ASIC has commenced proceedings in the Federal Court against health, beauty, and wellness company McPherson’s Limited (ASX: MCP) for allegedly breaching its continuous disclosure obligations and engaging in misleading or deceptive conduct during capital raising in late 2020.
On 20 October 2020, McPherson provided earnings guidance to the ASX forecasting growth in profit before tax of between $10.2m to $11.1m for the first half of the 2021 financial year and $24.1m to $25.3m for the full year.
McPherson’s guidance was based on forecast sales of its high-margin Dr. LeWinn product line to its key China joint venture partner, Access Brand Management (ABM). However, by 30 October 2020, McPherson’s had received information indicating the risk that sales to ABM would be significantly lower than McPherson’s had forecast.
Despite this, on 2 November 2020, McPherson issued a cleansing notice to ASX that represented that it had no information that needed to be disclosed and that it had complied with all its disclosure obligations.
When McPherson’s announced, on 1 December 2020, reduced Dr. LeWinn’s sales forecasts, a revised first half 2021 earnings guidance, and a withdrawal of its earnings guidance for the full financial year, its share price fell 34.5%.
ASIC alleges that between 30 October and 1 December, McPherson’s breached its continuous disclosure obligations and misled investors by:
failing to remove or update its original earnings guidance,
issuing a cleansing notice to the ASX on 2 November 2020 relating to a capital raising that represented that McPherson’s had no information that needed to be disclosed and that it had complied with all its disclosure obligations, and
reaffirming the October growth forecasts and the Dr. LeWinn sales forecasts at its annual general meeting on 4 November 2020.
ASIC also claims that McPherson’s former CEO Laurence McAllister breached his duties by failing to prevent McPherson’s breaches.
Further, ASIC alleges that McPherson’s announcement on 1 December was misleading when it stated it had only become aware of information on 27 November regarding the need to downgrade its earnings guidance. ASIC alleges McPherson’s had been aware of the information for weeks. ASIC also alleges that by authorizing this 1 December announcement, Mr. McAllister contravened section 1309(2) of the Corporations Act.
ASIC Deputy Chair Sarah Court said, ‘Cleansing notices are a critical feature of Australia’s low doc capital raising regime. At the time of capital raising, these notices give investors comfort that the company has met its disclosure obligations and that it has no further information that investors would need to make an informed assessment of a company’s prospects. ASIC’s case against McPherson’s is that its cleansing notice was misleading, as material information had not been disclosed to the market.’
‘Company directors and CEOs must ensure their companies comply with their continuous disclosure obligations and ensure that they provide accurate information to the market. If they don’t, ASIC can take action and companies and individuals can face penalties imposed by the Court,’ concluded Ms. Court.