Houghton v Saunders
[2014] NZHC 2229
•15 September 2014
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IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2008-409-348 [2014] NZHC 2229
BETWEEN ERIC MESERVE HOUGHTON Plaintiff AND
TIMOTHY ERNEST CORBETT SAUNDERS, SAMUEL JOHN MAGILL, JOHN MICHAEL FEENEY, CRAIG EDGEWORTH HORROCKS, PETER DAVID HUNTER, PETER THOMAS and JOAN WITHERS
First Defendants
CREDIT SUISSE PRIVATE EQUITY INC (FORMERLY CREDIT SUISSE FIRST BOSTON PRIVATE EQUITY INC)
Second Defendant
CREDIT SUISSE FIRST BOSTON ASIAN MERCHANT PARTNERS LP Third Defendant
FIRST NEW ZEALAND CAPITAL Fourth Defendant
FORSYTH BARR LIMITED Fifth Defendant
Hearing: 17-21 March, 24-28 March; 31 March-4 April; 7-11 April;
14-17 April; 28 April-2 May; 5-9 May; 12-16 May; 19-23 May;
3-6 June; and 9-12 June 2014Counsel:
A J Forbes QC, P A B Mills, A J F Wilding and T J P Gavigan for plaintiff
A R Galbraith QC, D J Cooper, S V A East and L M Campbell for first defendants (except Mr Magill)
T C Weston QC and D J Cooper for Mr Magill
J B M Smith QC, A S Olney and C J Curran for second and third defendants
D H McLellan QC, J S Cooper and R M Stewart for fourth defendant
A C Challis, D P Turnbull and H N McIntosh for fifth defendant
Judgment:
15 September 2014
HOUGHTON v SAUNDERS [2014] NZHC 2229 [15 September 2014]
RESERVED JUDGMENT OF DOBSON J
Contents
Background........................................................................................................................................ [2] The parties ....................................................................................................................................... [17] The preparation of the prospectus ................................................................................................. [19] The claims ........................................................................................................................................ [29] The range of pleaded criticisms ..................................................................................................... [42] Summary of the outcome ................................................................................................................ [50]
The test under the SA cause of action ............................................................................................ [56] The test for assessing whether a statement in a prospectus is untrue........................................ [58] The “prudent but non expert person”/“notional investor” ........................................................ [78] Level of reliance required to trigger liability ............................................................................ [102] Expressions of opinion, including prospective financial information ..................................... [121]
Plaintiff ’s evidence ........................................................................................................................ [127] Defendants’ evidence ..................................................................................................................... [155]
Analysis of the criticisms .............................................................................................................. [163]
AUndisclosed adverse trends in current trading ................................................................ [164] Adverse trend in gross sales revenue, and volume of sales ............................................... [164] Unacknowledged adverse trend in result for six months to 30 June 2004 ........................ [193] Removal of provision for management incentive plan ...................................................... [195]
BMisstatements or statements omitted as to risks confronting Feltex .............................. [197] Risks arising from reduced tariffs and increased imports of carpet into Australia ........... [197] Adverse impact of a strengthening in the New Zealand dollar.......................................... [229] The adoption of lean manufacturing techniques ............................................................... [242] The quality of Feltex’s relationship with major customers ................................................ [255] Carpet manufacturers have high break-even cost structures ............................................ [276]
CMisleading or unreasonable assumptions in predicting future performance ................ [280] Existing customers will continue to trade with Feltex at their current level ..................... [297] No change in competitive markets and industry conditions .............................................. [301] No change in the level of imported carpet ........................................................................ [304] Raw material costs, carpet selling prices.......................................................................... [307] Feltex’s market share would grow by one per cent ............................................................[311] The FY2005 projection was not reasonably achievable .................................................... [324]
DMisleading presentation of historical and prospective financial data ............................ [339] The “second bottom line” ................................................................................................. [342] Presentation of NPAT in summary financials .................................................................... [372] Inappropriate emphasis given to EBITDA ........................................................................ [378]
Misleading inclusion of SIP grants in reported earnings .................................................. [391] Failure to disclose forward dating of sales invoices – the allegation ............................... [409] Forward dating of invoices - the GSM data ...................................................................... [415] Forward dating of invoices - analysis ............................................................................... [429] Proposed dividend for FY2004 misleadingly presented .................................................... [445]
E Misstatements as to the nature and effect of the equity incentive plan .......................... [466] F Misstatement as to the book build process/content of the 24 May announcement ........ [495] G An unwarranted positive tone was conveyed by the prospectus ...................................... [518]
“Feltex not a good investment” ........................................................................................ [522]
“No adverse circumstances” assurance wrong ................................................................ [530]
Assessing the prospectus overall .................................................................................................. [534] The due diligence defence ............................................................................................................. [540] Were FNZC and ForBar promoters? .......................................................................................... [558] Was CSAMP an individual issuer, or a promoter? ..................................................................... [597] A co-existent cause of action under the FTA? ............................................................................. [613] Second cause of action under the FTA ........................................................................................ [630] FTA – claims brought out of time? .............................................................................................. [635]
A duty of care in tort? ................................................................................................................... [671] Principles relating to a claim in negligent misstatement ......................................................... [671] The plaintiff ’s claim .................................................................................................................. [679]
Quantification of loss .................................................................................................................... [699] Costs ............................................................................................................................................... [713]
A glossary of terms is included as Appendix A at the end of the judgment.
[1] This proceeding is brought on behalf of shareholders for losses claimed to arise from reliance on an allegedly misleading prospectus. A summary of my findings is set out, after an outline of the context and the claims, at [50] to [55] below.
Background
[2] Feltex Carpets Limited (Feltex) was a long-established and widely recognised New Zealand manufacturer of carpets. In May 2000, it completed the acquisition of an Australian carpet manufacturing business from Shaw Industries Inc (Shaw) of the United States.
[3] At that time, Feltex was owned by the third defendant, Credit Suisse First Boston Asian Merchant Partners LP (CSAMP). CSAMP is constituted as a limited partnership in the United States under the General Corporation Law of the State of Delaware. CSAMP’s interest as owner of Feltex was managed by the second defendant, Credit Suisse Private Equity Inc (CSPE), a company duly incorporated in the United States under the laws of New York. CSAMP and CSPE were at pains to emphasise their different status, particularly as they treated only CSPE as a promoter for the purposes of the prospectus. They denied that CSAMP qualified as an individual issuer and consequently denied that it had any potential liability in that capacity. For the most part, it is unnecessary to distinguish between them in dealing with the narrative of events, and they can conveniently be referred to jointly as Credit Suisse. I will consider later in the judgment the competing claims as to the
capacity in which CSAMP participated.1
[4] Credit Suisse resolved to sell Feltex. On 5 May 2004, Feltex issued a combined investment statement and prospectus to make an initial public offering (IPO) of all the 113,523,099 existing shares in Feltex. An additional component of the IPO was that Feltex would itself issue a further $50 million worth of shares (that would result in the issue of between approximately 25,600,000 and 29,400,000 new
shares, depending on the final price).
1 See [597]–[612] below.
[5] The prospectus referred to an indicative range of share prices between $1.70 and $1.95. It advised that the share price would be decided upon after a book build process that was to be undertaken part way through the period in which the offer was open. The book build process is the subject of one of the criticisms of the prospectus and is addressed in more detail below.2
[6] Although the prospectus identified numerous risks to the achievement of forecast and projected outcomes, it generally portrayed an improving financial position for Feltex. At the price subsequently settled as a result of the book build of
$1.70 per share, the prospectus predicted a price earnings ratio pre-goodwill amortisation of 9.8 times, and a gross dividend yield of 9.6 per cent per annum.
[7] The plaintiff (Mr Houghton) subscribed for 11,765 shares in Feltex in the IPO. The offer closed on 2 June 2004, on which day the shares were allotted. The shares were listed on the New Zealand Stock Exchange (NZX) and trading in the shares commenced on 4 June 2004. Mr Houghton subsequently bought a further
5,000 shares on market.
[8] On 24 August 2004, Feltex announced its result for the year ended 30 June
2004 (FY2004). The first defendants3 (the directors) authorised a final dividend for FY2004 at six cents per share, in accordance with the indication that had been given in the prospectus. On 23 February 2005, the company announced its interim result for the six months to 31 December 2004, which was up 7.1 per cent on the result for the first six months of the previous financial year. The company declared an interim dividend of six cents per share, which was 15.4 per cent above the interim dividend projection in the prospectus.
[9] On 1 April 2005, Feltex issued a profit downgrade warning, announcing the view of the directors that the company would not achieve the level of profitability projected in the prospectus. At the time of that announcement, the shares were
trading at $1.50. They dropped to $0.88 in the following two days. The directors
2 See [495] to [517] below.
3 Messrs Timothy Saunders, Samuel Magill, John Feeney, Craig Horrocks, Peter Hunter and Peter
Thomas and Ms Joan Withers.
made a second revised earnings announcement on 30 June 2005. That caused a prompt drop in the share price from $0.70 to $0.44, before recovering to $0.63.4
[10] On 22 September 2006, Feltex’s bank appointed receivers over the directors’ opposition to that course. In October 2006, the receivers sold the assets of Feltex to an Australian competitor, Godfrey Hirst. That effectively left the shares worthless. The company was placed in liquidation on 13 December 2006.
[11] The Securities Commission conducted an inquiry into the adequacy of disclosure in the prospectus. It concluded in a report issued in October 2007 that the prospectus was not misleading in any material respect. The plaintiff made relatively extensive references to transcripts of evidence given by directors and executives of Feltex to that inquiry, but urged that I should not place any reliance on the Commission’s determination. Mr Forbes QC made the point that I had no way of reliably identifying the extent of matters of fact and opinion that were traversed in the Commission’s inquiry.
[12] For their part, the defendants made passing reference to the Commission’s decision as tending to confirm the stance they all advanced in defence of the present proceedings. None of the defendants submitted that the Commission’s decision prevented the plaintiff making out any of the present causes of action. Although I have considered some extracts of the transcripts of evidence given to the Commission, I have not read its determination.
[13] 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.
[14] Mr Houghton commenced these proceedings on 26 February 2008 in a representative capacity on his own behalf, and on behalf of other shareholders who
4 I was not provided with a daily record of the market transactions in Feltex shares. I have taken these prices from exhibit 2 to Professor Cornell’s evidence, and figures 1 and 3 in Mr Cameron’s evidence, the accuracy of which was not challenged.
purchased shares in the IPO and subsequently suffered loss on that investment.5 The supervision of pre-trial issues was made more difficult by the absence of class action provisions in the High Court Rules, but the lack of procedural guidance that would be provided by such rules does not impact on the substantive determination.
[15] Earlier directions authorised those who were promoting the shareholders’ claims to canvass all shareholders who acquired shares in the IPO as to whether they would “opt out” of the proceedings.6 Subsequently, the basis for joining the proceedings was transformed into a requirement for shareholders to “opt in” to the proceedings.7 A succession of dates was ordered by the Court as the final date by which that step could be taken, as circumstances relevant to shareholders’ decisions on the point evolved. The final cut-off date was 30 May 2013, except for shareholders who subscribed via a Forsyth Barr (ForBar) nominee company, Forbar Custodians Limited, for whom the cut-off date was 21 June 2013. By then, 3,689 shareholders had opted in.
[16] In August 2012, the Court ordered that issues raised by the proceedings should be dealt with in two stages.8 The first stage, which this judgment addresses, was to determine Mr Houghton’s own claim, together with the issues that were common to the claims of all the other shareholders whom he represents. The remaining issues arising for the other shareholders who have opted in were to be determined at a second trial.
The parties
[17] Mr Houghton has sued:
(a) the first defendants, all of whom were directors of Feltex at the time of the IPO;
5 The proceedings were also commenced on behalf of shareholders who had bought shares on market, after the IPO. Some of their causes of action were struck out in Houghton v Saunders (2008) 19 PRNZ 173 (HC) at [93]. In addition, the representative plaintiff for that group was denied standing to sue for others, and the claims for that second group of shareholders have not proceeded.
6 Houghton v Saunders HC Christchurch CIV-2008-409-348, 26 February 2008.
7 Houghton v Saunders, above n 5, at [170].
8 Houghton v Saunders [2012] NZHC 1828, [2012] NZCCLR 31 at [39]. .
(b)the second and third defendants, CSPE and CSAMP, alleging that they were both promoters of the prospectus, and CSAMP as the vendor and issuer of the majority of the shares offered in the IPO;
(c) the fourth defendant, First New Zealand Capital (FNZC), which was, at the time of the IPO, a partnership in business in New Zealand; and
(d)the fifth defendant, ForBar, which is a duly incorporated company having its registered office at Dunedin.
[18] FNZC and ForBar participated as joint lead managers (JLMs) of the IPO. Mr Houghton alleged that both FNZC and ForBar had the status of promoters of the IPO for the purposes of statutory liability under the Securities Act 1978 (the SA). Mr Houghton also claimed that the nature and extent of involvement by FNZC and ForBar in the IPO gives rise to liability against them on other causes of action.
The preparation of the prospectus
[19] On 16 March 2004, Credit Suisse requested and authorised Feltex to proceed with an IPO, and the Feltex Board (the Board) resolved that it would proceed to do so. The Board approved the appointment of a Due Diligence Committee (DDC) to oversee the preparation of the prospectus. The Chairman of Directors, Mr Saunders, was on the DDC, as was Mr Thomas, the latter in his capacity as representative of the Credit Suisse entities. Mr Magill in his capacity as Chief Executive Officer (CEO) of Feltex, and Mr Tolan, in his capacity as Chief Financial Officer (CFO), were both members of the DDC. Mr Peter Rowe, a senior commercial solicitor at Minter Ellison Rudd Watts who had been retained on behalf of CSAMP, was also a member.
[20] Bell Gully acted as the solicitors for Feltex on the IPO and two of its partners, Messrs Gilbertson and Downs, were also members of the DDC. They proposed a relatively elaborate structure of steps for the DDC to oversee and check the content of the prospectus. That process involved allocating responsibilities to appropriate members of senior management of Feltex for drafting and/or verifying various components of the prospectus that addressed the nature of Feltex’s business.
This was done for both historical and prospective financial information, and the assumptions relied on for the prospective financial information.
[21] Although not represented on the DDC, Ernst & Young had representatives at all of its meetings in their capacity as Feltex’s auditors. Mr Stearne from FNZC and Mr Mear from ForBar were observers to the DDC in their capacity as representatives of the JLMs.
[22] The DDC met nine times, generally by telephone conference. The meetings included interviews of 11 senior managers in respect of component parts of the prospectus for which those managers were attributed responsibility. The DDC requested input from the various managers in writing, in terms that emphasised the importance of their answers being absolutely correct, and citing dire consequences if
the details in the prospectus were wrong.9 The prospectus was registered with the
Registrar of Companies on 5 May 2004, and the offer was open from that day. On
24 May 2004, Feltex announced to the NZX that the final price was $1.70 per share.
[23] From the outset, the due diligence process included provision for the DDC to hold a final meeting to “bring down due diligence”. That ninth meeting occurred on the day the offer closed, 2 June 2004. The task at that meeting was to confirm that no material adverse circumstances had arisen between the date on which the prospectus was issued, and the allotment of the shares, as is required under the SA.10
[24] The prospectus contained 148 pages. The table of contents listed 25 topics that were addressed. The majority of the document was in narrative form, under headings such as “Investment Features”, “Details of the Offer”, “New Zealand and Australian Carpet Industry”, “Business Description”, “Feltex Management” and “Overview of the Vendor and Promoter”. The remaining sections provided quantitative data, such as a summary pricing table and summary financial information, prospective financial information and historical five year summary
financial information, together with consolidated financial statements.
9 DD1 000042–000046.
10 SA, s 37A(1)(b).
[25] Because the document was a combined prospectus and investment statement, it was required to include content from sch 3D of the Securities Regulations 1983 (the Regulations). That schedule specifies content that is considered to be appropriate for the shorter form of disclosure. Page one of the document stated at the outset:
Investment decisions are very important. They often have long-term consequences. Read all documents carefully. Ask questions. Seek advice before committing yourself.
[26] Thereafter, under the heading “Choosing an Investment”, readers were told:11
When deciding whether to invest, consider carefully the answers to the following questions that can be found on the pages noted below:
There followed a list of the 11 questions required to be addressed by sch 3D of the Regulations. Those questions included “What Are My Risks?”, directing the reader to a section under that heading at page 125.
[27] That section contained some four pages of risks relating to the carpet industry and to Feltex’s business, and a further page and a half describing risks under the headings “General Business Risks” and “Other Risks”. These parts of the prospectus included statements in bold in the following terms:12
It is therefore imperative that before making any investment decisions, investors give consideration to the suitability of Feltex in light of their investment needs, objectives and financial circumstances.
And, addressing the uncertainty of forward looking statements:13
Given these uncertainties, investors are cautioned not to place undue reliance on such forward looking statements in this Offer Document. In addition, under no circumstances should the inclusion of such forward looking statements in this Offer Document be regarded as a representation or warranty by the Vendor, Feltex or any other person with respect to the achievement of the results set out in such statements or that the assumptions underlying such forward looking statements will in fact be true.
11 Prospectus at 2.
12 Prospectus at 125.
13 Prospectus at 130.
[28] When the terms of some of the risks stated in this section were put to Mr Houghton, he characterised them as generic statements that could be found in every prospectus – “frankly they all look the same”.14 He seemed inclined to dismiss the stated risks, including those specifically addressing Feltex’s business, as “legal mumbo-jumbo”, so it is difficult to evaluate the impact of other aspects of the prospectus on his individual considerations, when he appears not to have considered that other content in light of the risks to which the prospectus drew his attention.15
The claims
[29] The first cause of action was against all the defendants and was for breach of the Fair Trading Act 1986 (the FTA). It related to the defendants’ respective contributions to the representations in the prospectus as to the state of financial health of Feltex at the time of the IPO, the forecast for FY2004 and the projection for the year ended 30 June 2005 (FY2005). The plaintiff alleged that components of the prospectus were misleading, and that omissions from the prospectus left a misleading impression overall for potential investors.
[30] As anticipated in the description of the book build process in the prospectus, Feltex made an announcement to the market by means of a statement that was released to NZX on 24 May 2004 (the 24 May announcement). The 24 May announcement was in the names of Messrs Saunders and Magill as Chairman of Directors and CEO respectively. The 24 May announcement reported what Feltex saw as positive progress with the IPO and confirmed that the final price would be
$1.70 per share. At that time, the offer was still open for potential investors who would commit to shares via firm allocations that had been made by the JLMs to themselves and to various other brokers in New Zealand.
[31] Mr Houghton alleged that the content of the 24 May announcement added to the misleading nature of the prospectus.
[32] A second cause of action under the FTA was pleaded solely against
Mr Magill as the only executive director in relation to his conduct after the allotment
14 NoE at 62/9–10.
15 NoE at 63/22.
of shares. It alleged that Mr Magill was responsible for overstating the extent of debtors owed to Feltex, which contributed to a misstatement of its financial position in the period after the IPO, thereby disguising the availability to subscribers for the shares of a statutory remedy under s 37A of the SA to avoid the allotment of shares, and obtain repayment of their subscriptions.
[33] Very little was made of this separate claim throughout the evidence, and in closing. Although Mr Forbes’ instructions did not permit him to formally abandon the cause of action, no tenable basis for it emerged. In particular, the elements of it were not squarely put to Mr Magill.
[34] The third cause of action was a claim against all defendants for breach of relevant provisions in the SA. The civil liability regime prescribed by the SA was amended on 24 October 2006.16 Because the prospectus was issued prior to this date, the SA as it existed in 2004 continues to have effect for the purposes of this proceeding as if it were not amended.17
[35] It was alleged that the prospectus contained statements that are deemed untrue in the statutory sense, thereby triggering liability for the defendants to pay compensation for the loss sustained by shareholders by reason of the untrue statements. Directors signing a prospectus, and those who participated in the prospectus as promoters, are rendered liable for such untrue statements.18 FNZC and ForBar both denied that their participation brought them within the statutory definition of a promoter. CSAMP also denied that it was a promoter.
[36] All defendants denied that the prospectus contained untrue statements in the statutory sense. In the alternative, they argued that if the content is found to include an untrue statement, then they ought to be excused from liability because they contributed to the prospectus on the terms it was issued, after they had made all due enquiry and that they had reasonable grounds to believe, and did believe, the
statements made in the prospectus were true (the due diligence defence).
16 Securities Amendment Act 2006, ss 6–10.
17 Section 24.
18 SA, s 56(1)(c) and (d).
[37] In addition to denying that they had status as promoters, in the alternative FNZC and ForBar joined the other defendants in arguing that the prospectus did not contain any untrue statements. FNZC and ForBar also argued that if, contrary to their primary position, they were indeed promoters for the purpose of statutory liability under the SA, then the due diligence defence would be available to them.
[38] Mr Houghton claimed in a fourth cause of action against all defendants that they owed him and shareholders in the same position a duty of care in tort, and that they breached that by way of negligent misstatements in the prospectus, and in the
24 May announcement.
[39] The defendants raised limitation defences in a number of contexts. The second and third defendants led arguments that the loss claimed under the FTA was reasonably discoverable by December 2006. Parts of the FTA cause of action were added during and after 2010 and, on the defendants’ argument, would have been
commenced after the three year time limit elapsed.19 In addition, amendments to the
allegations made in 2010 and 2013 under other causes of action were challenged as out of time because they were more than six years after the events giving rise to claims. The defendants argued that these new allegations constituted new causes of action because they were sufficiently different from the type of allegations to which they were added.
[40] Notwithstanding the sequence of these causes of action, I have undertaken the primary factual analysis of the criticisms of the prospectus by reference to the cause of action under the SA. Mr Forbes argued for a different scope of what might amount to misleading conduct under the FTA, relative to what constitutes an untrue statement under the SA. He also contended for the prospect that a different test might apply to ascertaining whether there had been a negligent misstatement for the cause of action in tort.
[41] The defendants argued that when the relevant conduct is regulated by the SA, there could be no prospect of liability under the FTA. They also argued that once
their conduct and potential liability is regulated by the SA, that takes any imputed
19 FTA, s 4(5).
relationship that might otherwise give rise to a duty of care outside the circumstances in which a tortious duty should be recognised. A practical alternative is that any duty of care should not be imposed on any different terms to those required under the SA.
The range of pleaded criticisms
[42] The criticisms of the prospectus were pleaded in diffuse and overlapping terms. In four amended statements of claim, the criticisms grew to some 34 pages of particularised allegations of misleading content and omissions. The allegations relate to some 21 passages in the prospectus. If the particulars in support of criticisms of the prospectus were given status as separate criticisms, then they would total approximately 80 criticisms.
[43] A number of the criticisms relied on acknowledgements made by
Mr Saunders, and another director, Mr Thomas, at the Feltex AGM on 1 December
2005 (the 2005 AGM). Messrs Saunders and Thomas attempted to explain certain reasons, as they identified them at that time, for the deterioration in Feltex’s business. On the basis that the directors knew or ought to have appreciated the risks of such adverse factors at the time of the IPO, the statement of claim alleges that statements inconsistent with the position acknowledged in December 2005 were misstatements, and failures to acknowledge adverse circumstances as recognised in December 2005 amounted to material omissions from the prospectus in relation to those points.
[44] The defendants pursued a number of pre-trial applications seeking orders for further particulars of the statement of claim. In many respects, those initiatives were attempts to seek a rationalisation of the criticisms in a more focused way. Pre-trial, the plaintiff asserted an entitlement to plead the criticisms extensively and by way of cross-reference, to reflect the range and relevance of what were considered to be misleading content and omissions.
[45] The extensive range of criticisms made it difficult to confine the scope of the evidence. In some respects, objections raised on behalf of the defendants were warranted in that the scope of issues explored extended to an extensive, if not exhaustive, review of the adequacy of the prospectus in a general sense.
[46] Mr Forbes’ opening addressed the criticisms by reviewing the text of the prospectus, together with a summary of the criticisms that would be addressed by each witness. On 21 May 2014, after 37 days of hearing, Mr Forbes provided a list of six topics that were not being pursued. Only in closing did the plaintiff rationalise the criticisms, by addressing them under 15 headings.
[47] The defendants responded to the criticisms under a more or less consistent list of headings as they perceived the requirement for them to be answered. In the end, there remained differences between the plaintiff and the defendants as to the extent of pleaded allegations that the defendants considered had not been addressed in evidence or argument, and criticisms advanced which the defendants considered were not pleaded.
[48] After considering all contributions to the arguments, I have adopted my own sequence for considering and determining the criticisms. In that process, numerous particulars of the criticisms pleaded inevitably have to be subsumed within larger topics to which they relate. It would unjustifiably lengthen my reasoning for the conclusions I have come to if I dealt with each individually. I am satisfied that the impact of all pleaded criticisms (and some that were not) is reflected in my analysis.
[49] I have analysed the pleaded criticisms under headings that are intended to reflect their essential character. I deal with the criticisms in a sequence that is intended to aid an understanding of the prospectus in the context of the criticisms made of it. The sequence does not necessarily reflect the strength of the plaintiff’s case on respective criticisms, nor their relative importance. The headings I have adopted are as follows:
A Undisclosed adverse trends in current trading
These deal with two allegedly material adverse trends in the current period of trading that arguably should have been disclosed in the prospectus, together with the allegedly misleading effect of removing a provision for incentive payments to management in the current year’s financial statements.
B Misstatements or statements omitted as to risks confronting Feltex
These deal with qualitative comments in the narrative sections of the prospectus that describe the nature of Feltex’s business, the environment in which it operated and the risks it faced.
C Misleading or unreasonable assumptions in predicting future performance These criticisms challenged many of the assumptions relied on to predict Feltex’s performance in the forecast for FY2004 and the projection for FY2005.
D Misleading presentation of historical and prospective financial data
These were criticisms of the manner in which various components of the quantitative data in the prospectus was presented.
E Misstatements as to the nature and effect of the equity incentive plan
These criticised the adequacy of disclosure of pre-existing contractual arrangements between Credit Suisse and directors and senior managers, where part of the benefits of those arrangements were being applied by many of the directors and senior managers to subscribe for shares.
FMisstatements as to the book build process/content of the 24 May announcement
These criticisms related to alleged discrepancies between the description of how the final price for the shares would be set, and how that was actually done, plus a challenge to the accuracy of matters stated in the 24 May announcement.
G An unwarranted positive tone was conveyed by the prospectus
These raised miscellaneous criticisms that the tone of the prospectus painted Feltex in a more positive light than was justified, and that it misrepresented the shares as being good or fair value at $1.70.
Summary of the outcome
[50] Although a number of the criticisms of the content of the prospectus had some justification, none of them made out material misleading content or omissions
that would trigger liability on the test as I have applied it under the SA. In addition, I have decided that because relevant conduct is regulated by the SA, the prospect of liability does not arise under the FTA. Nor are the circumstances of any relationship between the directors and other defendants on the one hand, and investors in the IPO on the other, such as to give rise to the prospect of a duty of care in tort being imposed.
[51] Those findings would be sufficient to determine the claims on the views I have come to. However, I was told repeatedly during the hearing that appeals would be inevitable. In those circumstances it is appropriate to record findings on numerous other issues which were the subject of extensive evidence and argument, and which would become relevant in the event that I am subsequently held to be wrong in dismissing the claims of misleading content in, or omissions from, the prospectus.
[52] Whether the defendants could avail themselves of the due diligence defence in the event they were found liable for misleading content or omissions might require re-argument, depending on the nature of any misleading content or omissions that might be accepted by an appellate court, and the circumstances in which that content or omission appeared or was omitted from the prospectus. However, I have considered the availability of the due diligence defence in the context of the process for preparation of the prospectus on the extensive evidence that was adduced. I have found that the defence would be available to the defendants in relation to the criticisms that were focused on.
[53] I have found that the JLMs were not promoters in the sense used in the SA. Nor was CSAMP. I have also made findings that uphold part of the defendants’ arguments on time limitations that apply to components of the claims.
[54] I have also upheld the defendants’ argument that even if misleading content or omissions were made out, then the plaintiff has not made out any recoverable loss.
[55] The sequence in which these issues are addressed in the remainder of this judgment is as set out in the table of contents at the outset.
The test under the SA cause of action
[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 1996,20 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.
[57] The SA prohibits offer documents from containing untrue statements. Section 58 imposes criminal liability on all directors of an issuer for documents, including prospectuses, that contain any untrue statements. Section 56 imposes civil liability for untrue statements on directors of the issuer and promoters.
The test for assessing whether a statement in a prospectus is untrue
[58] The definition of an untrue statement for the purposes of the liability regime under the SA is:
55Interpretation 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:
…
20 Securities Amendment Act 1996.
(In considering the application of this definition, I will refer to the two possible elements as “misleading content or omissions”.)
[59] The plaintiff urged that whether all or any of the allegations of misleading content or omissions were made out had to be assessed by considering the prospectus overall. In effect, the totality of the document might be found to be misleading because of an impression conveyed by the tenor of its contents.
[60] Mr Forbes submitted that s 55 is cast as a deeming provision, so that the definition of misleading content that will render a prospectus untrue in the statutory sense should not be treated as an exhaustive one. To achieve the statutory purpose, the misleading nature of a prospectus had to be assessed at a more general level than considering individual statements in isolation. He argued that if the definition of untrue statements in s 55 was treated as an exhaustive one, then that would run counter to the object of the SA. Because “statement” is not defined for the purposes of s 55, it might in appropriate circumstances be substantially more than a particular sentence.
[61] Mr Forbes cited from Heath J’s decision in R v Moses:21
The authorities make the obvious point that it is the overall impression conveyed by the offer document that is important, not a painstaking analysis of individual sentences contained in it.
[62] That observation was in dealing with a defence criticism of the adequacy of the particulars of the criminal charges arising out of a finance company prospectus. The authorities cited by Heath J included numerous older authorities, pre-SA, as well as the 1990 R v Rada Corporation Ltd decisions.22 Later in his judgment, Heath J summarised his findings:23
It is the combination of statements and material omissions that conveyed a false impression to investors about the true nature of Nathans’ business, the actual state of its financial health and the risks of the investment.
21 R v Moses HC Auckland CRI-2009-004-1388, 8 July 2011 at [20].
22 R v Rada Corporation Ltd [1990] 3 NZLR 438 (HC) at 446-447 and R v Rada Corporation Ltd
(No 2) [1990] 3 NZLR 453 (HC) at 474.
23 R v Moses, above n 21, at [215].
[63] The findings in that case were of pervasive misstatements and omissions on a range of topics that were particularised by the Crown, and which contributed to an inability of readers to assess the risks of investing in the issuer.
[64] Mr Forbes also supported his submission that misleading content or omissions had to be assessed by considering the impression given by the document overall, with the nineteenth century observation by Lord Halsbury LC in Arnison v Smith:24
This [requiring a plaintiff to establish particular reliance on a specified passage in the prospectus that was alleged to be false] 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. 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 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 shown that he knew the facts, or that he avowedly did not rely on the statement whether he knew the facts or not.
[65] That passage addressed the distinct issue of the nature of reliance that must be made out to establish liability at common law for misstatements in a prospectus. I am not persuaded that Lord Halsbury’s observations in that context justify reading the definition of untrue statements more widely than the natural and ordinary meaning of the statutory definition requires.
[66] The defendants opposed the plaintiff’s approach, and argued that any allegedly misleading content or omissions had to be measured specifically in the context of the statement alleged to be misleading or, in the case of an omission, by reference to a particular statement in the prospectus that was alleged to be rendered
misleading by the omission of some additional information.
24 Arnison v Smith (1889) 41 Ch D 348 at 369.
[67] The defendants’ analysis relied on the wording of s 55 of the SA. “Untruth” in the statutory sense is to be made out in respect of a statement included in a prospectus if that statement is misleading in the form and context in which it is included. The defendants argued that this required a plaintiff to identify a particular statement and establish that it is misleading in the form and context of its inclusion in the prospectus.
[68] In my view, the terms of the section contemplate that the assessment is to be undertaken on a statement by statement basis. However, if the context that renders any one or more statements misleading is reflected in numerous other passages in the prospectus, then a determination of whether the statement complained of is indeed misleading would require an assessment of the sense reasonably conveyed by the impugned statement, in whatever breadth of context is relevant to its understanding.
[69] It follows that a statement that is criticised as being misleading cannot necessarily be confined to a single sentence or paragraph. The focus should be on the subject that is alleged to be misleading in the context in which that subject is addressed in the prospectus. I accept Mr Forbes’ point on this, to the extent that the description of a particular topic in the prospectus (that is, the “context”) may be set out at some length, and may not all be addressed at the same point in the document.
[70] However, I treat the statutory test as requiring a plaintiff to identify the passages from the prospectus that are alleged to address a material point in misleading terms. That is what the definition contemplates. In this case the plaintiff appended to the fourth amended statement of claim (4ASC) 21 extracts from the prospectus with passages highlighted as those which contained misleading
statements. Some of the 21 extracts quoted passages from more than one page.25
[71] Given a relatively dense document of 148 pages, it would be extremely difficult to determine criticisms of misleading content or omissions without the
claimant citing the particular passages that rendered the prospectus misleading on a
25 The largest number of extracts relative to a single criticism came from six pages of the prospectus.
given topic. The classic misleading content complained of tends to be relatively
fact-specific such as:
“the company does not and will not undertake related party lending”;
“the company has unconditional contracts to purchase all the properties
involved in the proposed development”; or
“the vessel to be used in the venture is in survey and has all requisite
certificates for the work involved in the venture”.
[72] Certainly, misleading content may occur in less specific contexts than these examples, but there must still be adequate definition of the misleading content to enable argument and analysis of whether there is an “untrue statement”.
[73] Where allegations relate to omissions from a prospectus, the terms of s 55(a)(ii) require the identification of a particular statement within the prospectus that is rendered misleading by the omission of additional information which would be material to an understanding of that particular statement in the form and context in which the statement is included. This straightforward application of the terms of the section has been applied, for example, by Venning J in R v Petricevic:26
Whilst s 55 extends liability to cases of omission, the omission is linked back to the statement: s 55(a)(ii). The omission relates to the statement, but it does not replace the requirement for a statement in the first place. It is not an offence to omit something from the prospectus unless that omission makes a statement in the prospectus untrue.
[74] The consequence of this structure is that a plaintiff cannot plead omissions in an abstract sense that the overall impression given by the prospectus is misleading because additional information ought to have been given. Rather, the plaintiff has to identify particular content, the sense of which is rendered misleading because of the absence of other relevant information, where the inclusion of that additional information would enable the reader to avoid being misled in respect of the point
being addressed in the statement at issue.
26 R v Petricevic [2012] NZHC 665, [2012] NZCCLR 7 at [212].
[75] These provisions in the SA reflect a policy that the preparers of offer documents are to be held to account on a relatively specific basis, not at a level of abstraction that prejudices their ability to consider the criticism and respond to it. For instance, one of the more general criticisms here was that the prospectus overall gave an unjustifiably positive impression of Feltex’s business and its prospects. Unless related to a specific statement or omission from an identified statement, such generalised criticisms are difficult to evaluate objectively.
[76] To the extent that the approach of Heath J in R v Moses suggested a more liberal evaluation of the impression given by a prospectus than that of Venning J in R v Petricevic, it may well be that Heath J considered it appropriate in the context of that prospectus to reflect the overall impression conveyed by the offer document as part of the context, whereas Venning J was focusing on the statement or omission that was the subject of complaint. Certainly, Heath J assessed a number of particular passages that were found to be misleading and, after doing so, it was appropriate to reflect on their combined impact.
[77] The second and third defendants emphasised that for content or omissions to be misleading, they must do more than cause a reader to be confused or uncertain. In applying the definition in s 55 of the SA, the impugned content or omissions have to be such as to lead the appropriate reader into error in understanding the topic that is being addressed.
The “prudent but non expert person”/“notional investor”
[78] When the SA was amended in 1996 to provide for investment statements as less complex offer documents, the first of two purposes of an investment statement was expressed in s 38D(a) as being 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; …
That captured the essence of various concepts used at common law as the test for assessing whether the content of a prospectus was misleading.
[79] Proof that a particular claimant was in fact misled cannot be a sufficient basis for attributing civil liability to directors and promoters of a prospectus. Given the complexity of such documents, there are numerous circumstances in which a particular investor might be misled for idiosyncratic reasons that could not have been foreseen by those drafting the prospectus as reasonably likely to mislead.
[80] Therefore, even in the circumstances of a single claimant, the liability regime is to be applied by requiring that it was reasonable for the claimant to be misled in the respects complained of. Whether the individual claimant was materially misled by any particular misleading content or omissions will be relevant, but cannot be determinative.
[81] It follows that an objective standard is to be applied as to whether statements or omissions are misleading, namely by reference to the so-called notional investor. What attributes should that person have in the present context? This question has been considered in recent years mostly in the context of criminal prosecutions of directors of failed finance companies. Those cases involved prospectuses for debt
securities. A thorough analysis was undertaken by Heath J in 2011 in R v Moses.27
[82] In a subsequent criminal trial of the same type in 2012, I adopted Heath J’s
interpretation with one qualification:28
The Act contemplates that the audience for an investment statement is a “prudent but non-expert person”. Heath J held that the target audience contemplated by the notion of a “prudent but non-expert person” is also the audience in respect of which an issuer is deemed to prepare a prospectus. Heath J described the attributes he contemplated for a “prudent but non- expert person” (he used the term “notional investor”, which I will similarly adopt) as including:
•The notional investor falls somewhere between one who is completely risk averse and someone who is prepared to take a high level of risk. They are expected to know that the higher the interest rate offered the greater the risk of loss.
•The notional investor understands the language employed in the narrative sections of both an investment statement and a prospectus. This extends to a general understanding of technical words such as “debenture” and financial jargon, such as “rollover”. As non-
27 R v Moses, above n 21, at [65]–[70].
28 R v Graham [2012] NZHC 265, [2012] NZCCLR 6 at [25]–[26].
experts, notional investors are expected to focus more on the narrative of offer documents than on financial statements.
• Such notional investors seek assistance from financial advisers.
While not expected to be financially literate, such persons are likely to have sufficient ability to comprehend competent advice about
investment decisions.
The only one of these characteristics attributed to a notional investor which I have reservations about is the third. Whilst Heath J pointed out that the regime permitting use of investment statements was introduced at the same time as the Investment Advisers (Disclosure) Act 1996, I would not confine the characteristics of the notional investor to those who would be guided in their consideration of investment statements by advice from investment advisers. Certainly, that may be a predictable pattern of conduct and the terms of offer documents complying with the statutory requirements urge investors to seek advice before making investment decisions. However, I would include within the range of those treated as the “notional investor” some who may not seek investment advice, despite realising that they are non-experts when it comes to weighing up investment decisions. Notwithstanding that the statutory provisions contemplate investors taking advice, I attribute to Parliament the practical recognition that a portion will not do so.
[83] Both Mr Forbes and Ms Mills in their contributions to the plaintiff’s closing argument submitted that there was no material difference in the attributes of the audience for which a prospectus for shares in the IPO of a manufacturing company ought to be prepared, and the characteristics to be attributed to the audience for a finance company debt issue prospectus. They urged that there was no justification to vary the approach I had adopted in R v Graham contemplating a notional investor who was a non-expert but who nonetheless might not take advice before making an
investment decision.29
[84] They submitted that the statutory purpose of the SA would not be achieved if it did not impose liability on those responsible for issuing prospectuses for content that could mislead the non-expert reader, where the risk of being misled would be eliminated by such readers obtaining assistance from an expert to understand more accurately the description of the issuing company’s business. That would effectively make the test whether the prospectus was misleading to an expert reader.
[85] The attributes of the prudent but non-expert person are important in this case because the majority of the allegedly misleading content or omissions would
29 R v Graham, above n 28, at [26].
inarguably not have misled an expert reader of the prospectus. What higher standard of clarity of explanation than would be needed for expert readers was therefore required? The analysis is inevitably different from cases of classic misleading content such as the examples suggested in [71] above. Where there are such straightforward misstatements as to current facts, then readers will be misled, irrespective of the level of expertise they bring to reading the prospectus.
[86] For the first defendants, Mr Galbraith QC drew a distinction between the investment decision involved in placing money with a finance company to acquire debt securities for defined terms, and the potentially more complex evaluation of the prospects for an equity investment in an IPO of shares in a manufacturing company.
[87] For the most part, finance companies separately issued and relied predominantly on investment statements, the content of which would draw the readers’ attention to the availability of a registered prospectus that the issuer had to make available upon demand. In contrast, Feltex issued a combined prospectus and investment statement, so that all readers of its offer document had the more detailed information available to them.
[88] The investment decision in relation to Feltex shares was relatively more complex than that confronting potential investors in debt securities issued by finance companies. The assessment is not simply whether the issuer is sufficiently well run to be able to pay the interest on money invested, and be able to repay the principal on a set date, mostly between 12 and 24 months later. Instead, the assessment is whether the short, medium and long-term prospects of the issuer are sufficiently promising for it to pay the anticipated level of return to owners reflected in dividend projections, and to maintain the market’s perception of its value so that its share price is maintained, and hopefully enhanced. Numerous considerations and risks are likely to arise in a thorough evaluation of those prospects.
[89] Given the nature of the evaluation, the defendants attributed to the notional investor an appreciation of the extent to which he or she did not understand either the narrative or the financial tables in a prospectus, and that such persons would be
sufficiently concerned to make a good decision that they would seek advice to clarify those parts of the document that they did not understand.
[90] I am satisfied that there is a material difference between the evaluations respectively of a defined term debt investment in a finance company, and an open- ended equity investment in an IPO for a manufacturing company. An equity investment involves many more considerations bearing on the risk of not recovering the investor’s capital because the realisable value of the shares at any point in the future will depend on a wide range of factors, many of them independent of the quality of the governance and management of the company in question. So, too, with the prospects of earning income, given that the level of income on a debt instrument is a matter of contractual commitment and whether investors will receive it is confined to an assessment of the adequacy of the finance company’s solvency. In contrast, investors in shares are assuming a wider range of risks that could affect the timing and quantum of returns of income.
[685] Clearly, any special relationship in this case arises from the statutory obligations owed under the SA. Where the source of the obligations is the statute itself, and the statute prescribes a specific regulatory regime for prospectuses, it is difficult to contemplate the utility of an additional claim in negligence.
[686] An analogy can be drawn with the decision in Tait v Austin.246 In that case, the plaintiffs and others they represented were former employees of Fortex Group Limited, a public company listed on the NZX that was placed in receivership and liquidation in 1994. Prior to its liquidation, Fortex established a number of deferred payment share schemes for its employees. Under the schemes, employees could purchase shares by instalments paid by way of deductions from salary and wages. The parties accepted that the share scheme was an offer of securities to the public for subscription in terms of ss 33 and 37 of the SA. Fortex had not issued a registered prospectus.
[687] The plaintiffs commenced proceedings alleging breach of s 37 of the SA and negligence. Under the claim in negligence, the plaintiffs argued that the defendants had a duty of care in respect of the share schemes to ensure that:
(a) the scheme was lawful and/or that it complied with all relevant statutory and legal provisions for a scheme of its kind; and/or
(b)the position of each claimant was properly protected under the scheme; and/or
(c) all monies paid by each claimant were properly protected until the claimant received his or her shares.
[688] Master Venning noted that the effect and intent of these duties was the same as the duties outlined in s 37(5) and (6) of the SA. The defendants sought an order striking out the claim on the basis that common law remedies are not available to enforce the provisions of the SA. Master Venning found that the case came within a
category where a liability not existing at common law is created by a statute that
246 Tait v Austin (2000) 8 NZCLC 262,167 (HC).
provides a special and particular remedy for enforcing that liability. Master Venning concluded that the liability of the directors was pursuant to s 37(6) of the SA and it was not open to the plaintiffs to pursue directors in negligence for failing to ensure the share schemes complied with the SA, when the Act itself provides a clear remedy against the directors in that situation.
[689] Similarly in the present case, those responsible for the prospectus are the issuer, promoters and directors. A special relationship does not arise for the purposes of a negligence claim because the obligations owed by promoters or directors are already defined by the SA. The situation is akin to that identified by Cooke P,247 where the true interpretation of the statute is either that it covers the field to the exclusion of the common law or that it gives rise to a statutory cause of action. An existing remedy is available and a claim in negligence would not augment that remedy in any way.
[690] Further, it is difficult to see how a plaintiff in this particular situation is vulnerable in a way that is not already addressed by the SA. This would militate against the imposition of a duty of care.
[691] In the case of the fourth and fifth defendants, both claim that the SA does not apply to them because neither was a “promoter” in relation to the IPO. I have found that they were not promoters so their involvement was not governed by the SA. If I am wrong in that finding, so that their conduct is governed by the SA, then the same considerations outlined above in relation to the first and second defendants would apply.
[692] On the basis of my finding that the JLMs and CSAMP were not promoters, they are not subject to a relevant statutory liability that is a ground for resisting the imputation of a tortious duty of care. The assessment in relation to imputing a duty of care to the JLMs or CSAMP should nonetheless take into account that the SA creates a civil liability regime for the directors and promoters that is essentially of the same type as might be attributed to those responsible for the prospectus at
common law, if the statutory liability regime did not exist. Given that the JLMs and
247 Cited at [678] above.
CSAMP fall outside the net of those who are obliged to accept statutory liability for any untrue statements in the prospectus, it would be artificial to extend the category of those liable by imputing a common law duty to them when the nature of their involvement left them beyond the statutory civil liability regime.
[693] In addition, the context of involvement by the JLMs places them further away from an imputed assumption of responsibility to readers of the prospectus when, under the statutory regime, those who have to answer for the accuracy of the prospectus are the directors and promoters, whereas the JLMs participated in a more limited role as advisers without having decision-making authority to determine the terms on which the prospectus issued.
[694] I am accordingly satisfied that any relationship that can be imputed as between the JLMs and investors in the IPO by virtue of their reliance on the prospectus is not of a type that justifies the imposition of a novel tortious duty of care.
[695] So far as CSAMP was concerned, its director assumed liability, and the promoter role was separately performed by CSPE. Therefore CSAMP similarly falls outside the scope of those who might be attributed with a novel duty of care.
[696] I am mindful that my analysis of the alternative causes of action to the claim under the SA would have enabled the JLMs to avoid liability for misleading content or omissions in the prospectus entirely. They are not promoters and therefore not liable under the SA. The exclusion of the application of the FTA relates to conduct regulated by the SA (rather than the narrower liability of participants governed by the SA regime) and it is not appropriate to attribute a novel tortious duty of care to the JLMs in relation to their conduct in that capacity in favour of investors who relied on the prospectus. Therefore the JLMs would have avoided liability entirely for misleading content or omissions in the prospectus.
[697] I am comfortable with that outcome. The claim in negligence did not focus in any way on the relationship between the JLMs and clients of those firms who invested in reliance on the firms’ recommendation that Feltex was a good or
appropriate investment. In Mr Houghton’s case, it appeared that he had made numerous investments, including his subscription for Feltex shares, in reliance on ForBar recommendations. A range of interesting issues may have arisen if Mr Houghton had claimed against ForBar for negligent misstatement in its recommendation to him to invest in Feltex. Issues could arise as to whether ForBar as a firm could distance the client advisers responsible for recommendations to clients such as Mr Houghton from the very detailed knowledge of the content of the prospectus that the firm possessed by virtue of its involvement as a JLM. That is an issue for another day.
[698] This analysis of the lack of grounds for a cause of action in negligence also means that CSAMP avoids liability on any of the potential causes of action. On my analysis, it was sued in error when the director of CSAMP was the entity that would have been liable under the SA regime. An error of that type cannot add anything to the grounds for imputing a common law duty of care, and in any event CSAMP was sufficiently distanced from the preparation of the prospectus for there to be other grounds for negativing the existence of any requisite special relationship.
Quantification of loss
[699] The ultimate fallback position for all defendants was that if the Court found any untrue statements on which there had been requisite reliance, and in respect of which the defendants could not make out an affirmative defence, then the extent of loss claimed by the plaintiff was not, in any event, recoverable. The defendants submitted that the extent of any compensation they became liable for would be assessed on a tort measure. That is, the plaintiff would be entitled to the difference between the sum paid for the shares, and the fair value of the shares if the share price had been adjusted to reflect the untrue statement.
[700] The first to third defendants jointly called two experts on quantification of loss. A primary analysis was undertaken by Professor Cornell. His analysis relied on the efficient market theory which stipulates that the market for publicly traded shares will quickly assimilate the price effect of new information relevant to the value of those shares. It would follow that once a less than fully informed market
becomes fully informed, the impact of the new information is very quickly assimilated and reflected in the price at which the shares will trade.
[701] Professor Cornell’s analysis was considered from a New Zealand perspective by Mr Cameron. He opined that there was a more than sufficient market for Feltex shares to justify applying the efficient market theory to price responses to new information. He also analysed the price history of Feltex shares, relative to various milestones that would have affected the value of the shares.
[702] The efficient market theory is relatively widely accepted, and was not challenged by the plaintiff.
[703] The plaintiff did not call any evidence on loss. The closing submission on loss occupied less than two of a 227 page submission. The hypothesis put forward by Mr Houghton was that if there had been sufficient disclosure, he would not have invested and he should therefore be entitled to a full refund of the money paid, plus statutory interest. On that basis, I took the plaintiff’s claim on quantum to be akin to a total failure of consideration.
[704] The difficulty with that approach is that the shares inarguably did have substantial value. On a balance sheet basis, Feltex had net assets as at December
2003 of $28.147 million. At that time, the private equity owners had highly leveraged the extent of debt borrowed to operate the business, so that substantial repayment of debt would increase the value of net assets.248 In forecasting the company’s financial position at the end of FY2004, the prospectus stated net assets or equity attributable to shareholders at $90.250 million.249
[705] The plaintiff’s approach also overlooks the plaintiff’s obligation to mitigate his loss. 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. If indeed he was
248 Prospectus at 93.
249 Prospectus at 87.
materially misled as to the nature of Feltex’s trading to 30 June 2004 because of the non-disclosure of the adverse variance in gross revenue, then an appropriate opportunity arose in the period after the August 2004 announcement of the FY2004 result. For months after that disclosure, numerous opportunities arose for Mr Houghton to quit the stock at no or minimal loss. During that time, broking firms who followed the stock and produced analysts’ research in respect of Feltex were reporting on its progress.
[706] Plaintiff’s counsel also suggested during the hearing that had the alleged untrue statements been corrected, then the IPO would not have taken place because full disclosure would have substantially reduced the price to a level that Credit Suisse would not have accepted for their shareholding in Feltex. As to price, the plaintiff argued that the lowest price Credit Suisse was prepared to accept, of $1.70 per share, was only achieved by virtue of the participation of Hunter Hall. If Hunter Hall had been told of each of the matters about Feltex that were characterised as untrue statements, it would not have bid for shares, and the proposed offer would therefore have failed.
[707] This hypothesis was not raised in closing. An evidentiary foundation for it was not laid. In particular, whilst Credit Suisse’s negotiations with the JLMs and Feltex directors adopted the stance that $1.70 per share was the minimum for which they would sell the Feltex shares, I am far from satisfied that Credit Suisse would have rejected a sale if the book build process produced full coverage for the offer at, say, $1.60. It seems more likely that Credit Suisse would have been a reluctant seller, rather than abandoning the IPO process for the sake of 10 or 15 cents per share.
[708] The plaintiff’s ultimate fallback position was that the quantum of loss ought to be reserved for a subsequent inquiry. At the end of 11 weeks of hearing in which the plaintiff had made very limited response to relatively extensive evidence on behalf of the defendants in relation to quantification of loss, that was not an appealing prospect. In fairness to Mr Forbes, that prospect was one of the pleaded alternatives in the prayers for relief. However, the division of issues to be resolved within Mr Houghton’s claim at the first stage of the representative proceedings
contemplated a complete resolution and the defendants had joined issue on that basis.
[709] Had there been a finding of liability, I would not have been prepared to adjourn quantification of the compensation payable in the circumstances. The plaintiff’s primary position, which I consider was untenable, was effectively that there had been a complete failure of consideration. The plaintiff had not joined issue, even by way of reply evidence, on the defendants’ relatively extensive case challenging the existence of any recoverable loss.
[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.250 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.
[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.
250 The chart of Feltex’s share price (exhibit 2 to Professor Cornell’s BoE) shows that the price was
briefly above the $1.70 issue price, and traded in a range between $1.55 and $1.70 until
23 February 2005. That day, Feltex reported its result for the six months to 31 December 2004, and the share price thereafter dropped from near $1.70 to $1.57, before rebounding somewhat.
[712] That is a tenable approach. It is not appropriate to rule on it definitively in the absence of a finding that there was indeed one or more untrue statements in the prospectus. There would then need to be a more specific analysis of the value the market placed on the misleading content, once the correct position was known to the market.
Costs
[713] Assuming the quantum of the defendants’ entitlement to costs and disbursements cannot be agreed, I invite memoranda first on behalf of the defendants within 28 days of the release of this judgment, and then on behalf of the plaintiff within 14 days of service on his solicitors of the last of the memoranda on behalf of the defendants.
Dobson J
Solicitors:
Wilson McKay, Auckland for plaintiff
Bell Gully, Auckland for first to third-named and fifth to seventh-named first defendants
Clendons, Auckland for fourth-named first defendant
Russell McVeagh, Wellington for second and third defendants
Jones Fee, Auckland for fourth defendant
McElroys, Auckland for fifth defendant
Appendix A
Glossary of Abbreviations and Terms
AF Affidavits and Correspondence Bundle APC Australian Productivity Commission BoE Brief of evidence BP Board Pack Bundle CB Common Bundle CEO Chief Executive Officer CFO Chief Financial Officer CSAMP Credit Suisse First Boston Asian Merchant Partners LP (the
third defendant)
CSPE Credit Suisse Private Equity Inc (the second defendant) Credit Suisse Second and third defendants, jointly referred to throughout
the judgment
DD Due Diligence Bundle DDC Due Diligence Committee EBITA* Earnings before interest, tax, amortisation and write-offs EBITDA* Earnings before interest, tax, depreciation, amortisation and
write-offs
EIP Equity incentive plan Feltex Feltex Carpets Limited FNZC First New Zealand Capital (the fourth defendant) ForBar Forsyth Barr (the fifth defendant) FRS Financial Reporting Standards FTA Fair Trading Act 1986 FY2004 2004 financial year (1 July 2003 to 30 June 2004) FY2005 2005 financial year (1 July 2004 to 30 June 2005) IPO Initial public offering JLMs Joint Lead Managers (FNZC and ForBar) MIP Management incentive plan Mr Houghton The plaintiff NoE Notes of evidence at trial NPAT Net profit after tax NZX New Zealand Stock Exchange SA Securities Act 1978 SB Supplementary Bundle Shaw Shaw Industries Inc SIP grants Australian government support that subsidised capital
expenditure on innovations for textile manufacture
The directors The first defendants The Regulations Securities Regulations 1983 The 24 May announcement An announcement by Feltex to the market by means of a
statement released to the New Zealand Stock Exchange on
24 May 2004. It stipulated the final share price of $1.70.
2005 AGM Feltex’s Annual General Meeting held on 1 December 2005 4ASC Fourth amended statement of claim dated 12 March 2014 * The definitions used in the glossary in the prospectus. (There were inconsistencies in the
elements included in EBITDA in various places in the prospectus.)
20