In 2015, ANZ undertook a $2.5 billion underwritten institutional share placement (with a follow on non-underwritten share purchase plan). About $790 million or just over 30% of the placement was taken up by the underwriters. This was not disclosed by ANZ in the placement completion announcement.
ASIC and the ACCC commenced proceedings: ASIC for a breach of continuous disclosure laws by ANZ, and the ACCC for alleged cartel conduct. The ACCC’s case was discontinued.
ASIC was successful at first instance. ASIC based its case on the “prompt seller inference”, that had investors been informed of the allocation to the underwriters, they would have expected that the underwriters would sell down their allocation promptly, thus placing downward pressure on the market price of ANZ shares. However, ASIC did not prove at trial that the pleaded information was relevant to the value of ANZ’s shares.
In October this year, the Full Federal Court handed down a split decision dismissing ANZ’s appeal against the decision at first instance, 2:1.
Before considering the reasoning of the court, it should be noted that the fact that ASIC commenced these proceedings changed market practice: in our experience, instances of underwriters taking up securities in a capital raising by a listed entity are now typically disclosed as a matter of course, unless the shortfall is a negligible amount.
It should also be noted that in this case, ANZ received the full amount of the capital it sought to raise, the institutional placement book was fully covered by demand from investors but there was concern that some investors would be short-term holders, the amount taken up by the underwriters represented less than 1% of ANZ’s share capital, and the underwriters had indicated that they would undertake an orderly sell-down (which accords with their fair and orderly market obligations).
ANZ based its appeal on four points arising from the decision at first instance. Summarising, ANZ’s grounds of appeal were that the primary judge:
- failed to construe and apply correctly the words “persons who commonly invest in securities” (in the continuous disclosure provisions of the Corporations Act);
- failed properly to consider additional context that would render the relevant information immaterial;
- failed to have proper regard to what ANZ knew and understood when assessing the materiality of the relevant information; and
- erred in finding that the relevant information was information “concerning ANZ” within the meaning of ASX Listing Rule 3.1.
The first and fourth grounds were dismissed unanimously. The dismissal of the fourth ground was somewhat surprising: ANZ had received the full amount of the placement, and the relevant information pleaded by ASIC concerned the expected actions of a third party (the underwriters) in a liquid market. In that regard, it is difficult to distinguish the relevant information in this case from knowledge of a proposed block sale by a holder of less than 1% of the securities of a listed entity, which would never be considered to be information that a listed entity would be required to disclose. Perhaps “the vibe of the thing”, the size of the shortfall and the fact that it was not fully supported by existing long-term institutional investors, coloured the court’s thinking: those weren’t the reasons that ASIC pleaded to justify its argument that the relevant information should have been disclosed.
The majority also dismissed the second and third grounds of appeal. The additional context raised by ANZ to support these grounds included two main pieces of information of which it was aware at the relevant time: that the underwriters did not intend to be short-term sellers, and that they had hedged their exposure to the shares they had taken up. Accordingly, if ANZ had disclosed the relevant information, ANZ argued that if ASIC’s proposition was correct, the disclosure would have been misleading because it would have created a false inference that the underwriters were prompt sellers.
Justice Michael Lee wrote the majority judgment. He concluded that “the general assurances given by senior personnel in the Underwriters were subjectively credible to those to whom they were conveyed [at ANZ] but, in my respectful view, this is insufficient to demonstrate error in his Honour’s conclusion that those assurances, expressed in “very general terms” and which were “subject of further consideration”, meant that the pleaded information was not material”. In other words, the general nature of the assurances given by the underwriters, which were subject to further consideration, were not sufficient to displace the “prompt seller inference”. Justice Lee explained that the test was objective, and that the subjective views of ANZ on the contextual information were not determinative.
Justice Button disagreed on this point, and would have upheld the appeal on the second and third grounds. In her view:
“the critical point is that, while conveyed in general terms and lacking in detail, the assurances given meant that ANZ had information that the Underwriters did not intend to behave in precisely the way that the chain of reasoning underpinning the materiality findings depended on. In other words, the materiality finding depended on the prompt seller inference, but the assurances given were directly contrary to the prompt seller inference. That remains the position even though, as the primary judge found, the information held by ANZ was of a “general nature” and lacked “detail”. It is important to observe that the information ANZ had concerning the Underwriters’ intentions was an objective fact. What was communicated by the Underwriters about their intentions is relevant on that basis, and not on the basis that it affected ANZ’s subjective assessment of the magnitude of the risk that the Underwriters would be prompt sellers … .
…
In my view, those assurances did constitute relevant contextual information and, moreover, was information that directly undermined the prompt seller inference and so meant that the pleaded information was not material. Grounds 2 and 3 should be allowed to this extent.”
While the decision of the majority in the full court turned on the particular form of the assurances given by the underwriters, it is clear from the judgments in this case that information that would otherwise be material to be disclosed on a stand-alone basis need not be disclosed if, when viewed in the context of objectively relevant information, it is not material.
That said, there is clearly a risk that a notorious matter or a matter that adversely affects the reputation of a particular disclosing entity is more likely to be considered material for disclosure by the regulators and the courts than a similar matter concerning another entity that does not have that vibe. Listed entities and advisers should take that risk into account when making calls on disclosure issues.
