Voluntary Corporate Governance Structure Essay

Question:

Discuss about the Voluntary Corporate Governance Structure.

Answer:

Introduction:

The sale of shares in Jefferies Industries Limited conducted on 28 April 1995 was held to be in contravention of section 995 and 998 of the Corporations Act. The appellant, Fame, preferred an appeal against this finding and pleaded to set aside the order. ASC contended that the findings were relevant and that other share transactions conducted by Fame in Jefferies contravened section 995 and 998 of the Corporations Law.

As per the facts of the case, Jefferies is a public company, shares are listed on the Stock Exchange, and appellant had all its shares held in Jefferies. Mr. J F O’Halloran exercises control over the Fame and was director of the Jefferies formerly. The sale of the shares was conducted in the manner in which Stock Exchange Automated Trading System (SEATS) operates. As per the SEATS system, if Fame wishes to sell shares in Jefferies, it is important that bids are accepted in the sequence mentioned in the evidence.

The transaction of shares that was held on 28 April gave rise to several disputes among various persons with respect to the significance of such transactions regarding the conversion of the preference shares. The appellate court was required to determine the primary issue whether sales of 20000 shares of Jefferies at 14c and 74000 shares of Jefferies at 13c were in contravention of section 995 and 998 of the Corporations Law.

The appellant was held to have committed a breach of section 998 and 995 of the Act while selling the shares of Jefferies. According to section 998(1) of the Corporations Act, any person is forbidden from creating or acting with an intention or any such conduct is likely to create any false or misleading appearance with respect to the market for the price of or for any securities. This provision is a counterpart of section 124 of the present Australian statute of Securities Industry Act 1980 (Cth) and section 70 of the Securities Industry Act 1970 (NSW) and section 9 (a) (i) and 10 (b) of the Securities Exchange Act 1934 (USA) and Rule 10b-5 that was incorporated in pursuant of section 10(b).

According to section 995 of the Corporations law states that no person is permitted to engage in conduct that is misleading or deceptive or is likely to mislead or deceive while dealing in securities (Coffee, Sale & Henderson, 2015). This provision was incorporated having regard to section 52 of the Trade Practices Act 1974 (Cth). The primary objective behind the incorporation of this provision was simple and rational as the legislature believed that section 52 is applicable to several cases with respect to securities, hence there should be a similar provision that shall deal with cases involving conduct of the parties engaged in securities.

In this case, the conduct of the appellant, Fame, with respect to sales of shares in Jefferies was held to be misleading and deceptive towards the third parties.

Critical analysis of the decision

Mr. O’ Halloran adduced evidence for justifying his conduct while placing orders on 28 April, that he was under the pressure of obtaining quick cash for the purpose of fulfilling his financial commitments (Sealy & Worthington, 2013). The court did not consider his contention and did not rely on his evidence. As per the findings of Cohen J with respect to the evidence adduced by Mr. O’Halloran, he was not under any financial pressure and that he had sufficient money to pay off any urgent debts. This establishes the fact that O’Halloran did not have any need to obtain quick cash and deliberately sold the last 94000 shares on 28 April at a price that was lower than the former sale price. His conduct reveals that he intentionally created an artificially low figure for conversion calculation that were made in respect of preference shares.

The appellant argued that his conduct cannot be held as misleading and that he was not engaged in any form of manipulative conduct. He further argued that on 28 April he had an intention to take the advantage of and grab the opportunity available in the market situation. However, such situation did not result from any form of collusion between the appellant and any other person (Hannigan, 2015). The appellant agreed to the fact that he acted in his own interest and wanted to obtain financial benefits. The appellant acknowledged that he went accepted the various offers to purchase shares in Jefferies that had been placed in the market before 28 April and were still in place.

The appellant went into the market before the close of trading on 28 April and cleared all the current offers that were available to purchase the shares at the current offer prices. As discussed above that section 998 of the Corporation law forbids a person from creating anything in market that is false or misleading in its appearance for the sake of price of any securities, the appellant contends that his conduct does not amounts to any misleading or false appearance. In this context, the court referred to North v Marra Development Ltd [1981] HCA 68; [1981] 148 CLR 42 to explain the purpose of section 998 of the Corporations Act. The case dealt with section 70 of the Securities Industry Act 1970 (NSW), which aims at safeguarding the securities market against activities that would lead to managed or artificial manipulation (French et al., 2014). The section aims at ensuring that the market signifies the forced of genuine demand and supply. The phrase ‘genuine supply and demand’ excludes any buyers and sellers who conduct transactions for the purpose of maintaining or setting the market price.

The closing statement with respect to the phrase ‘genuine supply and demand’ is applicable to the issue raised in the present case. The court opined that section 998 aims at protecting the integrity of the share market and that while demonstrating the interactions of supply and demand forces, it may become subjected to various imperfections including mismatches of information, thus, destroying its integrity (Miglani, Ahmed & Henry, 2015). Moreover, the conduct of the seller who trades shares, calculating effect sales at the lowest instead of highest obtainable price with a view to avert the chance of other purchasers bidding up the price, signifies both the effect and purpose of creating an artificial market and price.


As was contended by Fame that there was no collusion when he went to the market immediately before the closing of trading on 28 April, was not taken into consideration. This is because, the court was of opinion that there is a distinction between the individual buyers and the market who had the opportunity to make current bids immediately before the close of trading on 28 April. This establishes that the impact of Fame’s conduct on the market with respect to the shares in Jefferies and the market price was not at all incidental. This further establishes the fact that primary object of Fame’s conduct was to influence the market price on 28 April 1995.

Now, with respect to section 995 of the Corporations Law, which prohibits a person from engaging into any, conduct that is misleading or deceptive or is likely to mislead or deceive, and the present case states that Cameron securities and James Capel, the third parties were not mislead or deceived. Further, they did not make any compliant about the conduct of the appellant, Fame. The offer made to sell shares to James Capel and Cameron securities rather their acceptance to the offers made to purchase the shares and neither the sale nor purchasing contract that was made in isolation between them and the appellant amounted to any deceptive or misleading conduct. They had the intention to have legal effect, which all the parties dealing with the securities market usually wish to achieve (Chitimira, 2015).

Nevertheless, the conduct of Fame with respect to the connection with the sales shall amount to misleading or deceptive conduct that intended to deceive or mislead the third parties who were interested in the share market in Jefferies. This is because the third parties were misled to presume that market prices demonstrated the genuine interaction of forces supply and demand and that they did not have any reason to expect that the seller was seeking to sell off the shares to the lowest bidders and eliminate any possibility of emergence of higher bidder. This establishes the fact that the appellant had failed to comply with section 995 of the Corporations law, by engaging into a deceptive or a misleading conduct while dealing in securities. The findings made with respect to the contravention of section 995 were held correct (Bromberg, Gilligan & Ramsay, 2016).

Dissenting Judgment

However, in a dissenting judgment, Priestly JA was of the opinion that the appellant did not exhibit any conduct that was misleading or deceptive and merely sold shares for prices offered to any holder of the shares who wished to sell them off at such prices. The appellant did nothing more than accepting the offers made as per the rules of the market to purchase the Jefferies shares at the stipulated prices (Grinblatt & Titman, 2016). Further, the knowledge situation regarding the conversion of the preference shares was publicly available, independently of the appellant. The appellant was merely acting to obtain a financially advantageous position using the available information and sold shares as per the market procedures.

While the appellant was acting to achieve financial advantage, had no intention to cause any misleading or deceptive appearance in relation to the market or for the prices of the shares to the disadvantage of Jefferies. The appellant had the intention to close the market price to his advantage. The conduct of the appellant does not establish the fact that he was engaged in any conduct that was misleading or deceptive in appearance and the impact of the conduct of the appellant is reflected from what actually happened in the securities market. The circumstances that arose on 28 April when the appellant sold his shares were not foreseeable by the Jefferies and resulted to the disadvantage of Jefferies. On the contrary, Jefferies created a market environment, which lead the market procedure and had fallen into its own pit. In other words, Jefferies made rules regarding the converting shares and the appellant merely took advantage which any reasonable person in position of the appellant who held 170000 shares in Jefferies, would have exhibited the same conduct. The appellant had taken full advantage of an advantageous situation (Cumming, Dannhauser & Johan, 2015).

It is difficult to believe how the appellant who did not do more than selling shares according to the market procedures. The appellant followed procedures without engaging into collusion or any connivance, hence it cannot be established that the appellant has been engaged in any form of collusion or any deceptive conduct. The motivation of the appellant is the only factor that could be used against the appellant otherwise, there are no instances that could establish that the appellant was engaged in any deceptive or misleading conduct. The action or conduct of the appellant does not establish the fact that the appellant had contravened sections 995 and 988 of the Corporations Law.

Any other form of conclusion may be concluded with respect to the appellant’s sale of shares in relation to the twenty-six and eight cents and twenty-five cents. However, these sales were not considered to be in contravention of section 959 and 988 of the Corporation law. It is also very difficult to understand how at one point of time a seller is allowed to accept lawful standing offers at twenty-five cents and the same seller is prohibited to accept another offer at thirteen cents. Hence, the appeal should be upheld with costs (Huang & Howson, 2017).

Impact of the decision

According to the Corporations Act, the directors are required to act in the best interest of the company and in the event of conflict between the personal interest and the interest of the company; the directors are required to give more priority to the interest of the company. They are under statutory obligation to act in good faith and exercise due care and diligence while carrying out business operations (Aobdia & Shroff, 2017). In order to determine whether the directors are discharging their responsibilities with care and diligence, any reasonable person should be exercising such care and diligence in the same position under same circumstances. As discussed in the present case, it is imperative for the corporations to ensure that the business operations or the directors of the company are not engaged in any conduct that is misleading or deceptive or is likely to deceive or mislead third parties.

Reference list

Aitken, M. J., Harris, F. H. D. B., & Ji, S. (2015). A worldwide examination of exchange market quality: Greater integrity increases market efficiency. Journal of Business Ethics, 132(1), 147-170.

Aobdia, D., & Shroff, N. (2017). Regulatory oversight and auditor market share. Journal of Accounting and Economics, 63(2), 262-287.

Austin, J. E. (2016). When Insider Trading and Market Manipulation Cross Jurisdictions: What Are the Challenges For Securities Regulators and How Can They Best Preserve the Integrity of Markets?.

Bird, H. L., Gilligan, G., Godwin, A., Hedges, J., & Ramsay, I. (2016). An Empirical Analysis of the Use of Enforceable Undertakings by the Australian Securities and Investments Commission between 1 July 1998 and 31 December 2015.

Britt III, T. M., Mak, S., Knight, L., & Rozsa, J. (2013). International Securities and Capital Markets. Int'l Law., 47, 259.

Bromberg, L., Gilligan, G., & Ramsay, I. (2016). Enforcement of Financial Market Manipulation Laws: An International Comparison of Sanctions.

Chitimira, H. (2015). The Regulation of Markert Manipulation in Australia: A Historical Cmparative Perspective [2015] PER 14. REGULATION, 18(2), 1727-3781.

Chitimira, H. (2015). The regulation of market manipulation in Australia: A historical comparative perspective. PER: Potchefstroomse Elektroniese Regsblad, 18(2), 112-148.

Coffee Jr, J. C., Sale, H., & Henderson, M. T. (2015). Securities regulation: Cases and materials.

Corporations Act 2001 (Cth)

Cumming, D., Dannhauser, R., & Johan, S. (2015). Financial market misconduct and agency conflicts: A synthesis and future directions. Journal of Corporate Finance, 34, 150-168.

Cumming, D., Dannhauser, R., & Johan, S. (2015). Financial market misconduct and agency conflicts: A synthesis and future directions. Journal of Corporate Finance, 34, 150-168.

FAME DECORATOR AGENCIES PTY LIMITED v JEFFRIES INDUSTRIES LTD & ORS, Supreme Court of New South Wales, Court of Appeal, [08 May 1998]

French, D., Mayson, S., Mayson, S. W., & Ryan, C. (2014). Mayson, French & Ryan on company law. Oxford University Press, USA.

Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.

Grinblatt, M., & Titman, S. (2016). Financial markets & corporate strategy.

Hannigan, B. (2015). Company law. Oxford University Press, USA.

Hanrahan, P. F., Ramsay, I., & Stapledon, G. P. (2013). Commercial applications of company law.

He, W. P., & Lepone, A. (2014). Determinants of liquidity and execution probability in exchange operated dark pool: Evidence from the Australian Securities Exchange. Pacific-Basin Finance Journal, 30, 1-16.

Huang, R. H., & Howson, N. C. (Eds.). (2017). Enforcement of Corporate and Securities Law. Cambridge University Press.

Miglani, S., Ahmed, K., & Henry, D. (2015). Voluntary corporate governance structure and financial distress: Evidence from Australia. Journal of Contemporary Accounting & Economics, 11(1), 18-30.

North v Marra Developments Ltd [1981] HCA 68; (1981) 148 CLR 42

Sealy, L., & Worthington, S. (2013). Sealy & Worthington's Cases and Materials in Company Law. Oxford University Press.

Securities Industry Act 1970 (NSW)

How to cite this essay: