FEDERAL COURT OF AUSTRALIA

Australian Securities & Investments Commission v National Exchange Pty Ltd [2005] FCAFC 226

CORPORATIONS – respondent sent unsolicited off-market offers to buy shares to the shareholders of a demutualised company – purchase price below market value of shares – whether s 1019G(2) of the Corporations Act 2001 (Cth) requires an offer to remain open for at least one month – whether the respondent’s conduct and the terms of the offer document were misleading or deceptive – whether the respondent’s conduct was unconscionable within the meaning of s 12CC of the Australian Securities and Investments Commission Act 2001 (Cth) – whether s 12CC requires the conduct to be unconscionable in relation to a specific person – whether the shareholders accepted the offer “for the purpose of” trade or commerce

Corporations Act 2001 (Cth) ss 624, 1019E, 1019G, 1019I

Acts Interpretation Act 1901 (Cth) s 15AB

Australian Securities and Investments Commission Act 2001 (Cth) ss 12CA, 12CB, 12CC

Trade Practices Act 1974 (Cth) s 51AC

Trade Practices Amendment (Fair Reading) Bill 1997 (Cth)

CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 applied

Campomar Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 followed

Australian Competition and Consumer Commissioner v C G Berbatis Holdings Pty Ltd (2000) 96 FCR 491 referred to

Australian Competition and Consumer Commissioner v Keshow [2005] FCA 558 referred to

Attorney General of NSW v World Best Holdings Ltd [2005] NSWCA 261 referred to

Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 referred to

G Pearson, “The ambit of unconscionable conduct in relation to financial services” (2005) 23 C&SLJ 105

R Bigwood, “Curbing Unconscionability: Berbatis in the High Court of Australia”(2004) 28(1) MULR 203

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v

NATIONAL EXCHANGE PTY LTD (ACN 006 079 974)

NSD 192 OF 2005

TAMBERLIN, FINN AND CONTI JJ

SYDNEY

25 NOVEMBER 2005

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.         The appeal is dismissed.

2.         The cross-appeal is dismissed with costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

THE COURT:

1                     ASIC claims that the primary Judge made three substantial errors.  First, his Honour decided that National Exchange did not make any misleading statement in relation to offers by it to purchase shares from members of a demutualised company, Aevum Ltd.  Secondly, his Honour failed to find that National Exchange was guilty of unconscionable conduct.  Thirdly, his Honour decided there was no evidence that acceptance of the offers by the shareholders was for the purpose of trade or commerce.

2                     National Exchange filed a Cross-Appeal on two grounds.  First, that the primary Judge erred in holding that the offer did not remain open for at least one month.  Secondly, that the primary Judge misinterpreted the meaning of the statutory term “withdrawal” in that he considered that the expression imposed a requirement that an offer must remain open for at least one month.

overview

3                     National Exchange sent unsolicited off-market offers to members of Aevum to buy shares at a price of $0.35 per share.  The offer document contained a statement advising the shareholders that National Exchange considered that a fair estimate of the value of each share was in the range of $0.90 to $1.29.  Notwithstanding this, National Exchange’s offers to purchase at $0.35 per share were accepted by 257 shareholders. 

4                     National Exchange is controlled by David Tweed.  ASIC tendered a transcript into evidence in which Tweed admitted that he had directed offers to members of demutualised companies such as AMP, AXA and NRMA because it was likely the members would accept an offer at less than half the market value of the shares.  This was because the members had not paid for the shares and it was likely that they were less interested in holding onto them.  They would be more likely to sell regardless of the price offered.  They would also be unlikely to know the value of their shares.  Tweed did not claim that his offer was fair.  It was merely an offer to buy at a price.  It is in this factual matrix that the conduct of National Exchange falls to be examined.

the issues

1.         Did the $0.35 per share offer comply with s 1019G(2) of the Corporations Act 2001 (Cth), which provides that an off-market offer may be withdrawn at any time but not within one month of the date of offer?

2.                  Were the terms of the offer document and the conduct of National Exchange misleading or deceptive?

3.                  Was the conduct of National Exchange unconscionable?

4.                  Did the shareholders accept the offer “for the purpose of” trade or commerce?

ORDERS BELOW

5                     The adverse consequences of the Tweed offers have been substantially diminished because, on 26 November 2004, the primary Judge made interlocutory orders requiring National Exchange to send a letter to the shareholders giving them an opportunity to have their shares retransferred.  His Honour did this on the basis that the offer document was not sent as soon as practicable after the date of offer, as required by s 1019E(2), and was therefore non-compliant.  The issue as to timing is not before this Court on appeal.  On 20 January 2005, his Honour made declarations that National Exchange had breached the Corporations Act by not sending the offer to shareholders as soon as practicable and also by the offer not being expressed to remain open for at least one month. His Honour accepted undertakings that prevented National Exchange from registering any transfer of shares from shareholders who had accepted the offers.

6                     We now turn to the specific questions raised in the Notices of Appeal and Cross-Appeal.

1.         Did the offer comply with the Corporations Act?

7                     Section 1019G(2) provides that an unsolicited offer to purchase a financial product off-market may be withdrawn at any time but not within one month after the date of the offer.  A “financial product” includes a share.  By subs (4), a purported withdrawal contrary to subs (2) is ineffective.

8                     The offers were sent to Aevum shareholders on 28 October 2003.  The offer document provided that the offers were to remain open until the earlier of the following two times:

·        5 pm on 10 November 2004; or

·        the time when the total number of shares in Aevum in respect of which the offeror has received acceptances under the offer first exceeds 3,350,000.

9                     National Exchange concedes that the offer was not expressed to remain open for at least one month but says that the offer does not contravene the Corporations Act because, in terms, s 1019G(2) does not prescribe any requirement of a minimum period for which the offer must remain open.  It is not concerned, according to National Exchange, with the duration of the offer but rather with the withdrawal of the offer.  The subsection does not require that the offer remain open for at least one month. The prohibition only operates on withdrawal or revocation within a one month period.  National Exchange says that this does not mean that the offer must “remain open” for at least one month.  National Exchange submits that the only subsection dealing with the duration of an offer is s 1019G(1), which limits the duration of an offer to twelve months after the date of offer.  National Exchange refers to the interaction between subs (2) and the other subsections and says that if “withdrawal” is interpreted to mean “cease to remain open”, then subs (4 ) will have no work to do.  Subsection (4) provides that a withdrawal within a one month period is ineffective.

10                  The primary Judge rejected these submissions and interpreted subs (2) as imposing a requirement that an offer must remain open for at least one month and therefore the National Exchange offer was invalid because it was possible that the 3,350,000 shares specified could be purchased within a period of one month.  In support of this conclusion, his Honour considered other parts of the Act that suggested that the use of the word “withdrawn” evinced an intention to refer to an offer ceasing to remain open.  In particular, his Honour referred to s 624(1) concerning on-market purchases of financial products, which prescribes the period for which a takeover offer must remain open.  His Honour considered that, in principle, there were sound practical reasons for a minimum period for which an offer should remain open in relation to both on-market and off-market transactions since, in his Honour’s view, a minimum period of one month would provide an opportunity for an offeree to obtain information and advice and to adequately consider whether to accept the offer.

11                  It is not necessary to find ambiguity before the Court looks to extrinsic material to interpret statutory provisions.  In CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408, the Court, after referring to s 15AB of the Acts Interpretation Act 1901 (Cth) said that the Court may refer, for example, to reports of law reform bodies to ascertain the mischief which a statute is intended to cure.  They said that the “modern approach” to statutory interpretation:

“(a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses ‘context’ in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. ... if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance.  Further, inconvenience or improbability of result may assist the Court in preferring to the literal meaning an alternative construction which … is reasonably open and more closely conforms to the legislative intent.”  (Emphasis added)

12                  The relevant part of the Explanatory Memorandumto the Financial Services Reform Amendment Bill 2003 (Cth), which inserted the provisions relating to unsolicited off-market offers to purchase financial products into the Corporations Act, is in the following terms:

“3.11   The relevant offer needs to be made in printed or electronic form. Unsolicited offers in any other form, for example via telephone, are prohibited.  The provisions introduce a timeframe for which such offers are to remain open (at least one month but not more than 12 months).  In addition, the provisions specify the way in which an offer could be withdrawn.”  (Emphasis added)

13                  Further support for the primary Judge’s conclusion is to be found in the Second Reading Debate on the Bill of 4 November 2003,where the mischief of inadequate regulation is identified and a clear intent is shown to close the gaps and more closely regulate unsolicited off-market offers.  In relation to the mischief to which the amendments were directed, Mr Griffin said at 21988 of Hansard:

“The key changes made by the bill include establishing a disclosure regime for unsolicited off-market offers to purchase financial products - what I call the David Tweed amendments …”

At 22000 of Hansard, Mr Andren said:

“With regard to the bill’s measures to combat unsolicited offers to purchase financial products off market, we can only hope the bill is more watertight than preceding regulations that attempted to curb the activities of operators such as Mr Tweed and his company, National Exchange Corporation Pty Ltd.”

14                  In our view, this extrinsic material favours a broad interpretation to give effect to the Bill’s purpose of controlling the conduct of Tweed.  The provisions relating to on-market sales, including s 624 of the Corporations Act, also lend support to the conclusion that s 1019G(2) was intended to require an offer to remain open for at least one month.  The offer in the present case does not do this.  Accordingly, no error has been shown and this ground of the cross-appeal is not made out.

2.         is the conduct misleading?

15                  ASIC alleges that the offers, considered in the context of Tweed’s admitted practice, were liable to mislead or deceive the public.

16                  The primary Judge concluded that, on a fair and reasonable reading, the offers were not misleading.  His Honour noted that the offer document was less complex and more intelligible than that required by the Corporations Act to be sent in the event of a takeover.  His Honour considered that the offer document clearly informed the offerees that National Exchange’s estimate of the fair value of the shares was more than 90 cents per share.  It was noted that the shares had not yet been listed on the market when the offers were sent and that the offerees were told to seek their own advice.  His Honour did not consider that the image of the substantial building on the National Exchange stationery was misleading, nor did he consider that the reference to “Exchange” was liable to mislead a recipient into connecting the offer with a stock exchange or another financial exchange.  His Honour noted that “stock exchanges” do not themselves normally buy shares.  They are simply a mechanism to facilitate trading in the shares.  Furthermore, his Honour found that the offer did not represent, as contended by ASIC, that the fair value of the shares was $0.35 per share.  In his Honour’s view, the layout of the offer was not misleading.  ASIC had contended that the placing of the fair value of the shares on the second page was a relevant consideration.

17                  His Honour referred to evidence that 45% of the members of Aevum were over 70 years of age at the time of demutualisation and he accepted that some members may not have properly understood the offer.  His Honour did not, however, consider that age, of itself, was sufficient to establish disability or disadvantage.  He accepted that some members may have been inexperienced in acquiring shares.  Nevertheless, having regard to the clear language of the offer, there was no misrepresentation or deception.

18                  The material sections of the offer document are as follows:

“OFFER TO BUY YOUR SHARES IN AEVUM LIMITED

This is an important document.  It should be read in its entirety.

Please consult your financial or other adviser immediately.

Offeror

This offer is made by National Exchange Proprietary Ltd ACN 008 079 974 on its own behalf (Offeror).

What is this Offer About?

Aevum Limited (Aevum) is the new name for Hibernian Friendly Society (NSW) Limited.  If you were a member of that society, you would have been issued ordinary shares in Aevum (shares) as part of its demutualisation in 2002.  Offeror is now making an offer to you to buy your shares.

Your shares

According to the register of holders of shares in Aevum, you own the number of shares set out on the enclosed Acceptance Form (Your Shares).

Offer

Offeror offers to buy Your Shares at a price of $0.35 per share, subject to the terms set out in this document (Offer).

Offeror has made an offer, dated 22 October 2004, on the same terms to all other holders of shares in Aevum (Other Offers)

It is a term of this Offer and the Other Offers, which term cannot be waived, that Offeror will not, pursuant to this Offer and the Other Offers, purchase any more than 3,500,000 shares in Aevum.

Date of Offer

The Offer is dated 22 October 2004.

…

Payment

If you accept the Offer, you will be posted a cheque for $0.35 for each of Your Shares.  The cheque will be posted within 7 days of Offeror receiving your SRN.

Fair estimate of value

Aevum has issued a prospectus dated 29 September 2004, for the issue of 11,111,111 shares at a price of $0.90.  Offeror expects that in deciding to issue shares at that price, Aevum has received and relied on expert advice as to the price investors would be willing to pay to subscribe for the shares on offer under the prospectus.  Offeror has also considered the 2004 earnings per share of $0.071, the forecast 2005 earnings per share of $0.054 and the pro-forma net tangible assets per share of $1.29, each of which is stated in the prospectus.  Offeror has also considered the price earnings ratio of companies listed on the Australian Stock Exchange, including, in particular, the S&P/ASX Small Ordinaries price earnings ratio series number 14.66 on 12 October 2004 which would give a value of $1.04 using the $0.071 historical earnings per share.

In accordance with Offeror’s legal obligations (and for that purpose only), Offeror advises that, on the basis of the above information, a fair estimate of the value of a share in Aevum at the date of the Offer is a range of $0.90 to $1.29.

Important qualification to fair estimate of value

The above estimate is provided by Offeror to satisfy a legal requirement.  It is provided in good faith. However, neither Offeror nor its director is qualified to provide valuations and this estimate should not be considered to be a valuation.  If you wish to obtain a valuation of Your Shares, you should consult an appropriately qualified valuer.

…” (Original emphasis)

19                  The pre-paid reply envelope enclosed with the offer document contained an image of a substantial building.  It was contended that this conveyed a connotation that National Exchange was a substantial recognised commercial establishment connoting some form of control or regulatory function in the nature of a trading exchange.

20                  As at late October 2003, Aevum had not been listed on the Stock Exchange.  On 18 November 2003, Aevum was listed and trading opened at $1.54 per share, which was 4.4 times the price offered by National Exchange.

21                  His Honour considered that a substantial number of the 257 shareholders who accepted the offers were confused and misapprehended the value of their shares, however, such “confusion” did not arise from the offer document.  He noted that the only contact between the members of Aevum and National Exchange was by way of the offer document.

22                  Although, as a matter of commercial logic, it is difficult to see why an offeree would accept an offer of $0.35 when the offeror itself indicated a fair value was between $0.90 and $1.35, given the timing of the offer, it is possible that there may have been cases where members were pressed for cash or wanted to realise assets urgently.  In those circumstances, a lower than anticipated market price might be acceptable.  There is no evidence that this was, in fact, the case.  On the material before the Court, the reasons for acceptances by members of the offers are unknown and can only be a matter of speculation.

23                  In determining whether conduct or representations are misleading to a class of persons, the High Court has said that it is necessary to isolate a representative member of the class of persons to whom the conduct is directed with a view to ascertaining the likely understanding of an ordinary or reasonable member of the class and to disregard assumptions by persons which are extreme or fanciful.  In Campomar Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 at 85-87, the Court said:

“The initial question which must be determined is whether the misconceptions, or deceptions alleged to arise or to be likely to arise, are properly to be attributed to the ordinary or reasonable members of the classes of prospective purchasers.”

24                  In this case, the only conduct relied on is the offer material and, having examined that material, we are not satisfied that, in itself, it contains any misleading or deceptive representations or evidences misleading or deceptive conduct.

25                  Close examination of the offer shows that it has been deliberately and carefully crafted in a way that does not exhort or advise the offerees to accept.  Nor does it represent that the price is fair.  Rather, it urges shareholders to obtain their own valuation of the shares.  It is clearly stated in the offer document that a fair value range ($0.90 to $1.35), as estimated by National Exchange, is in excess of two to almost four times the price offered by National Exchange.  The image of the building on the stationery does not indicate any association with an official securities institution.  Nor does the name “National Exchange” necessarily convey such a connotation.  In these circumstances, we do not think that his Honour erred in finding that there was no misleading or deceptive conduct.

3.         Is the conduct unconscionable?

26                  The question of whether the conduct of National Exchange was unconscionable involves additional and different considerations.  His Honour said that, under the general rule, it was not meaningful to speak of unconscionable conduct except in relation to a particular person and it was not meaningful to address the question of whether conduct is unconscionable in the abstract.  His Honour noted that no claim was made by any member of Aevum that the conduct of National Exchange was unconscionable in relation to that member, and, in these circumstances, his Honour considered that it was inappropriate to make any declaration. 

27                  The primary Judge adverted to the standards of unconscionable conduct imposed by the unwritten law.  His Honour did not consider that the conduct of Tweed in this case was unconscionable, however, his Honour said at [109] that the circumstances gave rise to “considerable disquiet”.  This proceeding is not brought under the unwritten law.  Nor has it been bought under s 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”), which statutorily incorporates the unwritten law.

28                  The claim of ASIC is brought under a specific statutory provision, namely, s 12CC of the Australian Securities and Investments Commission Act 2001 (Cth), which prohibits unconscionable conduct by a person in trade or commerce in connection with the supply of financial services.  In determining whether conduct is unconscionable, the section lists a number of specific matters that may be taken into account by the Court.  This does not purport to be an exhaustive list.

29                  Section 12CC can be contrasted with s 12CA, which prohibits a person from engaging in conduct in relation to financial services and in trade and commerce where the conduct is unconscionable within the meaning of the “unwritten law”.  Section 12CC makes no reference to the unwritten law and refers to conduct that is, in “all the circumstances”, unconscionable.  It is also specific in its requirement that the supply of financial services must not only be “in trade or commerce”, but the acquisition of those services must also be “for the purpose of” trade or commerce: s 12CC(8).

30                  In our view, his Honour erred in approaching the question of unconscionable conduct on the basis of the limitations that the general law imposed on that concept.  It is evident from par 3.7 of the Explanatory Memorandum to the Financial Services Reform (Consequential Provisions) Bill 2001 (Cth), which concerned the proposed s 12CC of the ASIC Act, that this section was intended to operate as a ‘mirror’ provision to s 51AC of the Trade Practices Act 1974 (Cth): see also Hansard, vol 216, H of R, 8767 (‘Ministerial Statements’) and 8800 (‘Second Reading Speech’).  There is no foundation in the language or purpose of s 12CC to impose limitations from the unwritten law, such as the necessity to identify a specific or particular person.  Authority on s 51AC supports the proposition that the prohibition in s 12CC is not to be read down by limiting its operation only to circumstances where the common law would grant relief in respect of unconscionable conduct: Australian Competition and Consumer Commissioner v C G Berbatis Holdings Pty Ltd (2000) 96 FCR 491 at 502ff per French J; Australian Competition and Consumer Commissioner v Keshow [2005] FCA 558 at [97] per Mansfield J and the cases and authorities there cited.  It is equally clear both from the actual language of s 51AC and of s 12CC and from the extrinsic materials relating to s 51AC that these provisions were intended to build on and not to be constrained by common law case law: see Australian Competition and Consumer Commission v Radio Rentals [2005] FCA 1133 at [24]; and Hansard, H of R, above.  The language must be given its ordinary meaning and must not qualified by pre-existing constraints on liability: see Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 at [30]-[37]; G Pearson, ‘The ambit of unconscionable conduct in relation to financial services’ (2005) 23 C&SLJ 105 at 123;  R Bigwood, ‘Curbing Unconscionability:  Berbatis in the High Court of Australia’ (2004) 28(1) MULR 203.

31                  The extrinsic material before the Court indicates that s 51AC was inserted into the TPA to protect persons engaged in small business.

32                  We now turn to the question of whether the conduct was unconscionable within the meaning of s 12CC.

33                  “Unconscionable conduct”, on its ordinary and natural interpretation, means doing what should not be done in good conscience.  In a case where the discrepancy in price and value is great, as in the present case, and the conduct is systematically and directly focused on vulnerable but unnamed members, some of whom who can be expected to accept the offers, such conduct can reasonably be described as being against good conscience.  The targeted offerees in this case could reasonably be expected to include persons who are unacquainted with share values, inexperienced in trading their interests, lacking in commercial experience and some of whom act inadvertently and are elderly.  The evidence shows that Tweed believed from his past experience that such persons were more likely to accept the offer.

34                  ASIC says that the unconscionable element arises from the following considerations.

35                  National Exchange is an experienced share investor that has acquired shares through the making of off-market offers for shares in demutualised companies at substantially below the value of these shares.  Tweed knew that Aevum had been a mutual society, that it had recently demutualised and that, in September 2004, it was an unlisted public company with 6,255 shareholders.  He was aware that Aevum had published a prospectus on 29 September 2004 and that it was the intention of Aevum to offer in the order of eleven million shares at 90 cents each and to seek listing and quotation of the shares on the Australian Stock Exchange.  Tweed also knew that, when the offer document was sent to Aevum shareholders, there was no current market price for shares in Aevum.

36                  The time period for the offers was to close relatively early, either on 10 November 2004 or before that date if sufficient acceptances were received. The offer document was not sent to the shareholders as soon as practicable after the date of the offers.   This delay had the effect that members receiving the offer document had no more than seven business days to consider the offer, obtain advice and post the acceptance to National Exchange for receipt by the deadline of 10 November 2004.

37                  Evidence was tendered that Tweed, the controlling mind of National Exchange, had in earlier proceedings given evidence that members of demutualised companies, having not paid for their shares, were more likely to sell them for less than their market value than were shareholders who had paid for their shares.  He believed and acted on the basis that shareholders who had not paid for their shares and did not want to hold them were more likely to be prepared to sell their shares for less than half their market value.  Tweed perceived that it was an advantage to make offers without the necessity of disclosing any prevailing market price for the shares that were the subject of the offers.  He considered that a reasonable person would be less likely to accept the offer if his or her attention was directed to the estimate of the value of the shares in Aevum.  The offer document was therefore cast in such a way that the critical information as to the fair estimate of the value of the shares was not contained on the front page in close proximity to the consideration for the offer and nor was it linked it to the consideration.  The information as to the fair estimate was printed on the reverse page of the offer document.

38                  Against these considerations must be weighed the fact that there was no communication between National Exchange and the shareholders other than by the offer document.  Nor was there any fiduciary relationship or evidence that any recipient was under a special disability as to age or personal circumstances.  The offer document, in our view, was not misleading and contained a recommendation that the shareholders consult an adviser and read the entire document.  Moreover, National Exchange disclosed its estimate of the value of the shares.  The document was a short one and was not in legalistic terms.

39                  In these circumstances, the question is whether the conduct of National Exchange was “unconscionable”, according to the ordinary and natural meaning of that term, having regard to the list of statutory considerations.

40                  The starting point in making this determination as to unconscionability is the list of factors to which the Court’s attention is drawn by s 12CC(2).  These factors should be considered and weighed as a whole.  Some may weigh in favour of a characterisation of the conduct as unconscionable and others may not.  It is not appropriate to approach this list as exhaustive.  This list is indicative of some of “the relevant circumstances”.  There are several factors that clearly apply in this case to support a characterisation of the conduct as unconscionable.  The first is that there must be some doubt as to whether the recipients who accepted the offers were able to understand the offer document since, on its face, it is difficult to see why or how a recipient would be persuaded to part with shares, without any bargaining, where the price offered was admitted by the offeror to be substantially less than half the offeror’s estimate of the value of the shares and less than one quarter of the initial market price of the shares.  There may be special factors which operate, such as the urgent need for money or the possible inability of recipients to obtain cash from any other source or to wait a few days to see what price the market indicated, however, there is no evidence to warrant this inference in the present case.

41                  The “financial service” in this case is National Exchange’s offer to purchase the shares at $0.35 per share.  One matter to be taken into account under s 12CC(2) is the amount and circumstances under which the recipient could have acquired an equivalent offer.  While there was no equivalent offer in the present case, the fact is that, when the shares came on the market shortly after the offer closed, they sold for 440% of the price offered by Tweed.  This is not a case where there was any room for negotiation between the parties.

42                  Another of the listed considerations is the extent to which the supplier acted in good faith.  On the evidence and concessions before the Court as to Tweed’s strategies, it cannot be suggested that the conduct of Tweed was undertaken in good faith.

43                  National Exchange set out to systematically implement a strategy to take advantage of the fact that amongst the official members there would be a group of inexperienced persons who would act irrationally from a purely commercial viewpoint and would accept the offer.  They were perceived to be vulnerable targets and ripe for exploitation, as they would be likely to act inadvertently and sell their shares without obtaining proper advice, and they were a predictable class of members from whom Tweed could procure a substantial financial advantage by reason of their commercially irrational conduct.  This is not a case of shrewd commercial negotiation between businesses within acceptable boundaries.  The conduct can properly be described as predatory and against good conscience.  This is not a case of obtaining a low price by shrewd negotiation.  It is predatory conduct designed to take advantage of inexperienced offerees.  The primary emphasis is on the conduct of the offeror towards the offeree in deciding whether conduct is unconscionable.  The law is not, of course, intended to protect the reckless or the unreasonable and, as Spigelman J stated in Attorney General of NSW v World Best Holdings Ltd [2005] NSWCA 261 at [121], “[u]nconscionability is a concept which requires a high level of moral obloquy”.  The concept of unconscionability is, however, concerned to prohibit conduct such as that of the offeror in this case, which was directed at exploiting the targeted recipients.  There is a strong element of moral obloquy in this case.

44                  Section 12CC requires the Court to focus primarily on the unconscionable conduct of the offeror and to determine whether that conduct is contrary to the norm of conscientious behaviour. In our view, the conduct of National Exchange in this case, pursuant to its carefully formulated and systematic approach, clearly offends against basic notions of good conscience and fair play.

45                  For these reasons, we consider that the trial Judge erred in finding that National Exchange did not engage in unconscionable conduct for the purposes of s 12CC.  It is unnecessary to consider whether His Honour was correct in concluding that this conduct was not unconscionable for the purposes of the unwritten law.  We should not be taken as concluding that where a person targets a class of persons on the assumption that there are likely to be vulnerable persons within that class who cannot protect their own interests, that person cannot be found in appropriate circumstances to have engaged in unconscionable conduct in dealing with individual members of that class.  The conclusion that National Exchange engaged in unconscionable conduct for s 12CC purposes leads to the question of whether acceptance by the members can be characterised as being “for the purpose of trade or commerce”.

4.         Can acceptance of the offer be characterised as being for the purpose of trade or commerce?

46                  The primary Judge found that National Exchange did not engage in unconscionable conduct.  His Honour went on to say that it was a very forced concept to speak of the acceptance of an unsolicited offer to buy shares as being an acceptance for the purpose of trade or commerce.  His Honour said that it may be that the acceptance was “in the course of” trade and commerce, however, it was not “for the purpose of” trade or commerce.  In our view, this conclusion was correct.

47                  The evidence does not provide any basis for the conclusion that any member accepted, or would have accepted, the offer for the purpose of trade or commerce.  It is true that recipients would accept the offer for the purpose of realising an asset, however, this is not sufficient to satisfy the statutory requirement that the seller must sell for the purpose of trade or commerce.

48                  The Second Reading Speechin relation to the Trade Practices Amendment (Fair Reading) Bill 1997 (Cth), which inserted s 51AC into the TPA, records at 8800 of Hansard that:

“This Government is strengthening the Trade Practices Act 1974 to better protect the legal rights of small businesses, to ensure that small businesses can confidently deal with large firms.

…

This bill will provide a new substantive legal remedy for small business against unconscionable conduct …”

This Speech underlines the legislature’s concern that there should be improved enforcement rights and access to remedies for small business.

49                  Extrinsic sources indicate that s 12CC was intended to “mirror” s 51AC of the TPA, which is a cognate provision: see the Explanatory Memorandumto the Financial Services Reform (Consequential Provisions) Bill 2001 (Cth)at pars 3.4, 3.6 and 3.7.  A comparison of ss 51AC and 12 CC(2) shows a close parallel between the two provisions in relation to the factors that are to be taken into account by the Court.  The headings of both sections refer to “conduct in business transactions”.  Section 12CB, in contrast, is concerned with unconscionable conduct in relation to the supply of services to consumers.  This is expressed to be a reference to a financial service of a kind ordinarily acquired for personal, domestic or household use.  That is not this case here. In the present case, it cannot be said that the acceptance of the offer, which is a financial service, is for a personal, domestic or household use.

50                  Having regard to the extrinsic materials that indicate that s 51AC was directed to protect small businesses in their relationships with more substantial enterprises, we are persuaded that s 12CC, being intended as a “mirror” provision, should be approached in a similar way.  The language on its face is clear.  Having regard to the ordinary and natural meaning of the words “for the purpose of trade and commerce” and to the extrinsic material referred to earlier, we are of the view that the primary Judge was correct in his conclusion that, in this case, the acquisition or possible acquisition of the financial service (i.e. the acceptance of the offer) is not for the purpose of trade or commerce.  If ASIC wishes to control conduct like that of Tweed in the present case, it is necessary to consider different language to that selected in the present legislation to ensure that such conduct is prohibited.  The acceptance in this case is not within either s 12CC or s 12CB, as presently framed, even if the conduct is found to be unconscionable, because of the limitation of the section to acquisition for the purpose of trade or commerce.

DOES THE APPEAL LACK UTILITY?

51                  National Exchange submits that the appeal by ASIC lacks utility.  This is because, on 26 November 2004, the primary Judge granted substantive relief against National Exchange based on non-compliance with ss 1019E and 1019I.  It is said that this appeal is an attempt by ASIC to obtain an advisory opinion on the law by means of claims for declaratory relief.  Injunctive relief is said to be inappropriate because there is no evidence of any threat by National Exchange to send out any further offer documents and, insofar as the injunction seeks to do no more than compel National Exchange to comply with the law, it is both superfluous and oppressive.

52                  In our view, there is no substance in this contention.  There is a live issue as to the meaning and effect of the statutory provisions and, given the history of National Exchange and Tweed, we see no reason to interfere with the declarations and orders made by the primary Judge.  They are appropriate to ensure compliance and deterrence.

CONCLUSION

53                  This appeal is dismissed.  Having regard to the findings made in relation to unconscionable conduct, it is not appropriate in this case to make any orders as to the costs of the appeal.  The cross-appeal is dismissed with costs.

Associate:

Dated:              25 November 2005