Discuss about the case study of Biotechnology Company for Vaccine Ltd.
Issue: In this case, Mr. Soust was earlier the chief executive officer of a biotechnology company, Select Vaccine Ltd., which was a listed company. Goldberg J of the Federal Court made these orders. In the present case, the ASIC was successful in getting a pecuniary penalty order and also a disqualification order in proceedings that were initiated against Dr. Martin Soust. The Court arrived at the conclusion that contravention had taken place regarding the purchase of the shares of Select Vaccine Ltd by Dr. Soust in the name of his mother on 31st of December, 2007. The effect of this purchase was that the price of the shares of this company was increased from 2.0 cents to 2.5 cents which amounted to a rise of 25 percent. The court heard that the plea regarding the imposition of appropriate penalty and gave the order that Dr. Soust should pay a monetary fine of $80,000. At the same time, the Federal Court also ordered that the concern person should be barred from managing incorporation for 10 years in future. It was also ordered by Goldberg J that legal costs should be paid by Mr. Soust to the ASIC.
Select Vaccine Limited was involved in the development and sale of vaccines that preventing infectious diseases. The shares of the company were mentioned on the Australian Stock Exchange (ASX) but there was very little trading in these shares. At that time, Dr. Martin Soust was acting as the MD and CEO of the company. According to an Executive Service Agreement, the services of Dr. Martin Soust were provided for $245,000 per annum and also a bonus that was related with the movement in the share prices of the company. It also needs to be noted at this point that a bonus was to be paid to Dr. Martin Soust in case there was, “a change in the share price of the company, that outpaces the variation in the Intersuisse Biotech Index by a percentage of 10 points”. In this way, for instance, in case, the index increases 10 percent within a year, and the share prices of the company increases by 15%, the bonus will amount to 40% of the service fee; in the same way if the index drops 10% and the share prices of the company declined by 4%, the bonus will amount to percent of the service fee. In this regard, the balance date of the company was that it was 31st of December every year and the movements taking place in the prices of the shares of the company were to the measured during the reporting period.
It also needs to be mentioned that Dr. Martin Soust was also the member of the board of the company. As was the case with all other directors and officers, he had to follow the share trading policy of the company. He was prevented from trading in the shares of the company except during the six weeks, after the annual general meeting of the company and the release of the half yearly and annual financial results of the company.
However, Dr. Soust put a bid with his stockbrokers on 31st of Dec. 2007 which was outside these permitted periods. After that moment, the last preceding sale was executed at the price of 2 cents. Dr. Soust was aware that the meaning of the deficiency of market depth was that many trades will be needed to fulfill the order and consequently the prices will increase passed the 2.4 cents at which they were offered earlier. Immediately, a trade was conducted at 2.4 cents and subsequently, two more trades took place at the price of 2.5 cents per share. The result was that the price of the shares of the company increased immediately by 19.05% as compared to the price of 2.1 cents per share on 31st of December, 2006 and outpaced the Intersuisse Biotech Index by 20.54 percent. If that trade was not made by Dr. Soust, the price of the shares of the company would have decreased by 4.76% and in this way, it would have under-achieved the Intersuisse Biotech Index by 3.27%.
Later on, Dr. Martin Soust joined the meeting of the remuneration committee of the company and the full board meeting. It was disclosed by him that he had made the trade due to which the price of the shares increased from two cents 2.5 cents. The result was that subsequently it was resolved by the board of the company that the performance bonus should be paid to Dr. Martin Soust. However this would not have been decided by the board if it would have known that the managing director, Dr. Soust was involved in the transaction.
Under these circumstances, the ASIC blamed that Dr. Martin Soust had carried out the transactions due to which, an artificial price for the shares of the company has been created (amounting to market manipulation) and it also resulted in a false and misleading impression that an active market was present for the shares of the company or that the shares were being frequently traded at a certain price (amounting to market rigging). The ASIC also accused that Dr. Soust had also failed to discharge his duty to act in good faith, and in the best interests of the company as well as the duty to act for proper purpose. The evidence presented by the ASIC related with the factual background was not challenged by Dr. Soust. Instead he claimed that his actions cannot be considered as a contravention of the various provisions of the Corporations Act.
In his support, he claimed that the transactions were generally in the sense that they were not fictituous; in these transactions, the seller was not misled by any means; it is not fake to purchase shares at a price which they were offered; it is not illegal to do something due to which the share prices have increased and the authenticity of the trade was not adversely affected by an ulterior motive.
On the other hand, it was argued by the ASIC that the intention behind these transactions was to generate an artificial price for the shares of the company, or in other words, an amount contract only one mainly with the purpose of setting the market. It was claimed that Dr. Martin Soust was not a sincere purchaser and he had hoped that he will have the shares at the best price that will be accepted by any willing and well-informed seller. But instead he paid a price that failed to represent the interplay of the genuine forces regarding supplying and demand.[1] The result was that a false and misleading appearance regarding the price of the shares of the company was created by these transactions, claimed the ASIC. Therefore the ASIC started its civil penalty proceedings on 24 December, 2008 and it sought the declarations from the court that the purchase of the shares had resulted in creating an artificial price for trading in the shares of Select Vaccine Ltd that amounted to a breach of the provisions of section 1041B, Corporations Act.
At the same time, the ASIC also sought a declaration from the court that Dr. Martin Soust has also breached his duties as the director of the company and had used his position name properly. Similarly, he failed to act in good faith when he did not inform the board of the company and the remuneration committee regarding his participation in the buying of the shares made on 31 Dec. 2007.
The submissions made by the ASIC were preferred by Federal Court. After going through all the evidence placed before it, the Court came to the conclusion that the test that needs to be applied in this case is if the price is constructed or contrived so as to be different from what will generally take place in the ordinary course of things. The court said that it is fundamental for the market integrity that the buyers want that they buy the securities at the lowest possible price and the sellers try to attain the uppermost possible price for the securities. If any other approach is adopted by the buyers of the sellers, open market forces of demand and supply will be distorted by such conduct. It is a misconception to believe in the presence of a genuine seller in isolation, when there is no genuine buyer proposed with acquiring the securities at the lowest possible price. Therefore, the court stated that by purchasing the shares of the company at an artificially high price, amounted to the contravention of the share trading policy of the company and the fact of concealing this activity from the board of the company also resulted in the breach of the director’s duty of good faith by Dr. Soust.
Under these circumstances, the court made the following declarations of contravention. It stated that Dr. Martin Soust had contravene the provisions of section 1041A, Corporations Act, when he took part and carried out the transaction regarding which it can be said that it had created an artificial price for trading in the shares of the company. The court also declared that Dr. Soust had contravened the provisions of section 1041(1)(b), Corporations Act when he was involved in an act that had resulted in creating a false and misleading appearance regarding the price for trading of the shares of the company on the ASX. Similarly, it was mentioned by the court that the provisions of section 181(1) of the Corporations Act have also been contravened by Dr. Soust when he did not exercise his powers and discharge his duties as the director of the company in good faith and in the best interests of the company. It was also held that another provision of the Corporations Act, section 182(1) has been breached by the defendant as he had used his position name properly as Select Vaccines Limited’s director for the purpose of gaining an advantage.
Therefore in this case, Goldberg J of the Federal Court had discussed the meaning of artificial price. The court stated that the meaning of the term was a price that has been created with a view that was not related with attaining the outcome of the interplay of general market forces related with the demand and supply and at the same time, the uncertainty regarding section 1041A has been removed by the views of Justice Goldberg which have also been found by the High Court.
Conclusion:
In this way, in this case it was found by the court that the defendant was involved in market manipulation that contravene the provisions of Corporations Act, namely sections 1041A and 1041B. in this regard, the Federal Court arrived at the conclusion that the term “artificial price” as mentioned in section 1041A is related with the price that is not created with a view to implement or consummate a transaction among sincere parties who want to buy or sell securities in the market but instead for any other purpose that is not related the purpose of achieving the interplay of genuine market forces regarding demand and supply. In this regard, Goldberg J considered the reasoning adopted in North v Marra Developments Ltd by Mason J and stated that these are also applicable to creating an false price for securities as described action 1041A due to the reason that it had resulted in the creation of a false or misleading impression regarding the market for, or the price of securities under section 1041B.
Ann O’Connell, ‘Protecting the Integrity of Securities Markets – What is an “Artificial Price”?: DPP (Cth) v JM’ on Opinions on High (1 August 2013) https://blogs.unimelb. edu.au/opinionsonhigh/2013/07/25/o-connell-jm/
Adler v Australian Securities and Investments Commission [2003] NSWCA 131
Briginshaw v Briginshaw [1938] HCA 34
DPP (Cth) v J M [2013] HCA 30
Fame Decorator Agencies Pty Ltd v Jeffries Industries Ltd [1998] NSWSC 157
North v Marra Developments Ltd (1981) [1981] HCA 68
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