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Murdoch University Electronic Journal of Law |
Author: | Robert McKenzie School of Law, Murdoch University |
Issue: | Volume 1, Number 1 (1993) |
TABLE OF CONTENTS
ABSTRACT
INTRODUCTION
Structure of the Paper
PART ONE: DISCLOSURE THEORY
1.1 Investor Protection and
Deterrence of Fraud 1.2 Market
Efficiency 1.3 Prospectus Disclosure
PART TWO: THE CURRENT LEGAL POSITION
2.1 General Prospectus
Provisions in the Corporations Law 2.2
Pre-prospectus Advertising 2.3
ASC Policy 2.4 Remedies
PART THREE: EFFECTIVENESS OF THE
PRESENT REGIME
3.1 Legislation 3.2 Policy
PART FOUR: SUGGESTIONS FOR IMPROVEMENT
4.1 Issuing of Guidelines
4.2 Introduction of New Procedures
4.3 Legislative Amendment
PART FIVE: CONCLUSIONS
BIBLIOGRAPHY
Books Journal Articles Government
Publications Regulatory Body Publications Other Publications Cases Interviews
NOTES
ABSTRACT
The author puts forward the thesis that the Corporations Law fails to provide
an adequate foundation for the effective regulation of "image"
advertising, during the period prior to the registration of a prospectus, by
corporations intending to issue securities.
The paper begins with an examination of the philosophy of disclosure and
identifies three goals of mandatory disclosure regulation: investor protection
from undisclosed risk; deterrence of fraud; and improved securities market
efficiency. The current legal framework for the regulation of disclosure in
initial public offerings is then described, with reference to both legislation
and policy.
The third part of the paper asks whether the current regulatory regime is
sufficient to achieve the goals of disclosure regulation and concludes that it
is not. Part Four makes suggestions for improvement to the current regime by
issuing guidelines, introducing new procedures and amending legislation.
The paper concludes that mandatory disclosure by prospectus is necessary in
initial public offerings of securities and that strict control of advertising
is needed to ensure the good work of disclosure is not undone. Lessons must be
learned from the large privatisations and corporate floats of the early 1990s
if capital markets are to continue to attract investors; particularly in light
of the many privatisations pending. Amendment of existing legislation is
necessary to clarify current uncertainty.
INTRODUCTION
In early 1992 the Commonwealth Bank of Australia (CBA) offered shares to the public. The public float of this
government owned body was, by any yardstick, enormously successful: hundreds of
thousands of investors, some of whom had never invested in shares before,
rushed to pay the $5.40 per share subscription price. The success of the float
was at least partly due to an extensive advertising campaign launched by CBA
prior to the release of the prospectus.(1)
Encouraged by the success of the CBA float, the New South Wales (NSW)
government pressed ahead with plans for the float of that State's publicly
owned insurer, the Government Insurance Office, as GIO Australia Holdings
Limited (GIO). This float was also a success in terms of the number of
investors who applied to subscribe for shares in the company. However, the
float differed markedly from that of the CBA inasmuch as many people were
dissatisfied with the way that the GIO float had been conducted and the
lacklustre performance of GIO securities after listing.(2)
Inevitably, the question arose of why there should have been such a difference
in the perceived levels of success of the CBA and GIO floats. There were,
undoubtedly, many factors which contributed to the variance between the results
of the two floats, but perhaps none so crucial as the alternative advertising
campaigns undertaken by the issuers. In particular, many of the complaints
about the GIO float stemmed from the way in which the expectations of investors
were raised by pre-prospectus
advertising. It is such pre-prospectus advertising which forms the focus for
this work.
The paper explores the thesis that a strong regulatory framework is necessary
to protect investors in initial public offerings and that the current regime
for regulation of pre-prospectus advertising is ineffective.
At present the legal regime centres around ss.1025 and 1026 of the Corporations
Law. Section 1025 prohibits, subject to s.1025(2) and s.1026(2), the
publication of a "notice" which offers securities for
subscription;(3) or issues invitations to subscribe for securities;(4) or
"refers or calls attention, whether directly or indirectly, to: ... [inter alia] an offer or intended offer for
subscription of securities of a corporation ...".(5) Section 1026 is
concerned with the publication of "reports" which are likely to
induce applications for shares, where the person publishing the report is aware
that a prospectus has been prepared or is being issued. Structure of the Paper Part One discusses
the various rationales underpinning the Corporations Law requirement for
corporations to issue prospectuses. This is accomplished by looking at
corporate disclosure generally and prospectus disclosure in particular. The
three broad goals of disclosure regulation which emerge are investor
protection, deterrence of fraud and improved market efficiency.
Part Two closely examines the current state of the law with respect to
pre-prospectus publicity in Australia. This involves a detailed look at the
governing legislation and Australian Securities Commission (ASC) policy in the
area and the way in which they interact.
The current regime is then examined, in Part Three, to assess whether it is
successfully promoting the underlying goals of disclosure regulation. The
operation and scope of the law is considered using statutory interpretation
techniques, in light of the very limited case law in the area. The
unquestionable conclusion of this inquiry is that the ASC has reached the upper
limit for the use of policy to restrict pre-prospectus advertising.(6) Further
controls are necessary, it is suggested, and these can best be implemented by
amending the Law.
Some such amendments are proposed in Part Four, along with suggested guidelines
and procedural changes which may also assist in improving the current regime
for regulating pre-prospectus advertising.
I conclude, in Part Five, that mandatory disclosure by prospectus is necessary
for the protection of investors, both from fraud and undisclosed risk, and for
the long term viability of the capital markets. In order for disclosure to be
effective there must be strict regulation of pre-prospectus advertising.
Current legislation is adequate to deal with advertisements which overtly offer
securities for subscription or issue invitations for subscription, but is not
sufficient to prevent "image" advertising which may undermine the
raison d'etre of the prospectus. Empirical research into the effects of image
advertising upon investors is desirable to guide statutory change.
PART ONE: DISCLOSURE THEORY
Before the effects of pre-prospectus advertising can properly be discussed, it
is necessary to decide what purposes a prospectus should serve. Accordingly,
the first part of this paper examines the issue of corporate disclosure
generally and then inspects prospectus disclosure in light of the general
discussion.
Investor Protection and Deterrence of Fraud
The ASC has stated that the "primary aim of the prospectus provisions of
the Law, ... is to ensure that both the primary and secondary markets for
securities are adequately informed."(7) Although the ASC speaks of
"markets", it is implicit in this statement that the ASC's intention
in ensuring information flow is to give investors a sound basis for making
investment decisions.
This interpretation of ASC policy direction was recently confirmed, `and
extended, in an address by the Chairman of the ASC, Mr Alan Cameron. Mr Cameron
expressed the view that the Commission had dual roles to play in investor
protection:
"... the Commission is not a prudential regulator. We are there to ensure
that people understand what the risk is and then make a decision. I am seeking
to protect the investor from undisclosed risk, or the risk of the money being
stolen, as opposed to the money being invested in something that does not turn
out to be as successful as the investor would have liked."(8)
Forcing corporations to disclose and providing substantial sanctions for those
who fall short of the required standard serves as a deterrent to those issuers
of securities who may be tempted to act fraudulently in a public issue. It also
compels honest promoters to investigate the viability of projects more fully
before embarking upon capital raisings. That is, it is a discipline to
discourage the lazy as well as the dishonest. Brandeis encapsulated this view
when he wrote: "Sunlight is said to be the best of disinfectants; electric
light the most efficient policeman."(9)
In addition to deterring fraud, the ASC aims to protect investors by ensuring
the disclosure of information by
corporations, which will provide a basis for investment decision-making.
However, this merely initiates the inquiry as to who will use a prospectus and
what information those users will require.
In an attempt to answer this inquiry Ruth Hines, in 1981, examined six studies
conducted in Australia and overseas, which investigated whether investors used
annual reports in their decision making.(10) The studies found that most
investors read the narrative portions of the reports thoroughly, but that most
thought the Profit and Loss (Income) Statement and Balance Sheet were more
important in deciding whether to invest.(11) Despite the wide recognition given
to the importance of financial statements, only those respondents versed in
accounting were able to state that they understood them.(12)
These findings were largely confirmed by a 1987 study undertaken in the United
States by SRI International (SRI).(13) The SRI researchers divided the
"individual" and "professional" investor groups into
further sub-groups, based on results of their research.(14) They found that the
professional and semi-professional investors concentrated on the financial
statements in annual reports and tended to discount the narrative portions of
reports as being "biased" and "unduly optimistic".(15)
Professional investors preferred to make their own forecasts, based on the financial
data and perceived quality of management, than to rely on forecasts by the
Chief Executive Officer in the annual report.(16)
In addition, the SRI investigation found that all investor sub-groups expressed
a desire for more information than was currently available in annual reports,
but that professional and semi-professional investors expressed a preference
for information with a greater degree of detail and analysis than did the
individual investors.(17) Individual investors also sought more information and
acknowledged the importance of the financial statements, even though they did
not understand them. The SRI researchers postulated that individual investors
believed in the importance of financial statements because numbers convey an
impression of precision and accuracy which words lack.(18)
The evidence of Hines and SRI indicates that information in annual reports may
be understood by professional investors but the information which all investor
groups perceive as most important (financial reports) is not understood by the
majority of individual investors. If the information currently provided is not
comprehensible to untutored investors, then a choice must be made by regulators
either to require information to be presented in a more understandable way, or
to encourage investors to seek professional advice before investing.
The former approach has been adopted in the United States by the Securities and
Exchange Commission (SEC), which takes the view that financial reports should
be addressed to the "unsophisticated" investor and the professional
adviser alike.(19) Consequently, it requires
issuers to include summaries for unsophisticated investors, in addition
to the more complex and detailed information provided for professional
investors and advisers.(20)
However, one vocal critic of the SEC approach, Professor Homer Kripke, argues
persuasively that unsophisticated investors can only make truly informed
investment decisions after consulting a professional adviser.(21) One reason
for this view is that the complexity of financial accounting ensures meaningful
information is beyond the understanding of most investors.(22)
Also, Kripke asserts that a meaningful investment decision involves a choice
between alternative investment options, such as real estate, artworks, shares,
debentures, futures and term deposits. Information about one of these options
does not inform the investor of the merit of the investment compared to the
other options available.(23) Only an investment adviser has the expertise
necessary to make such a comparison.
Further support for the argument against simplified summaries, and in favour of
professional advisers, came from the UK Board of Trade when it said:
"In the Board's view the object of a prospectus is not primarily to enlighten
the lay investor and to be readily readable and understood by him, but rather
to enable his professional advisers and the financial press generally to assess
the merits of the investment proposed in any prospectus and to offer their
skilled advice."(24)
This view has also enjoyed support in Australia. In its Exposure Draft ED42B25
the Australian Accounting Research Foundation (AARF) expressed the view that
financial statements should be "understandable" and
"comparable". In answering the question "To whom should
financial statements be understandable?" the AARF stated:
"General purpose financial reports can only be prepared with a view to the
broad capabilities of the categories of users that can be expected to benefit
from those financial reports. In making an assessment of those capabilities it
should be borne in mind that professional advice can be obtained by the various
categories of users of financial reports. It is also to be recognised that
complex transactions and events cannot always be reported in simple or
simplified terms without sacrificing relevance and/or reliability."(26)
"Financial reports ought to be constructed having regard to the interests
of users who are prepared to exercise diligence in reviewing those reports and
who possess the proficiency necessary to comprehend the significance of
contemporary accounting practices. Relevant and reliable financial information should not be omitted from
financial reports because it is difficult to understand."(27)
One of the major categories of users of financial reports envisaged in ED42B is
investors.(28) Since all investors want as much relevant information as
possible, and since only trained professionals have the necessary skills to
interpret that information which is perceived to be most useful, the AARF
approach represents a common-sense solution.
Market Efficiency
A further reason to mandate disclosure is to promote market efficiency. An
enhanced flow of information in the markets is very important to the
credibility of those markets.(29) Lack of disclosure requirements may suggest
to potential investors that markets operate on the strength of
"insider" information and this could deter potential investors who
are not privy to such information. For a market to operate efficiently, its
participants and potential participants must have confidence in its ability to
function equitably.(30)
However, not all commentators agree that legislation to compel disclosure is
necessary. One argument which is often raised in support of a system of
voluntary disclosure is the Efficient Market Hypothesis (EMH).(31) This
hypothesis is concerned with the "efficiency" of the market, where
efficiency is used in a narrow sense to mean the ability of the market to
quickly set new prices for securities based on all new information which has
become available.(32) The main thrust of the EMH is that investors cannot
consistently "out-perform" the market with their investments.(33) A
corollary of this view is that corporations will make voluntary disclosure to
investors in the absence of a mandatory disclsure regime.(34)
There are three forms of the EMH, for which empirical support exists. The
"weak" form holds that the marketis efficient if share prices fully
reflect the information implied by all prior price movements. The
"strong" form deems that the market is efficient if share prices
mirror all information, including information which has not been published
("insider" information).(35) The "semi-strong" form holds
the market to be efficient if share prices adjust instantly and without bias to
newly published information.(36)
That is, the effect of the "semi-strong" EMH is that share prices
reflect publicly available information, so that it is not possible for
investors to beat the market. As Keane puts it:
"One conclusion emerges beyond reasonable doubt from the empirical
evidence relating to market efficiency: it is futile for the ordinary layman
without access to privileged information to expect to gain anything from
looking behind the market price of securities."(37) However, some doubts have recently been
raised about the validity of the EMH. The volume of trading on financial
markets seems to be much greater than predicted by the EMH and there is a large
body of statistical data that conflicts with the hypothesis.(38) In response to
the perceived inability of the EMH, as presently defined, to clarify such
anomalies, some economists have looked to the behavioural sciences to explain
investment trends.(39)
This does not meant that the EMH should be cast aside in favour of a
behavioural model, but rather that the behavioural literature demonstrates our
understanding of securities pricing is still evolving.(40) That is, contrary to
the views expressed by Keane(41) and Lorie(42) in the 1980s, the EMH is far
from being accepted as doctrine. In any case, the prevailing view today is that
adherence to the EMH does not necessarily dictate that mandatory disclosure has
no benefit with respect to market efficiency.(43)
Prospectus Disclosure
In addition to the arguments for and against mandatory disclosure, discussed in
parts 1.1 and 1.2 above, prospectuses have been criticised in the past for
including irrelevant information and failing to include relevant information.
However, in view of the discarding of the "checklist" approach to
prospectus preparation, in favour of the current s.1022, this criticism is less
persuasive. Section 1022 requires prospectus preparers to disclose all
information which investors and their advisers might reasonably require in
order to make an informed investment decision.(44) This gives issuers the
flexibility to include information which is relevant, while omitting
inconsequential data.
Another criticism of mandatory prospectus disclosure is that the cost of
compliance is prohibitively high, and this may discourage small corporations
from participating in public capital floats.(45)
However, in a recent paper presented to the Economic Planning AdvisoryCouncil
(EPAC)(46) the ASC defended its disclosure policy. The Commission argued
persuasively that small firms are precisely those which should be subject to the most rigorous
disclosure requirements. These small corporations are dependent on the capital
markets because they cannot raise funds, or cannot raise them cheaply enough,
from financial institutions. The risk which causes institutions to demand
higher rates of interest is also the risk which demands more stringent
disclosure, particularly because the marketing of these securities is directed
to the "less sophisticated investor".(47)
In addition to the foregoing arguments, Coffee has identified four convincing
justifications of mandatory prospectus disclosure.(48) He contends that
voluntary disclosure will not provide an effective alternative to mandatory
disclosure because information has many characteristics of a public good, which
does not encourage diligent verification of the information;(49) lack of
mandatory disclosure causes higher social costs as investors spend excess time
pursuing trading gains;(50) voluntary disclosure assumes that the interests of
managers are identical with the interests of shareholders, but this is rarely
the case;(51) and even in an efficient capital market there is information
which is best provided under a mandatory disclosure regime.(52) On balance, a
statutory regime provides the most reliable mechanism for ensuring that
corporations make adequate disclosure.
PART TWO: THE CURRENT LEGAL POSITION
The prohibition against gun-jumping is a natural progression from the
prospectus disclosure requirements of the Corporations Law. Investors are
protected from the risks of investing without sufficient information by the
prospectus, which the law requires a corporation to prepare.(53) They are
further protected by having the application form attached to the prospectus,
which ensures that each applicant for securities receives a prospectus.(54)
Finally, investors are protected from those extraneous information sources
which may undermine the information value of the prospectus, by legislation
which restricts the advertising of securities issues.
For the purposes of such advertising control, the Law applies differently to
the period before a prospectus is issued ("pre-prospectus") and the
period after issue ("post-prospectus"). The basis for this different
treatment lies in the ASC view that "... post-prospectus statements may be
examined by individual investors and the market generally in light of the full
prospectus information. Unsupported claims in post-prospectus advertisements
may be relatively easily identified by the market."(55) It would be more
difficult to assess the accuracy of statements where a prospectus had not yet
been issued. According to the ASC there would also be an increased risk of
issuers employing "pressure selling" techniques and
"drip-feeding" information to the market.(56) The combination of
these effects may lead to investors making investment decisions based on
information contained in advertisements, rather than in prospectuses.(57)
General Prospectus Provisions in the Corporations Law
In order to appreciate the current position of the advertising regime, it is
necessary to look briefly at the general prospectus requirements of the
Corporations Law.
Section 1018(1) of the Law requires a prospectus to be lodged whenever offers
or invitations to subscribe for securities are made. This general rule is
qualified by exemptions which exist for:
(a)an excluded issue of securities; or (b)an excluded offer of securities for
subscription or purchase; or (c)an excluded invitation to subscribe for or buy
securities.(58)
Section 66 defines what is meant by excluded issues, offers and invitations.
Noteworthy paragraphs of subsection 66(2) include:(59)
"An issue or allotment of securities is an excluded issue if, and only
if: (a)the amount subscribed for the
securities by each person to whom the securities are issued or allotted is at
least $500,000; or (b)the securities are issued or allotted to an underwriter
under an underwriting agreement; or ... (e)the securities are issued or
allotted to: (i)an executive officer of the corporation by which the securities
are issued or allotted or of a related body corporate; or (ii)a person ... who is the spouse, or is a
parent, brother, sister or child, of such an executive officer; or ... (n)the issue or allotment of the securities
is, or is of a kind that is, declared by the regulations to be an excluded
issue.(60)
There are also exemptions for securities which were listed when the new s.1018
became law (that is, 1 January 1991)(61) and
for other listed securities for which a prospectus has previously been issued.(62)
If a prospectus is required to be registered, both parts of the prospectus
content provisions must be observed. The first part comprises specific items of
information which are required to be in all prospectuses. These are detailed in
s.1021 and include such things as the date of the prospectus, the nature and
extent of directors' interests and the signatures of directors.(63)
The second part of the content provisions is contained in s.1022 and is more
controversial than the first. Subsection 1022(1) states:
"In addition to the information required by section 1021 to be included in
a prospectus in relation to securities of a corporation, such a prospectus
shall, subject to subsection (2), contain all such information as investors and
their professional advisers would reasonably require, and reasonably expect to
find in the prospectus, for the purpose of making an informed assessment of:
(a)the assets and liabilities, financial position, profits and losses, and
prospects(64) of the corporation; and
(b)the rights attaching to the securities."
Subsection 1022(2) provides that the information required in s.1022(1) above is
that information which is known to the directors, professional advisers and
others involved in the preparation of the prospectus.(65) Subsection 1022(3)
gives some criteria for deciding what type of information would satisfy the
requirements of 1022(1). These include the nature of the securities, the kinds
of persons likely to subscribe for the securities and the extent of information prospective investors may already
have about the corporation, by virtue of being existing shareholders in the
corporation.(66)
Pre-prospectus Advertising
Prior to the enactment of uniform companies legislation in the 1970s, each
state had its own companies and securities legislation, based on the United
Kingdom model. In each jurisdiction the topic of advertising was dealt with by
"deeming" any advertisement to be a prospectus, and then requiring
the advertiser to comply with the prospectus content provisions.(67) An
Interstate Corporate Affairs Agreement ("the Agreement") was
negotiated between the states and territories, which aimed to develop uniform
companies and securities legislation throughout Australia.
Under the Agreement the Companies Act Amendment Act (No.2) 1975 was passed in
Western Australia to amend the principal Act (Companies Act 1961). A major part
of the amending legislation was the change in approach to regulating the
advertising of securities issues. The legislature adopted the recommendations
of the Eggleston Committee(68) by introducing a new s.40 which dealt with
"notices" and s.40A which dealt with "reports".(69)
The new provisions, which were drafted in similar terms to the Eggleston
Committee proposals, were intended to achieve a balance between the perceived desirable and undesirable effects
of advertising.(70) The Committee saw bona fide press comment as performing the
useful function of informing potential investors about forthcoming floats, but
disdained "image" advertising. The Committee framed the problem thus:
"Under modern conditions in which a company that wishes to raise money by
a public issue can promote its "image", it is possible for a
publicity campaign to engender such interest in a company that it is
unnecessary to do more than announce that a prospectus is available. ...By the
time the prospectus is in circulation, prospective investors are already
convinced that the investment is a desirable one, and neither misrepresentation
nor puffing is necessary in the prospectus itself."(71)
In 1981 a co-operative scheme of companies and securities legislation was
introduced in Australia. The Companies Code re-enacted ss.40 and 40A as ss.99
and 100 of the Code respectively. In 1991 the Corporations Law re-enacted ss.99
and 100 of the Code in essentially the same terms, with some relaxation of the
provisions relating to post-prospectus advertising.(72) The relaxation of
prohibitions in s.99 were made possible by the inclusion of ss.765 and 995,
which provide increased scope for the prohibition of misleading and deceptive
conduct in relation to securities.(73)
Sections 1025 and 1026 of the Corporations Law now regulate the advertising of
securities issues. Section 1025 deals with "notices".(74)
"Except as provided by subsection (2), a person shall not publish a notice
that: (a)offers for subscription securities of a corporation or proposed
corporation; (b)issues invitations to subscribe for securities of a corporation
or proposed corporation; or (c)refers or calls attention, whether directly or
indirectly, to: (i)a primary prospectus in relation to securities of a
corporation; (ii)an offer or intended offer for subscription of securities of a
corporation; (iii)an invitation or intended invitation to subscribe for
securities of a corporation; or (iv)another notice that refers or calls
attention, whether directly or indirectly, to a primary prospectus in relation
to securities of a corporation or such
an offer, intended offer, invitation or intended invitation, not being a notice
referred to in subsection (2)."(75)
An exception to the prohibitions is made in the case of notices which comply
with s.1025(2). This subsection provides that a person may publish a notice,
including a notice concerning the matters in s.1025(3), provided they also
comply with all the conditions within s.1025(2). This subsection allows a
notice to be published if it:
"(a)is published by the person who issued the prospectus concerned, the
holder of a dealer's licence, the holder of an investment adviser's licence or
an exempt dealer; (b)states that a prospectus in relation to the securities of
a body corporate or proposed body corporate has been lodged; (c)specifies the
date of the prospectus; (d)states where a copy of the prospectus can be
obtained; (e)states that allotments or issues of, or contracts for the
subscription for, securities to which the prospectus relates will be made only
on receipt of a form of application referred to in and: (i)if the securities
are debentures - attached to, or accompanied by; or (ii)otherwise - attached
to; a copy of the prospectus; and (f)specifies the interest (if any) that the
person publishing the notice has in the success of the offer or invitation to
which the prospectus relates, being an interest that the person has as
underwriter or sub-underwriter to the issue of the securities to which the
prospectus relates or a relevant interest in those securities."
As a matter of statutory interpretation the ASC has stated(76) that the net
effect of s.1025 is to allow a corporation to advertise a securities issue,
provided that:
1.the published notice contains all the information specified in s.1025(2);
2.the notice does not contravene any other section of the Law;(77)and 3.the
prospectus has already been issued.
In other words, in the absence of discretionary relief granted by the ASC,there is no scope under
s.1025 for a corporation to directly advertise its securities issue prior to
the issue of a prospectus. However, once a prospectus has been issued, an
advertisement can contain any statements (subject to compliance with other
sections of the Law), provided the information specified in s.1025(2) is also
included. The question which is of major interest is how advertisements which promote the
corporation, but which do not refer to a forthcoming issue, should be treated.
This problem is investigated in Part Three, below.
Section 1026 relates to "reports".(78) Subsection 1026(2) states:
"Nothing in this Part prohibits the publishing of: (a)a report that
relates to affairs of a body corporate that is included in the official list of
a securities exchange and: (i)is published only to that securities exchange or
an officer of that securities exchange ...; or (ii)has been so published; (b)a
report of ... the proceedings at a general meeting of a body corporate that is
included in the official list of a securities exchange if the report does not
contain any matter other than matters laid before that meeting; (c)a report
that relates to a body corporate and is published by or on behalf of the body
or by or on behalf of one or more of its directors and: (i)does not contain matter that materially
affects affairs of the body other than matter previously made available in a
prospectus that has been lodged, an annual report or a report referred to in
paragraph (a) or (b); (ii)does not contain a reference, whether directly or indirectly,
to an offer of securities for subscription or to an invitation to subscribe for
securities ... other than a reference to the principal business of the body
where the principal business of the body is the borrowing of money and the
provision of finance; and (iii)is not accompanied by a copy of a prospectus
that has been lodged or a [s.1025(3) notice], and is a report that the body and
its directors have taken all reasonable steps to ensure is not published in a form or manner in which it
might be associated with a notice described in s.1025(3); (d)a report published
on behalf of a body corporate by or on behalf of its directors with the consent
of the Commission; (e)a report that is
a news report ... or is genuine comment, published by a person in a newspaper
or periodical or by broadcasting or televising relating to: (i)a prospectus
that has been lodged or information contained in such a prospectus; or (ii)a
report referred to in paragraph (a), (b), (c) or (d); [on condition that the
person publishing the report, and others associated with the publication, have
not received, or become entitled to, any benefit in exchange for publishing the
report] ..."
Subsection 1026(3) prohibits a person from making a report, except as allowed
by subsection 1026(2) above, that is "reasonably likely to induce persons
to apply for ... securities" if that person knows that a prospectus is in
the process of being prepared or that the prospectus has been issued. In other
words, s.1026 operates to control the making of reports both before and after
the issue of a prospectus. In relation to the types of reports allowed by
s.1026(2), a "rule of thumb"
is that reports required in the course of complying with regular disclosure
requirements of the ASC and ASX, as well as bona fide news reports, are allowed
to be published.
ASC Policy
ASC policy makers have avowed an intention to give effect to Parliamentary
policy underlying the provisions of the Law.(79) In light of this intention it
is perhaps surprising to note the extent to which ASC policy on the advertising
of securities issues has altered between 1990 and 1993, although it may be
argued that the legislature intended the ASC to exercise its discretion freely
in this area.(80)
The main instrument of policy available to the ASC is s.1084, which gives the
Commission powers to exempt persons or classes of persons from compliance with
any or all of the provisions of Divisions 2, 3, 4, 5 and 6 of Part 7.12 of the
Corporations Law and from compliance with regulations made for the purposes of
those Divisions. Such exemptions may be granted unconditionally or on whatever
conditions the ASC considers appropriate.(81)
The ASC used this power to grant first CBA, and then GIO, conditional relief
from the restrictions on pre-prospectus advertising. On 28 March 1991 the ASC
issued five Instruments to grant relief to CBA from ss.1025, 1026 and 1078.
Instrument 164/91 allowed CBA to conduct limited market research (with a
maximum sample size of 5,000 persons) by changing the definition of
"notice" (as it applied to CBA) in s.1025(1) to exclude market
research questionnaires. This was done under the authority of s.1084(6) of the
Law (power to make a section of the Law apply to certain persons as if the
wording of the section had been altered).
Instrument 165/91 gave CBA a conditional exemption from s.1025(3), to allow
advertising by way of publication, television and radio broadcast, news
releases and direct mail to employees and customers. The only statements which
were allowed to be made in the notices were of the same nature as those allowed
for post-prospectus advertising by s.1025.(82) That is, statements could be
made relating to the proposal to lodge a prospectus; the expected date of
lodgement; the means of obtaining a prospectus; and the fact that applications
could only be made on the form attached to the prospectus. This and the
following Instruments were issued by authority of s.1084(2) of the Law (power
to exempt persons).
Instrument 166/91 gave CBA an exemption from ss.1025(3) and 1026(3) to allow it
to conduct "roadshow"
presentations,(83) subject to conditions which specified that the
presenter must inform the audience of the matters set forth in s.1025(2) and
must secure an undertaking of confidentiality from the audience before the
presentation began. The audience could only comprise investment advisers,
dealers and securities representatives.
Instrument 167/91 gave relief from ss.1025(3) and 1026(3) to allow CBA to publish
"tombstone" advertisements.(84) The relief in this Instrument would
seem to be from the post-prospectus advertising restrictions of ss.1025 and
1026, since the wording of Schedule B of the Instrument refers to information
about the prospectus itself, rather than to a "forthcoming"
prospectus. The key to the relief lies in not having to comply with all the
requirements of s.1025(2), such as the necessity to state the date of the
prospectus and the fact that an application must be made on the form attached
to the prospectus.
Instrument 168/91 was issued "for the removal of doubt". Section 1078
prohibits a person going from place to place issuing invitations to subscribe
or offers to buy securities. "Going from place to place" includes the
use of telephone or facsimile machines, but does not include the use of
television or other advertising.(85) The Instrument exempts CBA from the
"share-hawking" provisions of s.1078, including the offer of shares
"by means of televising". It seems that the CBA wanted to be sure
that there was no doubt about the legality of its television advertising and
that the ASC agreed to granting specific relief, even though
"publish" is defined in s.9 to include broadcasting or
televising.(86)
The contents of the CBA Instruments were recapitulated in Policy Statement
Release (PSR) 15, with some additional relief.(87) It detailed the Commission's
policy with respect to the granting of relief for pre-prospectus advertising in
the context of privatisation floats only. Paragraph 15(a) of PSR 15 was in
similar terms to Instrument 165/91 (pre-prospectus tombstone advertising), with
the additional requirement that any such advertising contain the statement:
"An investment decision should only be made after you have read the
prospectus and if necessary obtained independent advice."(88)
Paragraph 15(b) was virtually identical to Instrument 164/91 (market research);
paragraph 15(c) equated to 166/91 ("roadshows"); and paragraph 17 was
equivalent to 168/91 (relief from s.1078 to allow television advertising).
There was no equivalent for Instrument 167/91, but this was corrected in PSR
38.
As well as reciting the contents of the CBA
Instruments PSR 15 provided, in paragraph 15(d), for the registration of
a "preliminary prospectus". Such a document had to comply with the
content requirements of ss.1021 and 1022, except that it need not state an
issue price and a "registration form" should be attached instead of
an application form.
PSR 15 was issued nearly a year after the CBA float and one month before the
granting of relief to GIO. The Statement explained why the ASC chose at that
time to treat privatisations differently to other public share floats. Three
reasons were proffered. The first of these reasons was that privatisation
schemes commonly involve offers of extremely large numbers of securities over a
relatively short period.
This implied that private businesses do not involve offers of equivalently
large numbers of securities, which is generally true in comparison to the
numbers involved in privatisations. However, there are notable exceptions, such
as the float of Woolworths Ltd (Woolworths), which raised more than $2 billion.
Note, however, that when Woolworths was previously preparing to make a public
offering the ASC did agree to grant relief along the lines of that granted to
CBA.(89)
The second reason advanced in PSR 15 was that governments usually wish to
maximise the opportunity for the general public to participate. This is
undoubtedly the case, but an implication that private businesses do not wish to
maximise opportunities for the public to participate lacks intuitive appeal.
Every corporation wants to sell the securities which it is offering. While some
corporations may prefer to deal primarily with institutional investors (for
example, to avoid costs of prospectus production) the primary aim is to sell
the securities, and corporations will sell to any person who has the purchase
price, subject to considerations of takeover exposure.
Thirdly PSR 15 stated that governments particularly want those members of the
public who are not accustomed to investing in shares to participate.(90)
Governments are susceptible to political considerations which may make
widespread security ownership a priority, but it is questionable whether
political factors should be taken into account by the ASC in this way. One
would expect that advertising campaigns which specifically target
unsophisticated investors would attract more strict regulation, rather than a
relaxation of the rules.
There are a number of possible explanations for the ASC policy of limiting the
relaxation of advertising restrictions to government businesses. One
possibility is that the ASC had bowed to government pressure to allow
advertising. Since the ASC is a government funded regulator, there is a
possibility that political pressure could have been applied, notwithstanding
its independent status.(91) On this point, it is germane to remember that
before privatisation the NSW Government considered that, as vendor of GIO
shares, it was not subject to the
Corporations Law. However, it agreed to act as if it was subject to the
Law.(92)
Another possibility is that the ASC believed that government business
enterprises were more "trustworthy" or responsible than other
businesses - that they would not abuse the privilege of being able to advertise
prior to the release of a prospectus. However, as some commentators observed,
there is no reason to believe that politicians will be more responsible in
promoting securities than company directors.(93)
A third possibility is that the ASC wished to "test the water" for
easing of the advertising provisions and this testing could most appropriately
be conducted in relation to relatively low risk investments, such as
privatisations. If the relaxation of the advertising restrictions was
successful for privatisations, the ASC could consider extending relief in the
future.(94)
GIO was granted similar relief to that given to CBA, and was also allowed to
conduct a prospectus reservation scheme. This scheme required the ASC to issue
an Instrument allowing GIO to send a notification acknowledging receipt of an
applicant's prospectus reservation form.(95) However, the ASC declined to grant
specific relief to allow GIO to set up an information and registration centre,
preferring instead to insist that any such centre comply with the existing law.
When PSR 38 was subsequently issued in November 1992, it consolidated the
policy shifts embodied in the exemptions granted previously to CBA, GIO and
Woolworths. In PSR 38 the general relief granted from pre-prospectus
advertising prohibitions was to allow tombstone advertising;(96) bona fide
market research;(97) and roadshow presentations (on identical conditions to
those contained in the CBA relief in ASC Instrument 166/91) for underwritten
floats of $500 million or more (on identical conditions to those contained in
the CBA relief in ASC Instrument 166/91).
Any other pre-prospectus advertising, including "image advertising",
had to comply with the Law.(98) PSR 38 also retained the preliminary prospectus
from PSR 15, but only for privatisation floats.(99) Unlike PSR 2 or 15, PSR 38
also considered the application of "pathfinder prospectuses".(100) A
pathfinder is circulated to assist in the pricing of issues and to finalise
prospectus content.(101) It may only be distributed to prospective
underwriters, brokers and exempt offerees and relief is currently only available where the issuing corporation is
proposing to list the issued shares on the ASX.(102) The pathfinder must not
contain an application form and no agreement to subscribe for securities may be
entered into on the basis of the document.(103)
PSR 38 acknowledged the similarities between the float of large private
entities and the privatisation of government business enterprises, by extending
most of the relief given to privatisation issues to underwritten issues of $500
million and over. However, the most recent policy document, PSR 54, shifts the
focus away from privatisations and large floats as criteria for relief.
Instead, relief may be available for any corporation which is listed or intends
to list.(104) This is because listed corporations are subject to a greater
level of scrutiny than unlisted entities.(105)
PSR 54 re-states the concerns expressed in Media Release 92/243 that statements
in advertisements preceding the release of a prospectus cannot be verified to
the prospectus. The ASC fears this could result in issuers using pressure
selling techniques; issuers "drip-feeding" the market with information;
and investment decisions being made on the basis of information in the
advertisements, rather than in the prospectus.(106)
The concern of the ASC is that, although s.995 is still available as a remedy
for misleading statements made in pre-prospectus advertisements, the potential
exists for investment decisions to be made on the basis of incomplete
information, which may not be misleading in itself and hence will not fall
within the scope of s.995.(107)
As a result of this concern, the ASC has decided to limit the relief available
to tombstone advertising, roadshow presentations and market research. The terms
for these exemptions are set forth in Class Orders 93/421, 93/422 and 93/423
respectively and are essentially in the same terms as the Instruments granted
to CBA. The only general requirement now in place is that issuing corporations
be listed or intending to list.
However, even listed corporations will not be accorded relief to facilitate
their use of image advertising.(108) PSR 54 devotes considerable attention to
image advertising and begins by defining it:
"Image advertising means advertising conducted by a body corporate which
contains express or implied assertions about the nature, value or worth of the
body corporate, but which does not contain any express reference to a
forthcoming prospectus or issue of securities."(109)
PSR 54 canvasses two possible views of the legislation applying to image
advertising. In the narrow view an image advertisement would not be unlawful if
it did not of itself call attention to an issue of securities. That is, the
context of the advertisement is not relevant to a decision of the legality of
the advertisement.
The broad view of image advertising is the one preferred by the ASC. This view
takes a contextual approach to deciding whether an advertisement calls
attention to an offer of securities. This view is stated to be consistent with
the approach to interpretation detailed
in s.109H of the Law.(110) In coming to the conclusion that a broad approach
better fulfils the intended purpose of the legislation, the Statement refers to
the origins of contemporary pre-prospectus advertising legislation, which can
be traced back to the Eggleston Committee Report.(111) The ramifications of the
broad view are explored in Part Three below.
Remedies
Section 995 of the Law prohibits persons engaging in misleading conduct in
relation to the issue of securities.(112) If a notice or report is not
misleading, but contravenes ss.1025 or 1026, an offence is committed and a
maximum penalty of $2,500 or six months imprisonment, or both, may be
applied.(113) In addition, civil liability may apply, pursuant to s.1005.
The Court may issue an injunction to enjoin advertising which is in breach, by
virtue of s.1324.(114) This is an important remedy, which furthers the goal of
investor protection particularly well by preventing the offending advertisement
from influencing further potential investors. It appears that the process for
the issue of an injunction increases the effectiveness of this remedy.(115)
Also, the Court may grant an award of damages in addition to, or in substitution for, an injunction.(116)
The usefulness of the injunction as a remedy is enhanced by s.1034(6), which
waives the requirement of proving that imminent harm may flow to the plaintiff.
This is crucial, because the crux of this area of law is that harm is hard to
assess and even harder to prove. The real danger that is sought to be avoided
is that the potential exists for investors to be disadvantaged in their
investment decision making by being distracted from the prospectus provided.
A further important remedy under the Law is s.1114, which allows the Court to
make orders where a person contravenes any section in Chapter Seven of the
Law.(117) For example, the Court may make an order restraining a person from
disposing of securities(118) or an order declaring a contract relating to
securities to be void or voidable.(119)
PART THREE: EFFECTIVENESS OF THE PRESENT REGIME
Part One identified the three main rationales underpinning the prospectus
disclosure provisions of the Law as being investor protection from undisclosed
risk; deterrence of fraud; and efficiency of the capital markets. If these
goals of mandatory disclosure are to be attained, it is essential that the
legislation and policy regulating the publication of notices and reports
effectively operates to prevent investors obtaining their investment
information from advertisements, rather than from prospectuses. Consequently,
this Part looks at whether the law is enforceable and hence whether the
powerful remedies identified in Part Two can be brought to bear.
3.1 Legislation The law is clearly
adequate to deal with the situation in which an advertisement openly offers
securities to the public, or overtly refers to matters such as an intended
invitation to subscribe for securities. In such cases s.1025 is breached and
s.1324 can be invoked to enjoin the publishing of the offending advertisement.
Penalties will apply to the party in breach and civil action can be taken by
the injured party, pursuant to s.1005.
The difficult cases are those in which no direct reference is made to the
forthcoming float, but where the issuing corporation embarks on an advertising
campaign to promote its public image. In such cases, the ASC has refused to
grant relief(120) and has adopted a "wait and see" approach. If the
advertisement shows evidence of "drip feeding" information to the
public, or of using pressure selling techniques, the Commission will
intervene.(121)
Just how effective such intervention will be depends on how the Court
interprets the Law. In particular, it depends on whether the Court is persuaded
to take the broad, purposive view espoused by the ASC, or some narrower,
literal interpretation. Unfortunately there has been no judicial consideration
of ss.1025 or 1026 and an extensive search has revealed only one case which has
considered the gun-jumping provisions.(122) However, even this case is of
little assistance in determining judicial attitudes, since it concerned a
breach of the old "deeming" provisions of the Companies Act (s.40)
and throws little light on the present inquiry. Consequently, recourse to
statutory interpretation techniques is necessary to predict the likelihood of
enforcing the advertising provisions.
The ASC, in PSR 54, states its belief that s.109H of the Law requires the Court
to adopt a purposive approach to interpreting the Law. Section 109H provides :
"In the interpretation of this Law, a construction that would promote the
purpose or object underlying the Law (whether that purpose or object is
expressly stated in the Law or not) is to be preferred to a construction that
would not promote that purpose or object."
This provision of the Law is (apart from the substitution of "Law"
for the more general term "Act") in exactly the same terms as s.15AA
of the Acts Interpretation Act 1901 (Cth). Accordingly, although the effect of
s.109H on statutory interpretation has not been extensively considered by the
courts, it should be possible to appraise the probable influence of this
section by reference to past judicial consideration of s.15AA. Similar
reasoning applies to an assessment of s.109J, which is in essentially the same
terms as s.15AB of the Acts Interpretation Act.(123)
Section 15AA purports to extend the common law approach to statutory
interpretation. At common law it is still generally accepted that a purposive
approach should only be employed to clear up an ambiguity or doubt on the face
of an Act.(124) Section 15AA seems to require that a purposive approach be used
even when the meaning of the words in the statute is clear. An interpretation
arrived at by reference to this purposive approach may differ from an
interpretation flowing from the literal meaning of the words and s.15AA
requires the courts to adopt the former, purpose-oriented interpretation.(125)
However, it is unclear whether this is being implemented by the courts. Pearce
and Geddes(126) suggest it is likely that courts have reached conclusions which
have been based on s.15AA, or which have been influenced by that section, but
that this has not been explicitly acknowledged by them. It seems therefore,
that the best that can be said with any certainty is that the courts will use a
purposive approach when there are alternate interpretations flowing from the
literal meaning of the words of a statute, but that it remains open whether
they will take the opportunity to use this approach as a primary method of
interpreting the Law.
This hypothesis is supported by the recent High Court decision in Mills v
Meeking.(127) In that case Mason CJ and Toohey J, with whom Brennan J
concurred, delivered the majority judgement. Their Honours declined to use
extrinsic material to determine the purpose of the Road Safety Act 1986 (Vic.)
because they considered that the relevant section of the Act was not
ambiguous.(128) Instead the "ordinary and grammatical meaning" of the
words was discerned from a reading of the whole statute.
McHugh J, in dissent, employed a purposive approach in interpreting the
section, but appeared not to do this on the basis of s.35 of the Interpretation
of Legislation Act 1984 (Vic.).(129) His Honour did not clearly articulate
whether he considered the section of the Road
Safety Act to be ambiguous, but he did appear to be justifying his
approach on common law principles.
Only Dawson J, also in dissent, determined that s.35 allowed the Court to
consider the purpose of a statute as a primary aid to construction. He felt
that: "The approach required by s.35 needs no ambiguity or inconsistency;
it allows a court to consider the purposes of an Act in determining whether
there is more than one possible construction."(130)
The fact that a majority of the Court required an ambiguity to exist before
invoking s.35 indicates that the ASC may have been overly optimistic in its
interpretation of the scope of ss.1025 and 1026.(131) Given the uncertainty
about the Court's willingness to invoke a purposive approach as an initial tool
of interpretation, it seems the only circumstances in which the Court could be
relied upon to invoke a purposive approach is in the case of an ambiguity in
s.1025 or s.1026.
However, it seems unlikely that a court would find either section ambiguous.
There may be a degree of uncertainty about the intended scope of the sections,
but it is probable that this could be resolved without recourse to extrinsic
materials. On any reading of ss.1025 and 1026 it is clear that certain conduct
is allowed (s.1025(2) notices and s.1026(2) reports) and other conduct is
prohibited if it refers or calls attention, directly or indirectly, to a public
float or if it is reasonably likely to induce persons to subscribe for
securities.
The fact that the Law does not ban all advertising, other than that allowed by
subsections 1025(2) and 1026(2), is indicative of the intention of Parliament.
If we turn first to s.1025 and ask the question "What advertising did the
Parliament intend should be allowed in spite of this provision?", the
answer might be "Any advertising which does not, even indirectly, call
attention to a public float." Undoubtedly this includes the advertising
which a corporation undertakes to promote its products or services.
But it is much more than this: if product advertising was the only advertising
to be excluded from the operation of s.1025, it could have been specifically
exempted by the legislative draftsperson.(132) This suggests that Parliament
intended to allow image advertising, provided it did not call attention to an
impending float. If this is the case, then the broad view of s.1025, as
espoused in PSR 54, appears inappropriate.
PSR 54 takes the position that an image advertisement is unlawful if "read
in conjunction with the surrounding circumstances, the advertising campaign and
all other publicity, it would call the securities issue to the attention of the
average person in possession of common knowledge ...". To take this view
would be to ban image advertising in virtually all instances, since one expects
at least some publicity to surround the float of any corporation.
Although the foregoing argues for a narrow reading of s.1025, when the section
is read in conjunction with s.1026 the effect is to further narrow the range of
permissible advertising. The result is that image advertising which does not
call attention to a float may nevertheless by disallowed because it is
reasonably likely to induce persons to subscribe for securities.
The scope of s.1026 was considered in Policy Statement Releases 2, 15 and 38,
where the ASC stated its belief that the test (for deciding what constitutes a
report which is reasonably likely to induce persons to subscribe) should be an
objective one. In so stating, the Commission drew a distinction between an
advertisement which was likely to induce a person to subscribe and one which
merely prompted a person to make further inquiries.(133) Importantly, the
Commission declined to repeat this analysis in the draft policy statement
(Media Release 92/243) and PSR 54.
In spite of the ASC's change of heart, the above approach seems consistent with
a literal interpretation of s.1026. If potential investors are only likely to
make further inquiries, they would not be induced by the advertisement to invest.
However, if investors make such inquiries and receive further information in
reply, which induces them to invest, the Court may take a different view. In
Mutual Home Loans(134) the majority held that documents sent in response to a
request inspired by an advertisement formed part of the advertisement. Evidence
of pressure selling techniques and drip feeding of information in
advertisements may constitute, in the eyes of the Court, activity likely to
induce persons to subscribe for securities.
From the foregoing discussion, it is apparent that the ASC faces a difficult
task if the Court takes a literal approach to interpreting the advertising
provisions. However, if the Court decides to pursue a purposive approach to
interpreting the Law, one must ask what extrinsic materials it is likely to
use, and what relative weight will likely be assigned to each, in determining
the definitive "purpose"
underlying ss.1025 and 1026. Section 109J of the Law assists by listing some of
the sources which the court may consider, while stipulating that the list is
not exhaustive.
Given the preference for documents which are widely circulated,(135) it is
probable that the Eggleston Committee Report would be favourably received. This
is particularly so because it contained the antecedent of ss.1025 and 1026 in
draft form.(136) If the Court did act in accordance with the intentions evinced
in the Report, it is likely that the PSR 54 criteria for unacceptable image
advertising (that is content; timing; frequency of publication; and mode of
publication) would also be applied.(137) If a broad purposive approach was
adopted, ASC policy would assume greater importance than otherwise.
3.2 Policy ASC policy tacitly
acknowledges the difficulty the Commission faces in successfully prosecuting a
corporation for a breach of either s.1025 or s.1026. Despite declaring
confidence in a broad view of the provisions, the Commission resiles from a
truly broad interpretation by requiring evidence of "drip feeding" or "pressure selling" before acting.
This is despite the claim, in paragraph 35, that any grant of relief to
facilitate image advertising would compromise policy objectives.
By insisting on evidence of drip feeding and pressure selling before
proceeding, the ASC has chosen to ignore the effect which image advertising
has, and is intended to have, on investors. The whole purpose of image
advertising, in the context of an impending float, is to encourage investors to
subscribe for the securities when they become available. In combination with
press reports, such advertisements can create an atmosphere of near hysteria,
as investors rush to send their applications in and secure an allocation.(138)
Investors are more likely to make ill-informed investment decisions in such a highly
charged atmosphere. They are more likely to invest without seeking professional
advice and without reading the prospectus if they believe that the securities
are highly sought after. Such reactions to image advertising are not dependent
on pressure selling techniques or drip feeding being employed. Instead, they
flow as a natural consequence from the existing investment environment, which
may be at an already "pressurised" level because of news reports or
other factors.(139)
3.3 Enforcement It seems the most
optimistic view of the current regime is that there is uncertainty about the
circumstances in which the ASC could successfully prosecute a corporation for
engaging in unacceptable image advertising prior to the release of a
prospectus. My less optimistic view is that the law, as drafted, is inadequate
to protect investors from the threat posed to them by image advertising. The
ASC has used its latest policy statement (PSR 54) in an attempt to shore up the
legislation, but has been forced to a compromise position from which it is
virtually powerless to prevent any but the most flagrant breaches of the
gun-jumping provisions.
The pre-prospectus advertising provisions of the Law, and its predecessors,
have been generally effective in protecting investors and ensuring the
efficiency of the securities markets by promoting the credibility of those
markets. However, this has not occurred as a result of successful prosecutions.
In the past, issuers have been content to proceed with floats without challenging the law, but this may be
set to change. The use of image advertising, without the grant of relief by the
ASC, in the recent Woolworths float indicates a changing mood in the securities
industry. Even the fact that issuers are now prepared to test the limits of the
present regime reduces its effectiveness. A full challenge may reveal that the
pre-prospectus advertising regime is a "paper tiger".
PART FOUR: SUGGESTIONS FOR IMPROVEMENT
Part Three identified a number of shortcomings of the current legal regime for
regulating pre-prospectus advertising. Of note is the doubt about the efficacy
of ss.1025 and 1026 as mechanisms to control image advertising. An allied
problem is the obscurity of the message being sent to issuers by the latest ASC
policy document (PSR 54), which indicates a tough enforcement approach by the
ASC to image advertising, but then insists on evidence of drip feeding or
pressure selling before proceeding. The result is uncertainty about what is,
and what is not, allowed.
Suggested improvements have been divided into three categories, termed
"issuing of guidelines"; "introduction of new procedures";
and "legislative amendments". Guidelines would be the easiest changes
to implement and the least cost alternative, however they provide, at best, a
stop-gap remedy. Procedural changes would be more expensive and time consuming
to implement than guidelines, but may be more effective as a medium term
solution to the problem. The preferred solution to the perceived problems of
pre-prospectus advertising is to amend the legislation.
4.1 Issuing of Guidelines Guidelines
may take the form of published lists of acceptable and unacceptable advertising
practices, including such things as the timing and frequency of advertisements.
The ASC is encouraging the development of guidelines in relation to prospectus
preparation and this may be extended to include pre-prospectus advertising
guidelines.(140)
An alternative is the introduction of a system of "no action"
letters, based on the SEC procedure in
the United States.(141) By publishing ASC rulings in this way, issuers and
their advisers can form a view of what advertising material is acceptable. Such
a system has clear benefits in the current situation where the scope of the law
has not been judicially defined. When deciding on the content and amount of
image advertising which they intend to employ prior to a securities float,
issuers may be content to limit any campaign to one which the ASC will accept,
rather than one which would maximise subscriptions. In this way, issuers get
some benefit from their advertising without risking the wrath of the ASC.
A possible impediment to the implementation of a full "no action"
program in relation to pre-prospectus advertising is the memory which some
people have of the National Companies and Securities Commission (NCSC) approach
to corporate regulation. Perhaps this could best be summarised as a fear of
returning to the "bad old days", where deals were sometimes done as
an alternative to enforcement. However, an official "no action"
system is preferable to any de facto system, in which newspapers report the
ASC's attitude to various advertising campaigns.(142)
4.2 Introduction of New Procedures Of
necessity, any system of "no action" reports would rely on the
"pre-vetting" of
advertisements, which is an easily implemented procedural step. The NCSC
adopted a "pre-vetting" procedure in relation to prospectuses but the
ASC abandoned the practice because it felt this was not an effective use of resources.(143)
The cost of administration is a major disadvantage of pre-vetting, but costs
may be reduced by limiting the vetting procedure to image advertising. The
results of pre-vetting exercises should ideally be incorporated in published
guidelines or "no action" reports, as discussed at 4.1 above.
A second procedural step which may be effective in achieving greater investor
protection, is the inclusion of strongly worded warnings in all image
advertising which is undertaken by corporations within a certain time prior to
an issue of securities.(144) Professor Tom Valentine(145) participated in a
national radio interview recently and expressed the view that warnings to
investors should be in strong terms, which he likened to the health warnings in
cigarette advertisements.(146) As Professor Valentine also indicated in that
interview, the problem may not be with the corporation which is issuing
securities, but with the way that an investor perceives those securities as a
result of the advertising. For example, an investor may invest solely in a
particular security, rather than opting for a range of investments, on the
basis of image advertising. Any downturn in that investment will affect the
investor severely, if there are no other investments to offset the loss. Risk
may be significantly reduced by investing in a spread of different investment
products.
A further procedural step to promote informed investment decision making is the
distribution of a preliminary prospectus, which contains all the information
required to be in a full prospectus, except the issue price.(147) The contents
of the preliminary document could be incorporated, by reference, into the final
prospectus. The point of such a document is to give investors time to study the
disclosed information in detail, or to seek professional advice about its
contents, without the pressure of making an investment decision within a
limited period. This is particularly necessary in the situation where there is
excessive demand for a security, whether due to advertising and press comment
or because the market is "hot". In such a situation a float may be
open for only a few days.(148)
4.3 Legislative Amendment The final suggested category for improvement
is legislative reform. This long term solution will take time to implement and
should be supplemented in the interim by procedural reforms. There is support
in government and the business community for widespread reform of the
Corporations Law.(149) Amendment of ss.1025 and 1026 should be a priority of
any revision of the Law.
The existing provisions are adequate to deal with situations in which
advertisers make express references to
securities issues, but difficulties exist in attempting to regulate image
advertising. Part Three of this paper illustrated that the state of the law is
inconclusive in its effect on image advertising because of the difficulties of
defining what is meant by "calls attention, whether directly or
indirectly" to an issue of securities. Two possible solutions are proposed
in this paper.
One option is to add a subsection to s.1025 to prohibit image advertising by a
corporation for three months prior to a planned float. Image advertising should
be defined in the subsection and should include consideration of content, timing
and frequency of advertisements.(150)
A second option is the redrafting of ss.1025 and 1026 using "fuzzy
law".(151) In essence, this process involves replacing "black letter
law", with law which clearly sets out the aims of the legislation with
simple requirements and exceptions. The idea is to guide the courts in their
decision making, rather than binding them with prescriptive provisions.(152)
The inclusion of purposive statements within the confines of the statute should
ameliorate uncertainties associated with judicial reluctance to use extrinsic
materials.(153) Legislative amendment
was also the approach favoured by the Prospectus Law Reform Sub-Committee of
CSAC in the Lonergan Report.(154) The major recommendation of the Sub-Committee
was that ss.1025 and 1026 be amended to apply only to unlisted securities, on
the basis that s.995 of the Law and s.52 of the Trade Practices Act together
provide sufficient recourse to persons suffering loss as a result of misleading
or dishonest advertising by issuers of listed, or listing, securities.(155)
This approach fails to recognise the impact which image advertising has on
investors. The Sub-Committee has taken the narrow view that advertising is only
harmful if it is, in itself, misleading. It does not take into account the
detriment that flows from being inadequately informed, which is a natural
consequence of making investment judgements based on advertisements, rather
than on a prospectus or professional advice.
Recognising that not all would agree with its major recommendation, the
Sub-Committee made several further recommendations. Most of these are minor
changes to ss.1025 and 1026, but one significant proposal is the amendment of
legislation "to relax pre-publicity restrictions".(156) The reason
advanced for this reform is to allow investors to learn in advance about
pending floats. Provided publicity is limited to "tombstone"
advertisements and genuine press comment, this reform would not appear to undermine goals of investor protection and market
efficiency.
PART FIVE: CONCLUSIONS
There is no dispute that corporate disclosure is necessary as a basis for
investment decision making. Studies have shown that both professional and
unsophisticated investors seek as much information as possible about a
corporation when making investment decisions.(157) What is debated is whether
disclosure should be compulsory; what information should be disclosed; and to
whom disclosure should be addressed.
In this debate one argument which is often raised against mandatory disclosure
is that it is not necessary in an efficient market. The basis for this claim is
the EMH. However, the scope of the EMH has been called into doubt recently, so
that it is fair to say that it is not certain that all corporations would
adequately disclose unless compelled to do so. Prospectus disclosure has been
made increasingly relevant by the requirement, in s.1022, for a corporation to
provide information which investors might reasonably require to make an
investment decision about that corporation. Depending on the circumstances,
this may increase or decrease the amount of information disclosed, but in all
cases it should improve the relevance of disclosed information.
Advertising controls are necessary to complement the prospectus; to ensure the
primacy of the prospectus as the information source relied upon by investors.
Without such controls the prospectus would be ineffective, with unsophisticated
investors possibly preferring the simple messages of advertisements to the more
complex information which is contained in the prospectus.
Parliament recognised this when it legislated to amend the Uniform Companies
Act in terms of the proposals of the Eggleston Committee.(158) These amendments
sought to preserve the prospectus as the instrument of disclosure in a public
offering of securities, but accepted the desirability of investors having
access to other sources of information, such as press reports, which could
improve investment decisions.
The Eggleston Committee expressly refers to the undesirable result of
corporations promoting their "images".(159) It is ironic, therefore,
that the current legislation, which evolved from the Eggleston Committee
recommendations, appears to be less than equal to the task of regulating such
image advertising.(160) ASC policy declares an intention on the part of the
Commission to protect investors and appears confident of being able to achieve
that aim, in relation to advertising, through a wide judicial interpretation of
ss.1025 and 1026.
However, the avowed confidence of the ASC to use the existing legislation to
curtail image advertising appears misplaced. Successful prosecution of an
issuer for using image advertising is dependent on the courts adopting a broad
purposive approach to interpreting ss.1025 and 1026. It appears, from the High
Court decision in Mills v Meeking,(161) that there is still considerable
judicial reluctance to adopt such an approach in the absence of an ambiguity in
the legislation. Since ss.1025 and 1026 do not appear to be ambiguous, it seems
that they would be interpreted
according to the natural meaning of the Law as a whole.
Consequently, amendment to the legislation is necessary to clarify the position
and give the ASC a strong legislative foundation from which to regulate. It is
particularly important that the legislation be amended in the near future, in
view of the large number of privatisations which are likely to occur within the
next two years.(162)
It seems likely that a major re-drafting of the Law will occur within the next
few years, and that the emphasis will be on a simplified statute.(163) This
provides an opportunity for extensive research to be done in the interim, to
guide the drafting process. However, amendment should be undertaken before then
if image advertising is to be successfully regulated until that time.
To guide proposed legislative reform the ASC should undertake a study of the
effects of image advertising on investors to determine what level of image
advertising, if any, is compatible with the goal of investor protection. Such
research should consider factors such as the state of the economy at different
times and the attitude of the press to speculative reports about such things as
"stag" profits to be made. Empirical research would be conducted
before, during and after major public floats in which the issuers are engaged
in image advertising. If empirical research is impractical, further
consultation with industry and consumer groups would be beneficial.
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& Country Bank07-03-93
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12-05-93
NOTES
1
The CBA had special dispensation from the Australian Securities
Commission (ASC) to conduct the advertising campaign. Advertising prior to the
issue of a prospectus is generally contrary to law and is given the name
"gun jumping" by United States regulators: see generally
Chiappinelli, E.A., "Gun Jumping: The Problem of Extraneous Offers of
Securities", 50 U.Pitt L. Rev. 457, 1989.
2 Those dissatisfied with the GIO float
included brokers; applicants who failed to receive shares, or had their
applications scaled back; and successful applicants who did not receive the
expected early profits from the float.
3 Paragraph 1025(3)(a).
4 Paragraph 1025(3)(b).
5 Paragraph 1025(3)(c). Note that ss.1025 and
1026 are concerned only with primary prospectuses, since they apply to offers
to subscribe for securities, not offers to purchase securities.
6 Note, however, that significant scope
remains for the easing of advertising restrictions, using s.1084 of the Law.
7 Australian Securities Commission,
"The Prospectus Provisions of the Corporations Law: The First Three
Months", Policy Statement Release 2, Issue 1, effective 26 April 1991, at
para.4. This aim was repeated in Australian Securities Commission, The
Prospectus Provisions of the Corporations Law", Policy Statement Release
38, (issued 9 November 1992 and updated 30 November 1992), also at para.4.
8 Reported in The Australian Financial
Review, 23 April 1993, at p.15.
9 Brandeis, L.D., Other People's Money
and How the Bankers Use It, (edited by Richard Abrams), Harper & Row, New York,
1967, at p.62.
10 Hines, R., "Are Annual Reports
Used by Shareholders?", The Chartered Accountant in Australia, March 1981,
48-52.
11 Ibid., at pp.49-50.
12 Ibid., at p.50.
13 SRI International, Investor
Information Needs and the Annual Report, Financial Executives Research
Foundation, Morristown (N.J.), 1987.
14 Ibid., at pp.18-22.
"Buy-and-hold" investors are those who typically trade an average of
only one parcel of securities per year and look at the long term prospects;
"opportunity-driven" investors make more transactions per year and
are more intuitive in their decision making; "semi-professional"
investors generate an average of twenty nine transactions per year, have a
greater understanding of financial statements
and are more like the true professional investors in their approach.
15 Ibid., at p.53, but note that
professional investors take natural optimism into account in coming to their
own, less optimistic, views.
16 Ibid., at p.32.
17 Ibid., at p.3.
18 Ibid., at p.53.
19 Azzi, J., "Disclosure in
Prospectuses", Company and Securities Law Journal, v9, August 1991,
205-234 at p.207.
20 Loss, L., Fundamentals of Securities
Regulation, (2nd ed.), Little, Brown and Company, Boston, 1988, at pp.126-128.
21 Kripke, H., "The SEC,
Accountants, Some Myths and Some Realities", 45 New York University Law
Review 1151, 1970.
22 Ibid., at p.1167.
23 Ibid., at p.1169.
24 Company Law Committee, Minutes of
Evidence: Twentieth Day, 24 March 1981, Her Majesty's Stationery Office,
London, at p.1578, para.93.
25 Australian Accounting Research
Foundation, "Qualitative Characteristics of Financial Information",
Proposed Statement of Accounting Concepts ED42B, Australian Accounting Research
Foundation, Caulfield (Vic.), 1987.
26 Ibid., at para. 35.
27 Ibid., at para. 36.
28 Australian Accounting Research
Foundation, "Objective of Financial Reporting", Proposed Statement of
Accounting Concepts ED42A, Australian Accounting Research Foundation, Caulfield
(Vic.), 1987 at para. 15.
29 Australian Securities Commission,
"Companies and Securities Regulation in Australia: The Regulator's
Perspective", Prudential Regulation in Australia: Recent Developments,
Papers presented to Economic Planning Advisory Council, Australian Government
Printing Service, Canberra, 1991, at p.22.
30 Committee of Inquiry into the
Australian Financial System, Australian Financial System Final Report,
Australian Government Printing Service, Canberra, 1981 (the "Campbell
Committee Report"), at para.1.32.
31 For example, see generally Keane,
S., Stock Market Efficiency: Theory, Evidence, Implications, Phillip Allan
Publishers Limited, Oxford, 1983. The EMH is also sometimes referred to,
particularly in the US literature, as the Efficient Capital Market Hypothesis
(ECMH). This is perhaps a more accurate designation because it limits the
discussion of the hypothesis to its operation in the capital markets. Keane, at
p.7, approves the distinction on the
basis that capital markets are more nearly "perfectly competitive"
markets than other markets and the EMH is therefore more likely to hold valid
for capital markets.
32 Ibid., at p.9.
33 Ibid.
34 Langevoort, D.C., "Theories,
Assumptions, and Securities Regulation: Market Efficiency Revisited", 140
U.Penn. Law Review 851, 1992, at p.874.
35 Keane supra note 31, at p.10. Keane
notes (at p.12) that the strong form of
the EMH relates to the efficiency of information markets, rather than capital
markets. In this sense the strong form of the hypothesis is irrelevant to the
present discussion. Lorie infra, note 42 at p.76, does not draw the distinction
between markets, but states that the strong form of the hypothesis is in any
case flawed because insiders can trade before information is published.
36 Ibid., at p.10.
37 Ibid., at p.135.
38 Langevoort supra note 34, at p.863.
39 Ibid., at p.866 et seq.
40 Ibid., at p.871.
41 Keane supra note 31.
42 Lorie, J., Dodd, P. and Kimpton, M.,
The Stock Market: Theories and Evidence, (2nd ed.), Dow Jones-Irwin, Homewood
(Ill.), 1985.
43 Langevoort supra note 34, at 874.
44 This is in addition to the specific
information required by s.1021.
45 The costs are undoubtedly high. In
the GIO Australia float $15.9 million in fees was paid to experts in preparing
the prospectus (Australian Financial Review, 23 June 1992, p.5).
46 EPAC supra note 29.
47 Ibid., at p.21.
48 Coffee, J., "Market Failure and
the Economic Case for a Mandatory Disclosure System", 70 Virginia Law
Review 717, 1984, at p.722.
49 Ibid. In other words, a small number
of people pay for the information which a large number of people utilise: SRI
supra note 13, at p.36 and Hines supra note 10, at p.51. Note that the cost of
producing an annual report passes indirectly to the shareholders through
reduced profits, but that professional investors obtain the information at no
cost. Prospectuses are distributed to many people who do not use them, but the
cost is ultimately born by those who do invest.
50 Ibid.
51 Ibid. A whole body of literature
exists on this topic, concerned with reducing the "agency costs"
associated with the disparity between the aims of management and owners. For
example, see generally Anderson, A.G., "Conflicts of Interest: Efficiency,
Fairness and Corporate Structure", UCLA Law Review, v.25, 1977-78, 738-795
for a discussion of the tension between the efficiency and "fairness" of corporate
structures.
52 Ibid. Also discussed in Langevoort
supra note 34.
53 Section 1018.
54 Section 1020.
55 Australian Securities Commission,
"Draft Policy Statement: Relief from the Advertising Provisions of the
Corporations Law Applying Prior to the Lodgement of a Prospectus", Media
Release 92/243, issued 21 September 1992, at para.16.
56 Ibid., at para.17.
57 Ibid.
58 Section 1017.
59 Subsection 66(3) is in similar terms
for excluded invitations and excluded offers.
60 There are several exceptions listed
in the regulations, one of which is the case of the investor who has more than
$10 million of funds under management: Reg 7.12.05(e).
61 Subsection 1018(2).
62 Subsection 1018(5).
63 Subsections 1021(4), (6) and (13)
respectively.
64 The requirement to give estimates
of the financial future of the corporation is one of the most contentious parts
of the new prospectus content provisions. Lonergan, W. and Moore, S.,
"Prospectus Law Reform: An Examination of the Report of the Prospectus Law
Reform Sub-Committee of the Companies and Securities Advisory Committee",
Prospectus Law Reform: Papers Delivered at a BLEC Forum Held in May 1992,
Business Law Education Centre, Melbourne, 1992, at p.21, point to the inherent
uncertainty of forecasts and argue that the "reverse onus of proof"
in s.765, coupled with the liability provisions in s.1005, places an
unreasonable burden on prospectus preparers. They claim this results in most
contemporary prospectuses being issued without consideration of "prospects".
65 Subsection 1022(2), in conjunction
with s.1006(2)(b) to (h) inclusive.
66 Paragraphs (a), (b) and (d),
respectively, of subsection 1022(3).
67 For example, see s.40 Companies Act
1961 (WA).
68 Parliament of the Commonwealth of
Australia, "On the Control of Fund Raising, Share Capital and Debentures -
Fifth Interim Report", Company Law
Advisory Committee to the Standing Committee of Attorneys-General,
October 1970 (the "Eggleston Committee Report").
69 For the full text of the amendments
proposed by the Eggleston Committee, see Appendix A of the Report: Ibid., at
pp.38,39.
70 Ibid., at para.21.
71 Ibid., at para.18.
72 Australian Parliament,
"Corporations Bill 1988 Explanatory Memorandum", Australia Parliament
House of Representatives and Senate Bills and Explanatory Memoranda, Vol.12,
1987-89, at para.3069-3074. Sections 1025 and 1026 of the Law apply only to
primary prospectuses, whereas ss.99 and 100 of the Code apply to both primary
and secondary prospectuses. Section 1027A of the Law allows extension of the
advertising provisions to secondary transactions, but this has not been
exercised. Section 99 of the Code exhaustively lists the information which may
be included in post-prospectus advertisements, whereas s.1025 of the Law states
the minimum content and allows any other information to also be included,
subject to compliance with other sections of the Law. Section 1026 of the Law
differs from s.100 of the Code only in minor differences of phraseology.
73 Ibid., at p.750.
74 Notice" is defined in negative
terms by s.1025(1): "... does not iinclude a prospectus that has been
lodged or a report, statement or notice the publication of which is permitted
under section 1026." It is also defined in s.9: "...includes a circular
and an advertisement;...".
75 These prohibitions are detailed in
s.1025(3).
76 PSR 2 supra note 7, at para.45(a).
77 In particular, s.995 of the Law
prohibits misleading or deceptive conduct in relation to, inter alia, any
notice published in relation to securities.
78 A "report" is defined in
s.1026(1): "... includes a
statement or notice, whether or not in writing, but does not include a notice
the publication of which is permitted under section 1025." This definition is stated to hold
"unless the contrary intention appears".
79 PSR 38 supra note 7, at para.2.
80 As evidenced by the wide
discretionary powers to grant relief, contained in s.1084.
81 Subsection 1084(2). Note that Part
7.12, Division 2 includes sections 1017 to 1034 of the Corporations Law.
82 That is, the exemption exclusively
allowed "tombstone" advertisements, whereas s.1025 is inclusive of
the tombstone information.
83 "Roadshow" presentations
are demonstrations to members of the securities industry, which commonly
involve a combination of informative statement, audio-visual presentation and
promotional and technical literature. Instrument 166/91 forbade audience
members from publishing any of the information obtained at the roadshow (which
was not also available publicly) until after the prospectus was issued.
84 Tombstone advertisements are of a
type which provide a limited amount of purely factual information. Instrument
167/91 allowed CBA to publish notices containing statements of the following
facts: that the shares to which the prospectus relates are CBA shares; the
means of obtaining a prospectus; and the period for which the offer or
invitation is open, provided no promotional material was included.
85 PSR 2 supra note 7, at para.45(g).
86 The relevant paragraph of s.9 reads:
"'publish' (a) in relation to a notice - means, in Chapter 7, publish by any means, including
in a newspaper or periodical, by broadcasting or televising or in a
cinematograph film; (b) in any case - includes issue;"
87 Australian Securities Commission,
"Relief from the Advertising Restrictions in the Context of Privatisation
Floats", Policy Statement Release 15, effective 14 February 1992.
88 Note that later Policy Statement
Releases did not retain the requirement for this statement to be included in
any pre-prospectus advertising.
89 Australian Securities Commission,
"Woolworths Ltd", Media Release 92/174, issued 17 September 1992.
90 PSR 15 supra note 87, at para.2.
91 Australian Financial Review, 23 July
1992, at p.12. In this article it was implied that the ASC was pressured by the
NSW Government into giving relief from the advertising prohibitions: "...
the Government was able to use taxpayers' money on an advertising campaign that
was little short of an extravaganza as well as using its political power to
gain an exemption from the Australian Securities Commission's advertising
regulations [sic].
92 Memo to the ASC from the Premier of
NSW, dated 11 June 1992 (see CCH, Australian Securities Commission Releases,
Sydney, 1991, at p.91-049). It is possible that the NSW Government was able to
negotiate a more amenable advertising regime with the ASC as a result of its
actions in treating itself as subject to the Law.
93 For example, see Australian
Financial Review on 6 August 1992, at p.14.
94 The available evidence appears to
support this last possibility as the most likely scenario, since there have
been two further Policy Statement Releases issued, which have built on the lessons
learned from the GIO float: PSR 38 supra note 7 and PSR 54 infra note 104.
95 ASC Instrument 92/295, issued 31
March 1992.
96 The information allowed to be given
in a pre-prospectus tombstone advertisement was confined to a reference to the future
availability of a prospectus and a telephone number or coupon for the
registration of an interest in obtaining the prospectus. The limiting of
general relief left it open for the ASC to grant more generous exemptions from
the Law on a case by case basis. Note that there was no requirement in PSR 38
for pre-prospectus advertising to contain a statement recommending the
prospectus be read or professional advice sought. This was a significant easing
from PSR 15 - see text accompanying note 88 supra.
97 PSR 38 supra note 7, at para.60(c).
In line with the relief given previously to CBA and GIO, PSR 38 restricted the
number of respondents in any market research to a maximum of 5,000 and
prohibited the disclosure of any information to the respondents which may have
stimulated interest in the issue. The use of respondents' names and addresses
to identify individuals who may have been interested in subscribing for the
securities was also forbidden.
98 Image advertising is advertising
that does not directly promote an issue of securities, but which leaves the
viewer or listener with an enhanced image of the business itself: PSR 38 supra
note 7, at para.60(a).
99 PSR 15 supra note 87, at para.15(d)
and PSR 38 supra note 7, at para.60(e).
100 See Australian Securities
Commission, "Pathfinders: Relief from Compliance with the Provisions of
the Corporations Law Relating to Notices and Reports", Policy Statement
Release 8, issued 20 August 1991. The currency of this PSR was confirmed in PSR
54 infra note 104, at para.59.
101 PSR 38 supra note 7, at para.60(f)
102 Note that the use of pathfinders to
price issues may diminish if the use of "open pricing" becomes
widespread.
103 Australian Securities Commission,
Media Release 91/99, issued 6 August 1991.
104 Australian Securities Commission,
"Pre-prospectus Advertising", Policy Statement Release 54, issued 11
May 1993, at paras. 22 and 23.
105 Ibid., at para.23. A corporation
which proposes to list, but is unable to do so for some reason, would not be
subject to ASX Listing Rules. However, section 1031 provides that if a
corporation proposes to list securities on a stock exchange but fails to do so,
the allotment or issue is void and applicants' money must be returned.
106 PSR 54 supra note 104, at para.18.
107 Ibid., at para.19.
108 Ibid., at para.34.
109 Ibid., at para.25.
110 Ibid., at para.32. Section 109H
urges a "purposive" approach to interpreting the Law where more than
one possible interpretation exists.
111 See text accompanying note 68 et
seq.
112 The provisions of this section are
similar to s.52 of the Trade Practices Act. Civil liability may apply by virtue
of s.1005.
113 Schedule 3 Corporations Law.
114 An application for injunction can
be brought by the ASC or any person whose interests have been affected by the
conduct: s.1324(1).
115 Subsection 1324(8) provides that,
where the Commission applies for an injunction, the Court "shall not
require ... an undertaking as to damages." In addition, s.1324(6) gives
the Court power to grant an injunction restraining a person from engaging in
conduct regardless of (inter alia) whether or not there is an imminent danger
of substantial damage to any person if the first-mentioned person engages in
the conduct. The Court has power to grant an interim injunction, pending a
final resolution of the matter, by virtue of s.1324(4).
116 Subsection 1324(10).
117 The orders may only be made
subsequent to an application by the Commission, or by a securities exchange, in
the case of a contravention of listing or business rules of the exchange:
s.1114(1)(a) and (b).
118 Paragraph 1114(1)(d).
119 Paragraph 1114(1)(f).
120 PSR 54 supra note 104, at paras. 34-36.
121 Ibid., at para.38.
122 Mutual Home Loans Fund of Australia
Ltd and NSW Mortgage and Discounting Co Ltd v Attorney-General of New South
Wales (1973) 130 CLR 103.
123 Both sections indicate the
circumstances in which extrinsic aids to interpretation may be used.
124 Pearce, D.C. and Geddes, R.S.,
Statutory Interpretation in Australia, (3rd ed.), Butterworths, Sydney, 1988.
125 Ibid., at p.30.
126 Ibid., at p.32.
127 (1990) 169 CLR 214.
128 Ibid., at 223.
129 Section 35 of the Victorian Act is
in similar terms to s.15AA of the Commonwealth Act and s.109H of the Law.
130 Mills supra note 127, at 235.
131 Perhaps the attitude of the courts
can best be summarised by the words of Justice Bryson from his lecture
(reprinted as "Statutory Interpretation", Australian Bar Review,
v.8(3), 1992, 185-204) at p.187: "These [purposive interpretation
sections] have not signalled any large new turn in the construction of
statutes. The response to these provisions thus far appears to be appropriate
to treating them as declaratory, and in my suggestion that is what they
are."
132 PSR 54 supra note 104, at para.29,
identifies s.1026(2)(c) as providing an exception to the advertising provisions
which allows a corporation to continue its regular advertising. This suggests
that the advertising intended to be allowed by s.1025 is something more than
mere product advertising.
133 PSR 2 supra note 7, at para.45(b);
PSR 15 supra note 87, at para.7; and PSR 38 supra note 7, at para.59(b).
134 Supra note 122.
135 Pearce and Geddes supra note 124,
at p.42, acknowledge that an "ordinary citizen" would be
disadvantaged if an Act was interpreted by reference to unpublished material.
The principle can be extrapolated to say that
136 See Eggleston supra note 68, at
Appendix A - pp.38,39, for the full text of the draft sections.
137 Since they promote assessment of
the extent of probable effects of the image advertising. For example,
infrequent image advertising which ceases a month prior to prospectus lodgement
is unlikely to influence as many investors as frequent advertising continuing
up to and after the issue date, and would be less likely to be found in breach.
138 For example, GIO was flooded with
applications from the time the prospectus first became available.
139 For example, brokers speak of
"hot" markets, where investor confidence is at a general high level.
In such markets, a small amount of image advertising may have a much greater
effect than would normally be the case.
140 Australian Financial Review, 21
April 1993, at p.10. The Deputy Chairman of the ASC, Mr Charles Williams,
reportedly called for the formulation of an industry "codes of best
practice", which he was careful to distinguish from a return to the
checklist approach of prospectus drafting. Advertising guidelines could also be
drafted in association with an industry body. For example, the ASX could build
on its existing links with the ASC to develop acceptable guidelines.
141 Members of the securities bar
inquire how the SEC will react to a given set of facts. Commission staff reply
with a letter stating either that they will or will not recommend to the
Commission that action be taken. Letters which state that no action will be
recommended are published and are conditional upon the facts being as stated in
the inquiry. However, the SEC is not bound by the decisions of its staff. See
Ratner, D. and Hazen, T., Securities Regulation: Cases and Materials, (4th ed),
West Publishing Co., St. Paul (Minn.), 1991, at p.17; Jennings, R., Marsh, H.
and Coffee, J., Securities Regulation: Cases and Materials, (7th ed.), The
Foundation Press Inc., Westbury (N.Y.), 1992, at p.101.
142 For example, in the Australian
Financial Review, 12 May 1993, at p.22, Mr Andrew Serpell of the ASC was
reported as commenting, in relation to Woolworths' advertising: "The ASC
has not to date seen evidence of pressure selling or significant drip feeding
(of prospectus information)... It doesn't believe there are any investor
protection concerns."
143 PSR 38 supra note 7, at para.5(b)
and PSR 15 supra note 87, at para.11.
144 PSR 15 included a requirement for
tombstone advertisements to carry a warning that investors read the prospectus
and/or seek professional advice before investing (see text accompanying note 88
supra), but this was omitted from subsequent policy statements. The warnings
suggested here would be more strongly worded than the PSR 15 statement.
145 Professor of Economics at
University of Technology in Sydney and adviser to the Law Reform Commission
investigating image advertising.
146 "The Business Program",
Radio National, 26 May 1993.
147 In the United States the issue
process is substantially different to Australia. The SEC faced the problem that
investors only received a prospectus when actually purchasing securities, so
they did not have a reasonable opportunity to become informed before deciding
to invest. To overcome this problem the SEC encouraged the distribution of a
"red herring" prospectus prior to issue. See Loss supra note 20, at
p.121-122 for a discussion of the rationale underlying the issue of red herring
prospectuses.
148 For example, the GIO float was only
open for 32 hours - Australian Financial Review, 1 July 1992, at p.19.
149 Australian Financial Review, 23
April 1993, at p.15. The Attorney-General, Mr Michael Lavarch, was reported in
The Australian Financial Review, 18 June 1993, at p.1, as favouring a complete
revision of the Law.
150 As does PSR 54 supra note 104, at
para.38(a).
151 See generally Green, J.M.,
"'Fuzzy Law' - A Better Way to Stop 'Snouts in the Trough'", Company
and Securities Law Journal, v.9(3), June 1991, 144-157.
152 Ibid. Green supra note 167, at
p.147. Note that The Australian Financial Review reported on 18 June 1993, at
p.1, that the Attorney-General, Mr Michael Lavarch, plans to have the Law
rewritten and that he favours a move away from the traditional "black
letter law" approach to legal drafting.
153 See text accompanying note 127 et
seq.
154 Companies and Securities Advisory
Committee, Report of the Prospectus Law Reform Sub-Committee of the Companies
and Securities Advisory Committee, March 1992.
155 Ibid ., at p.115.
156 Ibid.
157 See the discussion in the text
accompanying Hines supra note 10 and SRI supra note 13.
158 Eggleston supra note 68.
159 For example, see the quotation in
the text accompanying note 71 supra, which expressly refers to the use of
advertising to promote corporate image.
160 As evidenced by the Woolworths
advertising campaign, which is a clear illustration of the way in which
advertising can condition the public to believe in the worth of an investment
in securities of a corporation prior to the release of a prospectus.
161 Supra note 127.
162 Qantas and SGIO are two
privatisations which are imminent and CBA intends to raise more funds from the
public.
163 The Australian Financial Review, 18
June 1993, at p.1, reports that the Attorney-General favours such a revision.