BSL201 Finance Law Workshop Questions Chapter 3

Question One

Answer the following (only short answers are required):

 Complete the sentence “If a coy wishes to raise funds it must issue a…..”
o Disclosure documents
 Name the types of Disclosure documents (DD’s)
o Short Form prospectus
o Profile statements
o Offer information statement
o CSF offer documents
 Why is disclosure necessary?
o To prevent misleading information to investors
o To provide warning to investors for decision making of pursuing investments
o To provide protections for investors
 In terms of the DD’s which of them require the preparation of a prospectus?
o Short form prospectus
o Profile statements
 Can a pty coy issue a DD?
o No, proprietary companies cannot solicit money from the public under S113(3)
 How does a pty raise funds?
o Debt fundraising by borrowing money from a financier
 Why are there situations where disclosure (by public company) is not required?
o Only those exempted under S708 or S708(a) or falls within Pt 6D.3A in relation to
crowdfunding
o These offerings are usually small scale, or to sophisticated investors or the company
is not the principal of the transaction
 What is the relevant section that provides these exceptions and what types of exceptions
are involved?
o S708 or S708(a)
 Small scale offers of less than 20 pax subscribing less than $2 million dollars
worth of securities
 Transaction with sophisticated investors who subscribe $500k or have net
asset of $2.5m or annual gross income of over $250k and above
 Transacted through licensed dealer so company is not the principal
 Transact with related parties
 Offer to existing debenture holders
 Transaction with no consideration involved
 Takeovers
 How would you describe the obligation of s710 in terms of content of a prospectus?
o S710 is a general disclosure requirement where entity is obligated to disclose all
relevant information to investors, their advisers that they are expecting the
prospectus to contain to assist with their decision-making process and only if a
person whose knowledge is relevant.
o S710 requires company to disclose: -
 Offer to issue shares, debentures, or interests in a managed investment
scheme
 Offer to grant a legal or equitable interest in securities or grant an option
over securities

 How would you describe the obligation in terms of content for a OIS (offer information
statement)
o It must include an audited financial report with a balance date in the preceding 6
months. However, under S715(1), the document directs investors to obtain their
professional advice prior to decision making

 What happens if that person fails in the obligation imposed under any of the content
requirements for any of the DD’s?
o S729 allows investors who suffered loss or damages as a result of relying on the
incomplete information contained in disclosure documentation to obtain
compensation against the company, directors and underwriters.
o S728(1) can cause company to pay compensation and are subject to criminal
sanctions, including imprisonment
 Explain the defence of due diligence.
o Defence of due diligence falls under S731 Corporation Acts.
o S731 applies to prospectus and this defends against S729 whom investors are trying
to obtain compensation for investment loss against the company for relying on their
disclosure documentation
o The party involved made all reasonable inquiries and reasonably believed that the
statement was not misleading or no omission of required information
 How does this defence differ from the defence of lack of knowledge?
o Defence of lack of knowledge falls under S732 Corporation Acts.
o S732 applies to OIS and provides defence only if the party concerns did not know
that the statement was misleading or omitted
Question Two

What is a company’s gearing ratio and what effect does it have on investors?

It is a measurement of financial leverages that demonstrates the degree of a firm’s operations are
being funded by equity or debt where a highly equity financed company are considered lowly
geared.

If a company is highly geared, and income declines, investors may get lower or no dividend as
company will prioritise paying off debt first.

Question Three

What are the differences between a CSF Offer Document and a small scale offering?

CSF Offer Document allow unlisted public companies, with both consolidated gross assets and
revenue each less than $25m, raise up to $5m in 12-month period from and subject to a $10k
investment limit in any 12-month period and also applies a cooling off period of 5 business days for
retail clients.

Small scale offers of less than 20 pax subscribing less than $2 million dollars’ worth of securities and
no disclosure is required.

Question Four

What is a debenture, who issues it , who holds it and how is it secured?

Debenture is the right to enforce a company’s undertaking to repay a debt.

Borrowing company issues debenture based on their financial creditworthiness to the lending
investors and the lending investors hold the debentures.

It is usually secured by a security interest over company’s assets until the debt is repaid
Question Five

Slackbank lends Shady Corporation Limited (‘the company’) $30,000 secured by a charge over
various items of personal property owned by the company (‘the collateral’). Subsequently the
company grants another charge over the collateral in favour of Westbank. Both charges, each of
which was granted by the company signing a security agreement, were registered under the
Personal Property Securities Act 2009 (Cth) but Slackbank’s charge was not registered until after that
of Westbank, which was unaware of its existence at the time the charge in its favour was created.

a) Advise Slackbank whether its charge will take priority over that of Westbank. Give reasons for
your answer.
Explain security interest
Explain the concept of attachment – occurs when the PP is identified and security agreement is
signed
Perfection i.e. when registration occurs - note the process in the textbook associated with the
registration of security interest
General rule applies: -
- registered charges takes priority over unregistered charges
- first registered charge prevailed over subsequent registered charge
- a postponed registered charge prevailed over subsequent registered charge provided with proof
- Amongst all unregistered charge, first create will prevail
Therefore, in this case, Westbank registered first which prevails over Slackbank under S280.
b) Would your answer be different if neither charge had in fact been registered?
Yes, if both are unregistered, the first created will prevail. Hence, in this case, Slackbank was first
charge created and thus, it prevails.