Think Nicholsons

Jul 18

What's the point of an explanatory memorandum (EM)?

Explanatory memorandum - it's a term you hear a lot, when you're talking to lawyers.  So - why do EMs exist, and what's the point?

Sometimes an EM is literally required by law.  So, for example, if a company wants to cut a deal to buy back its own shares, then it must: "include with the notice of the meeting a statement setting out all information known to the company that is material to the decision how to vote on the resolution." (s.257D(2) Corporations Act 2001).  The 'statement' is often called an explanatory memorandum or EM.

EMs come up in a lot more contexts than buy-backs.  Want to raise funds? You'll probably need an EM (which may have a more formal name such as prospectus, offer information statement or might be called an 'information' memorandum, depending on the context).   Want to convince your members to vote for something?  You'll probably need a decent EM, as the Australian Computer Society found out. 

Flaws in the ACS explanatory memorandum 

There was an EM in that case (Clarke v Australian Computer Society Incorporated [2019] FCA 2175), but it failed to do its job.  The judge noted that management, who were driving the proposed resolutions, had the: 

"duty to make full disclosure of all facts within their knowledge which are material to enable the members to determine what action to take

The EM needed to be drafted so that ordinary people could 'fairly' understand it - it was not allowed to be tricky or 'artfully framed'.‡.  To be clear - in this case, there was an EM, which (it appears) had been prepared by lawyers, and the judge didn't think there had been any ulterior motive such as an intent to deceive - but he still considered that the EM didn't do its job and was "materially misleading".ƒ

So, what were the main problems - why didn't the EM do its job?  What should have been done to ensure that there was a point to providing an EM? 

  • The EM contained too much 'spin'. For example, it included a statement "said to have been made by the Society’s President that “[w]e need to ensure our organisational design and governance frameworks are fit for purpose, so that ACS delivers agility in a changing operating environment..." Ø

  • The EM lacked enough substance.  The Judge said that the EM: "did not provide any substantive or meaningful detail concerning the proposed changes".

  • There was no point-by-point analysis of the changes between the old rules and the new rules - despite the changes being substantial, and likely to lead to significantly different consequences for many people.  It failed to "include any clear discussion of the main changes to corporate governance that would occur".

  • Though it claimed to provide "background information to assist members [to] understand how the proposed new governance model will operate in its entirety" - it didn't do that in an effective way.  Though there were significant changes being proposed, "None of those changes were identified, let alone addressed in any detail".

  • Though the 'against' case was spelled out (to a limited extent) in a related document, the Judge considered it "unsatisfactory that the only real consideration of the nature of the proposed ... changes appeared in an argumentative form in a document containing the case against the proposal" and mentioned that "a purely objective comparison" would have been preferred.
The judge considered that the EM (and related material) breached the Australian Consumer Law (s.18).

Important things to learn

In this case the EM failed to:
  • provide information;
  • analyse the effects of the proposal;
  • be objective;
  • have substance; or
  • provide necessary detail.

So, what's the point of an EM? 

To inform. Analyse. Communicate objectively, with appropriate detail. Explain. If your EM is not doing that - then consider starting again. 

Wigney J at [143], quoting Dhami v Martin [2010] NSWSC 770; 241 FLR 165 at [53].

‡ Wigney J at [142].

ƒ Wigney J at [31] then [147], [153 - 154].

Ø I have to confess some mild bias here, because I have antipathy toward the over-used term 'agility', in the same way that I dislike 'pivot', 'unprecedented', 'new normal' and such other buzzword nonsense. The quotes in these bullet points are from the judgement of Wigney J, mainly at paras [33], [137], [139], [148] & [151].

Stephen Robertson

Stephen is a commercial lawyer with extensive experience in advising businesses in areas of acquisitions and divestments, commercial agreements, structuring, legal risk and revenue issues. He also advises on property law, with a focus on commercial and industrial property.