This case illustrates that care should be taken when drafting information access rights in shareholder agreements, remembering the possibility that a shareholder may become a competitor or opposing litigant of the company in the future.
Metallurg Inc (Metallurg) is part of a global group of metallurgical and engineering companies owned by AMG Advanced Metallurgical Group NV (AMG Group). Global Advanced Metals Pty Ltd (GAM) is the ultimate holding company of a global group of tantalum and other companies (Tantalum Group). This case concerns a dispute between Metallurg and GAM over the terms upon which Metallurg, a shareholder in GAM, could access information about GAM under the GAM Shareholders’ Deed (Deed).
Metallurg sought to access GAM’s books and records due to concerns about particular aspects of GAM’s accounts which, if correct, would require Metallurg to revalue its interest in GAM for its own reporting. GAM was concerned about providing access on the following grounds:
- certain entities in the AGM Group carried on similar businesses to certain entities in the Tantalum Group so there was the potential for the information to be used by the AMG Group to obtain competitive advantage. GAM argued that regardless of any obligation not to use the information to the detriment of GAM, the information would remain with the officers of the AMG Group and could not be forgotten; and
- AMG could misuse the information to gain a forensic advantage in existing litigation between AMG and GAM subsidiaries in the US. GAM argued that the mere reading of the confidential information amounted to using it “in a way which damages or is reasonably likely to damage” the Tantalum Group in contravention of the Deed.
GAM had advised Metallurg that it was only willing to provide the requested information subject to Metallurg executing a confidentiality agreement that would:
- impose significant further confidentiality obligations in addition to the existing confidentiality provisions of the Deed; and
- require certain information to only be provided to an appointed independent accountant who would review it and report (subject to certain content restrictions) to both GAM and Metallurg.
In granting the access orders sought by Metallurg, Chaney J in the Supreme Court of Western Australia agreed with Metallurg’s construction of the relevant access provisions of the Deed that it gave Metallurg 2 separate and independent rights:
- an ‘access/inspection right’, being the right, on notice, to access GAM’s premises, to inspect GAM’s books and records and to discuss GAM’s affairs, finances and accounts with GAM’s officers, employees and auditors for the purposes of auditing or valuing the Tantalum group or for any other reasonable purpose. Because this right is exercised by individuals (some of whom may not be employees of Metallurg), the confidentiality provisions in the Deed will not bind them. The access provisions therefore existed to fill the privity gap by requiring such persons to enter into a separate confidentiality deed with GAM; and
- an ‘information right’ being the right for shareholders to request such information about GAM’ and it subsidiaries and affiliates as was required in order to comply with their tax, accounting or regulatory filing and compliance requirements. The information right is not qualified by the access provisions but rather, where a shareholder makes use of this right, it is bound by the confidentiality provisions, and the access provisions cannot be used to impose additional confidentiality restrictions on Metallurg as the shareholder receiving the information. The reference in the access provisions to ‘access’ and ‘inspection’ supported this construction because those words were used only in relation to the access/inspection right and not the information right.
Chaney J also held that:
- the fundamental flaw in GAM’s contention was that it equated access and inspection to use of information which “damages, or is reasonably likely to damage” the Tantalum Group. Chaney J did not accept that loss of confidentiality in respect of a Relevant Shareholder necessarily creates a reasonable likelihood of damage to the Tantalum Group;
- GAM had bound itself to provide information, including commercially sensitive information, to Metallurg in its capacity as a shareholder and Metallurg obtained the rights to such information for valuable consideration. The fact that Metallurg was also a competitor was immaterial; and
- while the use of the words “reasonable access” in clause 7.1 may involve consideration as to the mode and means of access, it does not limit the nature or content of the information which a shareholder may access. If it was the intention to limit the type of information, appropriate words of limitation could have been used.
This case provides a useful example of when the Federal Court is willing to exercise its discretion to extend the time period for admitting securities to quotation on the ASX, and to validate shares already issued, in connection with a share capital raising. The Court will essentially be guided by the conduct of the company (including any dishonesty) and any injustice to the company, its shareholders and the applicants for the shares in the event that curative orders are not made.
A prospectus (Prospectus) issued by Helios Energy Ltd (Helios), which was dated 16 February 2017, included a minimum subscription condition and a statement that the securities would be admitted for quotation on a financial market. As such, under the time limits in section 723(3)(b) and section 724(1)(b)(ii) of the Corporations Act 2001 (Cth) (Act), the last day for admission to quotation was 16 May 2017.
On 7 April 2017, Helios issued securities pursuant to some (but not all) of the offers in the Prospectus. However, in the week prior to the last date for admission to quotation, Helios had completed all steps necessary for the Prospectus except the ASX requirement for a suitable spread of security holders, and as such could not meet the 16 May 2017 deadline. In an attempt to extend the last date for admission, Helios issued a “refresh document” under the ASIC Corporations (Minimum Subscription and Quotation Conditions) Instrument 2016/70 (Cth) (LI2016/70) on 15 May 2017. However, ASIC advised that the relief was not available to Helios because it only applies to a prospectus where no securities have already been issued. Helios then sought curative orders extending the time for admission to quotation by 15 days to allow the issue of the remaining securities (under section 1322(4)(d) of the Act) and validating the securities already issued (under section 254E and 1322(4)(a) of the Act).
In making an order to extend the time for admission to quotation, Gilmour J found that;
- the pre-condition in section 1322(6)(c) that no substantial injustice had been, or was likely to be, caused to any person by extending the period was met. Rather, there would be substantial injustice to each of Helios (who would have to refund money and incur corporate and legal expenses), the existing Helios shareholders (whose securities would not be re-instated for trading and would be affected by the absence of capital for the investments contemplated by the Prospectus) and the applicants (who generally wanted the admission of the shares (issued or to be issued) for quotation) if no curative orders were made;
- factors in favour of exercising the discretion to grant the extension order included:
- the extension order was for a relatively short period of time;
- there was a genuine and good reason for an extension, i.e. mistaken reliance on LI2016/70;
- Helios had done everything necessary except meet the ASX spread requirements;
- the orders provided for notice to all persons potentially affected;
- the extension order was consistent with facilitating the conduct of commerce generally(including by maintaining market confidence that technical difficulties will not necessarily prevent or unduly hinder the raising of capital by the issue of securities to be admitted to quotation); and
- neither ASX nor ASIC opposed the extension order.
In making an order to validate the securities already issued, Gilmour J found that:
- the requirements of section 254E (which provides for orders to validate share issues which are invalid for any reason) and section 1322(4)(a) (which provides for an order that the shares issued were not invalidated by reason of a contravention of the Act) were satisfied; and
- the pre-conditions to section 1322(6) were satisfied because the admission to quotation where Helios has complied with ASX’s requirements was “essentially of a procedural nature”, there was no dishonesty by Helios (rather there was genuine mistake), it was “just and equitable” that the order be made, and the validation orders would cause no substantial injustice if made (but may (for the reasons above) cause substantial injustice if not made).
Gilmour J also refused to exercise discretion to withhold relief on the basis that:
- there was no evidence of any substantial misconduct, serious wrongdoing or flagrant disregard of applicable law or the constitution; and
- Helios had acted promptly and properly in seeking legal advice, and resolving to commence (and commencing) these proceedings.
This case demonstrates when the Federal Court will exercise its discretion to validate trading in shares issued and on-sold on without correct disclosure under the Corporations Act (in this case, where the company issued cleansing notices (rather than a prospectus) in circumstances where the use of cleansing notices was not available as an option for the company).
In March and April 2017, Spectrum Rare Earth Limited (Spectrum) issued shares without a prospectus, but instead purported to issue cleansing notices in circumstances where cleansing notices were not open to it because its shares had been suspended from trading for more than 5 days in the prior 12 months (section 708A(5)(b) of the Corporations Act 2001 (Cth) (Act)).
Spectrum applied to the Federal Court of Australia for orders under sections 1322(4)(a) and 1322(4)(c) of the Act to:
- validate the on-sale of the shares that had been issued by Spectrum without correct disclosure until 30 May 2017 (being the date on which a cleaning prospectus was issued and lodged); and
- relieve any seller of the shares from civil liability arising out of a contravention of section 707(3) and section 727(1) of the Act, or by reason of Spectrum’s failure to satisfy section 708A of the Act.
In granting the orders, Barker J in the Federal Court of Australia held that the requirements of section 1322(6) were met because:
- neither Spectrum (nor its directors or officers) had acted dishonestly. Rather, Mr Boden (the Spectrum company secretary) was mistaken in his belief as to the ability of Spectrum to issue cleansing notices under section 708A(5);
- none of the sellers who subsequently on-sold the shares had acted dishonestly;
- it was just and equitable to make the orders because:
- the circumstances arose due to the inadvertence of Mr Boden who was not legally trained and who, once he became aware of the possible contravention, sought legal advice on behalf of Spectrum and took steps to remedy it;
- the public policy of Chapter 6D of the Act (to ensure disclosure to shareholders) would not be infringed. It was unlikely that any prejudice would be suffered by purchasers of the shares and to the extent that there was, the orders were made on terms that preserved the rights of those affected;
- the orders did not relieve Spectrum from liability to any of its current and former shareholders;
- no person who has been adversely affected in respect of the purported cleansing notices had contacted Spectrum and any such person would have 28 days to apply to take steps if they were concerned about the effect of the orders on their rights; and
- neither ASX nor ASIC opposed the orders; and
- no substantial injustice had been caused or was likely to be cased to any person by the orders.
Chevron Australia Holdings Pty Limited (Chevron) has withdrawn its application for special leave to appeal to the High Court over the ATO’s assessment of $340 million in tax and penalties for interest payments made to related offshore parties, following a settlement with the ATO for an undisclosed sum.
In summary, the case concerned a related party loan between Chevron and its US subsidiary, with the key issue being whether the terms of the loan were at arm’s length (as required under Australia’s transfer pricing rules). Chevron sought to challenge Australia’s transfer pricing rules and the appropriate method for establishing an arm’s length interest rate for a related party loan.
The Full Federal Court upheld the ATO’s position in April this year, finding that the terms of the loan exceeded the arm’s length consideration that might reasonably have been expected in an agreement between independent parties dealing with each other at arms’ length.
The withdrawal of the appeal means that the decision is now final. The ATO’s initial estimates are that the Chevron decision will bring in more than $10 billion of additional revenue over the next 10 years in relation to transfer pricing of related party financing alone.
Although the Chevron decision has created a lot of “buzz” amongst tax practitioners, taxpayers should keep in mind the narrow and specific facts that were in dispute. Chevron was mainly about the old transfer pricing rules, and involved a scheme where a US parent borrowed externally at approximately 1.2%, and on lent to an Australian group member for 9%, ultimately returning that margin (previously claimed as a deduction in Australia) as profits to Australia with no further tax. Despite its limited application, the ATO has taken principles from the Chevron judgment and is aggressively reviewing the terms of intra-group loans of multinational groups. Taxpayers should review their existing financing arrangements as soon as possible and consider whether they should revise their affairs (especially under the ATO’s new amnesty).
See also Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP’s media release dated 18 August 2017.