Topic
Corporations Law (Investors V Austin Retail LTD)
Instructions
Austin Retail Ltd (Austin Retail) has issued a prospectus seeking to raise $12 million via an issue of 12 million $1.00 shares. It has lodged the prospectus with ASIC. Its current share price is $3.50. In the prospectus Austin Retail said that its forward book of orders was in excess of $25 million over the next three years. This estimate was incorrect, and based on poorly researched consultant’s report given to Bob Brown, Austin Retails commercial sales manager.
Bob suspected the advice was incorrect and failed to query the report with DB Consultants let alone make his own inquiries. The real order book was more like $15 million over three years. Dendy Securities Ltd the underwriter for Austin Retail did not query the DB Consultants report or the advice given by Austin Retail. Dendy Securities was the named underwriter in the prospectus and as the share offering was fully subscribed there was no need to have to honour the contractual promise it made to Austin Retail under the underwriting agreement.
During the time the prospectus was lodged with ASIC, Austin Retail increased its general retail advertising for its goods. The $12 million shares were issued with a premium of 25c making the issue price $3.75. Three months after the share issue the $25 million forward orders collapsed to $7 million over two years. It was thought that this happened because of a new entrant into the market. The Board of Austin Retail gradually became aware of this and a Board meeting was held to discuss the issue.
The share price of Austin Retail fall to $2.50 on the back of this news. The institutional, professional and retail investors who bought the share at $3.75 based on the prospectus are upset and dismayed at the fortunes of Austin Retail and are seeking to recover their losses.
Required:
Consider the various issues that arise on these facts and advise the investors of their rights against Austin Retail Ltd and any of the other parties that may be liable on these facts. Your answer should consider the relevant sections of the Corporations Act 2001 and case law.
Advise Austin Retail Ltd and any other parties whether they can rely on any defences available to them under the Corporations Act 2001.
Answer preview
The Corporations Act 2001 provides for the fundraising provisions that endeavor to balance the requirements for the investor fortification against the necessity to provide a proficient and plausible capital market that allows companies to raise capital devoid of excessive regulatory costs and requirements. However, the general rule is that offers of securities have to be disclosed to investors in regards to relevant accurate data unless such an offer comes in within the scope of a particular exemption. The exemption identifies that not all investors in a security need protection; thus, in some instance, it would be commercially unrealistic to compel costly obligatory disclosure requirements.
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