Houghton v Saunders
[2016] NZCA 493
•12 October 2016 at 11 am
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| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA578/2014 [2016] NZCA 493 |
| BETWEEN | ERIC MESERVE HOUGHTON |
| AND | TIMOTHY ERNEST CORBETT SAUNDERS, SAMUEL JOHN MAGILL, JOHN MICHAEL FEENEY, CRAIG EDGEWORTH HORROCKS, PETER DAVID HUNTER, PETER THOMAS AND JOAN WITHERS CREDIT SUISSE PRIVATE EQUITY INC CREDIT SUISSE FIRST BOSTON ASIAN MERCHANT PARTNERS LP FIRST NEW ZEALAND CAPITAL FORSYTH BARR LIMITED |
| Hearing: | 11–14, 18 April 2016 |
Court: | Ellen France P, Randerson and Winkelmann JJ |
Counsel: | C R Carruthers QC, P A B Mills and G R Abdale-Weir for Appellant |
Judgment: | 12 October 2016 at 11 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BCosts memoranda to be filed in accordance with [314]–[317] of the judgment.
____________________________________________________________________
REASONS OF THE COURT
(Given by Winkelmann J)
Table of Contents
Para No
Relevant background [6]
Credit Suisse buys interest in Feltex [6]
Feltex’s trading history [8]
The decision to make an initial public offering of shares [11]
The prospectus is registered: 5 May 2004 [13]
Due diligence [22]
Feltex’s performance post allotment [24]
High Court proceedings [32]
Case on appeal [34]
Grounds of appeal relating to test under ss 55 and 56 of the SA [37]
Policy of the SA[42]
Analysis [43]
Meaning of “untrue statement” and the materiality
requirement [46]
Judgment [47]
The argument on appeal [49]
Discussion of s 55 [51]
Discussion of s 56 [57]
Did the Judge err in his application of the prudent
non-expert investor test? [74]
Judgment [76]
Analysis [77]
Grounds of appeal relating to factual findings [83]
Undisclosed adverse trends and revenue forecast for FY04[84]
Appellant’s argument [84]
Factual background [87]
Judgment [93]
Discussion [99]
FYO5 projection [117]
Factual background [118]
Judgment [120]
Analysis [122]
Tufting machines[125]
SIP grants and page 85 of the prospectus [145]
Factual background [145]
Analysis [149]
Second bottom line [151]
Judgment [160] Analysis [164]
JLMs’ proposal to pay $9 million dividend for FYO4 [174]
Discussion [180]
Equity incentive plan [191]
Judgment [195]
Discussion [197]
Conclusion on factual grounds of appeal [204]
Ground of appeal: Due diligence defence [205]
Ground of appeal: Judge erred in definition of promoter [214]
JLMs’ role [217]
Judgment [226]
Argument on appeal [229]
Discussion [238]
The concept of promoter at common law [238]
The concept of promoter in the SA and its legislative history [248]
Our interpretation [255]
Do the JLMs fall within the definition of promoter? [263]
Professional capacity exception [267]
Credit Suisse [274]
Judgment [275]
Argument on appeal [276]
Discussion [277]
Ground of appeal: Do s 63A of the SA and s 5A of the FTA apply
to preclude a claim under the FTA? [280]
Legislative provisions [281]
Judgment [287]
Analysis [290]
Ground of appeal: Loss [299]
Analysis [309]
Ground of appeal: The Judge was wrong to require the appellant
to disclose work product [312]
Result [313]
Feltex Carpets Ltd (Feltex) was a carpet-manufacturing company. On 5 May 2004 it issued a combined investment statement and prospectus for an initial public offer for the sale of shares (IPO). Mr Houghton, the appellant, subscribed for and was allotted shares in the IPO. In September 2006 Feltex went into receivership and in December 2006, liquidation, leaving the shares Mr Houghton had purchased effectively worthless. Mr Houghton commenced proceedings in a representative capacity for himself and for others who had also been allotted shares in the IPO. He claimed he and other shareholders had invested on the faith of a misleading prospectus and that they should be able to recover their full investment. He brought claims against all respondents under the Securities Act 1978 (SA) (the legislation then regulating the issue of prospectuses and allotment of shares), the Fair Trading Act 1986 (FTA) and in negligence.
Mr Houghton sued Feltex’s directors (the first respondents). He sued Credit Suisse First Boston Asian Merchant Partners LP (CSAMP) as vendor and issuer of the majority of shares offered in the IPO. He sued the following parties alleging they were promoters of the prospectus: Credit Suisse Private Equity LLC[1] (CSPE, listed in the prospectus as promoter), CSAMP (as noted, the vendor), and First NZ Capital Ltd (First NZ) and Forsyth Barr Ltd (Forsyth Barr). These latter two were appointed organising participants and joint lead managers of the IPO by Feltex. We refer to them collectively as the JLMs.
[1]Formerly, and at the time of the IPO, Credit Suisse First Boston Private Equity Inc.
In a judgment dated 15 September 2014, Dobson J found that Mr Houghton’s primary cause of action, the FTA claim, could not succeed because the application of the FTA was excluded by the SA.[2] He dismissed the negligence claim. He found that the relationships between investors in the IPO and the defendants was not such as to give rise to a duty of care being imposed in tort.[3]
[2]Houghton v Saunders [2014] NZHC 2229, [2015] 2 NZLR 74 [HC judgment] at [629].
[3]See [689]–[690] and [694]–[695].
As to the claims under the SA, the Judge said that although a number of the criticisms of the prospectus had some justification, in no case had Mr Houghton made out materially misleading content or omissions triggering liability under the SA.[4] And the Judge said if he had found that the prospectus was materially misleading, the defendants may still have been able to avail themselves of the defence under the SA that they exercised due diligence in the preparation of the prospectus.[5]
[4]See the Judge’s summary of his findings at [50].
[5]At [52].
On appeal Mr Houghton argues that the Judge was wrong:
(a)in his interpretation of provisions in the SA which create liability for “untrue statements” (ss 55 and 56) and in his interpretation and application of the concept of prudent investors;[6]
(b)in his interpretation of the term “promoter” as it appears in s 2 of the SA;
(c)in key factual findings;
(d)in his conclusion that the due diligence defence is available where statements are known by the directors to be untrue;
(e)in concluding that the SA excludes the application of the FTA in this case; and
(f)in findings he made in relation to reliance and loss.
Relevant background
Credit Suisse buys interest in Feltex
[6]See Securities Act 1978, s 38D.
In 1996 Mr Peter Thomas was head of Credit Suisse First Boston’s (CSFB) Asian-Pacific private equity division. He became aware of an opportunity to purchase shares in Feltex from its then principal shareholder, a company understood by Mr Thomas to be in receivership.[7] His recommendation that CSFB acquire Feltex was accepted and in December 1996 CSAMP, which was controlled by CSFB, acquired 85 per cent of the shares in Feltex with the balance of shares acquired by senior Feltex executives. Mr Thomas was appointed as a director of Feltex and continued in that role through the time period material to this proceeding.
[7]BTR Nylex, the Australasian division or subsidiary of the British company BTR plc.
CSAMP is constituted as a limited partnership in the United States under the laws of Delaware. Its investment in Feltex was managed by the second respondent, CSPE, a company incorporated in the United States also under the laws of Delaware. There is an issue on the appeal as to the exact nature and effect of the relationship between CSAMP and CSPE but, other than where that issue falls for consideration, we refer to them jointly as Credit Suisse for the purposes of this judgment.
Feltex’s trading history
Feltex experienced mixed trading results for the years immediately following the acquisition by Credit Suisse. In May 2000 Feltex purchased the Australian operations, Shaw Industries Australia Pty Ltd (Shaw), of United States carpet company Shaw Industries Inc. The directors of Credit Suisse and the board of Feltex believed that the purchase of Shaw would create value through the opportunity to access its parent company’s expertise, technology and products, and through greater access to the Australian market.
Shaw’s managing director, Mr Magill, was appointed joint managing director of Feltex. Following the acquisition he spear-headed the process of merging the two companies including bringing the Australian business under the Feltex name. Although for a time after this acquisition Feltex struggled to grow its sales and profitability, by early 2003 there were signs that Feltex’s prospects were brighter with some uplift in sales and a more substantial uplift in EBITDA.[8]
[8]Earnings before interest, tax, depreciation and amortisation. EBITDA is not a substitute for net profit but is a useful tool for assessing a company’s operating cash flow.
By late 2003 Credit Suisse had resolved to sell Feltex as part of a broader strategy to dispose of certain classes of international investments. No particular timetable was set but, according to Mr Thomas, it was clear that Credit Suisse would not invest further capital in Feltex and would look to sell the company if the opportunity arose.
The decision to make an initial public offering of shares
So it was that on 16 March 2004 Credit Suisse requested and authorised Feltex to proceed with an IPO and the Feltex board resolved it would do so. The board approved the appointment of a due diligence committee (DDC) to oversee the preparation of the prospectus. The membership of the DDC comprised the chairman of the board of directors, Mr Saunders; Mr Thomas as a representative of the Credit Suisse entities; Mr Tolan, the chief financial officer of Feltex; John Kokic, the chief operating officer; and legal advisors for both CSFB and Feltex.
As well as formal members, many others attended meetings of the DDC as observers including other Feltex executives, representatives of First NZ and Forsyth Barr, and accountants from Ernst & Young, Feltex’s auditors.
The prospectus is registered: 5 May 2004
On 5 May 2004 Feltex registered and issued a combined investment statement and prospectus for the IPO of all of the 113,523,100 shares in Feltex, owned at that time by Credit Suisse. In addition, Feltex offered a further $50 million worth of shares, the exact number to be issued depending upon the final price. The IPO would then enable Credit Suisse to sell its investment in Feltex and enable Feltex to raise a further $50 million in capital.
The prospectus contained historical financial information for the period from 1 August 1998 to 31 December 2003. The six-month period ending December 2000 represented the first full six-month period following the acquisition of Shaw. As Feltex balanced on 30 June each year,[9] the six months ending 31 December 2004 was the most recent complete six-month trading period before the registration date for the prospectus.
[9]Following the acquisition of Shaw in May 2000, Feltex changed its year end to 30 June.
The financial information showed that Feltex had experienced difficult trading conditions for much of the period covered in the historical financial information. Sales fell through 2001 and into 2002 with some improvements in sales thereafter but, it would be fair to say, no strong improving trend. EBITDA also fell through 2001 and the first half of 2002 but with a significant recovery in the second half of 2002 and thereafter.
The extent of the improvement in EBITDA was not fully reflected in the profit figures because the owner of Feltex, Credit Suisse, maintained high debt levels thereby incurring high interest costs. It was intended that the money raised through the IPO would be applied to reduce debt by accelerating repayment of an existing bond issue, which was otherwise due to mature and be repaid in 2008.
The prospectus also included prospective financial information in the form of a forecast for the financial year ending 30 June 2004 (FY04) and a projection for the financial year ending 30 June 2005 (FY05).
The forecast for FY04 was prepared using actual sales figures until the end of March 2004 and then forecast sales for April, May and June 2004. Mr Houghton says the FY04 forecast revenue figure was unreasonable because, by the time the prospectus was registered, the directors knew it would not be achieved.
The FY05 projections were prepared using a financial model. Mr Houghton claims the FY05 projected revenue figure was also unreasonable; it was unrealistic and failed to factor in the underachievement of the FY04 forecast revenue figure. There was no basis upon which the directors and the DDC could have concluded that the projected increase in Feltex’s share of the market, an assumption underlying the FY05 projection, could be achieved.
Mr Houghton also criticises how the prospective financial information was presented, which he claims owed more to marketing than to standard accounting practice.
The prospectus, as required by the SA, contained a list of the risks associated with the investment. Mr Houghton complains that some risks were not highlighted for investors and that material information was otherwise omitted from the prospectus.
Due diligence
Feltex did not meet the sales figure for the month of April 2004 used to calculate the sales forecast included in the prospectus for FY04. However, the prospectus was registered and distributed without amendment on 5 May 2004.
Shares under the IPO were allotted on 2 June 2004. Prior to the allotment, the board of directors and the DDC knew that the sales revenue for May also fell short of that month’s forecast and that Feltex would fall short of the total sales forecast for FY04. Again the decision was made not to correct that information in the prospectus and to proceed with the allotment of shares.
Feltex’s performance post allotment
FY04 ended shortly after the allotment of securities. Audited financial performance for FY04 showed that while revenue was $7.4 million (2.3 per cent) behind the forecast contained in the prospectus, EBITDA was above forecast by $0.5 million or 1.2 per cent. Net surplus was also higher by $1 million or 10.6 per cent.
The beginning of FY05 continued this general trend. On 23 February 2005 Feltex made its preliminary results announcement for the first six months of FY05. It reported a net surplus for the six months of $12.2 million and EBITDA of $24.6 million. This was a 7.1 per cent improvement in profit on the equivalent period in the previous year and a 6.9 per cent improvement in EBITDA. But while profit and EBITDA were strong, total sales were below the level projected in the prospectus for FY05 and below the level for the six months ending December 2003. In its announcement accompanying the preliminary results, Feltex ascribed these aspects of its performance to a continuing shift of products sold toward the higher‑price and higher-margin end of the market, and also to an adverse trend in the exchange rate.
The New Zealand dollar was consistently stronger than the assumptions used in modelling for the projections for the FY05. This had a negative impact on Feltex’s financial performance. Most of Feltex’s sales occurred in Australia and so were in Australian dollars but were then reported in the company’s financial statements in New Zealand dollars. When the New Zealand dollar was stronger than expected against the Australian dollar, that reduced the reported level of revenue. Feltex’s interim report published on 2 March 2005 ascribed $6.9 million of the reduction in revenue to the effect of these adverse movements in the exchange rate.
Prior to the April 2005 trading update shares in Feltex were trading at $1.50. They dropped to 88 cents in the following two days.
The second half of FY05 was worse for Feltex with a plummet in Australian consumer confidence affecting the Australian market and increasing material costs. These factors resulted in falling sales, EBITDA and profit. Feltex did not achieve the projections contained in the prospectus for FY05.
The directors provided revised guidance to the market on 20 June 2005. This guidance caused a further prompt drop in the share price from 70 cents to 44 cents, before recovering to 63 cents.
Feltex took various measures to address its poor performance. It changed its management team and restructured in order to take costs out of its operation. Feltex held discussions with various parties interested in investing in Feltex. If these talks had been successful this would have provided the additional capital Feltex’s bank was by 2006 insisting it provide. However, none of these talks reached fruition before Feltex’s bank appointed receivers on 22 September 2006. Feltex’s assets were then sold to an Australian competitor, Godfrey Hirst, one of the parties the directors had been negotiating with as a potential investor.
Feltex was placed in liquidation on 13 December 2006. As Dobson J said:[10]
Given the relatively rapid transformation of fortunes, it is unsurprising at an intuitive level that shareholders who purchased shares in the IPO would protest that the business must have been oversold in the prospectus, and that they had not been warned adequately of the risks of losing their investment.
High Court proceedings
[10]HC judgment, above n 2, at [13].
The parties agreed to a split trial in the High Court on the following basis.[11] First, Mr Houghton’s claim should be tried in its entirety, both as to liability and loss. Issues common to all members of the representative claim would also be tried and findings on these issues would be binding on all members of the class.
[11]Houghton v Saunders HC Christchurch CIV-2008-409-348, 9 December 2011 [Minute of French J] at [1]. The common issues were set out in a memorandum dated 20 January 2012.
A second hearing was contemplated at which individual aspects of the claims of all qualifying shareholders would be heard and decided. Stage one proceeded to a three-month hearing commencing in March 2014, with judgment delivered in September 2014. Unless Mr Houghton is successful on appeal there will be no need for the second stage of the hearing.
Case on appeal
The case Mr Houghton advances on appeal has shifted significantly from that at trial. The claim in negligence has been abandoned. In the High Court, the FTA was the primary focus of Mr Houghton’s claim. On appeal it is the SA. The scope of the alleged misleading content and omissions in the prospectus has also narrowed considerably.
Although in the High Court Mr Houghton advanced numerous criticisms of the content of the prospectus, they reduced to five broad headings of criticism on appeal.[12] While various other legal issues are pursued on appeal, the five allegedly misleading statements lie at its heart. If Mr Houghton does not carry the day in respect of at least one of these five allegations, his appeal cannot succeed.
[12]Dobson J had estimated that if the particulars in support of the pleaded criticisms of the prospectus were given status as separate criticisms, they would have totalled approximately 80 criticisms. See HC judgment, above n 2, at [42].
Mr Houghton argues that the Judge’s failure to find that these statements were misleading was caused, at least in part, by his misapplication of ss 55 and 56 of the SA (which governed the civil liability of the respondents for untrue statements in the prospectus) and his characterisation of the behaviour of the notional prudent but non-expert investor (the notional investor), who stands as the yardstick for assessing whether a statement is untrue. It is logical therefore to address these issues before addressing the alleged untruths.
Grounds of appeal relating to test under ss 55 and 56 of the SA
Section 55 of the SA provides:
55 Interpretation of provisions relating to advertisements, prospectuses, and registered prospectuses
For the purposes of this Act,—
(a)a statement included in an advertisement or registered prospectus is deemed to be untrue if—
(i)it is misleading in the form and context in which it is included; or
(ii)it is misleading by reason of the omission of a particular which is material to the statement in the form and context in which it is included:
(b)a statement is deemed to be included in an advertisement or registered prospectus if it is—
(i)contained in the advertisement or registered prospectus; or
(ii)appears on the face of the advertisement or registered prospectus; or
(iii)contained in any financial statements, report, memorandum, or document that accompany, or are incorporated by reference or referred to in, or distributed with, the advertisement or registered prospectus:
(c)a certificate registered under section 37A(1A), and any financial statements that accompany that certificate, shall be deemed to be included in the registered prospectus to which the certificate relates.
Section 56(1) is the civil liability provision:
56Civil liability for misstatements in advertisement or registered prospectus
(1)Subject to the provisions of this section, the following persons shall be liable to pay compensation to all persons who subscribe for any securities on the faith of an advertisement or registered prospectus which contains any untrue statement for the loss or damage they may have sustained by reason of such untrue statement, that is to say:
(a)where the issuer is an individual, the issuer of the securities:
(b)in the case of an advertisement, every person who is a director of the issuer at the time that the advertisement is distributed or who has authorised himself or herself to be named and is named in the advertisement as a director of the issuer or as having agreed to become a director either immediately or after an interval of time:
(c)in the case of a registered prospectus, every person who has signed the prospectus as a director of the issuer or on whose behalf the prospectus has been so signed, or who has authorised himself or herself to be named and is named in the prospectus as a director of the issuer or has agreed to become a director either immediately or after an interval of time:
(d)every promoter of the securities.
The Judge rejected arguments advanced for Mr Houghton that:
(a)the s 55 definition of what constitutes an untrue statement is not an exhaustive one;[13] and
(b)a plaintiff need not show that any particular statement in the prospectus was untrue and rather could rely upon an overall impression created by the prospectus, for example, where the allegation is that the entire prospectus is rendered misleading by the absence of relevant information.[14]
[13]HC judgment, above n 2, at [65].
[14]At [70] and [74].
On appeal, Mr Carruthers QC for Mr Houghton repeats these arguments.[15] Mr Carruthers argues the Judge was led into error when rejecting these arguments by a mistaken view as to the policy of the SA. That error is encapsulated in the following paragraph from the judgment:
[56] New Zealand securities legislation does not seek to limit the extent of risk to which investors may be exposed when making particular investments. Rather, the aim is to require adequate and accurate disclosure of matters relevant to the nature of the risks involved in an investment, to enable potential investors to make fully informed decisions. That is reflected in a requirement for those promoting investment in either debt or equity securities to do so by means of a prospectus registered with the Companies Office. Since 2 September 1996,[16] the essence of the narrative description of an offer might also be conveyed in the shorter form alternative of an investment statement. Such documents have to refer to the availability of a registered prospectus.
[15]We note that Mr Carruthers was not counsel for Mr Houghton in the High Court proceeding.
[16]Securities Amendment Act 1996.
Mr Carruthers says this mistaken view of the policy and purpose of the SA led the Judge to read down the ordinary meaning of ss 55 and 56, giving them a narrower meaning than the ordinary words of the provisions conveyed. We therefore address this policy argument first.
Policy of the SA
The appellant says that the Judge’s analysis of the policy of the SA set out in [56] of his judgment cannot stand in the face of Court of Appeal and Supreme Court authority to the effect that the SA is investor-protection legislation and, accordingly, its provisions should not be read down beyond their ordinary meaning. The Supreme Court in Hickman v Turn and Wave Ltd said that the SA is investor‑protection legislation, designed to ameliorate the vulnerability of investors.[17] The Court said that feature was relevant to the interpretation of the SA. Mr Houghton argues that the Judge was wrong to say the SA requires “adequate disclosure” because the investor-protection purpose of the legislation requires “full disclosure”. On that basis, the statement-by-statement approach taken by the Judge cannot be right. Mr Houghton cites in support the following passage of Richardson J’s judgment in Re AIC Merchant Finance Ltd:[18]
It is perhaps true to say that the premise underlying the Securities Act, as with much commercial law, is that the best protection of the public lies in full disclosure of the company’s affairs and of the security it is offering. That then allows the investor to make an informed investment decision, which in turn facilitates the functioning of financial markets.
It is, I think, for reasons of that kind that the Act places such emphasis on clear and accurate disclosure and that the key provision, s 33(1), prohibits the making of an offer of securities to the public unless it is made in or is accompanied by a registered prospectus that complies with the Act and all regulations made under the Act. The obligations are placed on issuers and neither directly nor indirectly are existing or potential subscribers required to check whether an issuer has met its statutory responsibilities.
Analysis
[17]See Hickman v Turn and Wave Ltd [2012] NZSC 72, [2013] 1 NZLR 741 at [41]–[46].
[18]Re AIC Merchant Finance Ltd [1990] 2 NZLR 385 (CA) at 392. See also R v Moses HC Auckland CRI‑2009-004-1388, 8 July 2011 at [36].
We agree with the Judge’s description of the aim of New Zealand’s securities legislation as embodied in the SA. His reference to “adequate” disclosure was to disclosure in accordance with the legislative scheme, which includes the detailed disclosure regime contained in the Securities Regulations 1983 and the requirement, contained in s 34 of the SA, to disclose adverse circumstances. The Judge’s reference to accurate disclosure, in turn, links to the SA’s requirement that prospectuses not include untrue statements.[19] The SA creates a comprehensive regime for disclosure, detailing to some level of exactitude what is required to be disclosed. There is no support in the case law for the appellant’s submission that full disclosure is required if, by that, he means disclosure above and beyond that which is required by the SA.
[19]See Securities Act, ss 55 and 56.
The Judge’s description of the aim of this legislation is, we consider, consistent with the statements of this Court in Re AIC Merchant Finance Ltd, relied upon by Mr Houghton, and with how this Court described the purpose of the SA in Hickman v Turn and Wave Ltd:[20]
… The purpose of the Act is the protection of the investing public against the risk that the issuer of a security may not be able to fulfil the contractual obligations it assumes under the security. The interpretation and application of the Act is to be approached from the investor’s viewpoint. The principal means by which the Act achieves its objective is to insist that adequate and accurate information be provided to subscribers through a prospectus or by other means, such that investors may make informed decisions and better appreciate the risks they may be taking.
[20]Hickman v Turn and Wave Ltd [2011] NZCA 100, [2011] 3 NZLR 318 at [311] (footnote omitted). Although the decision was reversed on appeal, this point was not disturbed by the Supreme Court.
Counsel for Mr Houghton also criticises the Judge’s observation that the purpose of the SA is not to limit the extent of risk. Again we consider the Judge’s approach was correct. The cases have consistently recognised that disclosure is the
means by which investors are protected under the SA.[21] The legislation does not seek to limit the level of risk to which investors may be exposed, but rather to ensure that investors receive adequate and accurate information so that they are able fully to understand and evaluate that risk for themselves. We note the comments of the Hon David Thomson, then Minister of Justice, when speaking during the second reading of the Securities Advertising Bill, which later became the SA:[22]The purpose of the Bill is to consolidate and amend the law relating to the raising of investment money from the public, with a view to increasing the protection of investors. I say protection advisedly, because the purpose of the Bill is not to insure investors against loss. Risk is an inseparable part of an investment, and the Bill in no way purports to alter that. But I do not regard as legitimate that part of the risk attributable to irresponsibility or mismanagement.
The Minister’s speech accords with the view we have expressed as to the purpose of the SA. Legitimate risk if adequately disclosed, even if very substantial, will not be caught under any of the SA’s provisions concerning liability.
Meaning of “untrue statement” and the materiality requirement
[21]Hickman v Turn and Wave Ltd, above n 20, at [311]; Jeffries v R [2013] NZCA 188 at [82]; and Boyd Knight v Purdue [1999] 2 NZLR 278 (CA) at [50] per Blanchard J.
[22](27 September 1978) 421 NZPD 3934.
We next address the issue raised for Mr Houghton as to what can amount to a statement under the SA.
Judgment
The Judge said that s 55 reflected a policy that the preparers of offer documents are to be held to account on a relatively specific basis.[23] The Judge said:
(a)The terms of s 55 contemplate that the assessment of whether a statement is untrue will be undertaken on a statement-by-statement basis, although the assessment of whether a statement is untrue may require an assessment of context.[24]
(b)The assessment of context may require consideration of multiple passages in the prospectus where the particular topic is addressed.[25]
(c)The statutory test therefore requires a plaintiff to identify the passages from the prospectus that are alleged to address a material point in misleading terms.[26]
(d)The result of this is that a plaintiff cannot plead generally that the overall impression given by the prospectus is misleading merely because additional information ought to have been given.[27] Where the allegation is that a statement is untrue because of omissions, the plaintiff has to identify particular content which is rendered misleading because of the absence of other relevant information
[23]HC judgment, above n 2, at [75].
[24]At [68].
[25]At [69].
[26]At [70].
[27]At [74].
In the context of a discussion as to whether the plaintiff had to show reliance upon the statement for the purpose of establishing liability under s 56, the Judge said that the legislative intent was to create liability in respect of misleading content or omissions where that content materially contributed to a claimant’s decision to invest.[28]
The argument on appeal
[28]At [118].
Mr Carruthers argues the Judge was wrong to treat s 55 as an exclusive definition of an “untrue statement”. It is not expressed as such and properly read, it is argued, is no more than a deeming provision. It deems true statements to be untrue by reference to certain tests. Outside the operation of deemed untruths, the expression “untrue statement” should be given its ordinary meaning. That means a prospectus can in itself be an untrue statement and a prospectus can be misleading by reason of an omission, even if that omission cannot be tied to a specific statement said to be rendered untrue by the omission.
As to the Judge’s analysis that s 56 requires a plaintiff to show that a statement was material, he says this was an unjustified reading-down of that provision. He cites in support the Supreme Court decision Hickman v Turn and Wave Ltd,[29] which he says establishes a principle that “extremely broad primary provisions [in the SA] are to be given their ordinary meaning” where there are specific exemptions from those primary provisions in the SA. There are such exemptions from liability under s 56(1). It follows, he says, s 56 should be read to create civil liability when a plaintiff proves that the prospectus contains an untrue statement. There is no added requirement of materiality.
Discussion of s 55
[29]See Hickman v Turn and Wave Ltd, above n 17, at [45]–[46].
We consider s 55(a) is an exhaustive definition of the term “untrue statement” so far as it relates to statements in a prospectus. In terms of s 55(a)(i), the definition includes any untrue statement if it is misleading in the form and context in which it is included. This means a statement that is literally true when read in isolation may nevertheless be deemed untrue for SA purposes if it is misleading in context. Conversely, it also means that a statement that is literally untrue when read in isolation may not be untrue for the purposes of the SA if it is not misleading in context. Section 55(a)(ii) also extends the meaning of “untrue” to include a statement that is misleading by reason of the omission of a material particular.
Counsel for Mr Houghton argues the Judge’s interpretation departed from the ordinary meaning of untrue statement because there is nothing in the statutory language to limit the length of what may amount to a statement, so that the whole of the prospectus may amount to an untrue statement. But the ordinary meaning of statement would not encompass a 150-page document containing hundreds if not thousands of individual statements. In making this argument Mr Houghton also disregards references in ss 55 and 56 to a statement being “included” or “contained” in the prospectus. As the respondents submit, both sections treat “statements” as sub-components of the prospectus, not the entire prospectus.
The appellant’s linked submission is that omission of information may create an untrue statement if the omission makes the overall impression created by the prospectus misleading, rather than one statement misleading. But the definition of untrue statement makes clear the need to link an omission to a particular statement rendered untrue by that omission.[30] The need to identify the particular untrue statements in a prospectus for which liability under s 56 is alleged to arise is a well‑established requirement.[31]
[30]This has been the approach in all cases decided on this issue. See R v Petricevic [2012] NZHC 665, [2012] NZCCLR 7 at [212]; R v Moses, above n 18, at [44]; and Graham v R [2013] NZSC 104 at [14] where the Supreme Court declined leave for a conviction appeal because the lower Courts had correctly identified particular statements in the prospectus rendered untrue by an omission.
[31]Graham v R, above n 30, at [14(a)]; and Jeffries v R, above n 21, at [88].
We have considered whether the overall scheme of the legislation supports the appellant’s arguments in relation to the meaning of s 55. We think not. It must not be overlooked that the definition in s 55 of a statement applies not just to alleged civil liability but also to criminal liability.[32] If an untrue statement could consist of a global impression (such as the impression created by a prospectus that generally portrays a falsely upbeat tone as to the company’s prospectus) which is said to be untrue, that would be unworkable as a test for criminal liability. We agree with the Judge that the policy of the SA is that the preparers of offer documents are to be held liable on a relatively specific basis.
[32]Securities Act, s 58(1).
We also note that the SA expressly provides for liability for omissions which need not be tied to a particular statement. Section 34(1)(b) prohibits the distribution of a prospectus if the prospectus is “false or misleading in a material particular by reason of failing to refer, or give proper emphasis, to adverse circumstances (whether or not it became so misleading as a result of a change in circumstances occurring after the date of the prospectus)”. Sections 37A–37G create a detailed regime for relief and liability in respect of breaches of this prohibition. Treating s 55 as an exclusive definition does not, therefore, create any gaps in coverage inconsistent with the purpose of the SA to ensure that investors have adequate and accurate disclosure.
Finally we note, as the respondents submit, Mr Houghton pleaded a case based on specific statements which he alleged were deemed to be untrue by the SA.
Discussion of s 56
The appellant argues that the Judge erred when he imported into s 56 a requirement that the untruth has to be material to trigger civil liability. He says this is an unjustified reading-down of s 56(1) inconsistent with the Supreme Court’s guidance that, as the SA is investor-protection legislation, these extremely broad primary provisions are to be given their ordinary meaning.[33]
[33]See Hickman v Turn and Wave Ltd, above n 17, at [45]–[46].
The appellant says s 56(1) should be read to create civil liability for the respondents if he proves that the prospectus contains an untrue statement, particularly where there are statutory defences. He does not have to prove the misleading content was material to the decision to invest or that the particular statement caused him loss; it is sufficient if it is untrue. This is especially so as s 33(1) of the SA prohibits in absolute terms the marketing of a security in a registered prospectus other than one which complies in all respects with the SA.[34] If the prospectus contains an untrue statement, it does not comply with the SA and therefore should not have been distributed.
[34]Securities Act, s 33(1)(c).
The Judge considered it was necessary for the appellant to show the untrue statement was material because, in terms of s 56(1), he had to show he had invested “on the faith of” a registered prospectus. He said:[35]
[117] Despite the focus on specific reliance in parliamentary materials, I do not treat the requirement that an investment had been made “on the faith of” a registered prospectus as requiring the same reliance on particular passages as arises, for example, in a tortious claim for reliance on a negligent misstatement. Had the legislature intended that closeness of connection, then the link between the prospectus and the investor’s decision to invest would instead have been expressed in terms of reliance on the content found to be misleading.
[118] I consider that the legislative intention was to create liability in respect of misleading content or omissions where that content materially contributed to a claimant’s decision to invest. The untrue statement or statements must be sufficiently material that, if corrected, it would then have been more likely than not that the investment would not have been made. That proposition assumes that the claimant makes out reliance on the prospectus in general, and that his or her assessment of the risks of investment would more likely than not have been reversed if the untrue statement or statements were corrected. It also involves rejection of the plaintiff’s broader claim that indirect reliance, merely on the existence of a prospectus, would be sufficient.
[35]HC judgment, above n 2.
We do not consider the appellant’s reliance upon the Supreme Court decision in Hickman assists him. The Court was there concerned with whether it should read down the words of broadly expressed provisions. That issue does not arise in this case. The Judge’s finding that the untrue statement must be material before a plaintiff may succeed in a claim under s 56 did not flow from a reading down of s 56(1) but rather from the express requirement that a plaintiff show it suffered loss “by reason of such untrue statement”. If an untrue statement is immaterial, it is difficult to see how a plaintiff can have suffered loss by reason of it. Moreover, as the Judge observed, the policy of the SA accords with this approach.[36]
[36]At [118] and [120].
Mr Carruthers attempts to meet this point with a “but for” argument constructed as follows. The SA prohibits registration of a prospectus which contains an untrue statement. This prospectus contains an untrue statement and should not then have been registered. If the prospectus had not been registered, Mr Houghton would not have invested and would not have suffered loss.
There are two fallacies in this argument. The first is that there is no absolute prohibition on the registration of a prospectus which includes an untrue statement. The focus of the legislation is on ensuring the accuracy of material information. Thus s 34(1)(b) prohibits distribution of a prospectus if it is “false or misleading in a material particular by reason of failing to refer, or give proper emphasis, to adverse circumstances (whether or not it became so misleading as a result of a change in circumstances occurring after the date of the prospectus)”. The prohibition in s 34(1)(b) would not apply if the untrue statement was not material.[37]
[37]See also s 37A(1)(b) of the Securities Act which provides that no allotment of a security to the public for subscription shall be made if, at the time of allotment, the prospectus is known by the issuer to be false or misleading in a material particular.
The second fallacy is that, as Mr Houghton frames his argument, the loss is caused by the distribution of the prospectus and not the untrue statement. Section 56 is clear in its terms that liability is only established when a plaintiff shows it suffered loss by reason of the untrue statement.
Does a plaintiff have to show reliance upon the untrue statement to establish loss by reason of it? This issue is resolved by the terms of s 56.
The first element is that the plaintiff must establish that the investment was made “on the faith of” the prospectus. This requirement excludes those who invest other than in response to the prospectus.[38] However, the use of the expression “on the faith of” suggests something more than merely investing after reading the prospectus. It has the connotation of an investor trusting in the truth of the statements in the prospectus and subscribing in reliance on those statements. In that sense, the expression “on the faith of” may be seen as a necessary first part of establishing that the untrue statement was material to the decision to invest.
[38]See Saunders v Houghton [2009] NZCA 610, [2010] 3 NZLR 331 at [85]–[86] where this Court expressly reserved its opinion on the scope of reliance required in relation to the claim. It contemplated, however, general reliance on the prospectus being sufficient.
The second element is that the plaintiff prove it suffered loss by reason of the untrue statement. How does a plaintiff go about satisfying this element of the s 56 cause of action? The Judge said that the plaintiff must establish that its assessment of risk was likely to have been reversed absent the untrue statement.[39] But again, how does a plaintiff do that? There are valid objections to resting this assessment upon the evidence of the plaintiff as to what it would have done. It is an easy thing for a plaintiff, with the hindsight knowledge that the investment was bad, to characterise the untrue statement as decisive in their decision to invest. Such evidence would be difficult for a defendant to test and, if measured on its own, difficult for a court to assess.
[39]HC judgment, above n 2, at [118].
This difficulty was described in Broome v Speak by Buckley J as follows:[40]
It is unintelligible to say that a person relied upon a fact which he was not told, or relied on his not being told a fact, and when you call a man after the event to say whether, if he had known a further particular fact, he would have done something or not, speaking for myself, it is so difficult to say exactly what a few years ago you would have done under different circumstances, that I should regard that evidence as of very little value. Be the man the most honest man possible, it is so easy to be wise after the event, that it is difficult for any man to say what he would have done under circumstances which did not arise. It is too much to expect of him that he should be able to say fairly what he would have done under those altered circumstances. The test I think to be applied is—it has been so stated by Lord Halsbury, and was so stated in Smith v Chadwick, and will be found in many cases—that if you find that the matter withheld is such as that if disclosed it reasonably would deter or tend to deter an ordinarily prudent investor from applying for the shares, then is he entitled to relief.
[40]Broome v Speak [1903] 1 Ch 586 (Ch) at 604 (footnote omitted).
A related difficulty is the artificiality of an exercise in assessing how one particular statement acted upon the mind of the plaintiff when the decision to invest is made on the faith of the whole prospectus, an observation made by Lord Halsbury LC in Arnison v Smith:[41]
It is an old expedient, and seldom successful, to cross-examine a person who has read a prospectus, and ask him as to each particular statement what influence it had on his mind, and how far it determined him to enter into the contract. This is quite fallacious, it assumes that a person who reads a prospectus and determines to take shares on the faith of it can appropriate among the different parts of it the effect produced by the whole. This can rarely be done even at the time, and for a shareholder thus to analyse his mental impressions after an interval of several years, so as to say which representation in particular induced him to take shares, is a thing all but impossible. A person reading the prospectus looks at it as a whole, he thinks the undertaking is a fine commercial speculation, he sees good names attached to it, he observes other points which he thinks favourable, and on the whole he forms his conclusion. You cannot weigh the elements by ounces.
[41]Arnison v Smith (1889) 41 Ch D 365 (CA) at 369.
In our view the proper approach is this. It is a question of fact whether an investor suffered loss by reason of an untrue statement. There may be evidence that satisfies the court that a particular investor was not affected in their investment decision by the untruth, for example, if the investor knew the true position but proceeded to invest. But if there is no such evidence, in reaching a view as to whether the plaintiff’s investment decision was affected by the untrue statement, the court must ask itself whether the notional investor would have invested if they had known the true position. The materiality of the statement is obviously critical at this point. This test includes both subjective and objective elements. The court asks first if the notional investor’s investment decision was more likely than not to have been influenced by the untrue statement. If the answer is yes, the element is made out unless the evidence establishes that the particular investor did not rely upon the untrue statement.
We note that this is the general approach taken by the English courts concerning misleading material within a prospectus. In Arnison v Smith Lord Halsbury LC put the matter as follows:[42]
It was said, and I think justly, by Sir G Jessel in Smith v Chadwick, that if the Court sees on the face of the statement that it is of such a nature as would induce a person to enter into the contract, or would tend to induce him to do so, or that it would be a part of the inducement to enter into the contract, the inference is, if he entered into the contract, that he acted on the inducement so held out, unless it is shewn that he knew the facts, or that he avowedly did not rely on the statement whether he knew the facts or not.
[42]Arnison v Smith, above n 41, at 369 (footnote omitted).
Arnison was a case involving an allegation of fraudulent misrepresentation or deceit, but we do not consider that the approach to causation set out there is to be limited to such cases. A year after that decision the earliest ancestor in the particular statutory family tree in which s 56 has a place was enacted in the United Kingdom: s 3 of the Directors Liability Act 1890 (UK).[43] Section 3(1) of that Act provided:[44]
Liability for statements in prospectus
Where after the passing of this Act a prospectus or notice invites persons to subscribe for shares in or debentures or debenture stock of a company, every person who is a director of the company at the time of the issue of the prospectus or notice, and every person who having authorised such naming of him is named in the prospectus or notice as a director of the company or as having agreed to become a director of the company either immediately or after an interval of time, and every promoter of the company, and every person who has authorised the issue of the prospectus or notice, shall be liable to pay compensation to all persons who shall subscribe for any shares, debentures, or debenture stock on the faith of such prospectus or notice for the loss or damage they may have sustained by reason of any untrue statement in the prospectus or notice, or in any report or memorandum appearing on the face thereof, or by reference incorporated therein or issued therewith …
[43]A year later a similar provision was brought over to New Zealand in s 3 of the Promoters’ and Directors’ Liability Act 1891. It was subsequently inserted into s 76 of the Companies Act 1903, s 76 of the Companies Act 1908, s 48 of the Companies Act 1933, s 53 of the Companies Act 1955 and finally in s 56 of the SA.
[44]Directors Liability Act 1890 (UK) 53 & 54 Vict c 64, s 3.
The fundamental effect of s 3 was to remove the requirement that a plaintiff prove actual fraud against a director in an action for misrepresentation in a prospectus.[45] Nevertheless, the Arnison approach to causation continued to be applied under the Act.[46]
[45]After the decision of the House of Lords in Derry v Peek (1889) 14 App Cas 337 (HL). See comments in Bundle v Davies [1932] GLR 379 (SC) at 381; and Clark v Urquhart [1930] AC 28 (HL) at 56.
[46]See for example Drincqbier v Wood [1899] 1 Ch 393 (Ch) at 404; Greenwood v Leather Shod Wheel Co [1900] 1 Ch 421 (CA) at 433; Broome v Speak, above n 40, at 604–605; and Broome v Speak [1903] 1 Ch 606 (CA) at 623.
Section 56 of the SA, although more simply expressed, continues to utilise the same key concepts as s 3 of the Directors Liability Act. The investor must show it invested “on the faith of” the prospectus. It must show that it suffered loss by reason of any “untrue statement” in the prospectus. The carrying forward of these key phrases shows an intention to carry forward the common law that had developed around those provisions. We therefore consider that the approach described in Arnison is equally applicable to s 56. We would add one gloss to it, which derives from the statutory framework in which s 56 operates. It seems to us that, when applying the objective part of the test described in Arnison, the relevant standard should be the standard provided for in the SA: that of the notional investor as we now discuss.[47]
Did the Judge err in his application of the prudent non-expert investor test?
[47]See Securities Act, s 38D(a).
It is common ground that what is misleading for the purposes of ss 55 and 56 is to be assessed by reference to an objective standard: the prudent but non-expert investor. Section 38D(a) provides that the prudent but non-expert person (again, the notional investor) is the audience for investment statements. In a number of decisions the notional investor has also been held to be the appropriate standard against which statements in prospectuses are to be measured, when considering whether they are misleading for the purposes of s 55 of the SA.[48]
[48]R v Moses, above n 18, at [63]; R v Petricevic, above n 30, at [224]–[225]; and R v Graham [2012] NZHC 265, [2012] NZCCLR 6 at [25].
On appeal Mr Carruthers, while accepting the applicability of the notional‑investor standard, argues that Dobson J erred in adding to the statutory scheme a requirement that the notional investor is required to seek advice in matters they do not understand. He argues that since s 38D states that one of the purposes of an investment statement is to provide “certain key information that is likely to assist a prudent but non-expert person to decide whether or not to subscribe for securities”, the key information should not be provided in a format that can only be understood by the expert investor, prudent or otherwise.
Judgment
The Judge noted that, in an earlier decision concerning finance companies, he had declined to confine the characterisation of the notional investor to those who would be guided in their consideration of investment statements by advice from investment advisors.[49] But, he said, the investment decision in relation to Feltex shares was relatively more complex than that confronting potential investors in debt securities issued by finance companies.[50] Whilst he adhered to the view that some notional investors would make decisions after considering a prospectus without taking advice, he acknowledged that the more complex any prudent evaluation of an investment decision needs to be, the less scope there exists to measure misleading content for prudent non-expert readers on the assumption they did not get advice.[51] He said:
[98] Accordingly, the notional investor, through whose eyes I will test whether the prospectus had misleading content or omissions, is a non-expert who has at least a basic understanding of all the narrative content of the prospectus. Such a reader is able to understand and evaluate the risks described in the “What Are My Risks?” section of the prospectus. The notional investor may not understand the significance of financial statements. Certainly, such readers will be unlikely to have the skills to analyse the financial data set out in the prospectus, in order to form a view about the attributes of the investment, independently of the narrative descriptions of the business and its prospects as they are set out in the prospectus.
[99] This notional investor will, for the most part, recognise the content of the prospectus that he or she does not understand. To the extent that passages not understood are perceived as material to his or her decision, then prudently he or she will not invest in the company before seeking clarification on the meaning of such passages.
(Footnote omitted.)
Analysis
[49]HC judgment, above n 2, at [82].
[50]At [88].
[51]At [93].
The appellant’s argument entails the proposition that only information comprehensible by the notional investor without professional assistance may be included in a prospectus.
There is nothing in the SA or the Securities Regulations requiring that conclusion. The standard for consideration is the ordinary prudent investor. A prudent investor will of course seek clarification when they realise they do not understand something. The notional investor could therefore be expected to seek advice when they realise they are unable to understand information contained in the prospectus.
This approach is consistent with the broader statutory scheme, which requires the offeror to provide key information likely to assist the notional investor to decide whether or not to invest. It is also consistent with the requirement that every investment statement set out at the front the following statement:[52]
Investment decisions are very important. They often have long-term consequences. Read all documents carefully. Ask questions. Seek advice before committing yourself.
[52]Securities Regulations 1983, sch 3D cl 1(1).
Mr Carruthers argues this approach places a burden upon the notional investor that is inconsistent with a statutory scheme which places the burden of compliance upon the issuer. We do not agree. The SA’s scheme proceeds upon the basis that the audience for a prospectus and investment statement is a notional investor who exhibits certain characteristics. Applying the standard of that notional investor when determining whether or not a statement is misleading, does not amount to imposing an obligation on the investor to ensure the issue is compliant.
The Judge did not assume that every investor would seek advice, only the investor who realises they do not understand the material they are presented with but still perceives it to be material to the investment decision. The Judge went on to refine this exception further:[53]
[100] I have to allow for exceptions where a prudent, non-expert investor reasonably does not appreciate that he or she does not understand particular misleading content, and proceeds in reliance on that misunderstanding. Such exceptions are context-specific, requiring an assessment of whether a prudent, non‑expert reader would reasonably appreciate that he or she had misunderstood the particular point being conveyed. This makes for an unwieldy test that should hopefully be unnecessary in other cases, but which I am satisfied is necessary to correctly apply the statutory test to the diffuse criticisms in this case. It is particularly appropriate where the alleged misleading content or omission would not mislead a sophisticated reader of the prospectus.
[53]HC judgment, above n 2.
To conclude:
(a)The Judge was correct to hold that the purpose of the SA is to protect investors by ensuring they have adequate and accurate disclosure to enable them to assess the risks entailed in the investment. The purpose is not to protect investors from risk. “Full” disclosure, above and beyond that mandated by the SA, is not required.
(b)For the reasons we have set out above, the definition provided in s 55 of “untrue statement” can be treated as an exclusive definition. An entire prospectus cannot, for the purposes of the SA, be an untrue statement. The need to identify particular untrue statements in a prospectus for which liability under s 56 is alleged to arise is a well‑established requirement. Any omission must be linked to a specific statement said to be untrue.
(c)We consider there is a materiality requirement in s 56. To succeed in a claim, a plaintiff must prove an untrue statement, that they read and considered the prospectus, and that the notional investor’s decision to invest was more likely than not to have been influenced by the untrue statement (unless the evidence establishes the particular plaintiff did not rely on the untrue statement).
(d)Lastly, the Judge did not err in his application of the “prudent, non‑expert investor” standard.
Grounds of appeal relating to factual findings
Mr Carruthers argues that several of the Judge’s factual findings were against the weight of the evidence, some of these influenced by the errors of law contended for by Mr Houghton and addressed earlier. The untruths Mr Houghton pursues on appeal are as follows:[54]
(a)The forecast revenue figures for FY04 and projected revenue figures for FY05 were untrue because the respondents could not reasonably have believed they would be achieved either at the time the prospectus was issued or at the time of the allotment of securities under the prospectus.
(b)The statements in the prospectus in relation to Australian Government grants (referred to as SIP grants) were untrue because they were misleading. They failed to disclose the extent of the contribution SIP grants made to the net surplus attributable to shareholders, and therefore the extent of Feltex’s reliance upon them.
(c)The consolidated statement of prospective financial performance for FY04 and FY05 contained a line labelled “Net surplus attributable to Shareholders” and below that a line labelled “Net surplus attributable to Shareholders (before amortisation, write-offs and Early Redemption Amount)”. This latter line is referred to in these proceedings as the second bottom line. Mr Houghton alleges it is misleading as it sits in the place the profit figure is normally found. It would, he says, confuse the notional investor into having a falsely positive view of the company’s future profitability.
(d)The statement on page 21 of the prospectus, that Feltex will use funds raised from the issue of shares to fund redemption of the bonds, was said to be misleading because some ($3.5 million) of those funds were used to pay part of the FY04 dividend of $9 million. During the hearing of the appeal an alternative argument was formulated: the prospectus should have included a statement that the size of the IPO had been increased to enable the payment of a dividend of $9 million.
(e)The prospectus contained statements regarding the purchase of 6,476,900 shares outside the offer by directors and senior managers. Mr Houghton alleges that those statements were untrue. They represented that directors would pay consideration equivalent to the retail price for the shares when the price paid was much less than retail. The statements also represented that directors would fund the purchase out of their own resources when, in reality, the purchase was 100 per cent funded by the proceeds of the sale of shares by CSAMP to the public through the IPO.
Undisclosed adverse trends and revenue forecast for FY04
Appellant’s argument
[54]The written submissions recorded several alleged errors of fact which were not pressed during oral argument. Errors falling into this category are “Dobson J recorded his view that Feltex was a long established manufacturer of carpets” and “Dobson J records that the respondent Mr Magill, in his capacity as Chief Executive Officer of Feltex, was a member of the Due Diligence Committee”. Mr Houghton does not, however, contend that any of these factual errors on their own were material to the outcome before Dobson J and we therefore do not consider them further.
It was argued for Mr Houghton before Dobson J that the revenue forecast for FY04 was unreasonable given Feltex’s trading history and was therefore an untrue statement for the purposes of ss 55 and 56 of the SA, and misleading for the purposes of s 9 of the FTA.
The appellant says that by 5 May 2004, the date of the registration of the prospectus, daily sales reports for April received by the chief financial officer, Mr Tolan, who sat on the DDC, and by Mr Magill, the chief executive officer, showed a significant shortfall for sales against the forecast which had been utilised in preparing the FY04 forecast in the prospectus.
Following registration of the prospectus there was a second month of underperformance. Sales for May were also significantly behind forecast. By the time of the allotment of securities in June 2004 the board of directors knew there had been two months of shortfall in sales. They therefore knew that the forecast figures for FY04 were incorrect and, on Mr Houghton’s case, untrue statements in terms of s 55. Yet the company proceeded to allot securities.
Factual background
The prospectus included consolidated statements of prospective financial performance, prospective cash flows and prospective financial position for FY04. The figures utilised were based upon actual performance by the company for the nine months ending 31 March 2004 and forecast financial performance for the last three months of FY04: April, May and June 2004. Mr Tolan was in charge of preparation of the forecast. He said it was substantially complete by 8 April 2004 but the team continued to make minor changes to it throughout April and the final version was completed by 30 April 2004.
Mr Tolan’s evidence was that the FY04 forecast in the prospectus did not include actual sales results for the month of April because, although he would have had reasonably accurate sales figures by that time, he would not have had available to him all other financial figures for the month such as costs and rebates to allow his team to produce an accurate monthly trading report. There is nothing to contradict that evidence.
Nevertheless, before the prospectus was registered, the board was aware that there would almost certainly be a shortfall in sales for April. The 27 April board minutes record “April is forecast to be a difficult sales month but the shortfall will be picked up in May and June.” There is no mention of the shortfall in the minutes of the DDC meeting on 4 May 2004, the day before registration of the prospectus, and the minutes of that meeting record that no material items had arisen since the last meeting on 30 April 2004. The minutes for the 30 April DDC meeting also contain no discussion of the shortfall in sales for April.
The final DDC meeting was held on 2 June 2004. The purpose of the meeting was to check whether any “material adverse circumstances” had arisen since the prospectus was issued on 5 May 2004. By the time of the meeting it was known that sales figures for April and May had fallen short of the figures used to compile the forecast for total sales for FY04. The forecast for FY04 had been prepared on the basis of April sales figures of $29,828,000, whereas actual sales were $24,271,000. The forecast had included a figure of $32,959,000 for May,[55] whereas actual sales were $26,657,000. By the time of the 2 June DDC meeting the projection was for an anticipated shortfall of approximately 2.8 per cent against forecast annual sales.
[55]Although we note that Mr Cameron, an expert engaged by the respondents, said the May 2004 forecast was for sales of $34,054,000.
At the 2 June 2004 meeting, Mr Tolan, the chief financial officer, presented information to the DDC recorded as follows:
The only number in the forecast that may not be achieved is the sales number and there should not be an issue with any of the other forecast amounts. Des [Tolan] confirmed that the Company’s balance sheet should be in line with the forecast balance sheet. Des indicated that the sales shortfall would be between $7.5 million and $9 million for the year ending June 2004, which translates to a shortfall of approximately 2.8 % of annual sales. Sales for the fourth quarter were currently down around 10 % but the feedback from the market indicates that June will be a strong month as the retailers push for their quarterly rebates.
Des confirmed that in his view, he did not consider the Company not meeting the sales forecast was a material adverse circumstance as the Company should still achieve its EBITDA and Net Profit After Tax forecast numbers.
The DDC and all of the observers present, including representatives from Feltex’s auditors, Ernst & Young, agreed that in the circumstances the sales shortfall was not material. This was then discussed at a full board meeting later the same day. The board resolved that there was no material adverse circumstance which required disclosure before it could proceed with allotment.
Judgment
Dobson J reviewed the evidence, including expert evidence called for both sides as to the significance of the failure to meet forecast sales figures for April and May 2004. He summarised the case for Mr Houghton before him as follows:[56]
[176] Mr Forbes [counsel for Mr Houghton in the High Court] argued that an anticipated failure to meet the forecast sales revenue to 30 June 2004 would have been important to readers of the prospectus for a number of reasons. First, it would signal that the forecast performance for FY2004 may not be achieved. Secondly, it would cast doubt on the reliability of the assumptions used, or the method for producing the forecast, given that those preparing it had actual figures for the first nine months of the 12 month period. Thirdly, readers were likely to treat the projection for FY2005 as being based on, or at least influenced by, the forecast for FY2004 and a doubt about the reliability of the forecast would also send a cautionary signal as to the reliability of the projection for the following year. Fourthly, it would enable readers of the prospectus to assess the reliability of positive claims about Feltex that were made in the prospectus, from a better informed perspective.
[177] In addition, Mr Forbes argued that the way the analysis of Feltex’s prospects was structured in the prospectus both explicitly and implicitly rated the extent of sales revenue as an important criterion. Mr Forbes argued that that importance was further heightened by Feltex’s sensitivity to high break-even costs. He cited an acknowledgement by Mr Magill in cross‑examination to the effect that if Feltex did not achieve sufficient sales revenue, then because of the high break-even costs it would obviously go into losses. Mr Magill acknowledged that he had explained this point to brokers and in institutional presentations prior to the IPO. The point can therefore be seen as having some importance, at least to analysts.
[56]HC judgment, above n 2 (footnote omitted).
The Judge said the defendants’ case was that Mr Houghton was cherry‑picking parts of only one feature of the management reports and that, when assessed overall, the data available to the directors at the time the prospectus was registered and when the securities were allotted did not create any cause for concern that the forecast revenue should be qualified or changed.[57]
[57]At [178].
The Judge, however, was of the view that the “concerted responses in evidence from and on behalf of the defendants”, denying the importance of Feltex’s failure to meet the gross revenue forecast and sales targets to 30 June 2004, involved an element of overstatement.[58] He said:[59]
The contemporaneous documents do support the directors’ focus on other measures of performance, but that cannot entirely eliminate the relevance of the trend in sales for a manufacturing company.
[58]At [186].
[59]At [186].
He continued:
[187] I do not accept entirely the defendants’ claim that the variance in gross sales revenue was not relevant. However, I am not persuaded that, on the statistics that were available on 5 May 2004, they unreasonably rejected a negative signal that should have been acknowledged in relation to the level of gross revenue from sales and volume of carpet sold. I agree with the directors that it was not tenable for the plaintiff to criticise them for accepting management’s advice that the variance was not material, when the FY2004 result subsequently confirmed that their analysis was accurate.
He then proceeded to assess what alternative courses of action were available to the directors:
[188] One alternative to the course the directors adopted would have been for them to adjust the gross revenues downwards, but to improve the margins achieved on relatively smaller sales to produce comparable EBITDA and net profit after tax (NPAT) forecasts for FY2004. A second alternative might have been to leave the numbers in the forecast as they were, but to amend the commentary to acknowledge the apparent extent by which actual gross revenue might not match the forecast number. Any such comment could legitimately cite the analysis provided for the directors, to the effect that although gross sales revenues were unlikely to achieve the forecast number, improved margins meant that the directors adhered to the forecast for EBITDA and NPAT. That is effectively the message that shareholders received in August 2004 when the result for FY2004 was announced. As Professor Cornell emphasised, the lack of reaction in terms of the share price at that time tends to confirm that the difference was not material.
He concluded that these courses of action available to the directors tended to demonstrate the lack of materiality of the variances in sales and revenue.[60]
Discussion
[60]At [192].
The Judge correctly stated the legal test for whether the information contained in the prospectus as to the forecast FY04 revenue figure amounted to a misrepresentation.[61] The inclusion of this material as a forecast is, in effect, an inclusion of a statement of the directors’ opinion as to the likely performance of the company through to the end of the financial year. Different considerations apply when considering whether a statement of opinion as to future events is untrue as when considering a statement of existing fact. The expression of an opinion can only amount to misrepresentation if the maker of that statement:
(a)did not honestly believe the opinion being expressed; or
(b)had no reasonable basis for that belief.
[61]At [126].
Although the Judge applied the correct legal test to determine whether the forecasts for FY04 were misrepresentations, it seems to us that the truth or otherwise of the forecast operating revenue was not at issue at trial and certainly is not on appeal.[62] This is because the directors did not claim that, as at June 2004, they had a reasonable basis to believe the forecast total operating revenue for FY04 included in the prospectus would be achieved. Rather, their defence was that, within the context of the company’s overall performance, that shortfall figure was immaterial.
[62]See [124]–[126] citing David v TFAC Ltd [2009] NZCA 44, [2009] 3 NZLR 239 at [43]; and Jagwar Holdings Ltd v Julian (1992) 6 NZCLC 68,040 (HC) at 68,077.
In our view the evidence establishes that while the directors may have continued to believe that the forecast was correct as at 5 May 2004, by the time of allotment they knew there would be a shortfall in total operating revenue against that forecast. They decided it was not a material shortfall in itself or in the overall context of the company’s performance. Having reached that view, they concluded that the prospectus did not require correction. Their approach was undoubtedly guided by the statutory framework which requires that a prospectus not be distributed if it is false or misleading in a material particular[63] and that securities not be allotted if, at the time of the allotment, the prospectus is known by the issuer or any director to be false or misleading in a material particular.[64] Their conclusion, in substance, was that an investor would not regard the shortfall as material in determining whether or not to proceed with their investment in the company.
[63]Securities Act, s 34(1)(b).
[64]Section 37A(1)(b).
We proceed upon the basis that the statement of prospective total operating revenue for FY04 included in the prospectus was, as at the date of the allotment, an untrue statement. But Mr Houghton must also show that the untrue statement was material in the sense we have described at [69] above. We have to consider whether the notional investor was more likely than not to have taken a different view on their investment decision if the total operating revenue forecast for FY04 had been corrected.
We ask ourselves, as did the directors at the time, how would an investor view this information? Before addressing this point in detail we mention a point taken by the respondents. The information in question was stated in the prospectus to be a forecast only, prepared on the basis of “assumptions as to future events that the Directors reasonably expect to occur associated with the actions the Directors reasonably expect to take as at the date the information was prepared”. The investors were advised that there was no present intention to update the information. Investors, say the respondents, would therefore expect variation from forecast and would not expect to be told of minor variations. That analysis is accurate but we consider that it does not take the matter very far. The statutory scheme placed an obligation on the issuer to ensure prospective investors were notified of any material adverse circumstance, including a change of circumstance in the time between registration of the prospectus and allotment of securities. The issue in this proceeding is whether the shortfall was material.
There are a number of factors which have led us to conclude that the shortfall in sales was not material for the purposes of ss 34 or 37A, and that it was also not material in the sense that it would more likely than not have caused an investor to take a different view of their prospective investment in Feltex. We refer to the following factors.
This was a two-month sales shortfall. There was ample evidence that sales figures can fluctuate significantly from month to month and there were explanations for that shortfall which suggested the downturn was temporary. If the market had been provided with the information regarding the shortfall, it would also have been provided with the explanations for it as understood at the time. These included that March had been a strong month but retailers were taking some time to sell that product through; scheduled plant closures had resulted in Feltex not being able to deliver certain sales orders by the required delivery dates; and unexpected production difficulties, now resolved, had resulted in a $3 million shortfall on sales.
The information that Feltex management was obtaining from retailers caused them to believe that June would be a good month so that the shortfall as against forecast was likely to be partially recovered by a strong performance in June.
The shortfall in sales would not in any event result in a shortfall in EBITDA or net profit after tax.[65] This was in part due to the success of a strategy of changing Feltex’s “product mix” away from lower-priced and lower-margin products in favour of higher-priced and higher-margin products. In other words, what was important to the company’s performance was not only how much carpet was being sold but what type was being sold. Feltex could make more profit from lower total revenue with the right product mix and although Feltex’s sales revenue increased by 3.9 per cent from FY03 to FY04, over that same period the margin earned on sales increased by 13.3 per cent. The Judge commented on this aspect of Feltex’s performance:[66]
[181] In his evidence-in-chief, Mr Thomas produced a table of comparisons with the prior year which showed a 21 per cent increase in premium/mid-product sales for FY2004, an 8.9 per cent reduction in mass sales, and an improvement in margins of 13.3 per cent. The plaintiff did not challenge the evidence given by Mr Thomas and others of this strategy to change Feltex’s product mix to improve the margin on goods sold. The extent of those changes reduces the relevance that could otherwise be attributed to the gross sales data in terms of revenue generated and volume of products sold. It means that the company’s targets were altered so that comparisons with the prior year were not on a fully like-for-like basis. The relevance of a variance on the opening item in a forecast is lessened by countervailing variances in subsequent items, which mean that the final outcome more or less accords with what was forecast.
[65]There was expert evidence supporting the view that EBITDA was the more helpful measure for the prospective investor.
[66]HC judgment, above n 2.
The appellant says that investors would have discounted this positive EBITDA figure if they had known it was to be achieved by extraordinary and unsustainable cost-cutting measures: the removal of bonuses for sales staff. But the evidence does not bear that out. The contractual entitlement to bonuses was linked to the budget revenue figure. Because the budget revenue figure was not met, the bonuses did not become payable. They were not then removed as part of a cost‑cutting measure.
Another argument was that investors would have discounted the positive aspects of Feltex’s performance if they had known it was achieved by “emergency‑style” sales techniques. It was argued that offering extended credit to retailers was adopted as a strategy to boost or accelerate sales, giving a false impression of how well sales were going — false because they were unsustainable. Because the offering of extended credit was a new practice, it was argued, the results for FY04 were not comparable to any other period.
However, this argument is unsustainable in light of the evidence of Mr Tolan and Mr Magill that the offering of extended credit was not a new practice. Mr Tolan said it was going on when he joined Feltex in 2002. Mr Magill’s evidence was that it was a practice that had been employed at Shaw and was brought across to Feltex.[67]
[67]The evidence of Messrs Tolan and Magill actually refers to the forward dating of invoices. The appellant says that is a different thing to extended credit sales. We accept the respondents’ submission that it is not.
The two-month sales shortfall has also to be seen within the context of a generally improving picture for Feltex in terms of financial performance. At the half‑year point at 31 December 2003, Feltex had achieved sales around $5.3 million ahead of the same period the previous year, its EBITDA was ahead by $8.9 million and its profit by $10.2 million. The third quarter to March is also relevant. The actual figures for this quarter were included in the prospectus. They also showed very positive variances to the same point in time in the previous year.
Discussion
The evidence is that CSAMP was a holding entity for Credit Suisse’s private‑equity investments in the Asia-Pacific region, which included the investment in Feltex. It was administered and directed by CSPE. Both CSAMP and CSPE confirmed that CSPE was the promoter. Credit Suisse’s legal advisors confirmed that this was the correct analysis.
We agree with the Judge’s analysis that in these circumstances it was CSPE which fell within the s 2 definition of promoter, as it was CSPE and not CSAMP which was a means by which the plan or programme pursuant to which the securities were issued to the public was formulated. It was CSPE which played the active role for Credit Suisse in the formulation and preparation of the IPO.
There is nothing in the agency point. The SA is definitive of which entity or entities are to be classed as promoter, not the common law. As discussed above, the definition focuses upon the role played, not ownership, in determining who is and who is not a promoter for the purposes of the SA. This interpretation does not create a potential loophole as the vendor of shares is liable as an issuer and, where the issuer is a corporate entity, the issuer’s directors are liable pursuant to s 56.
Ground of appeal: Do s 63A of the SA and s 5A of the FTA apply to preclude a claim under the FTA?
The first two causes of action pleaded in the fourth amended statement of claim were claims under the FTA. The defence to those claims was that the FTA could not apply because of the provisions of s 63A of the SA and s 5A of the FTA. The Judge held that those provisions precluded a successful claim under the FTA where, as here, the conduct is regulated by the SA and the defendant is not liable for that conduct under that Act.
Legislative provisions
Section 63A of the SA was added by the Securities Amendment Act 2006 (SAA), which came into force 25 October 2006. It provides:
63ANo liability under Fair Trading Act 1986 if not liable under this Act
A court hearing a proceeding brought against a person under the Fair Trading Act 1986 must not find that person liable for conduct that is regulated by this Act if that person would not be liable for that conduct under this Act.
Section 24 of the SAA contained transitional provisions which provided, in material part, as follows:
24 Transitional provision for existing offences and contraventions
(1)The principal Act continues to have effect as if it were not amended by this subpart for the purpose of—
…
(b)commencing or completing proceedings for an existing offence or contravention:
(c)imposing a penalty or other remedy, or making an order, in relation to an existing offence or contravention.
(2)In this section, existing offence or contravention means—
(a)an offence under, or contravention of, the principal Act that was committed or done in respect of a prospectus that was registered, or an advertisement that was distributed, before the commencement of this subpart; …
The SAA contained numerous amendments of substance to securities law in relation to offences and contraventions and s 24 must be understood in that context. As the Judge said “[t]he transitional provision in s 24 of the [SAA] was required to regularise the position with a number of the substantive amendments that had been made”.[119]
[119]HC judgment, above n 2, at [625].
Section 5A was added to the FTA and came into effect on 29 February 2008. It was inserted by the Fair Trading Amendment Act 2006. Section 5A duplicated the effect of s 63A. It provides:
5ANo liability under Act if not liable under Securities Act 1978 or Securities Markets Act 1988
A court hearing a proceeding brought against a person under this Act must not find that person liable for conduct—
(i)that is regulated by the Securities Act 1978 if that person would not be liable for that conduct under that Act:
…
The Feltex prospectus the subject of these proceedings was issued well before either s 63A or s 5A came into force. The conduct the subject of the proceeding also occurred before either provision came into force. Specifically, this proceeding was issued after s 63A came into force but before s 5A came into force.
Ms Mills for the appellant argues that neither s 5A nor s 63A applies to oust the application of the FTA to these proceedings. She argues that the effect of the transitional provision, s 24, is that s 63A does not apply to proceedings concerning prospectuses registered before 25 October 2006. And, in any case, to apply either provision so as to deprive shareholders of rights that had accrued under the FTA before either provision came into force is to apply those provisions retrospectively. Such an interpretation is inconsistent with standard principles of statutory interpretation and, in particular, with s 7 of the Interpretation Act 1999 which provides that an enactment does not have retrospective effect. The Judge rejected these arguments. The appellant says he erred in doing so.
Judgment
The Judge held that in the circumstances of this case s 63A meant the Court could not find the respondents liable under the FTA.[120] He accepted an argument that s 63A of the SA does not have retrospective effect.[121] He said:
[622] In considering the terms in which these mutual exclusivity provisions were expressed by the legislature, it is relevant that s 63A does not constrain commencement of proceedings in which causes of action invoke both the SA and the FTA. What is prohibited by both provisions is a finding of liability against a person under the FTA, if the claim relates to conduct that is regulated by the SA where the defendant would not be liable for the conduct complained of under the SA.
[623] Although there can be no doubt in the present circumstances, claims are likely to arise in contexts where the claimant is not able to be certain at the outset whether the conduct complained of is indeed regulated by the SA. An obvious example is whether the offer in question constituted an offer of securities to the public. In such cases, an application to strike out a cause of action under the FTA might well fail because a determination is needed as to whether the conduct complained of is indeed regulated by the SA before the Court could exclude the prospect of a finding of liability against the defendant under the FTA.
[624] On that interpretation of the provisions, no issue of retrospectivity arises. In this case, the third cause of action under the SA is pleaded as an alternative to the first cause of action under the FTA. However, it is only when there is an admission or a finding that the conduct the plaintiff complains of is regulated by the SA that the Court is deprived of the jurisdiction to make a finding of liability under the FTA.
(Footnote omitted.)
[120]At [629].
[121]At [624].
The Judge saw the absence of any transitional provision in the FTA as supporting his interpretation because, on his interpretation, such a transitional provision was unnecessary as neither s 63A nor s 5A would operate retrospectively.[122] But the transitional provision in s 24 of the SAA was required to address whether a number of the substantive amendments to the SA applied to proceedings founded upon an infringement committed when these substantive amendments were not in force.[123] There were no corresponding provisions inserted into the FTA which were required to be addressed in a similar fashion.
[122]At [625].
[123]At [625].
On appeal the respondents endorse the Judge’s reasoning. They say that since s 63A only directs what courts may do in the future this is not to give the provisions retrospective effect. As to s 24 of the SAA, it applies to proceedings under the SA but not to proceedings alleging a breach of the FTA.
Analysis
A statute is usually regarded as retrospective if it effects some change to the legal nature or consequences of a past act or omission. As this Court said in Waitakere City Council v Bennett:[124]
Whether or not a statute has retrospective effect in a way which engages s 7 is not necessarily easy to discern and, as noted in Bennion on Statutory Interpretation (5th ed, 2007), p 317:
… the mere fact that a change is operative with regard to past events does not mean that it is objectionably retrospective. Changes relating to the past are objectionable only if they alter the legal nature of a past act or omission in itself. A change in the law is not objectionable merely because it takes note that a past event has happened, and bases new legal consequences upon it.
[124]Waitakere City Council v Bennett [2008] NZCA 428, [2009] NZRMA 76 at [52].
The rationale behind the application of the presumption against retrospectivity (found now in s 7 of the Interpretation Act) is that Parliament does not intend statutes to cause unfairness. Staughton LJ explained the rule in Secretary of State for Social Security v Tunnicliffe:[125]
In my judgment the true principle is that Parliament is presumed not to have intended to alter the law applicable to past events and transactions in a manner which is unfair to those concerned in them, unless a contrary intention appears. It is not simply a question of classifying an enactment as retrospective or not retrospective. Rather it may well be a matter of degree—the greater the unfairness, the more it is to be expected that Parliament will make it clear if that is intended.
[125]Secretary of State for Social Security v Tunnicliffe [1991] 2 All ER 712 (CA) at 724.
The majority on this point, Randerson and Winkelmann JJ, agree with the respondents that s 24(1)(b) does not address claims under the FTA but rather claims under the SA when it provides, in substance, that claims for existing offences or contraventions are to be determined as if the SA had not been amended. However, the majority disagree with the Judge’s view that applying s 63A in the present case does not give the provision retrospective effect because to apply the s 63A bar on relief would have the effect of taking away from claimants’ substantive rights which had already accrued. If we had found that statements in the prospectus were misleading or deceptive then, as at the date of the allotment of securities, Mr Houghton had a cause of action available to him under the FTA. On the respondents’ argument, accepted by the Judge, he could still bring a claim for breach of the FTA. Nevertheless, without access to a remedy for breach, a right of action is worthless. Removing the right to a remedy removes substantive rights.
It is open to Parliament to provide that a statute should have retrospective effect.[126] It may do so expressly or a court may infer that this was the intention of Parliament from the language, purpose, subject-matter and other relevant context to the legislation. However, the greater the unfairness created by a retrospective application, the more clearly it would be expected that Parliament would express that intention. We do not consider that there is any indication in the language of s 24 of the SAA or 63A of the SA to indicate that s 63A was intended to have retrospective effect. The Judge identified as a policy objective of the amendments that “the application and enforcement of a specific civil liability regime governing the issuance of securities should not be subverted by an overarching consumer protection statute”.[127] We agree that was the policy objective but that policy objective does not require retrospective application.
[126]Interpretation Act 1999, s 4.
[127]HC judgment, above n 2, at [627].
Nor do we see the absence of a transitional provision in the FTA as evidence that the amendment was intended to have retrospective effect. On our interpretation, if conduct occurred prior to the 2006 amendments, no matter when proceedings were initiated, neither s 63A nor s 5A would operate to deprive plaintiffs of their rights which accrued when that conduct occurred. If a provision is intended to operate retrospectively, it would be more usual to include a transitional provision to that effect. There is simply a lack of parliamentary material supporting the Judge’s interpretation which is, in the majority’s opinion, to give the provisions retrospective effect.
In the majority’s view, to apply s 63A as argued for by the respondents creates unfairness. The SAA amended the civil liability regime, providing for different remedies and creating a penalty regime. These are provisions Mr Houghton cannot invoke by virtue of s 24(1)(c) of the SAA. As such, in the majority’s view, it would be unfair in this case to deprive him of any cause of action he had under the FTA when he cannot access the enhanced rights under the SAA.
The minority on this point, Ellen France P, agrees with Dobson J that s 63A of the SA does preclude a successful claim under the FTA by the appellant for the reasons given by Dobson J. In her view, the SA is clear that it is intended to apply to any proceeding. Because, as Dobson J explained, the provision would only apply where it was clear the SA regulated the conduct, no issue of unfairness arises.
Notwithstanding the view of the majority, we do not go on to consider Mr Houghton’s claims regarding the conduct complained of constituting misleading or deceptive conduct under s 9 of the FTA. That is because, in determining whether to grant any of the remedies pleaded for in s 43 of the FTA, Mr Houghton must show that any breach of s 9 was an effective cause of some loss or damage.[128] As the Supreme Court said in Red Eagle Corp Ltd v Ellis:[129]
Then, with breach proved and moving to s 43, the court must look to see whether it is proved that the claimant has suffered loss or damage “by” the conduct of the defendant. The language of s 43 has been said to require a “common law practical or common-sense concept of causation” … The impugned conduct, in breach of s 9, does not have to be the sole cause, but it must be an effective cause, not merely something which was, in the end, immaterial to the suffering of the loss or damage.
[128]Fair Trading Act 1986, s 43(1).
[129]Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [29] (footnote omitted).
In view of the Court’s findings above, the only conduct the majority sees Mr Houghton as capable of making out as misleading or deceptive is the forecast in respect of FY04. However, given the Court’s finding that the forecast for FY04 was immaterial, the majority considers the contention that the forecast caused loss is untenable.
Ground of appeal: Loss
In the absence of a finding that the prospectus contained an untrue statement (the Judge appeared to treat the FY04 forecast as to sales revenue as true on the basis that it was immaterial), the Judge did not rule definitively on any aspect affecting loss.[130] However, to the extent he made any observations, the appellant says he erred.
[130]HC judgment, above n 2, at [712].
The Judge noted that Mr Houghton did not call any evidence on loss because his case was that he would not have invested if there had been full disclosure and so was entitled to all of his money back.[131] Alternatively, Mr Houghton argued that had full disclosure taken place, the IPO would not have proceeded as it would have reduced the retail price for the shares to a level which would have been unacceptable to CSAMP and to Feltex.[132]
[131]At [703].
[132]At [706].
The Judge said that Mr Houghton needed to have produced evidence of his loss. He rejected the notion that the measure of his loss was the full purchase price because the shares clearly had substantial value at the time he purchased them.[133] The Judge said that Mr Houghton’s approach also overlooked his obligation to mitigate loss:[134]
Given a daily market for the shares from 2 June 2004, when Mr Houghton discovered the discrepancies (or arguably when he ought reasonably to have discovered them if he monitored his investment prudently), then opportunities would have arisen to minimise the loss by selling the shares on market.
[133]At [704].
[134]At [705].
As to the second of Mr Houghton’s’ arguments, that full disclosure would have in substance sunk the IPO, he observed there was also no evidentiary foundation laid for that proposition.[135]
[135]At [707].
He noted Mr Houghton’s ultimate fall-back position — that the quantum of loss ought to be reserved for subsequent inquiry — but said the division of issues in the staged hearing contemplated a full resolution of Mr Houghton’s claim.[136] Accordingly, had there been a finding of liability he would not have been prepared to receive further evidence from Mr Houghton on the issue of loss.[137]
[136]At [708].
[137]At [709].
He noted the defendants’ position was that the correct measure of loss was the difference between the sum paid for the shares and the fair value of the shares if their price had been adjusted to reflect the untrue statement.[138] He summarised the defendants’ case as follows:
[711] The defendants’ analysis on loss was to the effect that because Feltex’s shares traded within an otherwise explicable range of the issue price of $1.70 for some nine months, the issue price could not be shown as over‑valuing the shares. This analysis proceeded on two alternate premises. First, that the market became aware of the impact of any material matters that were either misstated or omitted from the prospectus, so as to factor those changes into the price. Secondly, given that Feltex’s shares were the subject of publicised comment by four broker analysts, and that the share price largely reflected the then current assessment of the value of its future cash flows, any misstatement or omission in the prospectus would have lost its impact over nine months, and was therefore no longer relevant to the market price for Feltex shares.
[138]See [711].
The Judge concluded:
[710] Had I found misleading content or omissions, I would have required the plaintiff to establish that the market remained unaware of the true position in relation to that aspect of Feltex’s business, for the period of nine months or so until there was a significant drop below the initial issue price for the shares. Unless that proposition was made out, the plaintiff had an adequate opportunity to avoid or minimise loss by selling when the market was informed, and (for that period of nine months or so) did not treat the further information about Feltex as materially affecting its share price.
(Footnote omitted.)
On the appellant’s case, the Judge was wrong to apply the tortious measure of damages when there was a statutory framework for this inquiry. In particular, he should have concluded that, since s 33 of the SA prohibits the offering of securities to the public unless the offer is made in an investment statement and registered prospectus that complies with the SA, this prospectus should not have been registered. It contained untrue statements. But for the making of a prohibited offer the investors could not have invested in Feltex. They would not have lost their investment.
Mr Houghton also argues that the Judge erred in imposing any duty to mitigate upon him.
Finally, he says the Judge was wrong to address issues of loss at a general level when issues of loss were to be addressed for other shareholders at the second stage of trial, as determined by French J.[139]
Analysis
[139]See Minute of French J, above n 11.
We have already recorded above our findings on the appellant’s argument as to the required proof of reliance. As we have set out, the “but for” arguments that Mr Houghton invokes to support his arguments that he need not prove loss are unsustainable in view of the language of s 56.
The Judge was also correct that in terms of the pre-trial directions, although a staged resolution of issues was contemplated, the directions given by French J required a full resolution of Mr Houghton’s claim. Mr Houghton needed to produce evidence to substantiate the loss he claimed.
We also agree with the Judge’s approach to quantification of the loss. As we have noted above, the reason for the enactment of the statutory ancestors of s 56 was to remove the need for a plaintiff to prove fraud in relation to misstatements in a prospectus. Section 56, however, like its predecessors, uses language which suggests an intention to carry forward the approach to reliance and quantification of loss in the 19th-century deceit cases. In claims brought under the predecessors to s 56, compensable loss is quantified as the difference between the price paid for the securities and the estimated value of the securities if there had been full and accurate disclosure.[140] This is the approach to quantification of loss applied by the Judge and is an approach with which we agree. On this analysis, however, the duty to mitigate does not arise.
Ground of appeal: The Judge was wrong to require the appellant to disclose work product
[140]Broome v Speak (CA), above n 46, at 623; Cackett v Keswick [1902] 2 Ch 456 (Ch) at 468; McConnel v Wright [1903] 1 Ch 546 (CA) at 553; and Bundle v Davies, above n 45, at 383.
The appellant also seeks to pursue on appeal what he characterises as a finding by the Judge that the appellant was obliged to disclose to the respondents work product in the form of data converted to a usable format. However, we do not read the passages in the judgment relied upon as recording findings but rather observations by the Judge.[141] He goes on to make clear that his concern at the delay in the provision of that data was not determinative of the issues he was addressing at that point in his judgment,[142] which was the significance of the practice of forward dating of invoices and the extent of that practice. Given that all counsel are in agreement that this issue is not determinative of any aspect of the appeal, we will not consider it further.
Result
[141]HC judgment, above n 2, at [421]–[422].
[142]At [423].
The appeal is dismissed.
All parties sought the opportunity to file written submissions on the issue of costs with, at least, counsel for the second and third respondents indicating they would seek increased costs if successful. Our preliminary view is that there is no justification for increased costs but we will receive submissions on the point should the respondents wish to advance that argument.
We would be assisted if the respondents could file joint submissions. The appellant’s submissions and the respondents’ joint submissions should each be no longer than five pages.
Any submissions by the respondents are to be filed and served no later than 20 working days after delivery of this judgment.
Any submissions by the appellant are to be filed and served 10 working days thereafter.
Solicitors:
Wilson McKay, Auckland for Appellant
Bell Gully, Auckland for First to Third and Fifth to Seventh named First Respondents
Clendons, Auckland for Fourth named First Respondent
Russell McVeagh, Wellington for Second and Third Respondents
Fee Langstone, Auckland for Fourth Respondent
McElroys, Auckland for Fifth Respondent
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