia
Securities. A cynic may shrug, and quip that a fool and his money
are soon parted – especially in an era when it is impossible
to do any private financial business without being inundated with
However, these developments do raise, once again, the question
of whether our investor protections are hitting the right target.
In that context, it is interesting that the Australian Securities
and Investments Commission has decided to start banging its
"truth in takeovers" drum again.
In brief, the truth in takeovers policy is that players in a
takeover battle should not make misleading statements about their
intentions. ASIC is particularly concerned that "mum and
dad" investors might not understand the legal subtleties of
statements such as "we do not presently intend to increase the
bid price". But this emphasis on the experience (or lack of
experience) of mum and dad investors is not necessarily shared by
the likes of the Takeovers Panel and the High Court.
In 2003, the Takeovers Panel was confronted with a dispute
arising out of a target company's survey of its shareholders.
The company announced that the majority of its shareholders would
not accept a bid that was then on the table. Discussing the effect
of the truth-in-takeovers policy on the publication of this survey,
the panel commented that: "In light of the market's
knowledge of the manner in which such surveys are conducted, [a
statement based on] such a survey should be, and we believe is,
accorded little weight, especially in forming any expectations
about the future actions of those shareholders."
Since not too many mum and dad investors would have any
knowledge of how shareholder surveys are conducted, the panel
appears to have been taking a different view from ASIC about what
sort of investors are affected by truth in takeovers. The
panel's position on this does not appear to have changed since
More recently, the High Court appeared to share the panel's
view, when it dismissed ASIC's charges against Fortescue Metals
Group and Andrew Forrest. ASIC had alleged that it was misleading
for Fortescue to publicly claim that it had enforceable contracts
with a Chinese state-owned enterprise. The High Court's
response was that the intended audience would not have believed
that Fortescue had ironclad contracts enforceable under Australian
This was spelt out most clearly by Justice Dyson Heydon.
Fortescue's audience, he said, was "superannuation funds,
other large institutions, other wealthy investors, stock brokers
and other financial advisers, specialised financial journalists, as
well as smaller investors reliant on advice". Such people
would know that a state-owned enterprise of the People's
Republic of China could not be forced to do anything.
Of course, while it may be true that sophisticated investors
understand the realities of doing business with China, the recent
Whitehaven Coal and David Jones debacles and the Bernie Madoff
Ponzi scheme collapse suggest they are not omniscient. Being
cleverer, more financially sophisticated, richer or more glamorous
than other folk is no guarantee that you can spot a scam, whether
it's an investment that is clearly far too good to be true or a
concocted media release.
These recent events make two things clear.
The first is that 20 years of bulky and increasingly onerous
disclosure requirements for every investment product under the sun
have not prevented investors' making bad investments.
The second is that key regulators are not on the same page when
it comes to identifying the types of investor we should be aiming
to protect and the best means of providing that protection.
These factors build a strong case for the initiation of a major
discussion about investor protection. It is clear that the current
system is both fractured and, in too many cases, ineffective.
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 bulletin.
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In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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