Amendments made to NSW Co-operatives Act

Under s.146A of the Co-operatives Act 1992 (NSW) (the Act) a trading co-operative must provide a disclosure statement to a person intending to take up shares as a new member of the co-operative. This section has been amended and three new sections inserted by the Co-operatives Legislation Amendment Act 2001, to prescribe new requirements relating to the content, issue and currency of disclosure statements.

The following is brief summary of the disclosure statement requirements to facilitate discussion on the operation of the new provisions. The information contained herein should not be viewed as legal advice or as providing an exhaustive review of the application of the new provisions to trading co-operatives or other persons. Co-operatives should seek their own professinal advice on the application of the new provisions.

Current Disclosure Statement

Section 146A of the Act now imposes an obligation on the board of a trading co-operative to issue a "current disclosure statement" to persons applying for membership and shares in the co-operative. An applicant who does not receive a current disclosure statement will not be bound to acquire shares in the co-operative. However, the member will be precluded under s.74(1)(b) of the Act from enjoying the privileges of membership until such time as the person acquires the minimum number of shares specified in the rules of the co-operative.

What is a Current Disclosure Statement?

A current disclosure statement consists of:

• In the case of a newly formed co-operative - the formation disclosure statement; or
• A disclosure statement which complies with the requirements specified under s.146B of the Act, and which has been filed with the Registrar.

What is Required for a Disclosure Statement to comply with s.146B?

Under s.146B a disclosure statement must contain:

• A statement of rights and liabilities attaching to shares in the co-operative; and
• A copy of the last annual report unless the report has been given to the members or has been made available for inspection in accordance with s.76A; and
• Any other relevant information about the financial position and prospects of the co-operative; and
• Any other information required by the Registrar.

Note: At this stage there has been no indication from the NSW Registry of Co-operatives as to the type of additional information that may be required by the Registrar. However, it is anticipated that the Registrar will issue a circular in relation to the new requirements which may cover this issue.

Application of the Provisions under the Corporations Law

There a number of sections under the Fundraising provisions of the Corporations Act 2001 that have been applied (with modifications) under s.146D of the Co-operative Act to the issue of a disclosure statement. These provisions are:

• Section 716(2) (Consent of person to whom statement attributed); and
• Section 722 (Application money to be held on trust)
• Section 723 (Issuing or transferring shares under a disclosure statement)
• Section 724 (Choices open to person making the offer if the disclosure document condition not met or disclosure document is defective)
• Section 725 (Expiration of disclosure statement)
• Section 728 (Misstatement in, or omission from, disclosure statement)
• Section 729 (Right to recover for loss or damage resulting from contravention)
• Section 730 (People liable on disclosure statement to inform person making the offer about deficiencies in the disclosure document)
• Section 733 (General defences for all disclosure statements)
• Section 734 (Restrictions on advertising and publicity)
• Section 737 (Remedies for investors)

Note: There is some uncertainty as to the extent of the application of the above sections owing to the limited nature of the modifications specified in s146D.

Of particular relevance to the content of a disclosure statement, are the provisions ss.716 and 723 of the Corporations Act.

Section 716 precludes the issue of a disclosure statement containing a statement by a person, or a statement based on a statement by a person, unless:

• the person has consented to the statement being included in the disclosure statement in the form and context in which it is included: and
• the disclosure statement indicates the person has given his or her consent; and
• the person has not withdrawn his or her consent before the disclosure statement is lodged with the Registrar.

Section 723 requires an application form to be included in a disclosure statement, and precludes a co-operative issuing or transferring shares to a new member unless the issue or transfer is made in response to an application form from a current disclosure statement.

In addition, where a disclosure statement of a trading co-operative indicates that shares will not be issued or transferred until a minimum number of applications are received or a minimum amount raised, the co-operative must not issue or transfer shares to new members until that condition is satisfied.

When does a Disclosure Statement Cease to be Current?

Section 146B provides that a disclosure statement ceases to be current when:

• There is a change in the rights or liabilities attaching to any class of shares; or
• There is a significant change in the financial position of the co-operative; or
• The next annual report becomes available to members.

Note: There is no mention under this section of a disclosure statement ceasing to be current where the document contains a misleading or deceptive statement. However, a board of a trading co-operative will be required to amend any disclosure statement which contains a misleading or deceptive statement and to lodge the amended statement with the Registrar. See the section on Misstatement in, or Omission from, Disclosure Statement below.

In the case of a newly formed co-operative, the formation disclosure statement will cease to be current when the first annual report becomes available. However, where there are significant changes in the financial position of the co-operative the board would be expected to lodge an updated version of the disclosure statement with the Registrar. This will require adjustments to be made to the financial information provided under the formation disclosure statement. In addition, the board of a new co-operative will be required to monitor the disclosure statement to ensure that it does not contain any information which, with the passing of time, has become false or misleading.

Application Money to be held on Trust

A trading co-operative will be required to hold on trust all money received from potential members for the issue or transfer of shares. The money is to be held on trust until the shares applied for are issued or transferred, or until the money is returned to the applicant. Where a co-operative is required to return money to an applicant, the co-operative must do so as soon as possible.

Registrar to be informed when a disclosure statement ceases to be current

The board of a trading co-operative must inform the Registrar when a disclosure statement ceases to be current. The notice must be given in writing within 14 days after the date on which the disclosre statement ceased to be current and must specify the nature of the change which has affected the currency of the disclosure statement. For example, a statement that there has been a change in the rights and responsibilities attaching to particular class of share, or that there has been a significant change in the financial position and prospects of the co-operative.

Note: Notification is not required where a new a new annual report becomes available. However, the board of trading co-operative will be expected to take steps to update the disclosure statement and to file the amended statement with the Registrar, where it intends to transfer or make an issue of shares to new members.

Misstatement in, or Omission from, Disclosure Statement

A trading co-operative, or any other person, is precluded from offering the co-operative's shares under a disclosure statement if there is a misleading or deceptive statement in the disclosure statement, or in an application form that accompanies a disclosure statement. An applicant who suffers loss or damage because of an offer of shares under the disclosure statement may recover damages from:

• the co-operative;
• the directors of the co-operative;
• the person responsible for making misleading or deceptive statement,
• any person involved in the offer of shares under the disclosure statement.

Choices Open to Co-operative if Disclosure Statement Condition Not Met or Disclosure Statement Defective

Essentially, the co-operative will have three alternatives, where a condition specified in the disclosure statement has not been met or where the disclosre statement is defective. These are:

• Repay the money received by the co-operative pursuant to the disclosure statement
• Give the applicants
  1. A supplementary or replacement disclosure statement that corrects the deficiency or changes the terms of the offer; and
  2. One month to withdraw the application and be repaid; or
• Issue or transfer shares to the applicants and give them
  1. A supplementary or replacement disclosure statement that corrects the deficiency or changes the terms of the offer; and
  2. One month to withdraw the application and be repaid.

Note: The supplementary or replacement disclosure statement must comply with s146B of the Act and must be lodged with the Registrar.

Restrictions on Advertising and Publicity

A trading co-operative, or any other person, is precluded from advertising, or publishing a statement that directly or indirectly refers to an offer of the co-operative's shares to prospective members without having a current disclosure statement under s146A. The same applies to the advertisement of an offer or intended offer for shares in the co-operative, and to the publication of a statement, which is reasonably likely to induce people to apply for shares in a co-operative (albeit as part of an application for membership) are also precluded.

Note: A trading co-operative in breach of these requirements will be liable to a penalty of $2,750 or imprisonment for 6 months or both.

A trading co-operative will not breach the advertising or publicity provisions if, before a disclosure statement is lodged with the Registrar, an advertisement or publication is made containing nothing more than:

• a statement that identifies the offeror and the shares;
• a statement that a disclosure document for the offer will be made available when the shares are offered; or
• a statement that anyone who wants to acquire shares will need to complete the application form that will be in, or will accompany, a current disclosure statement; or
• a statement of how to arrange to receive a copy of the current disclosure statement.

General Exemption to the Advertising and Publication Provisions

An advertisement or publication does not contravene the Act if it:

1. consists solely of a notice or report of a general meeting of the co-operative; or
2. consists solely of a report about the co-operative that is published by the co-operative and:
   1. does not contain information that materially affects affairs of the co-operative other than information previously made available in a disclosure statement that has been lodged, an annual report or a report referred to in paragraph (a) or (b); and
   2. does not refer (whether directly or indirectly) to the offer; or

Similarly, an external advertisement or publication does not contravene the Act if it:

1. is a news report or is genuine comment, in a newspaper or periodical or on radio or television relating to:
1. a disclosure statement that has been lodged or information contained in such a disclosure statement; or
2. a notice or report published by the co-operative; or
2. is a report about the shares of the co-operative or proposed co-operative published by someone who is not:
1. the co-operative; or
2. acting at the instigation of, or by arrangement with, the co-operative; or
3. a director of the co-operative; or
4. a person who has an interest in the success of the issue or sale of the shares.

There is no exemption for an external advertisement or publication where a person gives consideration or other benefit for publishing the report.

There is also an exemption for any person who publishes an advertisement or statement in contravention of the disclosure statement provisions where the advertisement or statement is made in the ordinary course of publishing a newspaper or magazine, or in broadcasting by radio or television. To claim the exemption it must be shown that the person had no reason to suspect that its publication would amount to contravention of the disclosure statement requirements.

Boards of Trading Co-operatives Must Review Disclosure Statements

Given the application of the misleading and deceptive statement provisions, the board of a trading co-operative must undertake a regular review of the contents of its disclosure statement to ensure that there is nothing contained in the document which is misleading or deceptive. Also it must ensure that there has been no change which will affect the currency of the disclosure statement under s.146A.

A co-operative must not attempt to offer shares, or make invitations to subscribe for shares under a disclosure statement that contains misleading or deceptive information or which is no longer current. There will be an obligation on the co-operative to amend the disclosure statement where there is a misleading or deceptive statement or where the disclosure statement is no longer current. The amended statement should be lodged with the Registrar as soon as possible after the amendments have been made.

Registrar May Exempt a Co-operative From The Disclosure Requirements

Under s146C, the Registrar may exempt the board of a trading co-operative, or a class of trading co-operative, from the disclosure requirements under ss146A and 146B. However the Registrar may only grant an exemption if he is satisfied that compliance with the requirement would be inappropriate in the circumstances or would impose an unreasonable burden on the co-operative or class of co-operative.

An exemption may be granted by the Registrar with or without conditions. A breach of a condition set by the Registrar will remove the operation of the exemption rendering the board of the offending co-operative in breach of ss146A and 146B, and liable for breaches of the provisions of the Corporations Act as applied under s.146D.

Trading Co-operative's to Seek Legal Advice if in Doubt

Where a trading co-operative is in doubt as to the application of the new disclosure provisions it should contact its legal representative immediately.