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Nature of the relationship matters 

ASIC v Merkin International Limited and Rubicon Nominees Pty Ltd (Supreme Court, VIC, 25 July 2001 [2001] VSC 211)

Corporations - contraventions of provisions of Corporations Law relating to substantial shareholding and tracing beneficial ownership - degree of knowledge of relevant interests - whether contraventions should be excused - orders including remedial orders - Corporations Law ss671B, 672B, 1325A

Tracing beneficial ownership of shares: Information to be disclosed is limited to that within a person's knowledge

This case addressed the issue of whether the defendant company Merkin International Limited (Merkin) had breached the provisions on tracing beneficial ownership of shares by failing to disclose details of other persons who had a relevant interest in the shares in circumstances where Merkin claimed that it had no knowledge of these matters.

Tracing beneficial ownership of shares

Section 672A of the Corporations Act allows ASIC or a listed company to direct a member of that company or a person named in a previous disclosure to make a disclosure of:

  • its relevant interest in the shares of that company,
  • the name and address of each other person who has a relevant interest in the shares of that company and the circumstances which gave rise to their interest,
  • and the name and address of each person who had given instructions to the person receiving the notice in relation to the shares and details of those instructions.

A relevant interest in shares is broadly defined. The basic rule is that a person has a relevant interest in securities if they:

  • are the holder of the securities; or
  • have power to exercise, or control the exercise of, a right to vote attached to the securities; or
  • have power to dispose of, or control the exercise of a power to dispose of securities.

The facts in this case are that, in response to a notice under s672A of the then Corporations Law (the Law), Merkin was named as having a beneficial interest in 680,000 in Bligh Ventures Limited (the Bligh Shares).

ASIC issued a further notice under s672A directing, in accordance with the Law, that Merkin disclose the matters addressed above within 2 business days. Merkin failed to comply and ASIC began proceedings in Victorian Supreme Court.

Did Merkin have knowledge?

By affidavit an authorised officer of one of Merkin's corporate directors stated that the corporate shareholders in Merkin, Teak Limited and Pine Limited held their shares in Merkin as nominees or bare trustees for an undisclosed beneficiary and therefor did not have a relevant interest in the Bligh Shares. On this basis Merkin argued that it had no knowledge of any persons with a relevant interest in the Bligh Shares.

In reply, ASIC submitted that:

  1. Merkin was managed by PITCO, a company who was in the business of supplying and managing offshore companies on behalf of other persons, through its corporate directors; and
  2. the directors, secretary and shareholders of Merkin were all companies controlled by PITCO and supplied by it as part of the service that it provides to its client; and
  3. it is PITCO's client who engaged and pays for the services of PITCO to supply and manage Merkin, financed the acquisition of shares and could instruction Merkin through PITCO and Merkin's corporate directors; and
  4. PITCO's client was the "real directing mind and will" of Merkin.

ASIC argued that it followed that the knowledge of the identity of this client should be attributed to Merkin and that Merkin should comply with s672B by disclosing the name of PITCO's client.

The Court held that without evidence as to the chain of command or the precise relationships involved it was not satisfied that knowledge of the PITCO's client should be attributed to Merkin and so rejected ASIC's argument on this point. It held that Merkin had not contravened s672B other than by failing to comply within 2 business days.

Other grounds

It was accepted that Merkin had contravened the s709 (now s671B) of the Law which required it to give notice of its relevant interest a substantial holding (more than 5%) in Bligh from 1994 when it acquired its relevant interest to November 2000 when it lodged a notice under s671B of the Law.

Held: The court found that neither Merkin's failure to respond to the s672A notice within 2 business days or Merkin's contravention of s709 should be excused, ordered that the Bligh Shares be vested in ASIC and sold by tender and for deduction of ASIC's and Bligh's costs on an indemnity basis.

In making these orders, the Court noted that the fact that Merkin did not know the names of the persons who beneficially owned the shares, and who therefore have a relevant interest in the Bligh Shares, was a factor in favour of making remedial orders. Mandie J further stated that the legislation made clear that ignorance of such matters can be a basis for appropriate orders, and that this ignorance demonstrated that the contraventions were not just technical breaches which were now cured.

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Always put the interest of the company first

Australian Securities & Investment Commission v Doyle & Anor (Supreme Court, WA, 20 July 2001, [2001] WASC 187)

Companies - Director - Placement of Shares - ASX directs shares cannot be voted nor traded - Return of placement monies to placement shareholders - Director acting for allottees - Whether improper use of position contrary to s232(6) of the Corporations Law - Whether purpose to cause detriment to company or advantage to other persons - Corporations Law ss232(4), 232(6) and 233A(1) (Eds: these provisions were amended by the CLERP Act 2000 (Cth))

If a director prefers the interests of third parties to those of the company it is not necessary to show detriment to the company to establish that the director made improper use of his position.

This case involved an action brought by ASIC that Mr Doyle breached s232(6) of the Corporations Law. Section 232(6) states that an officer of a corporation must not make improper use of his position to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the corporation.

Doyle was a director of Chile Minera NL, which was listed on ASX (the Company). Doyle was also a director of Doyle Partners Pty Ltd (DCP), of which he owned 50 per cent of the issued shares. In August 1996, the Company entered into an agreement to purchase a mining concern. DCP was engaged to provide professional independent advice and to assist in capital raisings. It was to be paid a fee of 6 per cent of new capital raised. The Company issued 8,000,000 shares to DCP and clients of DCP, raising $400,000, for which DCP was paid $24,000. The ASX, however, determined that that this was in breach of Listing Rule 7.1 which prohibited a company from issuing more than 10 per cent of its capital in any 12 month period without the approval of ordinary securities. The Company stated that it would rectify the situation at the AGM by voting on the issue. The ASX informed the company that the 8,000,000 shares allotted to DCP would be unable to carry a vote in the AGM.

As a result, Doyle wrote to the directors of the Company stating that DCP, on behalf of its clients, demanded the repayment of the $400,000, as the shareholders took the shares in the belief that they had equal voting rights with existing shares. Preliminary legal advice stated that the money should be put into a trust account, although this was pending advice from counsel, and there was reason to believe that the money could not be returned to DCP other than by way of an authorised reduction of capital. Nevertheless, at a directors meeting involving Doyle and one other director, Mr Satterthwaite, it was resolved that the $400,000 be returned to a trust account of DCP, conditional upon the return to the Company of the 8 million shares. Doyle, a director of DCP, was unable to vote on this due to the conflict of interest.

The AGM was held. However without the DCP and related vote the allotment was not approved. A further meeting of directors took place, involving Doyle, Satterthwaite, and another director, Mountford. Doyle explained the situation to Mountford, stating that the preliminary legal advice allowed the money to go into a trust account. Both Mountford and Satterthwaite then voted in favour of cancelling the 8 million shares placed with DCP. Doyle did not vote.

The ASX informed the Company that the 8 million shares could only be returned to DCP by way of an authorised reduction of capital. ASIC sought a declaration that Doyle had contravened ss232A(1) and 232(6) of the Law and that Satterthwaite was knowingly concerned in one of the contraventions by Doyle (or in the alternative, that Satterthwaite himself contravened s232(4)). ASIC pleaded that Doyle improperly used his position as a director of the Company to cause detriment to the Company; alternatively it was pleaded that he did so to gain an advantage for the allottees (including DCP, of which he was a 50 per cent shareholder).

Held: Although no actual vote was made by Doyle at the directors meetings, by demanding the money be paid to DCP, by persuading the other directors to agree to it, and by proposing that the preliminary legal advice could be accommodated by putting the money in the DCP trust account, Doyle was an active participant in the decision making of the meetings, amounting to voting in favour of the resolution. Doyle was therefore held to have exercised his vote as a director of the company.

To establish a breach of s 232(6) it is not necessary for the applicant to prove the accrual of an advantage or the suffering of a detriment. What does have to be proved is that the use of his position by the officer was improper and it was done for the purpose of gaining an advantage or causing detriment. This includes establishing that the officer believed that the intended result would be an advantage for himself or some other person or a detriment to the corporation.

What is improper for the purposes of s232(6) is to be determined by reference to the powers and duties of a person in Doyle's position, namely a director of the Company, including the duty to act in the best interests of the Company and its shareholders. 

The relevant time at which the director's purpose and state of mind is to be considered is that when the conduct occurred. Doyle was aware that Nash's advice that the funds were to be held in trust pending counsel's opinion was preliminary advice. He was also aware the $400,000 was needed for the preliminary work in the mining venture and that without it the Company did not have funds to do other things. He knew the payment of the $400,000 to DCP would be a detriment to the Company since it would be depriving the Company of that money which it then controlled and which it may have been able to keep and apply to its own activities.

However, Doyle did not engage in the relevant conduct in order to cause detriment to the Company, rather he did so to obtain an advantage for the allottees. On this basis, the return of the money to DCP and Doyle's control when the allottees had no established lawful entitlement to it, or when any such entitlement to it was in question, was an advantage to them. Therefore, as he put the interest of the allottees ahead of those of the Company, Doyle's use of his position as a director was found to be improper.

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No breach of duty if other company benefits

Maronis Holdings Ltd v Nippon Credit Australia Ltd (Supreme Court, NSW, 7 June 2001, [2001] NSWSC 448)

Directors' duties - common directorship - directors caused company to mortgage its principal asset to secure a loan to its parent - whether directors liable for breach of duty - does the test in Charterbridge apply?

Where a person is a director of 2 or more companies in a group, the test for whether that person has breached his or her fiduciary duties when acting for a company in an inter-group transaction is not the test in Charterbridge (see below); the benefit to the company and the director's state of mind must be considered.

Girvan Corporation Limited (Girvan Australia) controlled 74% of Girvan Corporation (New Zealand) Limited (Girvan NZ) (a company listed on the New Zealand Stock Exchange). Maronis Holdings Limited (Maronis) was a 100% owned subsidiary of Girvan NZ. The 2 directors of Maronis were also directors of Girvan Australia. The 2 directors of Maronis caused Maronis to mortgage its principal asset to Nippon Credit Australia Limited to secure a $15 million loan to Girvan Australia. No cross-security or other arrangement was entered into to protect the interests of Maronis. One of the issues considered was whether the test in the Charterbridge case was the proper test to determine whether the directors had breached their fiduciary duty to Maronis.

The test applied in Charterbridge Corporation Limited v Lloyds Bank Ltd & anor [1970] Ch 62 at p74 (Charterbridge) was "whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company."

The test in Charterbridge was formulated in relation to a claim that the actions were outside the powers of the company.The test was not created to determine whether the directors of the company had breached their fiduciary duties. The New South Wales Supreme Court of Appeal considered the application of the test in Charterbridge in Equiticorp Finance Limited (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 (Equiticorp).

In Equiticorp, it was alleged that the directors had breached their fiduciary duties to the company by applying the company's liquidity reserve to discharge the debt of a related company and that the Bank of New Zealand had constructive knowledge of this breach. To prove that the Bank of New Zealand had constructive knowledge of the breach of fiduciary duties, the plaintiff resorted to the test in Charterbridge. In the Court of Appeal, Clarke and Cripps JJA observed that they applied the test in Charterbridge because the parties advised the court that the same test should be applied on appeal only, and they had considerable reservations about adopting the test.

Held: Bryson J considered the Charterbridge and Equiticorp decisions and concluded that the test in Charterbridge had not received endorsement from the Court of Appeal. Considering the authorities, Bryson J concluded that the test in Charterbridge should be applied when determining whether, as a question of fact, the directors were abusing their powers, such as in Charterbridge, and not when considering whether the directors have breached their fiduciary duties.

According to Bryson J, when directors have regard to an advantage that will flow to another company is not always an indication of abuse of power if the transaction benefits the company that is entering into it. The benefit need not be direct and immediate. Consideration must be given to understanding the relationship among the companies in question and the advantages which the transaction is seen to be bringing before one can determine whether the directors have breached their duty to the company.

The court found both directors of Maronis to be in breach of their duty as directors in committing Maronis to granting the mortgage.

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HYENAs are not securities

Macquarie Bank Limited v ASIC (Administrative Appeals Tribunal, 18 October 2001, [2001] AATA 868)

Issue of unsecured short term notes referred to as HYENAs - a hybrid investment priced by reference to underlying listed share investments - put option in favour of the issuer - whether HYENA a debenture within s9, whether a security within s92(3) of the Corporations Law - whether a prospectus is required - review of ASIC determination - Corporations Law ss9, 92(3) and 708(19)

The prospectus provisions of Chapter 6D of the Corporations Law which regulate the offering of securities did not apply to an issue of complex hybrid short term notes involving a put option in favour of the issuer because the notes were not securities as defined in s92(3).

Macquarie Bank Limited (MBL), an Australian authorised deposit-taking institution (ADI) offered unsecured short term notes principally to sophisticated investors by way of an Information Memorandum which was not lodged with ASIC. These notes were known as High Yield Equity Notes (interestingly named HYENAs), the terms of which are described as follows:

  • A HYENA was priced by reference to an underlying ASX listed share selected by MBL.
  • The investor was offered a HYENA for a purchase price equal to between 85-95% of the market value of the underlying security. The term of a HYENA was fixed, usually 3 months, and at the end of the term the investor received interest at a specified rate.
  • If at the end of the term the market value of the underlying security exceeded the purchase price paid by the investor, then the investor received his or her original principal back plus interest. If however the market value of the underlying security was less than the purchase price then one of the two things could happen:
  • the investor would receive from MBL an amount equal to the ASX closing price of the relevant security plus interest; or
  • MBL was entitled to place the relevant number of underlying shares with the investor. The placement right was given in the form of a revocable purchase order from the investor to MBL for the purchase of the relevant number of shares. The order became irrevocable in MBL's favour 20 days before the maturity of the HYENA.

MBL sought an exemption from ASIC from the prospectus provisions of Chapter 6D of the Corporations Law (now Corporations Act 2001 (Cth)) (the Act). ASIC refused and MBL applied to the AAT for a review of ASIC's decision.

Before the Tribunal MBL argued that a HYENA was not a security as defined by s92(3) and therefore not subject to regulation under the prospectus regime which applied to securities as defined in s92(3). It was argued that it was not a debenture as defined in s9 (or in the event that it was a debenture it fell within the s708(19) exemption for debentures issued by an Australian ADI such as MBL). MBL also argued that a HYENA resulted in a put option for MBL, the issuer - it did not grant an option to purchase shares to an investor (ie, a call option) which fell within s92(3) whereas by the wording of s92(3) a put option clearly did not.

Held: Ultimately the Tribunal accepted the argument by MBL that a HYENA did not fall within the definition of security in s92(3) and that therefore the prospectus provisions of the Chapter 6D fundraising regime did not apply. However it differed in its reasoning on the debenture question.

The Tribunal acknowledged that the HYENA was a complex hybrid product with both debenture and option elements. The question was whether a HYENA, when its component elements were analysed, fell within the s92(3) definition particularly s92(3)(b) a debenture and/or s92(3)(e) an option to acquire a share.

The Tribunal focussed principally on the HYENA option issue - whether the terms offered an option for the investor to acquire the underlying shares. The debenture issue was dealt with quite briefly with the Tribunal acknowledging that the complex hybrid character of a HYENA took it outside the ordinary course of banking business of an Australian ADI. The effect of the Tribunal's decision was the debenture aspect of the HYENA did not attract the s92(3) securities definition.

Are put options a security for the purposes of s92(3)?

The Tribunal found that a HYENA involved a Put Option in that MBL had a right to place shares with the investor if the underlying value of the shares fell below the purchase price at the maturity date. The investor had no enforceable right to acquire shares because the decision to place shares with the investor, if the underlying value of the share at the maturity date was less than the original purchase price, was within the absolute discretion of the issuer MBL. The HYENA did not offer the investor an option to acquire a share ie, a call option but rather gave the issuer a right to put the shares to the investor. Section 92(3)(e) applied only to call options but not put options.

The Tribunal was sympathetic to ASIC's proposition that the very complex nature of HYENA and various "risk" factors not disclosed in the Information Memorandum, made them just the sort of security that should be regulated by the prospectus regime in order to afford investor protection. However the literal meaning of the words of s92(3) were clear and the Tribunal suggested that legislative amendment would be required for MBL HYENAs to be covered by this definition.

The Tribunal remitted the matter to ASIC with a direction that HYENAs were not "securities" within the meaning of s92(3) of the Act.