We would appreciate five minutes of your time to complete this survey on the commercial impact of the controversial High Court decision in Sons of Gwalia v Margaretic (2007).

In Sons of Gwalia, a shareholder alleged that he had been induced to buy shares in an ASX-listed company as a result of the company’s misleading conduct. The High Court held that the shareholder had the same rights as an unsecured creditor on the subsequent winding up of the company to lodge a claim against the company’s assets for the shares’ loss in value.

In this case, the company’s alleged misconduct arose from a breach of its continuous disclosure obligations in failing to advise the ASX of changes in its operations that meant it could no longer operate as a going concern.

This is arguably a decision with many winners and losers. Some shareholders would appear to benefit at the expense of a company’s external creditors. Insolvency administrations may become ‘bogged down’ with an expanded field of claimants. Companies may have greater difficulties in capital raising.

This survey is being conducted jointly by Chartered Secretaries Australia (CSA) and TurksLegal (a specialist insolvency law firm), each of whom will be surveying their members and clients respectively. The separate responses may be used to support individual submissions by CSA and TurksLegal to CAMAC. Together we will look at both sets of responses to issue a joint press release, so that the information from those involved in governance and those seeking insolvency law services is available for public discussion and debate.

1. All things considered, the Sons of Gwalia decision will have a positive impact for Australian businesses and investors:

a) Agree                                                 37%
b) Disagree                                              56%
c) The decision will have a neutral impact   0%
d) Unsure                                                  7%

2a. If you agreed, why do you believe Sons of Gwalia will have a positive impact overall?

i) Shareholders need to have their compensation claims protected where they have been the victims of corporate misconduct and the company becomes insolvent 31%
ii) The decision promotes confidence in the capital markets because it deters companies from knowingly misleading investors
69%
iii) Other, please comment:

Shareholders with valid claims for misleading and deceptive conduct against a company should not be placed in a worse position than other claimants
only where there is proven misconduct by the company
Sons of Gwalia has in effect provided another basis for shareholders to claim damages which complements the continuous disclosure obligations under the Corps Act and ASX Listing Rules.

2b. If you disagreed, why do you believe Sons of Gwalia will have a negative impact overall?

i) Voluntary administration and winding-up proceedings would become more complex and time-consuming to the detriment of all claimants 20%
ii) Some shareholders would gain too much influence over the outcome of administrations through, for example, being able to vote at creditors’ meetings, even if in the end, they cannot substantiate their claim     7%
iii) It would split the rights of shareholders, based on how and when they bought shares
20%
iv) The decision would disrupt the normal operation of capital markets by blurring the important distinction between debt and equity whereby shareholders traditionally assume greater risk for higher returns and creditors assume lower risk for limited returns        31%
v) Companies will find it more difficult or expensive to raise unsecured debt capital
12%
vi) Financiers concerned about their risk exposure will place stricter limits on funds available on an unsecured basis      7%
vii) Trade creditors may be less inclined to extend credit   3%
viii) Other, please comment:

Other valid claims against the company must already be considered in a winding up. Valid claims by a shareholders can be accommodated within the existing regime for dealing with claims by a liquidator. The effect of the decision should not be overstated.
Equity investment is about risk and return. Decisions such as Sons of Gwalia attempt to reduce the risk of investing, however the flow on effect is the reduction in returns due to factors such as increased compliance costs.
All of the above particularly i),ii) & vi) plus it will encourage more "debateable" or arguably spurious claims by disaffected shareholders willing to have a go at making a recovery from liquidators who must choose between the cost of 'fight' or settle.
All of the above plus it effectively changes the fundamentals of our company laws which state that shareholders rank last in a wind up. Shareholders take a risk in investing and benefit if the shares gain in value. By ranking them together with creditors it makes a mockery of the age old distinction between shareholders and creditors and effectively means that shareholders they would be taking on less risk yet possibly gaining a benefit in which a creditor does not participate

3. How should Australian policy-makers and legislators respond to Sons of Gwalia?

a) Retain the Sons of Gwalia decision so that aggrieved shareholders can continue to participate as unsecured creditors in an administration or liquidation 17%
b) Amend the law to reverse the effect of Sons of Gwalia so that aggrieved shareholders would not be entitled to participate as unsecured creditors such that their claims would rank equally with ordinary shareholder claims 50%
c) Amend the law to reverse the effect of Sons of Gwalia so that aggrieved shareholders would not be entitled to participate as unsecured creditors but to allow their claims to rank above ordinary shareholder claims 33%
d) Other, please comment:

Amend the law to reverse the effect of Sons of Gwalia so that aggrieved shareholders would not be entitled to participate as unsecured creditors but to allow their claims to rank above ordinary shareholder claims
Valid claims should be accommodated within the existing regime
Set serious minimum gaol sentences/penalties for offending directors/officers
Only where there is proven misconduct by the company

And finally, a few questions about you and your organisation:

4. Please describe your main role in your organisation:

a) Governance/ compliance                 20%
b) Legal                                            17%
c) Finance                                         30%
d) Management                                   17%
e) Other, please comment:                  16%
(Other includes professional services with two employee directors; self employed share trader; consultant and senior management)

5. Please describe your organisation:

a) Listed public company                      36%
b) Unlisted private sector organisation    50%
c) Public sector organisation                 0%
d) Other, please comment:                    14%
(Other includes consultants)

6. In which industry sector does your organisation operate?

a) Banking and capital markets                      10%
b) Communications and entertainment             6%
c) Consumer products, retail and leisure          6%
d) Energy, chemical and utilities                      6%
e) Government                                              2%
f) Health services                                           2%
g) Industrial products and manufacturing        10%
h) Insurance and investment management      10%
i) Real estate and construction                         0%
j) Technology                                                 0%
k) Professional services                                  29%
l) Other, please comment:                              22%
(Other includes food and service industry; listed property trust/managed funds; waste management; retail and wholesale; consultanta; retail share dealings)