Corporation Act : Fame Decorators Agencies

Issue

The Fame Decorators Agencies Pty Ltd. v Jeffries Industries Limited and others, is the case of 1998 which was brought before the Court by the Fame Decorators Agencies Pty Limited. This case is all about the contravention of the section 955 and 998 of the Corporation Act 2001.

Jeffries being a public company is listed on the stock exchange. Mr. J F O'Halloran was the Chairman of the directors of the Jeffries who now controls the business affairs of the Fame. Fame always has held shares in Jeffries. Fame wanted to convert the preference shares of the shares they hold in Jeffries. The date of conversion of such shares was February 4^th 1999. The shares can be converted in certain circumstances which have been provided in the Association of Articles of Jeffries. The shareholders holding converting preference shares have the right to move the date of conversion in respect to some preference shareholders if the Jeffries failed to repay the specific dividend on a certain date. The number of ordinary shares to be allotted after the conversion of a preference shares to be determined by the way of a certain formula. The one of the ingredient of that particular formula was the average price of sale of fully paid shares, i.e., ordinary shares in Jeffries which was to be sold on the stock exchange in between the twenty days before the date of con

Mr. O’Halloran came to know on 27^th April that the directors of Jeffries have announced that no dividend would be paid for the conversion of the preference shares for the time which ends on the 30 April 1995 which was a Sunday. This would lead to setting of the motion for accelerating the provisions for the conversion. There were frequent sales of shares in Jeffries.

Mr. O’Halloran has contacted his stockbroker to discuss about the sale of shares in Jeffries by Fame. They both came to the conclusion that the conversion of shares will give advantage to fame.

Mr. Powell, the stock broker of Mr. O’Halloran has informed him about the details of the different offers to buy shares. The lowest price bid of the shares was on 9^th March 1995 in the system, where there were 250,000 shares at the rate of 13c per share. Fame has to accept those bids according to the sequence if it wants to sell Jeffries’ shares.

Further, Mr. O’Halloran and his stock broker Mr. Powell had a discussion about conversion where it was agreed by both of them that if there will be no change in the market, instruction will be given to Mr. Powell to sell 170,000 shares in Jeffries at the price of 13c per share before the market gets close. Thereafter Mr. O’Halloran gave a telephonic instruction to sell the same. Fame had accepted the outstanding offers of buying share in Jeffries and also agreed to buy 74,000 shares in Jeffries at the rate of 13c.

The Cameron Securities had provided an offer of buying 20,000 shares at the rate of 14c per share. The evidence which has been given Mr. Cameron is that the market price of the shares when the bid has been placed by him was at the rate of 35c per share. James Capel had given an offer for buying 250,000 shares of Jeffries at the rate of 13c per share, but there was no evidence given by any member of that particular organization.

Rule

In this case Cohen J found that the two share transactions, which was the sales of shares in Jeffries Industries Limited, is contravening sec 995 and sec.998 of the Corporation Act 2001. In the appeal before the Court, Fame being the appellant challenge the findings of the lower court and ask the court to set aside the declarations. But the respondent, ASC by way of cross-appeal said that the lower court has not gone further with the findings. Fame has also made sales of other shares on the same day as of Jeffries which is also contravening the Sec. 995 and 998 of the Corporation Act. Still ASC supports the findings of the lower court and asks this court to maintain and consider the declaration made by the lower court (austlii.edu, 2001). The cross-appeal has not been taken into considerations as the legal issues concerning to the appeal made by Fame is sufficient enough to consider the declaration of the lower court and dismiss the appeal (legislation gov, 2013).

Application

This case is all about the contravention of the sec. 995 and 998 of the Corporation Act. Sec.995 of the said Act states that a person should not get into any kind of dealings in securities and not limiting the general statement of not entering in dealing of any kind of securities, should not issue any shares or securities. He is expected not to publish any notice related to any securities or any appraisal of the securities or should not recommend any offer to bid which has been already taken over. The person is also bound not to make any negotiation in respect of the trading of the shares or make any arrangement of issuing or allotting of shares or any other securities to the general public or publish any report or notice in recommendation of any security. Because any such act will be considered as a conduct done in order to mislead. The person contravening this section is not guilty of any offence. In the case mentioned above, Mr. O’Halloran has been engaged in all the acts which are contravening this section (jade io, 2016).

Section 998 of the Corporation Act states that any person should not get into any kind of action that creates a false presentation in a trading of any securities or shares in a stock market or any presentation that misleads the factors like actual market price of any securities. He should not involve in any kind of change in the ownership of the securities or any transactions which is not genuine by means of purchase or sales of those securities. He should not be responsible for any fluctuations in the market price of the securities or any kind of shares by way of increasing or reducing the price of the shares in the market. a person who enters into any transaction of sale or purchase of any shares or securities which do not prove to be beneficiary for the owner of the said shares or securities, is said to have created a false representation of the price of the shares or any kind of securities in the market during the active trading of the said securities in a stock market. There is a provision in sub section 6 of the section 998 which acts as a defence for the person who is found guilty of contravening section 998 of the act (legislationgov, 2001). The defence is mentioned in sub section (5) where it has been mentioned that if the person can prove that the purpose for which he did the same was not for the purpose of creating a false representation or misleading the market or the buyers or sellers during the ongoing trading in the shares or securities (legislationgov, 2016). In the case herein mentioned above, Mr. O’Halloran has falsely represented the market and is involved in the act misleading the ongoing trading of the securities and shares on 28 April 1995 (legislation gov, 2016). He falsely presented the shares of Jeffries in the market at a much lower price, i.e., at the rate of 13c per share and sold 94,000 of the shares @ 13c. He has done this activity for his own benefit of acquiring more numbers of the ordinary shares after the conversion of the preference shares. Therefore, Mr. O’Halloran is guilty of contravening Sec.998 of the Corporation Act 2001 (Mkysugar, 2016).

Conclusion

This case contains evidence by the system of working of the Stock Exchange Automated Trading Systems (SEATS). In this system the offers to sell and offers to buy is placed by the brokers and is kept in record. All the trades and information of the trades which are kept in records are accessed by the brokers with the help of the computers. A trade takes place when there is an offer to buy matches with the offer to sell. According to the case mentioned here, the broker may make an offer to sell or an offer to buy at a price which is totally different from the market value of the shares with an expectation that it will be accepted in the future changes in market. if a company make an offer to buy shares at different price level, then the seller willing to trade will accept to sell the shares according to the descending order of the price level until there is no more willingness left to sell at the price offered to him or the available shares for sell have been used up (wipo int, 2013).

In the above mentioned no evidence or any conspiracy was found between Fame and the other two organisations, Cameron Securities or James Capel. An investigation was made on the transactions which took place on the 28 April. The transactions made which was related to the conversion of preference shares raised a question of validity of those shares between Jeffries and many other persons. This is not a important matter to discuss in the appeal. It is to be found that whether Fame has contravened Sec995 and 998 of the Corporation Act 2001 (asic gov, ND).

Mr. O’Halloran in his evidence in the lower court stated that he was under pressure in order to get cash to meet up some financial commitments on behalf of the company, which was neither believed nor challenged. It has been found that there was enough cash left with Mr. O’Halloran to make the financial commitments and there was no need to sell huge numbers of shares at a lower price for a simple reason of getting cash in hand. He sold 94,000 shares at a price lower than the market price just to create a lower price which will serve for the purpose of the calculation for conversion of the preference shares. The transactions were done by Mr. O’Halloran on 28 April 1995, in the last three minutes before the closure of the market. This was just according to the conversation made between Mr. O’Halloran and his broker Mr. Powell. This was made just to change the market for the buyers who will accept the offer to buy the shares of Jeffries at the price of 14c or above and the same happened in the very next trading day of the next week, which would create an advantage for Fame in terms of finance. This is because the lower share market price of Jeffries will lead to acquiring of more numbers of ordinary shares after conversion of the preference shares (legislation gov, 2016).

The appellant’s senior counsel submitted in the Court where the appeal is being heard that there was no manipulation of the market is involved and no misleading of the happening has taken place. It has been further stated that the appellant has used the opportunity of the market situation that existed on 28 April and is not been made by the said person. The appellant accepted the different offers made to buy shares in Jeffries just before the closing of the market, as there was own financial interest present.

The judgment made by the court is that there is a contravention of the sec 995 and 998 of the Corporation Act. This is because the vendor in order to get his own financial benefit in respect of some financial contractual agreement, has been involved in creating a lowest market price of numerous shares and selling of the shares at a lower price which could have an increased bidding in the near future. The appeal in this case has been dismissed with costs (Pearson, ND).

References:

asic gov (ND) Laws we administer, [Online], Available: https://asic.gov.au/about-asic/what-we-do/laws-we-administer/.

austlii.edu (2001) austlii.edu, [Online].

jade io (2016) jade.io, july, [Online], Available: https://jade.io/j/?a=outline&id=218602.

legislation gov (2013) Corporations Act 2001, [Online], Available: https://www.legislation.gov.au/Details/C2013C00003.

legislation gov (2016) legislation.gov, [Online], Available: https://www.legislation.gov.au/Details/C2016C00725.

legislationgov (2001) Corporations Act 2001, [Online], Available: https://www.legislation.gov.au/Series/C2004A00818.

legislationgov (2016) Corporations Act 2001, [Online], Available: https://www.legislation.gov.au/Details/C2013C00003.

Mkysugar (2016) Corporation Act 2001, [Online], Available: https://mkysugar.com.au/.

Pearson, G. (ND), in Pearson, G. Financial Services Law and Compliance in Australia, Cambridge University Press.

wipo int (2013) 'Corporations Act 2001 ', Corporations Act 2001 No. 50, 2001 as amended , vol. Volume 1: sections 1–260E , april.