House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 5 Defective CSF offer documents

Outline of chapter

5.1 This Chapter sets out the rules concerning defective CSF offer documents.

5.2 Unless otherwise stated, all references in this Chapter relate to the Corporations Act 2001.

Summary of new law

5.3 The amendments define when a CSF offer document is deemed to be 'defective'. The definition is aligned with the existing provisions in Chapter 6D applying to prospectuses and other offer documents.

5.4 The amendments set out notification obligations applying to certain classes of persons if they become aware that an offer document is defective. A number of further obligations and possible actions applying to the intermediary and company making the offer are defined in circumstances where an offer document is defective.

5.5 Liabilities arising from a defective disclosure document are set out in the amendments. These include criminal liability as well as exposure to action for recovery of loss or damage where the statement, omission or new circumstance which led to the document being defective is materially adverse from the point of view of an investor.

Comparison of key features of new law and current law

Detailed explanation of new law

Prohibition on making offers under a defective CSF offer document

5.6 The amendments provide that a company must not offer securities under a CSF offer document if the document is defective [Schedule 1, Part 1, item 14, subsection 738Y(1)]. A company will be taken to offer securities under a CSF offer document, at all times, before the offer is closed, while the document is published on a platform of the intermediary [Schedule 1, Part 1, item 14, subsection 738Y(2)].

5.7 The amendments provide that an intermediary must not publish or continue to publish a CSF offer document if the document is defective and the intermediary knows the document is defective [Schedule 1, Part 1, item 14, subsection 738Y(3)]. For the purposes of determining whether the intermediary knew the offer document was defective, the intermediary is taken to have knowledge of any matter that they would have had knowledge of had they conducted the prescribed checks to a reasonable standard [Schedule 1, Part 1, item 14, subsection 738Q(4)].

When an offer document will be 'defective'

5.8 A CSF offer document will be defective where:

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the document contains a misleading or deceptive statement; or

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there is an omission from the document of information required to be included in the document; or

•

since the document was published, a new circumstance has arisen that would have been required to have been included in the document had it arisen prior to the document being published. [Schedule 1, Part 1, item 14, subsection 738U(1)]

5.9 The amendments provide that a misleading statement includes a statement about a future matter where the person making the statement does not have reasonable grounds for making the statement [Schedule 1, Part 1, item 14, subsection 738U(2)].

Notification obligations where the offer document is defective

5.10 The amendments place obligations on certain persons associated with the offer document to provide written notification to the company and intermediary if they become aware, while the CSF offer is open, that the offer document is defective:

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if the issuer company becomes aware that the document is defective, it must notify the responsible intermediary as soon as practicable [Schedule 1, Part 1, item 14, subsection 738V(1)];

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if the intermediary becomes aware that the offer document is defective, the intermediary must notify the company as soon as practicable [Schedule 1, Part 1, item 14, subsection 738V(2)]; and

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if another person who is liable on the offer document (refer paragraph 5.42) becomes aware that the offer document is defective, that person must notify the company and the intermediary as soon as practicable [Schedule 1, Part 1, item 14, subsection 738V(3)].

5.11 The notification obligation only arises where the person required to notify becomes aware that the offer document is defective. If the person does not know that the document is defective, then no obligation to notify will arise.

5.12 In the case of an intermediary, it is relevant to note that an intermediary is taken to have knowledge of any matter that they would have known of had they conducted the prescribed checks to a reasonable standard [Schedule 1, Part 1, item 14, subsection 738Q(4)].

5.13 Notification that an offer document is defective is critical because:

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it will trigger the intermediary's obligation to remove the offer document from the platform and will prevent further applications from being received under a defective offer document; and

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for applicants that have already applied for securities under the defective offer document, they will either be provided with a supplementary or replacement offer document that corrects the defect and be given one month to withdraw their acceptance, or the offer will close but not complete, which will mean applicants will not be issued with securities and will be refunded any application money paid.

5.14 In light of the above and to ensure that investors are basing their investment decisions on a compliant offer document, it is necessary to ensure that persons who are aware that an offer document is defective provide the relevant written notifications. This is achieved by providing that a person that fails to comply with their notification obligations commits a strict liability offence, punishable by a maximum penalty of 50 penalty units. [Schedule 1, Part 1, items 14 and 34, subsection 738V(4) and item 245J in the table to Schedule 3]

Intermediary's obligation to suspend offer

5.15 Once an intermediary becomes aware that the offer document is defective, the intermediary must remove the offer document from its platform and either close the offer or suspend the offer, by giving notice on the offer platform that the offer is suspended [Schedule 1, Part 1, item 14, subsections 738N(6), 738X(1) and (2)].

5.16 The offer will continue to be suspended until: the company provides a replacement or supplementary offer document that the intermediary publishes, in which case the offer will be 'open'; or the intermediary closes the offer (either pursuant to their general power to close an offer or because they are required to do so pursuant to their gatekeeper obligations).

5.17 The notice advising of the suspension must continue to appear on the offer platform for the entire time the offer is suspended and no applications may be received while the offer is suspended. [Schedule 1, Part 1, item 14, subsection 738X(3)]

5.18 If the intermediary does not comply with their obligations to remove the offer document and either close or suspend the offer, or (where the offer is suspended) the notice that the offer is suspended does not appear on the offer platform at all times until the suspension ends, the intermediary will commit a strict liability offence, punishable by a maximum penalty of 50 penalty units. [Schedule 1, Part 1, items 14 and 34, subsection 738X(4) and item 245K in the table to Schedule 3]

5.19 Imposing an obligation on the intermediary to remove the defective offer document and either close or suspend the offer is necessary to ensure that no further applications can be received in respect of a defective offer document. For a person that has already applied for the offer, the intermediary, by closing or suspending the offer, ensures that the applicant will not be issued with securities under the CSF offer unless the person receives a replacement or supplementary offer document that corrects the defect and is given one month within which to withdraw their application.

5.20 In light of the above, the fact that the penalty for the offence complies with the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers and the fact that exposure to the offence is entirely dependent on the conduct of the intermediary, the strict liability offence is considered to be appropriate.

When a company may prepare a supplementary or replacement offer document

5.21 The company can prepare a supplementary or replacement offer document in relation to an original CSF offer document in the following circumstances:

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where the original offer document is defective, to correct a defect in the original offer document;

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where the original offer document does not comply with the requirement that information contained therein be clear, concise and effective, and comply with any regulations, to correct the non-compliance; and

•

in any other circumstances permitted by the regulations. [Schedule 1, Part 1, item 14, subsection 738W(1)].

5.22 A supplementary or replacement offer document cannot be provided in any other circumstance.

5.23 If the supplementary or replacement offer document is provided to correct a defective or otherwise non-compliant offer document, it must not incorporate any changes other than to correct the defect or non-compliance, unless this is permitted by the regulations. Where the regulations do permit other changes to be incorporated, the supplementary or replacement offer document must comply with any conditions imposed by the regulations. [Schedule 1, Part 1, item 14, subsection 738W(2)]

5.24 The amendments set out certain requirements that replacement or supplementary offer documents must adhere to:

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at the beginning of the supplementary offer document there must be a statement that it is a supplementary offer document, an identification of the affected offer document it supplements and a statement that the supplementary and affected offer document are to be read together;

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at the beginning of the replacement offer document there must be a statement that it is a replacement offer document and a statement identifying the document it replaces. [Schedule 1, Part 1, item 14, subsections 738W(3) and (4)]

5.25 The company will need to ensure that it obtains the relevant consents in relation to the replacement or supplementary offer document [Schedule 1, Part 1, item 14, paragraph 738W(6)(a)]. 'Fresh' consents will be required for persons that are liable on the CSF offer document as a whole (such as directors and persons named as proposed directors). However, if a person had consented to a statement in the original offer document and the supplementary or replacement offer document does not make a material change to the form or context of that statement, the company will not need to obtain a 'fresh' consent from that person [Schedule 1, Part 1, item 14, subsection 738W(7)].

5.26 Failure to obtain the relevant consents in relation to the supplementary or replacement offer document will mean the company will have committed the offence of failing to obtain the required consents prior to publication, which carries a maximum penalty of five penalty units. [Schedule 1, Part 1, item 34, item 245B in the table to Schedule 3]

5.27 An intermediary that is provided with a supplementary or replacement offer document by the company is not obliged to publish the offer document. Non-publication could be due to the intermediary's 'gatekeeper' obligations which will apply to a supplementary or replacement offer document in the same way as they applied to the original offer document. [Schedule 1, Part 1, item 14, paragraph 738W(6)(b)].

5.28 If the document provided is a supplementary offer document that the intermediary decides to publish, it must publish the supplementary offer alongside the original offer document [Schedule 1, Part 1, item 14, paragraph 738W(5)(a)]. Once the intermediary does so, the supplementary and original offer documents are taken to be the CSF offer document for anything that happens after the publication [Schedule 1, Part 1, item 14, subsection 738W(8)].

5.29 If the document provided to the intermediary is a replacement offer document that it decides to publish, the intermediary must only publish the replacement offer document [Schedule 1, Part 1, item 14, paragraph 738W(5)(b)]. Once the intermediary does so, the replacement offer document (and not the original offer document) is taken to be the CSF offer document for anything that happens after its publication [Schedule 1, Part 1, item 14, subsection 738W(9)].

5.30 Once the intermediary publishes the supplementary or replacement offer document on its platform, the offer will be open again, which means that new applications can be received via the application facility.

Intermediary's obligation to notify existing applicants of withdrawal rights when the supplementary or replacement offer document is published

5.31 Once the supplementary or replacement offer document is published, the period of suspension ends and the intermediary must give written notice to all applicants that accepted the offer prior to its suspension that they have one month (from the date of the notice) in which to withdraw their acceptance and obtain a refund of application money paid [Schedule 1, Part 1, item 14, subsections 738X(5), 738X(6) and 738X(7)]. Failure to provide the required notice will mean the intermediary will commit a strict liability offence, punishable by a maximum penalty of 30 penalty units [Schedule 1, Part 1, item 34, item 245L in the table to Schedule 3].

5.32 Strict liability, and the level of penalty, is appropriate, because:

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persons that have applied for the offer have based their investment decision on a defective disclosure document and it is therefore important that they be notified of their right to withdraw from the offer;

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the notifications are entirely dependent on the conduct of the intermediary who is liable for the offence;

•

the proposed penalty for the offence is consistent with the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers which specifies that a strict liability offence should be punishable by a maximum penalty of 60 penalty units with no term of imprisonment.

5.33 An applicant that wants to withdraw their acceptance must do so in writing within one month of receiving the notice from the intermediary [Schedule 1, Part 1, item 14, subsection 738X(9)]. The intermediary must refund the application money of anyone who exercises their withdrawal rights as soon as practicable [Schedule 1, Part 1, item 14, paragraph 738T(1)(a) and subsection 738ZB(4)].

5.34 Once the suspension ends and the CSF offer is open, the usual rules covering when an offer is 'closed' and when it is 'complete' apply (refer Chapter 4 of the Explanatory Memorandum). If there is a further defect in the offer document, the offer may be suspended once more.

Intermediary's obligations if the company does nothing

5.35 When the company becomes aware that the offer document is defective, there is no obligation on the company to do anything other than notify the intermediary that the offer document is defective. The amendments do not require the company to, for example, withdraw the offer or prepare a replacement or supplementary offer document. Therefore, a company may do nothing once the offer is suspended.

5.36 However, even if the company does nothing once the offer is suspended, an intermediary may choose to close the offer (so long as this is in accordance with the hosting arrangement) [Schedule 1, Part 1, item 14, subsection 738N(3)] . Even if it does not choose to close the offer, there will come a point in time (no later than three months after the offer was first made) where the intermediary will be required to close the offer [Schedule 1, Part 1, item 14, paragraphs 738N(4)(a) and (b)]. As the offer will be closed but not 'complete', the intermediary will be required to refund application money to applicants as soon as practicable after the offer is closed [Schedule 1, Part 1, item 14, paragraph 738N(4)(b)].

Liabilities relating to defective documents that are materially adverse from the perspective of an investor

5.37 Consistent with the approach applying to prospectuses and other existing disclosure documents, persons associated with the offer may be criminally liable or be exposed to action for recovery of loss or damage where the offer document is defective and the statement, omission or new circumstance which led to the document being defective is materially adverse from the point of view of an investor.

Criminal liability

5.38 A company that offers securities under a CSF offer document that is defective commits an offence if the statement, omission or new circumstance that caused the document to be defective is materially adverse from the point of view of an investor. [Schedule 1, Part 1, item 14, subsection 738Y(4)].

5.39 Likewise, an intermediary that publishes an offer document that it knows to be defective commits an offence if the statement, omission or new circumstance that caused the document to be defective is materially adverse from the point of view of an investor [Schedule 1, Part 1, item 14, subsection 738Y(4)]. This means an intermediary will not commit an offence where the defect in the offer document is materially defective if the intermediary did not know the offer document was defective. For the purpose of determining what an intermediary knows, an intermediary is taken to know all matters that they would have known had they conducted the prescribed checks to a reasonable standard [Schedule 1, Part 1, item 14, subsections 738Q(4) and 738Y(3)].

5.40 The penalty for a person that commits the offence is a maximum penalty of 300 penalty units, five years imprisonment, or both [Schedule 1, Part 1, item 34, item 245M in the table to Schedule 3].

5.41 There are a number of defences that are available to a person who would otherwise be criminally liable. These are discussed at paragraphs 5.45 to 5.53.

Investor's right to recover for loss or damage

5.42 An investor that suffers loss or damage because of a defective document is able to recover the amount of the loss or damage from certain persons associated with the offer, including:

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the issuer and its directors, to the extent the loss or damage was caused by any part of the offer document;

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persons named, with their consent, in the offer document as proposed directors, to the extent of loss or damage caused by any part of the offer document;

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a person named in the offer document with their consent as having made a statement that is included in the CSF offer document or on which a statement made in the CSF offer document is based, to the extent of loss or damage caused by the inclusion of the statement in the CSF offer document;

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a person whose conduct resulted in, or was involved in, the offer document being defective, to the extent of loss or damage caused by that conduct;

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the intermediary that published the offer document to the extent the intermediary knew that the offer document was defective, to the extent of the loss or damage caused by any part of the offer document. [Schedule 1, Part 1, item 14, subsection 738Y(5)]

5.43 For the purpose of determining what an intermediary knew about the offer document, the intermediary is taken to have known of anything that they would have known had they conducted the prescribed checks to a reasonable standard. [Schedule 1, Part 1, item 14, subsection 738Q(4)]

5.44 An investor has six years from the day the cause of action arose in which to commence recovery proceedings. [Schedule 1, Part 1, item 14, subsection 738Y(6)]

Defences against criminal liability and action for recovery of loss

5.45 The amendments set out the defences available to a person who would otherwise commit an offence or be liable for loss or damage in relation to a defective offer document. The defences are similar to those that are available in relation to certain existing disclosure documents. For these defences a defendant bears an evidential burden to point to evidence that suggests a reasonable possibility that the matter exists or does not exist. Once the defendant discharges this evidential burden, the prosecution must disprove these matters beyond reasonable doubt.

5.46 The evidential burden on the defendant is therefore fully consistent with the principle in the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers which establishes the general rule that a defendant should only bear an evidential burden of proof for an offence-specific defence.

5.47 The first defence applies where a person did not know the offer document was defective ('lack of knowledge' defence). This defence is currently available in respect of offer information statements (but not in respect of prospectuses, which have a higher 'due diligence' threshold).

5.48 A company will not commit an offence where they did not know the offer document was defective [Schedule 1, Part 1, item 14, paragraph 738Z(1)(a)]. The company bears the evidential burden of establishing that it did not know that the offer document was defective. This is appropriate as the company is best placed to raise evidence that they did not know the offer document was defective.

5.49 A person, other than an intermediary, who would otherwise be liable in respect of an action for recovery of loss or damage in relation to a defective offer document will not be liable if they did not know that the offer document was defective. This person bears the evidential burden of establishing that they did not know the offer document was defective as they are best placed to present the evidence required to demonstrate why they formed the view that the offer document was not defective .[Schedule 1, Part 1, item 14, paragraph 738Z(1)(b) and subsection 738Z(2)]

5.50 The 'lack of knowledge' defence is not available to the intermediary as the intermediary would anyway only be liable where it knew that the offer document was defective but continued to publish it [Schedule 1, Part 1, item 14, subsections 738Y(3) and 738Z(2)].

5.51 A second defence is available where the person placed 'reasonable reliance' on information given by another person, other than if that information was given by an employee, agent or (in the case of a company) a director [Schedule 1, Part 1, item 14, subsection 738Z(3)]. The evidentiary burden for this defence rests on the person making the claim as they are best placed to demonstrate that they did in fact place reasonable reliance on information from someone else.

5.52 Consistent with the position in relation to existing disclosure documents, a person that performs a particular professional or advisory function will not be taken to be an agent of the body or individual [Schedule 1, Part 1, item 14, subsections 738Y(3) and 738Z(5)].

5.53 As is the case with the lack of knowledge defence, the 'reasonable reliance' defence is not available to the intermediary given the intermediary would only be liable where they knew the offer document was defective. [Schedule 1, Part 1, item 14, subsection 738Z(4)].

Withdrawal of consent - statements and omissions

5.54 A person who is named in a CSF offer document as being a proposed director or underwriter, or as making a statement included in the document, or making a statement on the basis of which a statement is included in the offer document, is not liable for loss or damage and does not commit an offence if they publicly withdrew their consent to being named in the document. [Schedule 1, Part 1, item 14, subsection 738Z(6)]

5.55 A person making use of this defence has the evidentiary burden of demonstrating that they did in fact withdrew their consent publically as they would be best placed to be able to do this.

5.56 This defence is available in relation to existing Chapter 6D disclosure documents.

5.57 To make use of any of these defences, the relevant person will have to provide evidence as appropriate that they did not know that the offer document was defective, appropriately relied on information from another person or publicly withdrew consent to being referenced in the offer document. In each of these cases, it is appropriate that the person making use of the defence is required to raise the required evidence as they are the ones best placed to do so.

ASIC stop order powers

5.58 ASIC's stop order powers have been extended so that they apply where a company offers securities under a defective CSF offer document [Schedule 1, Part 1, item 15, paragraph 739(1)(d)]. ASIC may order that no offers, issues, sales or transfers of the securities are to take place while the order is in force [Schedule 1, Part 1, item 16, paragraph 739(1A)(a)].

Consequential amendments

5.59 Consequential amendments have been made to provide that the general rules prohibiting misleading and deceptive conduct in the Corporations Act do not apply in relation to a CSF offer document [Schedule 1, Part 1, item 30, subparagraph 1041H(3)(a)(iia)]. This amendment means that defective CSF offers will be treated in the same way as existing Chapter 6D disclosure documents.

5.60 Corresponding consequential amendments have been made to provisions in the ASIC Act: section 12DA (prohibition on misleading or deceptive conduct) and section 12DB (prohibition on making false or misleading representations) to exclude these provisions from applying to CSF offer documents [Schedule 1, Part 2, item 37, subparagraphs 12DA(1A)(a)(iii) and 12DB(2)(a)(iii) of the ASIC Act]. The carve out from these provisions in the ASIC Act is limited to CSF offer documents, the provisions will continue to apply to other misleading or deceptive conduct or false representations made by the issuer company or the intermediary.

5.61 Amendments have also been made to exclude the State Fair Trading Act of any State or Territory from applying to CSF offers made under a defective CSF offer document [Schedule 1, Part 1, item 31, subparagraph 1041K(1)(a)(iia)]. This amendment means that CSF offer documents will be treated in the same way as existing Chapter 6D disclosure documents.