The old joke was that a prospectus was the fat bit in front of the share application form. A more modern version might be that a product disclosure statement is the fat thing that stops your car insurance renewal fitting into your letterbox.
What is not a joke is that yet another group of self-funded retirees look set to lose big on a bad investment. The collapse of property financier Wickham Securities reportedly puts 300 such investors in danger of losing $27 million. They join the 16,000 investors who lost $650 million in the collapse of Banksia Securities. A cynic may shrug, and quip that a fool and his money are soon parted – especially in an era when it is impossible to do any private financial business without being inundated with disclosure documents.
However, these developments do raise, once again, the question of whether our investor protections are hitting the right target. In that context, it is interesting that the Australian Securities and Investments Commission has decided to start banging its "truth in takeovers" drum again.
In brief, the truth in takeovers policy is that players in a takeover battle should not make misleading statements about their intentions. ASIC is particularly concerned that "mum and dad" investors might not understand the legal subtleties of statements such as "we do not presently intend to increase the bid price". But this emphasis on the experience (or lack of experience) of mum and dad investors is not necessarily shared by the likes of the Takeovers Panel and the High Court.
In 2003, the Takeovers Panel was confronted with a dispute arising out of a target company's survey of its shareholders. The company announced that the majority of its shareholders would not accept a bid that was then on the table. Discussing the effect of the truth-in-takeovers policy on the publication of this survey, the panel commented that: "In light of the market's knowledge of the manner in which such surveys are conducted, [a statement based on] such a survey should be, and we believe is, accorded little weight, especially in forming any expectations about the future actions of those shareholders."
Since not too many mum and dad investors would have any knowledge of how shareholder surveys are conducted, the panel appears to have been taking a different view from ASIC about what sort of investors are affected by truth in takeovers. The panel's position on this does not appear to have changed since 2003.
More recently, the High Court appeared to share the panel's view, when it dismissed ASIC's charges against Fortescue Metals Group and Andrew Forrest. ASIC had alleged that it was misleading for Fortescue to publicly claim that it had enforceable contracts with a Chinese state-owned enterprise. The High Court's response was that the intended audience would not have believed that Fortescue had ironclad contracts enforceable under Australian law.
This was spelt out most clearly by Justice Dyson Heydon. Fortescue's audience, he said, was "superannuation funds, other large institutions, other wealthy investors, stock brokers and other financial advisers, specialised financial journalists, as well as smaller investors reliant on advice". Such people would know that a state-owned enterprise of the People's Republic of China could not be forced to do anything.
Of course, while it may be true that sophisticated investors understand the realities of doing business with China, the recent Whitehaven Coal and David Jones debacles and the Bernie Madoff Ponzi scheme collapse suggest they are not omniscient. Being cleverer, more financially sophisticated, richer or more glamorous than other folk is no guarantee that you can spot a scam, whether it's an investment that is clearly far too good to be true or a concocted media release.
These recent events make two things clear.
The first is that 20 years of bulky and increasingly onerous disclosure requirements for every investment product under the sun have not prevented investors' making bad investments.
The second is that key regulators are not on the same page when it comes to identifying the types of investor we should be aiming to protect and the best means of providing that protection.
These factors build a strong case for the initiation of a major discussion about investor protection. It is clear that the current system is both fractured and, in too many cases, ineffective.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
