Legal Advice: Future Energy Ltd Fundraising

Background of the case

To assist Wei Lee to prepare, I have chosen the case of Vince Impiombato v BHP Billiton Limited 2018.

Investors who bought shares in BHP Billiton Ltd on the ASX or LSE between October 21, 2013, and November 9, 2015 have joined together to file a lawsuit against BHP.

During a mudflow that occurred on November 5, 2015 at the Germano mines in Brazil, hundreds of houses, livelihoods, and lives were lost across the region. The Fundao dam was responsible for the collapse. An operating joint venture between BHP and Vale SA is responsible for the organization of the Germano mine.

Following the dam’s collapse, BHP’s stock price plummeted by 22 percent on the Australian Stock Exchange and 23 percent on the London Stock Exchange. The class action lawsuit aims to recoup damages sustained by stockholders as a result of the financial disaster in issue.

Under section 674 of the Corporations Act 2001 (Cth), BHP is obligated to make continual disclosure to the market of any potential risks that may arise from the Fundao Dam’s imminent failure, which has led to the environmental catastrophe that has transpired. Under Sections 737 and 728 of the Act, BHP shareholders might seek compensation for losses incurred as a consequence of BHP’s failure to disclose this information.

In accordance with s706 of the Corporations Act, BHP Billiton Ltd must produce a disclosure statement for an offer of its shares (Cth). BHP is a company that is on the stock exchange. In accordance with S674, a listed disclosing entity is subject to a disclosure requirement in the market listing rules and is required to disclose in line with these rules. Being a publicly traded company, BHP is obligated to notify the market operator of any new information that might have a meaningful impact on the company’s stock price or value if it becomes generally known. BHP is also a listed disclosing entity as previously stated.

To put it another way, if BHP had internal information of the anticipated Fundao dam breach, it would have had a major impact on the company’s stock price and value, and hence should have been informed to the ASX as soon as feasible. Any information on the hazards associated with the Fundao dam prior to its collapse was not made public by BHP. As a result, by neglecting to do so, BHP violated its responsibilities to provide the ASX with continuous information. Consequently, investors and stockholders had no idea of the dam’s dangers.

Section 674 Breach of Continuous Disclosure

Sec. 728 of the Corporations Act (Cth) deals with omissions and new items that have arisen as the disclosure document was submitted and that would have been required to be written in the disclosure document if they had occurred prior to the disclosure document being lodged, as per sections 710-715.

A civil liability will be imposed on BHP if the new item in question (the concealed risks associated with the dam) has a significantly negative impact on an investor’s decision-making process (s728).

Due to the company’s failure to disclose to the marketplace the possible dangers associated with the Fundao dam’s collapse, BHP’s share price traded higher than it should have. If s728 is violated, this is a criminal offence, and shareholders may claim for resulting damages under s728.

Under s729, the firm, directors, and individuals identified in the paper may also be responsible, as they owed a statutory responsibility to the market under sections 674 and 677 of the Corporations Act to disclose the dangers of the Fundao dam’s imminent failure.

Conclusion

As a result, BHP Billiton is a publicly listed company as defined under s706 of the Corporations Act (Cth). The business breached Sections 674 and 677 of the Securities Exchange Act of 1934 by failing to disclose new, significantly adverse information to the investors about the likely failure of the Fundao Dam. Shareholders who purchased shares at an inflated price have experienced a loss and may bring a lawsuit under s728 to recover their losses.

Kind regards,

Flinders Partners

Consultants and Corporate Advisors

Legal Advice: Future Energy Ltd Fundraising

The Corporations Act 2001 defines Future Energy Ltd as a public company with limited liability, as suggested by the ‘Ltd’ in its company name, and as such, Future Energy Ltd is a public corporation with limited liability (Cth).

Debt financing and equity financing are the two most common methods of capital for publicly traded firms.

Debt financing gives access to cash at the expense of periodic interest payments that can be fixed or variable in nature, as well as repayment of the original amount owed. This can be obtained by the issuance of a debenture, bank financing, private debt, or trade financing. A debenture is the most appropriate financing structure for Future Energy Ltd.

In addition, interest charges on debt financing are generally tax deductible, and there is no requirement that the company generate profits to cover interest payments. In addition, the lender will not be admitted as a member and will have no voting privileges.

Remedies available to Shareholders under section 728

Equity finance gives access to money at the expense of selling shares in a company’s common stock.

The firm will profit from discretionary dividends (with the exception of preference shares), and shareholders will bear the risk if the company performs badly or becomes insolvent in accordance with Section 556 of the Corporations Act, 2001. Disclosure requirements will be implemented in accordance with the intended market for the equity issue (s727 & s706 of the Corporations Act 2001).

Nevertheless, the directors should be aware that dividend payments do not qualify for a tax deduction, and that if the value of the company grows as a result of the share issuance, the business will not profit. It is also possible that existing owners would have their shares diluted, which might be perceived as a negative from the perspective of the shareholder.

I will go over the financial and legal ramifications of raising capital through equity investments.

s124; Future Energy Ltd is a business that can issue shares, whereas corporations limited by guarantee are not allowed to. It is also permitted to issue bonus, partially-paid, preferred and redeemable preference shares under Section 254A, and it has the authority to set its own share issuance terms under Section 254B.

Voting rights can be preserved by issuing preference shares if the board of directors chooses to do so at the expense of a set preferential dividend and principal repayment. Alternatively, I would suggest issuing private placements of ordinary shares. It is possible, however, to use s254A (2) to specify the rights of shareholders in a company’s constitution.

Is it required by law for investors, including current shareholders and staff of Clean & Green Ltd., when an offer of securities is made to create disclosure documents?

Since shares of a corporation are categorised as a security under s92(4), and since s700(2) makes it plain that an “offer” is defined as encouraging applications, Future Energy Ltd will have to give information to investors until the criteria of s708 are satisfied.

A disclosure statement and AASB-compliant audited financial statements are necessary if the board of directors want to offer shares to the public through a market operator. Preparation for a 9.5-million-dollar capital raising may be prohibitively expensive and require an inordinate amount of time.

For the sake of the company, I urge that the board of directors use a private placement to raise capital from a select group of high-net-worth investors. Unlike public offers, private share issuances would be less time demanding.

According to Section 708(8), the minimum amount payable for the securities is $500,000 or more.
S708(10) applies to high-net-worth investors with gross income more than $250,000 and net assets of minimum $2.5 million.
The definition of a professional investor in section 9 includes entities like a super fund, an APRA regulated organisation, or a financial services licensee, with a minimum threshold of no less than $10 million in net assets to qualify.

Conclusion

Future Energy Ltd will not be obliged to file disclosure documentation in respect of offers for share issuances under Section 708 of the Companies Act. Because Future Energy Ltd needs $9.5 million in capital, it’s best to raise the money privately by selling ordinary or preference shares to people who don’t work for the company (at director discretion). This would avoid having to meet very strict disclosure rules, which can be expensive and time-consuming, so doing so would be a good idea.

Kind regards

A Articles/Books/Reports

Narayanan, MP, “Debt versus Equity under Asymmetric Information” (1998), Journal of Financial and Quantitative Analysis, vol. 23, no. 1, pp. 39–51

Opler, Tim C. and Titman, Sheridan, The Debt-Equity Choice: An Analysis of Issuing Firms (November 1994).

Sánchez et al, “Impacts of the Fundão Dam failure” (2018), A pathway to sustainable and resilient mitigation, Rio Doce Panel Thematic Report No. 1. Gland, Switzerland: IUCN. <

https://portals.iucn.org/library/sites/library/files/documents/2018-038-En.pdf>

B Cases

Burland v. Earle [1902] A.C. 83

Vince Impombianto v BHP Billiton Limited; VID649/2018

C Legislation

Corporations Act 2001 (Cth) s 92.

Corporations Act 2001 (Cth) s 148.

Corporations Act 2001 (Cth) s 124.

Corporations Act 2001 (Cth) s 254.

Corporations Act 2001 (Cth) s 556.

Corporations Act 2001 (Cth) s 674.

Corporations Act 2001 (Cth) s 677.