Business Laws: Fundraising, Prospectus, and Corporate Liabilities

This report analyzes the fundraising activities of Austin Retails under the Australian Corporations Act 2001. It examines prospectus requirements, advertising restrictions, and the liabilities of involved parties including the company, sales manager, underwriter, and consultants. The report highlights breaches of section 728 and 674 concerning misleading statements and inadequate due diligence. It discusses director duties, remedies, ASIC powers, and available defenses. The report also covers the implications of inaccurate forecasts and non-compliance with ASX listing rules, including potential civil penalties and management bans. The analysis extends to the roles of DB Consultants and Dendy Securities Ltd, assessing their potential liabilities in the context of the misleading prospectus and the company's subsequent actions. The conclusion summarizes the key legal violations and the potential consequences for the involved parties.

Running head: BUSINESS LAWS
Business Laws
Name of the student
Name of the university
Author note

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Table of Contents
Introduction...........................................................................................................................................2
Prospectus Requirements.......................................................................................................................2
Forecast.................................................................................................................................................4
Advertising............................................................................................................................................4
Liability of the involved parties.............................................................................................................5
Breach of director duties........................................................................................................................6
Remedies...............................................................................................................................................7
ASIC powers.........................................................................................................................................7
Defences................................................................................................................................................8
Conclusion.............................................................................................................................................8
Bibliography..........................................................................................................................................9

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Introduction
According to Austin and Ramsay (2014) fundraising is a process through which a
company collect funding from the public to raise its capital and in return provide them equity in
the company1. A public company in Australia has been provided through the provisions of the
Corporation Act 2001 (Cth) the powers to raise funds from the public through the issuing of
share. In order to be entitled to raise funds from the public a company has to be registered with
the Australia Securities Exchange. There are several provisions which have been imposed on
such companies by both the rules of the ASX and the rules under the corporate legislation. These
rules have to be complied with in order to ensure that the fundraising in legal and there is no
penalties which the company indulging in raising funds or its directors are subjected to2.
The purpose of the paper is to analyze the circumstances of a company named Austin
retails which have indulged in a process of fundraising. The paper seeks to find out what
provisions of law have been violated by the company in relation to the process of raising funds
as under the Corporation Act. The paper also seeks to advice the parties associated with the
company in relation to their liabilities along with any applicable defences.
Prospectus Requirements
A prospectus is a document which is used to raise funds from the public. The general and
specific requirement of a prospectus are given under section 710 and 711 of the CA. a few
offerings will not need a prospectus as stated by section 708 of the CA. This document contains
information relating to the prospects of success of the cause of investment. This is a document on
1 Austin R.P. & Ramsay, I., Ford's Principles of Corporations Law, Butterworths, Australia, 16th edition, 2014.
2 Lipton, P., and Herzberg, A., Welsh, M, Understanding Company Law, 18 edition Thomson Reuters 2018

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which an investor relies upon to decide whether the investment is feasible or not. It has been
stated by the provision of section 710 of the CA that a prospectus for fundraising has to have all
information which the investors would require reasonably for making an informed assessment.
The prospectus must have information which is to be used for reasonable reliance and true
information which is obtained by making of reasonable inquires3.
Under section 674 obligations have been imposed on the company to act in accordance with the
listing rules of the ASX for making continuous disclosure in relation to the prospectus. Under
this section the market operator (ASX) has to be notified by a disclosing entity about information
in relation to a particular matter or event. The information has to be provided is not generally
available and in information which a reasonable person would think that if provided is going to
have a material effect on the value or price of the entities4.
It has been provided under the provisions of section 728 of the Act that securities must not be
offered through a disclosure where there is a statement which is misleading and deceptive and is
likely to mislead and deceive in the disclosure document (in this case a prospectus). It is further
stated by the provisions of section 728(c) that in situation of a new circumstances arising since a
disclosure document has been lodged which would be required to be disclosed than such
information must also be notified to the market operator5.
3 Bottomley S, Hall K, Spender P, and Nosworthy B, Contemporary Australian Corporate Law 1st edition 2017
Sydney Cambridge
4 Harris, J. Hargovan, A. Adams, M., Australian Corporate Law LexisNexis Butterworths 5th edition, 2015.
5 Parker, Clarke, Veljanovski, Posthouwer, Corporate Law, Palgrave 1st edition 2012

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In the case of Australian Securities and Investments Commission v Fortescue Metals Group Ltd
[2011] FCAFC 19 provisions in relation to section 674 with respect to content of a disclosure
document had been discussed by the court. The court on this case stated that section 674 had
been violated by the director of the company as it has provided information which was false. In
addition the court ruled that the rules under section 1041H and been invoked as the information
provided was misleading and deceptive in nature.
Forecast
Section 728(2) deals with forecasts and statements which are forward looking. It has been stated
by the section that a person is haled to have made a misleading statement in relation to future
event which includes committing or refusing to commit an action if there are no reasonable
grounds which are available to them based on which the statement has been made. In Australian
Securities and Investments Commission v Sino Australia Oil and Gas Limited (prov liq apptd) -
[2016] FCA 42 the provision relating to section 728 had been discussed. In this case it has been
stated by the court that where there is a wrong information provided in the prospectus which
would materially affect the price of the shares of the company in relation to a reasonable person
the director cannot claim that he did not understand the prospectus document before signing it
and must have obtained a translation service as he was not able to understand English. This
conduct may be regarded as a misleading and deceptive conduct as well as stated in the case of
ASIC v Narain [2008] FCAFC 120 as well as ASIC v Citrofresh International Ltd (No 2) -
[2010] FCA 276.
6 Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. Oxford 18th edition 2017

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Advertising
Under the provisions of section 734 of the CA there is a restriction which have been imposed
upon publicity and advertisement related to offers under exception for 20 issues in 12 months. A
person is restricted to indulge into advertisement referring to an intention of offer or offer of
shares which require disclosure documents. The advertisement must not be made if it has the
effect of inducing others to indulge in the application of the securities. Whether the
advertisement is related to the offer of securities or not is analyzed by considering whether the
advertisement is in general course of the products of the corporation7.
Liability of the involved parties
The primary parties whose position needs to be discussed in relation to the situation are Austin
Retails (the company), the Bob (sales manager and an offer under the provisions of section 9 of
the CA), the underwriter (Dendy Securities Ltd) and the consultants (DB Consultants). In the
given situation there is defect in the prospectus document which has been launched by the
company. This is because of it was stated in the prospectus that the company’s “forward book of
orders was in excess of $25 million over the next three years”. However such information was
false and thus the provisions of section 728 have been breached in relation to a misstatement in a
prospectus. In addition it has been provided through facts that the company had relied upon a
poorly formed report by DB Consultants. It has been stated via section 728(3) that a forecast in
7 Austin R.P. & Ramsay, I., Ford's Principles of Corporations Law, Butterworths, Australia, 16th edition, 2014.

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relation to the future matters of a company had not been based on reasonable grounds than such
situation will result in the breach of this section. In the given situation it can be stated that Austin
and its board have relied upon an advice based on poor research by DB and have not taken any
steps in which a reasonable person would take to inquire about the advice of make own inquires.
This means that they have breached the provisions of this section. In addition under the
provisions of section 674 of the CA the information has to be correct of the information is of
such a nature which a investor would feel that will affect the price of the security. It can also be
stated that the information in relation to forward book of orders is information falling within the
scope of section 674 of the CA. Thus this section also has been violated. It has been further
provided through the provisions of section 72(3) of the CA that it is the responsibility of the
organization to make disclosure in relation to an event which takes place after the prospectus
document has been launched if the even may be such that it may affect the price of the shares.
However as the drop in the forward orders took place after the issue was completed section
728(3) is not invoked. It has been provided by section 674(2) and 728 that any person who is
“involved” in making the company breach these sections will breach the provisions themselves.
The word involved is defined under section 9 and 79 of the CA. Under this section it has been
provided that a person is to be regarded as being involved in a contravention if such person has
abetted, aided or counseled the contravention, induced the contravention by a promise or a threat,
has resulted out of an act or omission indirectly or directly or has conspired with others to give
effect to the contravention. Thus in this case DB consultants are also involved in making the
company breach the obligation under section 728 and 674 of the CA. The company has also
breached the law of advertisement under section 743 as they have increased their advertisement
which is not in general course.

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An underwriter is a person who guarantees payment to the company in case the shares are not
taken up by the public8. Here it is stated that the shares have been fully subscribed so there is no
liability which they have in relation to the issues. But still the underwriter would be liable to
compensate the investors under section 729 of the CA.
Breach of director duties
The breach of directors’ duties can also be analyzed from the circumstances of Austin retails. It
has been stated in the case of ASIC v Sino as well as the case of Fortescue Metals Group Ltd that
the breach of provision of section 647 and 728 of the CA will result in the breach of section
180(1) of the CA. This section gives the “diligence and care” duty to be observed when
discharging obligations owed to the company. The degree of care and diligence is that of a
reasonable person. The breach of these provisions also leads to the contravention of civil penalty
provisos as per section 1317E
Remedies
Where there is a failure to comply with the provisions of section 674 it is treated as an offence
under 1311(1) and also a civil penalty provision under section 1317E. It has been provided
through the provisions of section 728(3) that where omission of new circumstances and/or the
misleading and deceptive conduct is materially adverse to the investors it is an offence and the
person may be liable to compensate the investors. Where an office is committed in relation to
this Act it is either a strict liability offence under section 6.1 of the Criminal code or an absolute
liability offence under section 6.2 of the Criminal code. In the relation to the civil penalty
provisions under 1317E penalties and bans can be imposed on the directors of the company.
8 Ciro T, Symes C, Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition 2013

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Pecuniary penalties are imposed under section 1317G and management ban is provided under the
rules of 206C. The maximum pecuniary penalty is $200000 and the ban can be as much as the
court finds justified. It can be even 20 years of ban as per ASIC v Sino case. Under section
1317G Compensation orders can be obtained under the civil penalty provisions as well as under
726(3) of the Act9.
ASIC powers
ASIC being the regulatory body under the CA can bring a claim against the involved parties
seeking declaration of contravention for civil penalties under section 1317E of the CA10.
Defences
A relief from the penalties for contravention of the civil penalty provision is provided through
section 1317S of the Act where the court may pardon the penalty to be imposed on the officers
and directors for the breach. Thus they involved parties can make a request to the court under
this section11.
Section 180(2) of the CA can be applied related to the business judgment rule but it would not be
affected as it requires informed decision making and the directors have not done so. These
provisions were discussed in ASIC v Rich. (2009) 236 FLR 112.
9 Graw, Parker, Whitford, Sangkuhl and Do, Understanding Business Law 7th ed LexisNexis Butterworths, 2015.
10 Cassidy J., Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney 2013
11 Fisher S, Anderson C, Dickfos, Corporations Law - Butterworths Tutorial Series, 4th Edition Butterworths, Sydney
2014
12 Davenport, S and Parker D, Business and Law in Australia, Thomson Reuters, 2012

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Under the provisions of section 731 of the CA a person who reasonably took all steps to verify
the statement in the prospectus in not misleading or any omission is not present can be exempted
from liability under section 72 and 729 of the CA. This defense cannot be taken the company or
the consultants as they did nt take reasonable steps required. In addition a person who did not
have knowledge about an omission or misleading statement will not be liable under section 728
and 729 of the CA. This defense can be claimed by the underwriters in context.
The defence under section 189 reliance can be put on the advice provided by other but such
reliance have to be reasonable which is not the case in the given situation. Thus this defence also
cannot be applied13
Conclusion
Thus it can be concluded that the company, Bob and DB consultants have been liable for the
breach of various contraventions of the CA as discussed above. The investors may claim
compensation under section 1317H of the CA and 729 of the CA as they have been subjected to
adverse effect.
13 Graw, Parker, Whitford, Sangkuhl and Do, Understanding Business Law 7th ed LexisNexis Butterworths, 2015.

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Bibliography
Austin R.P. & Ramsay, I., Ford's Principles of Corporations Law, Butterworths, Australia, 16th
edition, 2014.
Austin R.P. & Ramsay, I., Ford's Principles of Corporations Law, Butterworths, Australia, 16th
edition, 2014.
Bottomley S, Hall K, Spender P, and Nosworthy B, Contemporary Australian Corporate Law 1st
edition 2017 Sydney Cambridge
Cassidy J., Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney
2013
Ciro T, Symes C, Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition
2013
Davenport, S and Parker D, Business and Law in Australia, Thomson Reuters, 2012
Fisher S, Anderson C, Dickfos, Corporations Law - Butterworths Tutorial Series, 4th Edition
Butterworths, Sydney 2014
Graw, Parker, Whitford, Sangkuhl and Do, Understanding Business Law 7th ed LexisNexis
Butterworths, 2015.
Graw, Parker, Whitford, Sangkuhl and Do, Understanding Business Law 7th ed LexisNexis
Butterworths, 2015.

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Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. Oxford 18th
edition 2017
Harris, J. Hargovan, A. Adams, M., Australian Corporate Law LexisNexis Butterworths 5th
edition, 2015.
Lipton, P., and Herzberg, A., Welsh, M, Understanding Company Law, 18 edition Thomson
Reuters 2018
Parker, Clarke, Veljanovski, Posthouwer, Corporate Law, Palgrave 1st edition 2012