Brierely Investments Pty Ltd v Australian Securities Commission & Anor [1997] FCA 889 (5 September 1997)

Last Updated: 21 September 1998

FEDERAL COURT OF AUSTRALIA

CORPORATIONS - Power of Australian Securities Commission to refer certain conduct in relation to shares to the Corporations and Securities Panel - Sections 732 and 733 of the Corporations Law - Whether unacceptable circumstances had occurred - Meaning of "substantial interest" - Discussion of Eggleston Principles - Sections 615 and 618 of the Corporations Law

CORPORATIONS - Corporations and Securities Panel - Conflict of interest - Decision to hold an inquiry - Power of President to choose members - Section 185 (2) of the Australian Securities Commission Act 1989 (Cth)

STATUTORY INTERPRETATION - ss 615,618, 732, 733 of the Corporations Law

WORDS & PHRASES - "substantial interest"

Corporations Law ss 615, 618, 731, 732, 733, 736A

Australian Securities Commission Act 1989 (Cth) ss 171, 185, 188

Companies (Acquisitions of Shares) Act 1980 (Cth) s 60

Australian Securities Commission Regulations (Cth) rr 20, 22

Sagasco Amadeus Pty Ltd v Magellan Petroleum Australia Ltd [1993] HCA 14; (1993) 177 CLR 508 applied

Cullen v Wills (1991) 31 FCR 19 considered

Elders IXL Ltd v NCSC [1987] VR 1 applied

Australian Securities Commission v Deloitte Touche Tohmatsu (1996) 138 ALR 655 applied

BRIERLEY INVESTMENTS LIMITED (ARBN 002 982 407) & ORS

v AUSTRALIAN SECURITIES COMMISSION & ANOR

NG 659 of 1997

EMMETT J

SYDNEY

5 SEPTEMBER 1997

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 659 of 1997

BETWEEN:	BRIERLEY INVESTMENTS LIMITED (ARBN 002 982 407) FIRST APPLICANT GODINE CAPITAL LIMITED (ACN 009 237 290) SECOND APPLICANT YELLOW RIDGE NOMINEES PTY LIMITED (ACN 076 764 826) THIRD APPLICANT HARLESDEN SECURITIES PTY LIMITED (ACN 009 218 151) FOURTH APPLICANT
AND:	THE AUSTRALIAN SECURITIES COMMISSION First Respondent JOHN PASCOE Second Respondent DENIS BYRNE Third Respondent WARWICK HIGGS Fourth Respondent GRAHAM STANFORD Fifth Respondent MERRILL LYNCH (AUSTRALIA) FUTURES LIMITED (ACN 003 639 674) Sixth Respondent MLAE NOMINEES PTY LIMITED (ACN 066 325 746) Seventh Respondent

JUDGE(S):	EMMETT J
DATE:	5 September 1997
PLACE:	SYDNEY

REASONS FOR JUDGMENT

HIS HONOUR: The second, third and fourth applicants (respectively "Godine", "Yellow Ridge" and "Harlesden") are subsidiaries of the first applicant ("BIL"). The applicants ("the BIL Companies") seek orders of review under the Administrative Decisions (Judicial Review) Act 1977 (Cth) and section 39B of the Judiciary Act 1903 (Cth) in relation to:

(a) decisions made by the first respondent ("the ASC") under section 733 of the Corporations Law ("the Law"),

(b) the decision of the second respondent ("Mr Pascoe"), as President of the Corporations and Securities Panel established under section 171 of the Australian Securities Commission Act 1989 (Cth) ("the ASC Act"), to direct that the fourth and fifth respondents (respectively "Mr Higgs" and "Mr Stanford") be among the members constituting the Panel for the purposes of performing and exercising its functions or powers in relation to an application made by the ASC pursuant to section 733 of the Act; and

(c) the decision of the third respondent ("Mr Byrne") and Messrs Higgs and Stanford ("the Panel Members") to hold an enquiry in relation to that application.

BACKGROUND

John Fairfax Holdings Limited ("Fairfax") is a public company listed on Australian Stock Exchange Limited ("ASX"). On 16 December 1996, BIL acquired a relevant interest in approximately 19.98 per cent of the issued shares of Fairfax by reason of the acquisition of those shares by subsidiaries of BIL. Those shares were acquired from Daily Telegraph Holdings BV ("DTH"), the ultimate holding company of which was Hollinger International Inc. ("Hollinger"). Up to 16 December 1996, DTH held 25 per cent of the issued shares of Fairfax.

On 10 January 1997, Merrill Lynch & Co. Inc. ("Merrill Lynch") or subsidiaries of Merrill Lynch acquired 4.99 per cent of the issued shares of Fairfax from DTH or other subsidiaries of Hollinger. On 27 March 1997 the sixth respondent or the seventh respondent (respectively "MLAF" and "MLAE" and together "the Merrill Lynch Companies") acquired those shares in Fairfax.

On 27 March 1997, five equity Swap Contracts ("the Swap Contracts") were entered into between MLAF and Harlesden whereby MLAF was obliged to pay to Harlesden or was entitled to receive from Harlesden a sum calculated by reference to a formula. Included in the elements of the formula were a number of shares in Fairfax and the volume weighted average trading price of shares in Fairfax on the respective dates stated therein ("the Valuation Dates"). The numbers of shares in the first three Swap Contracts and their Valuation Dates were as follows:

Number of shares	Valuation Date
7,500,000	17 June 1997
8,500,000	24 June 1997
6,751,905	27 June 1997

On each of the Valuation Dates, MLAF sold on ASX and one or other of the BIL Subsidiaries purchased the following numbers of shares on the dates specified:

Number of shares	Date of Purchase
7,500,000	17 June 1997
8,500,000	24 June 1997
6,700,000	27 June 1997

Thus, the BIL Subsidiaries acquired a total of 22,700,000 shares in Fairfax which comprised approximately 3 per cent.

On 15 August 1997 the ASC made an application to the Panel under section 733(1) of the Law for a declaration under section 733(3) of the Law that the purchase of those shares in Fairfax by the BIL Subsidiaries and conduct of the BIL Companies and the Merrill Lynch Companies in relation to the shares of Fairfax was unacceptable conduct. On the same day, the ASX issued a media release stating that the ASC had applied to the Panel "for a declaration that certain trading in shares of [Fairfax] by [MLAF] and [BIL] was unacceptable conduct." The ASC, in its application to the Panel, contends that the Swap Contract was structured so as to constitute an incentive to MLAF to sell on ASX on its Valuation Date the number of shares specified in it and an incentive to the BIL Companies to purchase on the Valuation Dates the number of shares so made available for sale by MLAF. It is not necessary for me to outline the basis upon which ASC contends that such incentives arise although I should record that the BIL Companies strongly contest that the incentives necessarily arise. There could well be other factors which would have a bearing on whether such sales or purchases might occur.

The ASC states in its application to the Panel, that by reason of the conduct by the BIL Companies and MLAF and MLAE the shareholders of Fairfax other than MLAF were denied the opportunity:

(a) to sell Fairfax shares to BIL and its subsidiaries to enable BIL to give effect to its desire to acquire a further 3 per cent parcel in Fairfax;

(b) to buy Fairfax shares made available by MLAF on each of the Valuation Dates in the knowledge that they were bidding against BIL Companies and could subsequently sell their shares to BIL at a premium to enable BIL to give effect to its desire to acquire a further 3 per cent parcel in Fairfax.

It appears to be contended that those shareholders of Fairfax did not have the same opportunity as MLAF to participate in any benefits accruing in connection with the proposed acquisition by the BIL Companies of such an interest in Fairfax. The essence of the complaint appears to be that, because of the incentives alleged, the BIL Companies, in effect, have the benefit of knowing that they could acquire 3 per cent after the expiration of the relevant six month period at a price fixed before that period expired. It is argued that the price was, in effect, fixed on 27 March 1997 when the Swap Contracts were entered into. Whether those contentions are made out, of course, would be a matter for the Panel after considering all of the relevant material before it.

On 22 August 1997, Mr Pascoe directed that the Panel Members would constitute the Panel for the purpose of performing or exercising its functions in relation to the application made by the ASC. On the same day, Mr Pascoe consented to Messrs Higgs and Stanford taking part in the performance or exercise of the Panel's functions in relation to the matter the subject of the ASC's application, notwithstanding disclosure by each of them to Mr Pascoe of interests which each of them had which could conflict with the proper performance of their functions in relation to the matter.

FRAMEWORK OF THE DECISION OF THE ASC

Section 733(1) of the Law provides that where it appears to the ASC that unacceptable circumstances have, or may have occurred either in relation to an acquisition of shares in a company or as a result of conduct engaged in in relation to shares in a company, the ASC may apply to the Panel for a declaration under section 733(3) in relation to the acquisition or the conduct. Under section 733(3) where, on such an application, the Panel is satisfied that unacceptable circumstances have occurred in relation to such an acquisition or such conduct and that, having regard to certain matters, it is in the public interest to do so, the Panel may declare the acquisition to have been an unacceptable acquisition or the conduct to have been unacceptable conduct.

Under section 732(1) of the Law, unacceptable circumstances are to be taken to have occurred (relevantly) if, and only if:

(a) the shareholders and directors of a company did not know the identity of a person who proposed to acquire a substantial interest in the company; or

(b) the shareholders and directors of a company did not have a reasonable time in which to consider a proposal under which a person would acquire a substantial interest in the company; or

(c) the shareholders and directors of a company were not supplied with enough information for them to assess the merits of a proposal under which a person would acquire a substantial interest in the company; or

(d) the shareholders of a company did not all have reasonable and equal opportunities to participate in any benefits, or to become entitled to participate in any benefits, accruing, whether directly or indirectly and whether immediately or in the future, to any shareholder or to any associate of a shareholder, in connection with the acquisition, or proposed acquisition, by any person of a substantial interest in the company; or...

Section 736A(2) of the Law, which applies where the ASC makes an application under section 733(1), provides that the ASC may publish a report, statement or notice which states that the application has been made, states the name of the company whose shares are the subject of the application and the name of any other person to whom a declaration, if made, would relate.

Thus, it is a prerequisite of the exercise of the power conferred by section 733, that it must appear to the ASC that unacceptable circumstances have, or may have, occurred in relation to an acquisition of shares or as a result of conduct in relation to shares. The BIL Companies seek to impugn the determination made by the ASC that it appeared that unacceptable circumstances had or may have occurred and the decision to make an application to the Panel under section 733(1) for a declaration under section 733(3).

There are two bases upon which the determination and the decision are impugned. First it is said that each of the determination and the decision was made without jurisdiction, was not authorised by section 733 and involved an error of law in that neither the acquisitions of shares referred to above nor any conduct engaged in by the BIL Companies in relation to those shares was capable of constituting "unacceptable circumstances" as that term is defined in section 732 of the Law. Secondly, it is said that, in making the determination and in making the decision to apply to the Panel, the ASC failed to afford the BIL Companies the opportunity to be heard on whether the determination or the decision should be made.

UNACCEPTABLE CIRCUMSTANCES

The first contention turns on the use in section 732 of the expression "a substantial interest in a company". It is contended by the BIL Companies first that, having regard to the scheme of Chapter 6 of the Law, shares not exceeding 3 per cent of the issued share capital of a company could not, as a matter of law, constitute a substantial interest in a company. Alternatively, it is contended that, in the circumstances concerning Fairfax known to the ASC, it could not have appeared that unacceptable circumstances had or might have occurred because the shares acquired by the BIL Subsidiaries could not, in those circumstances, constitute a substantial interest in Fairfax.

Scheme of Chapter 6

There is no definition of the term "substantial interest" in the Law. However, the circumstances which may constitute unacceptable circumstances are generally regarded as arising from the failure to observe principles referred to as the "Eggleston principles". The Eggleston principles were formulated in the Eggleston Report (Second Interim Report, February, 1969, Command 144) which was a report to the Standing Committee of Attorneys-General relating to disclosure of substantial shareholdings and takeover bids. The report contains the following:

16. We agree with the general principle that if a natural person or corporation wishes to acquire control of a company by making a general offer to acquire all the shares, or a proportion sufficient to enable him to exercise voting control, limitations should be placed on his freedom of action so far as is necessary to ensure-

(i) that his identity is known to the shareholders and directors;

(ii) that the shareholders and directors have a reasonable time in which to consider the proposal;

(iii) that the offeror is required to give such information as is necessary to enable the shareholders to form a judgment on the merits of the proposal and, in particular, where the offeror offers shares or interests in a corporation, that the kind of information which would ordinarily be provided in a prospectus is furnished to the offeree shareholders;

(iv) that so far as is practicable, each shareholder should have an equal opportunity to participate in the benefits offered.

It may be significant that the expression "substantial interest" is not to be found in that statement which is concerned with acquiring "control" of a company. Nevertheless, in Sagasco Amadeus Pty Ltd v Magellan Petroleum Australia Ltd [1993] HCA 14; (1993) 177 CLR 508, the High Court observed that the object of Chapter 6 of the Law is generally to ensure compliance with the Eggleston principles. For example, Part 6.7 imposes obligations to provide substantial shareholding notices. That corresponds with the principle found in section 732(1)(a). Section 638 concerning the contents of offers, gives effect to the principle in section 732(1)(b). Section 750, requiring offerors to provide Part A statements or Part C statements, the requirements of which are specified with some particularity in the Law, gives effect to the third principle stated in section 732(1)(c). Finally, section 635, which deals with full offers and proportional takeover schemes and sections 697 and 698, which deal with benefits not generally available, correspond with the fourth principle stated in section 732(1)(d).

Further, Part 6.9, where sections 732, 733 and 736A are to be found, provides some flexibility in the regulation of the acquisition of shares in circumstances where the literal operation of the regulatory regime is either unnecessarily restrictive or ineffective to achieve the object of Chapter 6. Thus, under section 728, the ASC is empowered to exempt persons from compliance with Chapter 6. Under section 730 the ASC is empowered to declare that Chapter 6 should apply in relation to specified persons as if provisions of the Chapter were omitted, modified or varied. Where such a declaration is made, Chapter 6 applies accordingly. Under section 731, in exercising those powers, ASC must take account of the desirability of ensuring that the acquisition of shares in companies takes place in an efficient, competitive and informed market and must have regard to the need to ensure that the Eggleston principles are observed. In that context, it is clear enough that the regime involving the Panel established by Part 6.9 is designed to ensure regulation of the acquisition of shares over and above the provisions contained in the balance of Chapter 6 and, more specifically, contained in Part 6.2 which is concerned with the control of the acquisition of shares (see Black CJ in Cullen v Wills (1991) 31 FCR 19 at 24-25). That is also borne out by the following statement in the explanatory memorandum relating to the Bill for the Companies (Acquisition of Shares) Act 1980 , the predecessor of sections 732 and 733.

170. The purpose of this provision is to discourage activities which would frustrate the aims of the code. This is to be achieved by the NCSC having power to act in those circumstances where it considers that the acquisition or conduct does not satisfy certain criteria in the clause.

Moreover section 109H of the Law provides that the Law should be interpreted according to the object and purpose underlying the Law. Thus, the object of sections 733 and 732 appears to be to cover situations where, while there has been strict compliance with the Law, there has been a transaction or conduct which, nonetheless, contravenes the Eggleston principles. The real complaint of the ASC in this case, is that other players in the market did not know that Fairfax shares were being traded on the Valuation Days and that they were being acquired by the BIL Companies.

If the expression used in the statement of the Eggleston principles was "significant interest" rather than "substantial interest", it would be very easy to conclude that, in the particular circumstances of a specified company, the smallest proportion of issued shares could constitute a significant interest, having regard to the numbers of shares held by other shareholders. Nevertheless, while "substantial" is susceptible of ambiguity and is calculated to conceal a lack of precision, it may signify a shareholding interest which is real or of substance, as distinct from ephemeral or nominal (per Deane J in Tilmanns Butcheries Pty Ltd v Australasian Meat Industry Employees Union [1979] FCA 84; (1979) 42 FLR 331 at 348), a shareholding interest of a material nature or of real worth or value (Macquarie Dictionary [Macquarie University, Sydney, 1981]) or a shareholding interest which is of real significance or is important (Shorter Oxford Dictionary, Oxford University Press, Oxford, 1993). A very small proportion of the issued share capital of a company might be material or significant in particular circumstances. Whether such circumstances had been made out in a particular case would ultimately be a matter for the Panel.

In Elders IXL Ltd v NCSC [1987] VR 1 Marks J, in rejecting a submission that section 60 of the Companies (Acquisition of Shares) Code, a predecessor of section 733, applied to certain acquisitions of shares and certain conduct, concluded that the parcel of shares in question was not a "substantial interest" within the meaning of those parts of section 60 which correspond with section 732(1). His Honour said (at 17-18):

It is unnecessary to give definitive meaning to the expression "substantial interest" in the subsection. At the very least, in my opinion, it must be understood in the context of the takeover Code. It may well be that its meaning cannot be defined by reference to a stated percentage or a minimum percentage, but that the question as to what is or is not a "substantial interest" for the purpose of the subsection is to be determined according to the circumstances of a particular case. But its meaning in a particular case must attach to a step in the direction of takeover or change in corporate control. It is not to be considered in a vacuum as relating solely to size. The size must have relationship to a threat or potential threat to the stability of corporation control.

The BIL Companies and the ASC accept that statement as correct except that the ASC contends that the last sentence is incorrect because it confines too narrowly the meaning to be given to the term "substantial interest". I would be disposed to accept the statement of Marks J as correct, although I do not consider that that difference is significant in the present case. As a matter of language, therefore, I consider that an interest not greater than 3 per cent is capable of being a substantial interest.

The essence of the first contention of the BIL Companies is the effect of section 618, which appears in Part 6.2. The pivotal provision of Part 6.2 is section 615 which, except as otherwise provided by Chapter 6, prohibits a person from acquiring shares in a company if (relevantly) any person who is entitled to less than 20 per cent of the voting shares in the company would, immediately after the acquisition, be entitled to more than 20 per cent of the voting shares in the company. Section 618, on the other hand, provides that section 615 does not prohibit an acquisition of voting shares because of the effect of the acquisition on the entitlement to voting shares in the company in certain cases. Those cases are where (and I simplify) a relevant person has been entitled to not less than 19 per cent of the voting shares for a continuous period of not less than six months and the number of shares acquired does not exceed 3 per cent of the total shares. The application proceeded before me on the basis that, because of the operation of section 618, the acquisitions of shares by the BIL Companies did not contravene section 615.

The primary object of Part 6.2 is not to prohibit acquisition of shares in excess of 20 per cent absolutely but to ensure that any such acquisitions occur only in circumstances where the Eggleston principles are observed. For example, the primary exceptions to section 615 are sections 616 and 617. Section 615 does not apply in relation to an acquisition of shares as a result of the acceptance of an offer made under a takeover scheme or under a takeover announcement. Offers are made under a takeover scheme or under a takeover announcement only if detailed provisions of the Law are complied with ensuring that the Eggleston principles are observed. The significance of section 618, in contrast, is that it constitutes an express contemplation of acquisition of parcels of up to 3 per cent and every 6 months in circumstances where there is no requirement that the Eggleston principles be observed.

The BIL Companies contend that the acquisition, under section 618, of not more than 3 per cent of the shares in a company can never constitute the acquisition of a "substantial interest" in that company. It is contended that section 732 must be interpreted in the light of section 618 which places no restriction on the manner in which the 3 per cent is acquired. The acquisition is not required to take place on market or at market prices. If the acquisition of 3 per cent of the issued shares under section 618 was capable of constituting the acquisition of a "substantial interest", then the Panel, so it is said, would be required, by the definition in section 732, to find any acquisition which took place off market to constitute "unacceptable circumstances" even though such an acquisition appears to be specifically authorised by section 618. That is to say, non observance of the Eggleston principles is sufficient for the occurrence of unacceptable circumstances. It would emasculate significantly the effect of section 618 if 3 per cent of the shares constituted a "substantial interest".

There is no suggestion that any transaction presently under consideration was in any way prohibited. Nor is there any suggestion that the Merrill Lynch Companies were acting in concert with the BIL Companies or otherwise "associated" with BIL (or that BIL was associated with them) in any of the ways contemplated by Division 2 of Part 1.2 of Chapter 1 of the Law when Merrill Lynch acquired approximately 4.9 per cent of Fairfax on 10 January 1997 or at any other relevant time. Nor is there any suggestion that the Swap Contracts were contrary to any relevant policy or guidelines of the ASC.

Reliance was placed by the Merrill Lynch Companies on the observations made in NCSC Policy Statement Release 105 dealing with the interpretation of section 60 of the Companies (Acquisition of Shares) Act and Code. In that policy statement, the following view was expressed:

The term "substantial interest in any company"... normally involves an interest which affects control by being a parcel which may influence either a change of or maintenance of existing control. The term must also be read in conjunction with thresholds set by the Companies Act and Codes (the Companies Code). The Commission will have regard therefore, for the purpose of determining what constitutes a "substantial interest"... to the definition of "substantial shareholding" in the Companies Code.

At the time when the statement was made, a substantial shareholding was 10 per cent under section 136(9) of the Companies Code, although it is now 5 per cent.

Thus, the Merrill Lynch Companies contend, that the term "substantial interest" can attach only to a parcel which is of significance in the context of corporate control. It is contended that the word "substantial" is used, in the context of Parts 6.9 of the Law, in a relative sense, that is "of significance to corporate control". In contrast with other provisions in Chapter 6 which contain mechanisms to ensure that interests in shares are aggregated for particular purposes, there is nothing in section 732 which suggests that a "substantial interest" must be assessed having regard to the prior shareholding of the party who acquires or proposes to acquire the interest. Thus, it is contended, section 732 assumes that a substantial interest must be of such size, apparently standing alone, as to attract the operation of all the Eggleston principles. Since Chapter 6 recognises that parcels of 3 per cent can be acquired by a party already entitled to 19 per cent or more without any of the Eggleston principles being observed, a parcel of up to 3 per cent of the shares cannot constitute a substantial interest for the purposes of section 732.

The ASC, on the other hand, contends that the scheme of sections 732 and 733 is intentionally unspecific and that, in particular circumstances, any number of shares, no matter how small in relation to the total issued shares of a company, may, having regard to all of the circumstances concerning the company, constitute a substantial interest in that company. The ASC contends that assistance can be gleaned from the use of the expression "substantial shareholder" in section 708 of the Law. That term is defined as a person holding 5 per cent of the issued shares of the company. Such a person, upon becoming a substantial shareholder, is required to notify the company and ASX upon reaching that threshold and is then required to notify every 1 per cent change thereafter. It is said, therefore, that holdings at least as small as 5 per cent can be characterised, within that scheme, as being "substantial".

It is clear that section 618 contemplates that there may be an acquisition of no more than 3 per cent every six months without observance of the Eggleston principles. Of necessity, an off market acquisition without notice to other shareholders, and without those other shareholders having the opportunity of being able to compete for the sale of the 3 per cent sought to be acquired, ignores the Eggleston principles. Accordingly, it is clear that section 618 would be significantly emasculated if the Eggleston principles were required to be observed in relation to any acquisition satisfying section 618.

However, the complaint is not only about the purchases themselves but about the conduct of the BIL Companies and the Merrill Lynch Companies from March, prior to the expiration of the period of six months from the time when the BIL Companies first became entitled to more than 19 per cent of the shares in Fairfax, leading up to the acquisition in June. Section 733 is enlivened where it appears to the ASC that unacceptable circumstances have, or may have, occurred, not only in relation to an acquisition of shares, but also as a result of conduct engaged in in relation to shares in a company. Section 733(3) empowers the Panel to make a declaration, where it is satisfied that unacceptable circumstances have occurred as a result of conduct engaged in in relation to shares in a company, that the conduct was unacceptable conduct.

The ASC's application to the Panel seeks a declaration that the conduct briefly recounted above constituted unacceptable conduct in relation to shares in Fairfax. The application contains the following:

The ASC considers that the conduct of BIL and MLAF described above constitutes or may constitute unacceptable circumstances pursuant to paragraphs 732(1)(a), (b) and/or (d) of the Corporations Law ("the Law").

The ASC applies for a declaration by the Panel that the BIL Purchases, and each of them, and/or related conduct constitute unacceptable conduct in relation to the shares in, or affairs of, Fairfax engaged in by:

(a) BIL and its subsidiaries;

(b) MLAF; and

(c) MLAE.

The essence of the complaint relates to the Swap Contracts. While there is no suggestion that those arrangements contravened the Law in any way or were otherwise unlawful, they are said to have had the consequence that the BIL Companies expected that Merrill Lynch Companies would make available for sale 22.7 million Fairfax shares in the same numbers and on the same dates as the actual purchases and that the Merrill Lynch Companies expected that the BIL Companies would seek to purchase those numbers of shares on those dates. That consequence was because BIL had previously stated its intention to acquire 3 per cent of the shares in Fairfax after 16 June 1997, the first day on which it could take advantage of section 618 and because the swap arrangements created economic incentives for both of the parties to effect sale or purchase in the respective numbers and on the respective dates of the actual purchases. The market generally was not informed of the existence of the swap agreements and, accordingly, shareholders in Fairfax did not have the same advantage which the Merrill Lynch had of knowing in advance that BIL Companies would be in the market place on the relevant dates.

One difficulty with such a case, of course may be that the BIL Companies had in fact stated their intention to acquire 3 per cent of the shares in Fairfax on the first day on which it was permissible for them to do so under section 618. Since the purchases in question were made on ASX, all Fairfax shareholders, at least in theory, had the same opportunity as the Merrill Lynch Companies, on the respective dates of the purchases, to offer shares for sale on ASX. That, however, is not a question for me but is a matter for the Panel to determine.

Once it is accepted that, as a matter of language, an interest of 3 per cent can constitute a substantial interest the question arises as to whether the policy of section 618 overrides the policy of section 733. There is no specific indication which would justify reading into section 732 the arbitrary limit contemplated by section 618. The very aim of section 733 is to allow a degree of flexibility, notwithstanding strict compliance with Part 6.2 generally.

Further, a declaration of unacceptable conduct is, of course, predicated on the Panel being satisfied that it is in the public interest to make such a declaration as well as being satisfied that unacceptable circumstances have occurred. Having regard to the clear policy of section 618, arbitrary though it may be, the ASC and the Panel would be slow to make a declaration where an acquisition is made in accordance with section 618 and relates to a small proportion of the issued shares in a company. Nevertheless, I do not consider that, simply because conduct is authorised by section 618, it is not capable of constituting unacceptable circumstances.

It is at least arguable that the Eggleston principles were not observed in relation to the Swap Contracts, at least in the sense that, if the Swap Contracts gave the Merrill Lynch Companies a benefit in connection with the proposed acquisition by the BIL Companies of the parcels in question, the other shareholders of Fairfax did not have the same opportunity to participate in that benefit. Thus it was open to the ASC to conclude that unacceptable circumstances may have occurred as a result of conduct in relation to shares in Fairfax, namely entering into the Swap Contracts and selling and buying shares in Fairfax with the knowledge of their effect. It follows that the first contention of the BIL Companies must be rejected.

The circumstances of Fairfax

The alternative way in which the BIL Companies contend that no "substantial interest" was involved requires a detailed analysis of the material before the ASC upon which it based its determination that unacceptable circumstances had or may have occurred. Thus, it was said that, even if a parcel below 3 per cent can constitute a substantial interest, the shares in question did not, in the circumstances of Fairfax as apparent to the ASC, constitute a parcel which could amount to a substantial interest. The issue was formulated as being whether an increase in the holding in Fairfax from 19.9 per cent to 22.9 per cent posed any threat or potential threat to the corporate control of Fairfax and that, if it did not, the 3 per cent could not be regarded as a substantial interest.

There are twelve directors of Fairfax, only two of whom are nominees of BIL. There is no basis, it was said, for suggesting that a right or an arrangement, pursuant to which 2 directors out of 12 can be appointed by BIL could constitute control of the board. Further, there is no suggestion of any arrangement with any of the other substantial shareholders of Fairfax that additional directors be appointed at the nomination of the BIL Companies. BIL is not the only shareholder of Fairfax with a significant parcel of shares. In addition to BIL's interest of 22.97 per cent, Publishing and Broadcasting Limited has an interest of 11.78 per cent, Bankers Trust has an interest of 12.97 per cent and Permanent Trustee has an interest of 8.6 per cent. The proportion of shares held by those four substantial shareholders is at most 56 per cent and, accordingly, the proportion of shares not in the hands of substantial shareholders is at least 44 per cent , on the assumption that all substantial shareholders have complied with their obligations to notify a 1 per cent change in substantial shareholdings.

It is asserted that the BIL Companies cannot, by using their voting powers, impose their will on Fairfax if the other shareholders or a substantial body of them do not agree. There was no suggestion that there is any association between the BIL Companies on the one hand and any other shareholder of Fairfax on the other hand. There is not a broad spread of shareholding and, accordingly, it was said, the relatively large parcels held by the other substantial shareholders dilute the effect of holding 22 per cent of the shares and has the consequence that an increase from 19 per cent to 22 per cent is of no significance.

It is said that the acquisition of the additional 3 per cent cannot, in the circumstances of Fairfax, be said to involve, in any way, a change in control or a step along the way to a change in control, particularly having regard to the fact that Commonwealth Government policy would not permit BIL, as a foreign person, to acquire more than 25 per cent of the issued shares of Fairfax.

Thus, it is said, because of the other substantial shareholdings and because of the restrictions on foreign ownership, the BIL Companies will not be able to control Fairfax even with the additional 3 per cent. Accordingly, since the question of whether a parcel is a substantial interest must be gauged by reference to whether it confers control or its acquisition is a step along the way to a change in control, the parcel in question could not, in the present circumstances, amount to a substantial interest. Alternatively, no reasonable decision-maker could come to the view that the acquisition in question was an acquisition of a substantial interest.

The difficulty which I perceive with this argument is that whether the acquisition of the parcels in question could be a step along the way to a change in control is a matter to be considered by the Panel in the light of the material which comes before it. The ASC, according to a statement contained in its application to the Panel, was of the view that a holding of 25 per cent was sufficient for Hollinger to enable exercise of control of the affairs of Fairfax. The BIL Companies strongly dispute that as a fact. However, it appears to me that that is a matter which may depend upon an assessment of all the relevant material. I do not consider that I can conclude that it was not possible for the ASC, acting reasonably, to form the view that Hollinger had exercised control of the affairs of Fairfax with a holding of 25 per cent of the issued shares. Further, I do not consider that it has been shown that the Panel could not conclude that the acquisition of the parcels in question could not in any circumstances constitute a step along the way to a change in control of Fairfax.

It is significant that section 733(1) is enlivened when something "appears to" the ASC. The meaning of the expression "it appears to" was considered by the Full Court in Australian Securities Commission v Deloitte Touche Tohmatsu (1996) 138 ALR 655. While the expression does not mean that a decision is beyond a challenge, it will only be in exceptional circumstances that a Court would conclude that it could not have reasonably appeared to the ASC that the shares in question might have constituted a substantial interest. While a determination based upon a clear error of law may be impugned, it is not necessary for the ASC to demonstrate that unacceptable circumstances have or may have occurred. It is enough if it appears to the ASC, albeit acting reasonably, that unacceptable circumstances have occurred. It may be that the ASC will ultimately be shown to have been erroneous in the determination which it made. That is a matter for the Panel. It follows that the alternative contention of the BIL Companies must also be rejected.

PROCEDURAL FAIRNESS

It was conceded by the BIL Companies, on the basis of this Court's decision in Edelsten v Health Insurance Commission (1990) 27 FCR 56, that the decision to make an application under section 733(1) was not subject to challenge. Further, no challenge was made as such to the decision to make a statement under section 736A(2). Nevertheless, it was argued that because the decision to make the press release was made in close proximity to the decision to make an application under section 733 and before the application to the Panel had actually been made by the ASC, there was a duty to afford procedural fairness to the BIL Companies before making the application. I do not consider that the fact that the decision to make the media release was made in close proximity to the decision to make an application to the Panel and before the application had actually been made to the Panel constitutes circumstances such as to give rise to a right to be heard. I do not consider that the additional circumstances of the media release make the decision to apply to the Panel any different from the circumstances considered by the Court in Edelsten's case.

Reference was made to the observations of the High Court in Ainsworth v Criminal Justice Commission [1992] HCA 10; (1992) 175 CLR 564 at 579 to the effect that reputation is an interest attracting the protection of the rules of natural justice. While I accept that the publication of the media release was capable of causing harm to the reputations of the BIL Companies and the Merrill Lynch Companies, the determination to make the application to the Panel and the publication of the Media Release are of a different character from the finding which was under consideration in Ainsworth v Criminal Justice Commission. There, the report in which the finding was made was the final step in the discharge by the Commission of its functions and responsibilities. Here, the decision is no more than a step or stage in bringing the matter in question before the Panel where procedural fairness must be accorded to the BIL Companies.

Considerations relied on by the BIL Companies in relation to the circumstances of Fairfax suggest that there may well be significant hurdles in the way of a finding that the parcels in question do, in the circumstances of Fairfax, consitute a substantial interest. The possibility that the BIL Companies may have been able to provide information on that question is a reason why it may have been sensible for the ASC to consult with the BIL companies before making its decision to make an application to the panel. Nevertheless, I have concluded that there is no entitlement to such consultation and, accordingly, I reject the contention based on procedural unfairness.

THE DECISION OF MR PASCOE AS PRESIDENT

Section 184(1) of the ASC Act provides that the Panel is to be constituted, for the performance or exercise of its functions in relation to a particular matter, by three members in respect of whom a direction is in force in relation to that matter. Under section 184(2) the President of the Panel may give directions about the members who are to constitute the Panel in relation to particular matters. As I have said, Mr Pascoe gave a direction that Messrs Byrne, Higgs and Stanford constitute the Panel in relation to the matter which is the subject of the ASC's application.

Under section 185(1) where a member is a member of a Panel in relation to a particular matter and the member has any interest, pecuniary or otherwise, that could conflict with the proper performance of the member's function in relation to that matter, the member must disclose the interest to the President and, except with the President's consent, the member must not take part in the performance or exercise of the panel's functions or powers in relation to the matter. Further, under section 185(1A) the President must not consent to a member taking part in the performance or exercise of the panel's functions in relation to a matter unless the President believes, on reasonable grounds, that the member's interest is immaterial or indirect and will not prevent the member from acting impartially in relation to the matter.

Messrs Higgs and Stanford both disclosed matters pursuant to section 185. The disclosures were communicated to the BIL Companies in the following terms:

Mr Warwick Higgs

Mr Higgs was a director of Tourang Limited until April 1992 and resigned when the public offering was made. Mr Higgs was a director of Australian Consolidated Investments Ltd until it was taken over by the BIL Group at which time he resigned. Mr Higgs owns 32 shares in John Fairfax Holdings Limited ("Fairfax").

Mr Graham Stanford

Mr Graham Stanford has an indirect interest in Fairfax shares in that his family company owns 20,000 shares which were acquired in the original float in May 1992.

Mr Pascoe has formed the view that the members' interests are immaterial or indirect and will not prevent those members from acting impartially in relation to the matter, for the purposes of s.185(1)(a) of the ASC Act. Mr Pascoe has consented to those members taking part in the performance or exercise of the Panel's functions or powers in relation to the matter, pursuant to s.185(1)(b) of the ASC Act.

The BIL Companies did not challenge that Mr Pascoe believed that the interests of Messrs Higgs and Stanford were immaterial or indirect and would not prevent them from acting impartially in relation to the matter. However, it was contended that there were not reasonable grounds for that belief.

Mr Pascoe swore an affidavit containing the following, which was not challenged in cross-examination.

9. I also noted from paragraph 3 of Mr Higgs' disclosure that he owned 32 shares in Fairfax. I considered that no professional person of Mr Higgs' standing would be influenced in his judgement by such a holding.

10. I refer to the disclosure made to me by Mr Stanford on 21 August and to the document which I executed on 22 August concerning Mr Stanford (Annexure "D"). In reviewing that disclosure and giving the consent referred to in paragraph 6 above in relation to Mr Stanford:

(a) I knew that Mr Stanford had been a partner in a major accounting firm for a considerable period, and was also a member of the Administrative Appeals Tribunal ("AAT"). I also knew that Mr Stanford was held in high regard in the business community.

(b) I noted that the disclosure made by Mr Stanford related to shares which were held by his family company. I formed the opinion that the 20,000 shares in Fairfax held by that family company were inconsequential and immaterial, having regard to the capital structure of Fairfax.

(c) I also considered that, having regard to Mr Stanford's character and professional background, and his having been accustomed to sit on the AAT and to act in an impartial way in performing that role, a holding of those shares by a family company would not affect his judgement in any way.

(d) I considered that, although one possible outcome of an inquiry by the Panel would be to require BIL and its associated companies to sell the parcel of shares which were the subject of the Fairfax Application, there was no real or sensible possibility of Mr Stanford or his family company having an interest in the making of such an order, which could conflict with the performance of his duty as a member of the Panel.

It was contended that there would be a reasonable suspicion of bias against BIL on the part of Mr Higgs because he was a director of a company which was acquired in a hostile takeover by BIL and was effectively removed by BIL following the takeover. However, no challenge was made to Mr Pascoe in cross-examination concerning the reasonableness of the belief he formed that any interest which Mr Higgs was immaterial or indirect. There was no evidence concerning the circumstances of the takeover in question and I am not satisfied that there was a basis for concluding that there was any suspicion of bias on the part of Mr Higgs.

It was contended that Mr Pascoe's reasoning as outlined in paragraph 10 was flawed. First it was said that it was irrelevant that the 20,000 shares in Fairfax held by Mr Stanford's family company were inconsequential and immaterial. The real question was the significance of those 20,000 shares to Mr Stanford or his family company and the extent to the which the possible effect on the market in or value of Fairfax shares might have been material to him. That is probably so. However, Mr Stanford's interest in shares in Fairfax was by reason that his "family company" owned 20,000 shares. There was no evidence as to the relationship between Mr Stanford and his "family company", for example, whether he was a shareholder or possibly an object of a trust in which the "family company" was trustee. Nor was there any evidence as to the significance of that holding in relation to the other assets of the family company or the assets of Mr Stanford personally. The question of Mr Pascoe's reasoning in concluding that he would give his consent under section 185(1)(b) was not pursued in cross-examination. It seems that Mr Pascoe had some knowledge of Mr Stanford and his circumstances and the extent of the knowledge was not explored. I do not consider that the BIL Companies have discharged the burden of demonstrating that Mr Stanford's genuinely held belief was not held on reasonable grounds.

Alternatively, it was contended on behalf of the Panel that, in any event, the decision to consent to Messrs Higgs and Stanford taking part in the performance of the Panel's functions was occasioned by necessity. Reference was made to Laws v Australian Broadcasting Tribunal [1990] HCA 31; (1990) 170 CLR 70. Mr Pascoe gave evidence that he had been informed, or the Secretary to the Panel had been informed and had told him, that all other members of the Panel were for one reason or other unable or unwilling to constitute the Panel to deal with the ASC's application. In the light of the conclusion which I have reached above, it is unnecessary to decide this question.

DECISION TO HOLD AN INQUIRY

Under section 733(5) of the Law, the Panel may only make a declaration under section 733(3) if it has given each person to whom the declaration relates an opportunity to make submissions to an inquiry conducted by the Panel in relation to the matter. Under section 188(1) of the ASC Act, the Panel may hold inquiries for the purposes of the performance or exercise of any of its functions and powers. Division 3 of Part 10 of the ASC Act regulates the manner in which inquiries are to be conducted.

Regulation 20 of the Australian Securities Commission Regulations ("the ASC Regulations") provides that as soon as practicable after receiving an application by the ASC, the Panel must decide whether to hold an inquiry and, if it decides to do so, prepare a brief setting out specified particulars. Under regulation 22, if the Panel decides to hold an inquiry, it must, within five business days after receiving the application, give a copy of the brief to the ASC and to each company to which or person to whom the application relates.

By letter of 22 August 1997 from the secretary of the Panel, the BIL Companies, Merrill Lynch Companies and Fairfax were informed of the Panel's determination to hold an inquiry and were invited to lodge written submissions addressing the issues identified in the brief which was enclosed with the letter. That determination to hold an inquiry is impugned on the basis that it was made without jurisdiction, was not authorised by section 733 and involved an error of law in that the acquisition of the shares and the conduct engaged in by the BIL Companies in relation to those shares did not constitute and were not capable of constituting "unacceptable circumstances" within the meaning of section 732. The contention is that referred to above in relation to the determination of the ASC that it appeared to it that unacceptable circumstances had occurred. The rejection of that contention also resolves this question.

CONCLUSION

There were questions raised by the respondents as to the jurisdiction of the Court to grant relief against the ASC. In the light of the conclusions which I have reached above it does not appear necessary to consider those questions and it appears to me that the application should be dismissed with costs. However, the proceedings have been heard with some urgency having regard to the time constraints imposed on the Panel by the Law and I have not necessarily dealt with all questions in the proceedings with the thoroughness which I would have desired. In the circumstances I propose to publish my conclusions for the benefit of the parties and to defer making any orders until the parties have had an opportunity to consider my reasons. The parties may then make any submission they wish as to the appropriate orders.

I certify that this and the preceding twenty-two (22) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett

Associate:

Dated: 5 September 1997

Counsel for the Applicants:	T.F. Bathurst QC T.G.R. Parker
Solicitor for the Applicants:	Blake Dawson Waldron
Counsel for the First Respondent:	S.D. Rares SC T.D. Castle
Solicitor for the First Respondent:	Australian Securities Commission
Counsel for the Second, Third, Fourth and Fifth Respondents:	M. A. Pembroke SC Nye Perram
Solicitor for the Second, Third, Fourth and Fifth Respondents:	Mallesons Stephen Jacques
Counsel for the Sixth and Seventh Respondents:	J. J. Spigelman QC A.J. Payne
Solicitor for the Sixth and Seventh Respondents:	Allen Allen & Hemsley
Date of Hearing:	2 September 1997
Date of Judgment:	5 September 1997