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The corporate watchdog has commenced proceedings in the federal court against health, beauty and wellness company McPherson's (ASX: MCP) over its reporting of sales with a Chinese joint venture partner that fell short of forecasts in late 2020 - a fact that was revealed to the market after a $45.9 million capital raise had already been completed.
The Australian Securities and Investments Commission (ASIC) contends the company received information on 30 October of that year indicating the risk that sales of beauty collagen formula Dr LeWinn's to Chinese partner Access Brand Management (ABM) would be significantly lower than forecasts.
This date reported by the regulator is after its announcement of a $36.5 million institutional placement but before the completion of a share purchase plan (SPP) that added a further $9.4 million to the coffers.
The date was also just a few of days prior to a cleansing notice to the ASX where McPherson's reported it had no information that needed to be disclosed and that it had complied with all its disclosure obligations.
It was on 1 December 2020 that McPherson’s reduced Dr LeWinn sales forecasts because the highly anticipated 11/11 Single's Day sales event in China was below expectations, leading to higher than forecast inventory levels.
The group revised first half 2021 earnings guidance from $10.2 - 11.1 million down to $6.5 - 7.5 million, and withdrew its earnings guidance for the full financial year, prompting shares to plummet by 34.5 per cent.
ASIC alleges McPherson's breached its continuous disclosure obligations and misled investors between 30 October and 1 December 2020 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.
The regulator also claims that McPherson’s former CEO Laurence McAllister breached his duties by failing to prevent McPherson’s breaches. McAllister resigned as CEO and managing director on 9 December 2020.
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 authorising this 1 December announcement, McAllister contravened section 1309(2) of the Corporations Act.
"Cleansing notices are a critical feature of Australia’s low doc capital raising regime," ASIC deputy chair Sarah Court said.
"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."
The ASIC deputy chair emphasised 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," she said.
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