ISX Interlocutory proceeding (ISX vs. ASX) – Summary and opinion

The purpose of this postis to provide a high-level summary of the ISX vs. ASX Interlocutory proceedingsheld 16-4-2020. A “play-by-play” rendition of the day was posted by jacklesd on the ISX thread Ann: Commences Federal Court Action against ASX.

The purpose of this postis to pull the day together and to provide some personal observations at theconclusion of this document. This post has been compiled from copious notes and my memory of the proceedings and for this reason, it should not be considered a flawless account of the day. All care and consideration have been taken to ensure it is as accurate as possible, however, and I encourage a reading of the court transcripts when they are released. Additions and corrections are welcome.

ISX’s interlocutoryapplication was essentially to block until matters are heard at trial, therelease of ASX’s final reasons for the ISX suspension and the directions orderwhich is based on those reasons. The participants:

· Judge: Davies

· QC for ISX: Collinson

· Barrister for ASX: Button

To support Justice Daviesin making such a decision, submissions by Collinson for ISX and Button for ASXcovered such questions as (but not limited to):

1. Whether ASX has been operating within the scope oftheir statutory powers,

2. Whether ASX has been acting honestly, fairly and ingood faith and/or reasonably as implied in the listing rules,

3. Whether the court should separate the issues of ASX’sright to publish their “reasons” from their right to give directions prior tothe determination of the full court case.

4. In what direction the balance of convenience lies,that is, whether the relief to the ISX is greater than the injury that will bepotentially done to the ASX in relation to restraining ASX from releasing itsreasons document to the market and giving directions to ISX related to thosereasons.

To these points, I submitthe following:

1. Has ASX been operating within the scope of their statutory powers?

Collinson, for ISX stated he placed his reliance on the Corporationsact for his submissions on the statutory powers of ASX. He put forward the argument that revised Listing Rule 18.8 which was only recently introduced as an amendment in Dec 2019 (just before the first draft document was provided to ISX) is invalid because it gives powers that do not exist in the Corporations Act. It is believed that ASX relied on listing rule18.8 to provide the powers to assign the specific directions to ISX. Collinson’s stated criticism of the rule is that it provides such extraordinary powers upon the market licensee in conflict with the corporations act that doubt must surface as to the validity of this newly introduced and amended rule. Collinson also pointed to 792C which confers a statutory right to be heard upon a listed entity (ISX) if an entity has been given directions by ASX or ASIC and 1101b which indicates that if a listed entity has not complied with a listing rule and the market licensee (ASX) makes application to the court on that basis, a statutory protection for the listed entity exists that states that the court can only make an order if the court is satisfied it doesn’t unfairly prejudice the entity (ISX). 792 A, sub-section 1 empowers the market licensee (ASX) “to the extent that it is reasonably practicable to do so, do all things necessary to ensure the market is a fair orderly and transparent market.” To this, Collinson stated that information of the character revealed by the final reasons in their present form to be released to market is not consistent with a fair, orderly and transparent market since ISX strongly challenges those findings. He added that if ISX is right with respect to important aspects of the “reasons” document and a criticism has to be withdrawn after a trial, then “in the interim, the market will not have been a fair orderly and transparent market.”

Button, however, appeared to rely more on the listing rule 18.8 and inrelation to the listing rule 18.8 validity argument, she argued thatCollinson’s claims that the amendments to 18.8 confers new powers. Button states it is an expansion in the nature of the kinds of directions that can be made and that the current 18.8 is about giving directions. There is actually agreement here, it is the extent of the new powers to give directions and the concern that the right to due process may not be assumed in the revised version that appears to concern Collinson.

There is also common ground between Collinson and Button in theiragreement that ASX has a right to investigate and the right to suspend. But Collinson says that these activities must be acted on honestly, fairly and in good faith and/or reasonably.

There is also common ground between ISX and ASX that ASIC and ASX havethe right to undertake an investigation in the same “factual substratum”, butISX’s point is that ASIC has the tools to not only require people to producedocuments but also to call on people to come in for questioning and so contends that the kind of activity such as the investigation of ISX could more appropriately be done by a body with the powers and the staff capable of a complex investigation rather than a market licensee. Collinson pointed out that none of the information that ASX wants to release has been based on any contact in the form of interviews with any officers of ISX but that it has been based entirely on “a desktop survey” of documents ISX has provided to ASX.

2. Has ASX acted honestly, fairly and in good faith and/or reasonably as implied in the listing rules in the manner that ASX has carried out the investigation and in their wish to release to the market their reasons for the continued suspension and directions?

Collinson suggested thatthey have not. Collinson expressed several concerns. Firstly, he sites that it is recognised in the Memorandum of Understanding (MOU) between ISX and ASX, that disclosure in the course of conducting an investigation or enforcement action is undesirable and may jeopardise enforcement actions. Collinson interposed the observation that it is generally recognised worldwide that investigators don’t give a running commentary during investigations. My note: Even ASIC will not comment on an issue while that issue is in the process of being investigated. ASX, on the other hand, has been allowed to have that running commentary on the questions they are asking and the answers provided by ISX and they now wish to publish reasons that, in Collinson’s words “reflect uncertainty” while ASX and ASIC are still continuing investigations.

Collinson noted the thatthe comments in the reasons document “reflect uncertainty, lack clarity andfailure to make up its mind” on the part of ASX with regards to what their trueposition is with regards to matters concerning ISX. Some examples provided by Collinson include such phrases as

o It is not clear to ASX...,

o Raises concerns that...,

o ASX considers there is a reasonable argument that...,

o There are serious questions to be determined as to whether...,

o Out of the ordinary...,

o This begs the question...,

o Factual underpinning may be missing...,

o ASX remains concerned that...,

o This information gives ASX pause to question whether..., and so on.

Collinson also maintainedseveral times throughout his submission that ASX took into considerationirrelevant information while not taking into consideration relevantinformation. Collinson pointed Justice Davis to an exhibit that contains evidence by ISX individuals made under oath which denies conclusions expressed in the ASX’s reasons document. Collinson confirmed that the responses, provided under oath, are information and belief because that is how interlocutory applications are conducted. Collinson also pointed out the table in the exhibit that identifies each paragraph in ISX’s response, describes the response, and provides the person who confirms and supports the response and the source of the information in the response. Collinson pointed out that a large number of people who have been the source of the factual statements in the ISX response are listed in the table and pointed out the page on which their position in the company was identified.

Collinson maintained thatnot only did ASX not take into consideration this information which wasprovided under oath, but the “reasons” report also contains accusations of astatutory nature which are not part of ASX’s responsibilities which are merelyto monitor and enforce compliance with the listing rules.

Button stated in replythat it was reasonable to include the unconfirmed question of abuse of astatutory rule because it supported the reasons for the continued suspension inthat it was being investigated by ASIC.

Button also countered theargument that it needed to act reasonably by stating “It has not been acceptedby ASX in its pleading that it has an obligation to act reasonably in eithersense” and further states that by reference in their submission to the case lawand reference to the Chapman decision that even if ISX is correct that there isan implied obligation of reasonableness, this reasonableness must satisfy theWednesbury test for reasonableness, not mere reasonableness.”

NOTE: Definition Wednesbury unreasonableness: A reasoning or decision is Wednesbury unreasonable (or irrational) if it is so unreasonable that no reasonable person acting reasonably could have made it.

3. Should the court consider separately the issues ofASX’s right to publish reasons from their right to give directions prior to thedetermination of the full court case?

Collinson made the pointin his oral submission that ISX did not know at the time of formulating theirsubmission that ASX was going to attempt to split these issues and the judgeappeared to concur with this statement. Collinson did add, however, that the reasons for continued suspension and the reasons for producing the directions are in the same document and it would be artificial to split it.. He said their obvious complaint is that ISX will seek to get injunctions at the trial that application of 18.8 is invalid or, “exercised in a way that is a breach of duty”. He says also that if ISX were to comply with the directions before to the trial, then an injunction would no longer be possible.

Collinson also statedthat it might be valid to enforce the directions if there was potential realharm to ASX or shareholders, but that this did not apply since there was notrading issue since ISX is under continued suspension. It also appears that in ASX’s submission there must have been a suggestion (in support of releasing reasons and directions) that there had been some off-market trading. Collinson pointed out that there had been only one case in which some kind of off-market trading occurred since October 2, the date of the suspension, and that was a transfer which appeared to be due to a will or a discretionary distribution from a deceased estate. Collinson agreed that there might possibly have been trades of this nature that occur “higher up” and cannot be seen, and he said that ISX would be willing to put a formal undertaking in the form of an order that would come into effect if a loss was identified in an off-market trading event. Collinson also inquired what the urgency was with respect to the release, when ISX is under suspension, of a ”highly contested” reasons and directions report when ISX is suspended and if ASX is successful in the trial ASX will have the ability publish the reasons and directions following the trial.

Collinson also noted, in regard to the directions, that the directions 1 and 3 require ISX to provide information to the Market and that neither listing rule 18.7 nor 18.7a place that requirement on ISX. The second direction appears to be the requirement for ASX to appoint an independent expert to go into ISX to gather information about and investigate contracts and policies and procedures to which Collinson stated that 18.7 assigns the power to ASX to require ISX to give information to an independent expert selected by ASX, but it does not give ASX the power to import an independent expert into the business of ISX in order to “have this roving inquiry of the kind that is contemplated” in the directions. Collinson added that even if these powers do exist if still breaches the duties to act honestly, fairly and in good faith and/or reasonably as implied in the listing rules.

Collinson finally statedin support of considering both the publication and directions together that thereasons that precede the final paragraph on directions is intended at least inpart to support the making of the directions and the matters should beconsidered together since ISX has a strong prima facie case challenging boththe validity of the directions made and the power of listing rule 18.8 and itsapplication regarding ISX.

Button responds to thequestion of whether the publication vs. the directions should be coveredseparately by stating that the “answer to one is not the answer to theother”. She does confirm that the reasons set out the factual background to the directions in the reasons document but she states that they should be considered distinctly when considering the balance of convenience on whether there is a prima facie case for the publication question and the directions question.

4. Will the relief given to ISX be greater than theinjury that will be potentially done to ASX? – Balance of convenience?

This is the keyconsideration for the judge in making a determination on whether to grant theinterlocutory injunction. This is considered, as I understand it, in conjunction with whether a party has a prima facie case, but here I will only cover the submissions of perceived potential harm to each party.

Collinson went through ingreat detail the potential damage if ASX were to be allowed to publish a reportthat contains, as he said, “such mealy mouthed” statements that are listed in 2 above. The points put forward to support the damage to ISX include(but not exclusively):

· There is no real urgency to release the draft reasons because ISX is nottrading therefore people are not suffering loss therefore there is no real needto know,

· ISX, its staff, shareholders, client relationships and third parties wouldsuffer real loss if the report as it exists were to be made public,

· Current applications, agreements and plans could be canceled,

· The court will rule whether ISX is right or wrong and if wrong ISX couldhave no objection to it being published

During Button’s submission concerning their right to produce the reasons report, Judge Davies asked Button what the source of power is for publishing the reasons to the market. To which Button responded that the explicit power is in 18.71. She continued with a qualified explanation that it is “part and parcel” of ASX’s power as a market operator who has suspended an entity to inform the market having formed an opinion.

Judge Davies thenindicated that she didn’t have 18.7a in front of her and commented that itseemed to be about correspondence between the parties. Judge Davies also asked, “As a matter of fairness, if one was to publish reasons would it involve or require as a matter of fairness all the submissions put by the applicant (ISX) as well?"

Button responded thatalthough she didn’t have any instructions at that moment on whether there wouldbe an impediment to that from ASX’s view, she believed that ISX could respondto the draft reasons. She did not say ISX might be able to respond to the final reasons. Button continued to say that the publication does not impose any lack of fairness by failing to put forward ISX’s story since, as she said, "ISX’s story is contained within the reasons to a degree. She also stated ISX could put forward its more detailed submissions if it so chose.”

She later also qualifiesthis statement that ISX can respond on the ASX platform by saying that“publications must be accurate, complete and not misleading and the informationmust be factual, relevant and must be expressed in a clear and objectivemanner. It is not to be emotive or defamatory or intemperate.” So, the implication is, as long as ISX adhered to this, they could respond.

Note: A thought: I am wondering, if ASX is framing a release of a document (reasons) with words that are listed in 2, are they bound to this as well? I would say, perhaps not?

Collinson stated that ASXin support of publishing that if the reasons were published, ASX’s reasons canbe “formally retracted, revised, qualified or explained and would remedy anyprejudice to ISX.” Collinson stated that there is no evidentiary support that if the report was released and later ASX’s reasons are found to be wrong and are retracted or amended that the damage ISX would suffer between now and trial would somehow not be incurred or that they could be ameliorated.

As an added note fromme: We shareholders are keenly aware of the damage that this would do since the attitude of some of the negative posters on Hot Copper seems to be: if ASX has asked the question, it must be true. It is also probably safe to assume from comments ASX made in court that the AFR and the Ownership Matters report assisted ASX formulating their reasons for the suspension of ISX even though, in my humble opinion, the AFR articles were insinuating and lacking fact and Ownership Matters had, by ISX’s account, not bothered to attempt to verify the information with ISX.

It is said by certain negative posters over and over – that “where there is smoke, there is fire” with no recognition that the smoke might not represent a house burning down, but perhaps just a friendly campfire. Judgments need to be entered into with the view of innocent until proven guilty and, in my opinion, must not come to light until a clear and objective view has been taken, based on fact.

As for the reputationaldamage of ASX, ASX argued that if they are not allowed to publish the reasonsfor the continued suspension and the directions there will be a loss ofconfidence in ASX’s ability to enforce the listing rules and ASX will no longerhave any power to hold over the market to enforce compliance. ASX claimed that it would be a roadmap for how other listed companies would react to criticism and directions as they would just refuse to comply and force ASX into the court. Collinson stated that this is a “flood gate” argument and that ASX has powerful tools in the form of threatening suspension and delisting that would still be very effective tools for forcing compliance.

Button spent a vastamount of time on the damage that would be done to ASX, shareholders, and otherthird parties by stating that Mr. Moran’s affidavit sets out evidence of marketparticipants “expressing anguish, confusion, and desire to know why this entityis suspended.” Button added that the confidence in themarket operator (ASX) is being questioned in relation to the suspension. She stated, that there are compellingcircumstances that reinforce the need for the “reasons” document to be publicwhich if not allowed to be put to the market now it will be “stifled” forlikely months pending trial and further months should there be an appeal.

Collinson’s response tothis is that it isn’t a relevant argument if ISX remains suspended.

Button also stated,somewhat gleefully, in my opinion, that ISX couldn’t claim further reputationaldamage since the Ownership Matters report (a report that was neversubstantiated with ISX before it was released ), and AFR news reports about issues (which were also released without supporting facts), as evidence supporting asshe said “an appreciation of the current standing of ISX’s reputation.” She went on to say that ISX’s claim that it will be tarnished by the release of the final reason against the “well of market speculation and commentary asking for this information to be released” gives the court a view of the current standing of ISX. She says “ To cut a long story short, it is not true that it(ISX) has an unblemished reputation so far as this is an indication”.

At this point I wasbecoming infuriated. I can only believe and trust that Judge Davies would see through what I saw as a clearly an appallingly distorted, deceptive and manipulative ploy, not only to further discredit ISX in open court but to use our (shareholders) valid frustration and lack of trust in ASX as a weapon against ISX . This, in my opinion, was not worthy of the court and was, in my opinion, deplorable. My Question: Does Button really seriously believe that it is justifiable to add a report such as is described in 2 above on top of the unsubstantiated, fact-less, speculative and insinuating reporting that Ownership Matters and certain news (entertainment) companies have persisted in publishing?

At a point in this very very long submission on the harm ASX will suffer if they are not allowed to put out the “reasons” report, Button attempts to further support the argument by mentioning (twice) reports on Hot Copper and suggestions that have been made that there is a potential conflict of interest and competition between ASX and ISX.

Just to set the recordstraight, I have been one of those posters on HotCopper and I confirm that Ihave stated the following:

“It is my understandingthat ASIC is ASX’s listing authority and monitors ASX performance of itsobligations under the listing rules, including the management of conflicts ofinterest.

The ASX has real andpotentially lucrative conflict of interest with a company the ASX is currentlyinvestigating and which it suspended from official quotation on the 2^ndOctober 2019 indefinitely. That company is iSignthis (ISX).

I note that the document, ASX’s ConflictHandling Policy states that “A conflict of interest is defined in thedocument as:

· Actual – where a conflict between competing interests already exists

· Perceived – where a conflict between competing interests is, or mightbe, seen to exist

· Potential – where competing interests have the capacity to develop intoa conflict in the future.”

I then went on to list the conflicts of interest.

ASX has, it is stated inthe above document, a requirement to list competition to which they may have aconflict of interest (as defined above) and ASX has still, to my knowledge, anddid not in the open court on Thursday, acknowledge those conflicts of interest. Nor did Button note exactly what the concern in the Hot Copper post was and might I clarify: I said “ASX’s very seriousconflict of interest promotes real distrust in our regulatory system at thebase of our trading and economic systems in Australia.” I still support this concern.

It is my sincere opinion that it would promotebetter trust in ASX and in the trust that we have a fair, orderly and transparentfinancial market, if ASX and ASIC wouldacknowledge this conflict of interest and allow ASIC to complete thisinvestigation. We as shareholders are not, nor is ISX according to their submissions, averse to an investigation being carried out, we onlywant to have confidence that an investigation will be fair, will be enteredinto without bias, with an attitude of innocent until proven guilty and a clearwillingness to take into account ISX’s explanations at face value when there isno clear evidence to support otherwise.

Furthermore, it will be difficult for mepersonally to have confidence in any report that ASX produces about ISX ifreleased before the matters are heard in court and especially after listeningto Button’s, in my opinion, misleading performance when declaring potentialharm to ASX by using letters from angry and frustrated shareholders and HotCopper posters to support their argument against ISX that we saw in open courton Thursday.

A final opinion withregards to the balance of convenience and potential harm to ASX - ASX did notconsider in their submissions the harm that will be done to investor confidencein a fair, orderly and transparent market and/or ASX if the ASX reasons arepublished in advance to a hearing and then are determined to be unfounded bythe court. And this, in my opinion, is really the heart of the matter.