ASIC presumably hopes that one clear message from this
case is that being offshore doesn't give you practical immunity
from the Corporations Act.
There are worse things than divestment.
Divestment is a traditional remedy for non-disclosure of
shareholdings in listed companies: ASIC sells the offending shares
on-market and remits the proceeds to their former owner.
In a novel development, the Federal Court has ordered that,
rather than selling the shares, the appropriate remedy was their
Craigside Company Limited (incorporated in the British Virgin
Islands and operating from
Hong Kong) had held more than 5% of Northwest for almost ten
years. Its substantial holder notices stated that it was the legal
and beneficial owner of the shares.
In 2011, ASIC served a beneficial ownership tracing notice on
Craigside. This was apparently related to the Project Wickenby task
force investigation into participation in arrangements of an
international character which potentially breach laws relating to
financial markets and corporations, amongst other things.
In response to the notice, Craigside said that it was only a
nominee. It provided the names of two individuals who, it said, had
relevant interests in the shares or who had given voting directions
in relation to them.
ASIC sent beneficial interest tracing notices to those two
individuals. They responded that they did not have a relevant
interest in the shares and did not know who did.
ASIC then went to the Federal Court to obtain remedies under the
Corporations Act. The Act allows the Court to make remedial orders
where, in response to a beneficial tracing notice, a person states
that they do not know who has a relevant interest in shares.
It appears that ASIC originally considered asking the Federal
Court to order divestment of Craigside's holding in Northwest
(which was now 7%). However, by September 2013, Northwest's
financial position had started to deteriorate. It announced that it
needed capital to pursue a major project, but that it would have
problems raising that capital in the current market. As a result,
it would have to re-evaluate its approach to the project.
Subsequently, its share price declined from 4.1 cents to 1.5
The effect of divestment and a forced sale of 7% of its share
capital in these circumstances was obvious: finding buyers at a
reasonable price on market could be a lengthy process. This would
adversely impact on any attempts by Northwest to raise new equity
Accordingly, ASIC and Northwest agreed to ask the Court to order
the cancellation – rather than divestment – of the
shares registered in Craigside's name.
The Court considered all of these factors.
It also took into account the other side of the coin –
that a selective cancellation of 7% would boost the percentage
holdings of Northwest's remaining shareholders. It thought that
this raised two considerations:
would it be inappropriate to benefit Northwest's other
shareholders in this way? The Court thought that, "in all the
circumstances", the answer was No.
would cancellation of Craigside's 7% push any other
shareholder over the 20% takeover threshold? The evidence indicated
that that would not happen.
Accordingly, it ordered Northwest to cancel Craigside's
Tracing beneficial ownership through foreign shareholders has
always been problematic. ASIC is presumably hoping that one clear
message from this case is that being offshore doesn't give you
practical immunity from the Corporations Act.
At the same time, it has to be admitted that cancellation is an
unusual outcome. Nevertheless, apart from the Project Wickenby
aspects, the facts regarding Northwest are not that unusual in the
current economic environment. It will be interesting to see if
other companies or shareholders are emboldened to seek similar
remedies in respect of beneficial ownership tracing notices issued
by the company or (in the case of shareholders) by ASIC at the
request of shareholders.
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.
Persons listed may not be admitted in all states and
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