THE Australian Securities and Investments Commission is currently scrutinising companies that fundamentally alter the direction of their business to incorporate Internet-based and ‘hi-tech’ assets.
ASIC announced this stance after becoming aware of many instances of such companies disseminating documents with inadequate disclosure prior to shareholder meetings which are held to discuss the acquisition of ‘hi-tech’ assets.
In a recent case, a junior explorer proposed to acquire an Internet site and associated intellectual property rights in exchange for an issue of shares, which gave the vendor a considerable interest in the company.
In scenarios such as this, the Corporations Law requires the company to obtain the approval of its shareholders for the share issue to occur.
In addition, members must be given an information memorandum and independent experts’ reports to allow proper consideration of the transaction.
In this particular instance, ASIC reviewed the information memorandum and independent experts’ reports and found considerable deficiencies.
The company was warned ASIC would consider enforcement action if the documents were sent out in their current form.
Deficiencies included that the independent expert (an accountant) accepted the book value of the company’s exploration tenements without independent valuation by a geologist or similar mining expert.
In addition, the independent expert made statements about the expected usage and financial viability of the Internet site without detailing the grounds for such comments.
ASIC chief accountant Jan McCahey said when a company aims to make a fundamental change to its core business direction, it amounts to asking shareholders for the first time whether they want to invest.
“In these cases, shareholders should get the same quality of information as they would get in a prospectus for an initial public offering,” she said.
“ASIC will look very carefully at any proposed change of business by a company to ensure the information provided to members of the company – in particular any independent expert’s or specialist’s report – is accurate and useful.
“ASIC and ASX will also cooperate to ensure that companies do not try to get around the provisions of the Corporations Law and Stock Exchange Listing Rules requiring a proposed change of business to be approved by members,” she said.
