A recent decision of the Federal Court has illustrated the importance of accurate financial information for shareholder approval of a selective share buyback and the need to keep shareholders informed of any material changes to the financial position of the Company, to reduce the risk of any argument of misleading or deceptive conduct. More broadly, directors are reminded that the test is objective and imposes a high standard – conduct can be misleading or deceptive even where it occurs without knowledge or fault of the directors and notwithstanding the exercise of reasonable care.

In BPESAM IV M Limited v DRA Global Limited [2020] FCA 738, the Federal Court granted an urgent injunction against DRA Global Limited (DRA) and its directors in favour of the Stockdale companies preventing DRA from acting upon shareholder approval for a selective share buyback agreement.

DRA management had previously acquired many of its own shares via limited recourse loans under an employee share scheme and the purpose of the share buyback was to prepare DRA for listing by removing these loans. It was a condition precedent to the share buyback that there was a successful listing/reverse takeover of DRA to prevent the participants in the buyback being able to realise the value of some of their shares ahead of other shareholders. The independent non-executive directors had the ability to waive that condition precedent with consideration to be given only to the likelihood and timing of the listing.

The DRA shareholders (including the Stockdale companies) has previously approved the buyback on the basis of financial statements issued by DRA at the time.  DRA later reissued its financial statements on the basis of a $78 million discrepancy. As a result, the DRA listing did not proceed and the non-executive directors exercised their right to waive the listing condition precedent.

In granting the injunction, McKerracher J found that:

  • the financial statements were misleading or deceptive, and consequently the shareholder resolution approving the buy-back, which relied on the financial statements, was invalid;
  • the tests in sections 1041H of the Corporations Act and section 12DA of the ASIC Act are objective and whether or not the directors knew of the substantial error is irrelevant; 
  • the shareholders needed to have accurate relevant information in order to decide whether to approve the share buyback and if DRA wished to proceed with the buy back, it should have gone back to the shareholders with the correct financial information.  However, even if that analysis was incorrect, DRA had specifically advised shareholders that it would advise them if there were any subsequent events that would render any disclosed material misleading or deceptive and would seek further approval where required;
  • ASIC’s then current Regulatory Guide 110 and general law obligations supported the position that if there is an event in the 12 months following the shareholder approval which makes any previously disclosed information misleading or deceptive, then DRA can no longer rely on that approval to carry out a valid buy back; and
  • The text of the waiver right (specifically the emphasis on consideration being given only to the likelihood and timing on the listing) and the commercial context prevented any suggestion that the discretion to waive was absolute.  Without a concrete proposal for listing that was sufficiently certain, the independent non-executive directors could not form a view as to the likelihood and timing of the condition being met.