Houghton v Saunders
[2013] NZHC 1980
•7 August 2013
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2008-409-348 [2013] NZHC 1980
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: 6 August 2013 Counsel:
A J Forbes QC and P A B Mills for plaintiff
A R Galbraith QC and D J Cooper for first defendants, and on instructions from D H McLellan QC for fourth defendant
A S Olney for second and third defendants
A C Challis for fifth defendant
Judgment:
7 August 2013
RESERVED JUDGMENT OF DOBSON J
HOUGHTON v SAUNDERS [2013] NZHC 1980 [7 August 2013]
[1] I heard counsel yesterday on a second round of the defendants’ requests for further particulars of the plaintiff’s current pleading. Following my judgment of
19 July 2013, the plaintiff’s solicitors have circulated in draft a third amended
statement of claim (D3ASC). It was served on solicitors for the defendants on
30 July 2013.
[2] Since then, in accordance with the timetable proposed in my 19 July 2013 judgment, counsel for the defendants have filed a joint memorandum identifying the remaining respects in which they still seek further particulars of the statement of claim as it presently stands. Counsel for the plaintiff responded with a memorandum accepting the need for some further changes, and providing reasons for resisting others. I comment on each of the paragraphs in the current draft that remain of concern.
Para 22.5 and 22.5(i)
[3] Concerns arising from what transpire as errors in these paragraphs have been addressed. No additional particularity is required.
Para 33.2
[4] Paragraph 33.2 appears to be based on some analysis of Feltex conducted by KPMG in August 2002. The paragraph cites disadvantageous features of Feltex’s business, and that Feltex did not have effective strategies to counteract the effects of these features. It is not pleaded whether such disadvantageous features were not disclosed by the prospectus, or whether they were only inadequately disclosed, or whether they were adequately disclosed but with a misleading implication that Feltex had strategies to counteract them, when in fact it did not.
[5] Mr Forbes’ memorandum had acknowledged the defendants’ criticism of para 33.2 and proposed an amended form. That still drew criticism on the basis that it did not identify an allegedly false or misleading statement in the prospectus.
[6] After discussion, Mr Forbes acknowledged that the allegation would be re-cast to cite factual propositions, and to specify the respects in which they
constituted matters that ought to have been disclosed but were not (or relevant variants on that).
Para 33.6
[7] This paragraph, which runs to nine pages of the D3ASC is the sixth particular of the respects in which certain pleaded statements in the prospectus were alleged to be incorrect and likely to lead potential investors into error or mislead them. The defendants complain that it comprises a compendium of evidence, and does not clearly state the factual propositions on which the plaintiff will rely. Further, that it is “prolix and diffuse”.
[8] Those concerns are valid. The system of numbering paragraphs in the plaintiff’s pleading hardly assists its intelligibility. As to the content, the matters cited to justify each of a series of negative propositions about Feltex are matters of fact and can be pleaded to on behalf of the defendants. A measure of redrafting to distil factual propositions from the somewhat discursive allegations might aid the plaintiff’s case.
[9] One consequence of the present detail is that it provides the defendants with more than they would strictly be entitled to, at the cost of making response to the particulars more difficult. After exchanges with Mr Galbraith QC, he acknowledged that it was not critical to have these particulars transformed into precise allegations of fact. He reserved the position for the defendants to not respond to particulars. In the context of this D3ASC I am not persuaded that the plaintiff should be required to express these particulars in a more conventional way.
[10] In advancing argument for the defendants, Mr Galbraith acknowledged that expecting strict compliance with the requirements for a fully particularised pleading that did not include evidentiary matters was too major a task in this case, given time pressures of resolving pleadings before the plaintiff is to serve its briefs of evidence. My view in relation to a number of the requests is pragmatically influenced by that view.
Para 33.7
[11] This alleges that the prospectus represented that, in setting the final price for shares, Feltex would take a range of specified factors into account. It is alleged that the price as set did not fairly reflect the factors said to be relevant and para 33.7 then contains four pages of the particulars as to why the price did not fairly reflect the factors listed as influencing the setting of the final price. The particulars cite specific items, such as emails and draft memoranda, referring to content that is relevant to the allegation. They are not cast as factual propositions that go to making out the alleged non-compliance in the pricing exercise with the factors represented as influencing it. However, the relevance of the communications pleaded is clear and the defendants are able to plead to the allegations in their present form. I am not satisfied that they would be materially advantaged if the plaintiff was required to re- cast the content of the various items referred to as factual propositions that summarises the effect of them.
[12] The exception is the particular presently pleaded as 33.7(e). It constitutes a single sentence containing some 26 lines of an indented page. It alleges the content of a 28 May 2004 memorandum. In its present form, there would be undue difficulty for the defendants in pleading to it. Mr Forbes QC accepted that the plaintiff is to distil the essence of the factual matters apparently relied on from that memorandum, preferably in a separated form that enables the defendants to respond to its individual components.
Para 33.9
[13] This alleges that a claim in the prospectus to the effect that Feltex was “expanding its relationships with key customers and increasing customer service levels” misrepresented the position when Feltex had actually reduced the level of retailer customer rebates and increased the margins that Feltex charged for its products. The defendants sought details as to which rebates were reduced, and for which customers and at which times. Mr Galbraith argued that the defendants could not prepare a response to this without knowing the detail of it, and that the plaintiff should specify the detail required to analyse the alleged extent of this practice.
[14] Mr Forbes accepted that the pleading should be further amended, but resisted any requirement to plead on an individual customer basis the extent of the change in terms, and the date from which they applied.
[15] However, the relevant paragraph is followed by an allegation of the extent to which the practices increased the reported profit in 2003 and 2004. That must enable at least a range of changes and the extent of their effect to be pleaded and this should occur. The pleading should also provide a definition of types of customer, the geographical areas in which such changes in Feltex’s dealings occurred, and the period in which they were introduced.
[16] Mr Olney emphasised that this was a lack of particularity that made responding particularly difficult for the Credit Suisse entities which had no involvement in the running of Feltex at the time to which the allegation relates. I am not persuaded that that predicament (which may well be shared by First New Zealand Capital and Forsyth Barr) increases the extent of the pleading obligation on the plaintiff.
Para 37.6
[17] Concerns about the adequacy of particulars in the D3ASC in paras 37.6 and
37.8A expanded into more general concerns about the pleading in para 37. That alleges that the prospectus conveyed misrepresentations by omission and was therefore incorrect, likely to lead potential investors into error or mislead them. The particulars thereafter identify a range of matters that were not addressed in the prospectus but which the plaintiff alleges ought reasonably to have been.
[18] Mr Forbes acknowledged that a number of the allegations presently pleaded as particulars deserved independent status as allegations in their own right, so that a re-casting of all of what is presently in para 37 will occur. So far as the present para 37.6 is concerned, the allegation of a failure to disclose in the prospectus concerns that the directors allegedly held about weaknesses in Feltex’s senior management was accepted as being inadequate on its own to sustain that allegation. Mr Forbes suggested he would expand it by way of a cross-reference back to the
particulars in para 33.6 on the proposition that Feltex did not have a good management team.
[19] Conceptually, particulars of a complaint that a positive statement in the prospectus about the quality of the management team was misleading could also be relied on as particulars of an allegation that the prospectus omitted to warn its readers that Feltex did not have a good management team. As with other respects, the plaintiff should test the amenability of the earlier particulars to cross-referencing in the different context. Subject to that, the plaintiff’s intended re-casting of para 37.6 seems likely to address the defendants’ legitimate concerns on this paragraph.
Para 37.8A
[20] This alleges a failure of the prospectus to disclose a practice of accounting for sales in earlier accounting periods than the period in which they would conventionally be reported. It alleges the practice had occurred from in or about May 2003, but the particulars of the practice then cite conduct from May 2004. Mr Galbraith argued that it mattered to the directors whether the potentially improper or inappropriate practice was alleged against them from May 2003 or indeed only from May 2004, and if it had occurred from the earlier date, then factual matters that were to be relied on by the plaintiff should be pleaded.
[21] Mr Forbes accepts that particulars of how the practice was undertaken in the earlier period need to be pleaded, and he will reconsider the content of that paragraph. It should either particularise the facts alleged as making out the practice in the earlier period, or be amended to relate only to the later period.
Para 37A
[22] Paragraph 32 of the D3ASC contains a generic allegation that each of the defendants participated in activities relevant to the issue of the shares, and did so whilst engaged in conduct in trade that was misleading or deceptive, or was likely to mislead or deceive. Paragraph 37A then pleads particulars in respect of Forsyth Barr as to the generic allegation against it in para 32 on the Fair Trading Act cause of
action. The content of para 37A cites Forsyth Barr’s role and conduct in matters referred to in one series of paragraphs, and the involvement arising in the allegations made in an extensive series of other paragraphs. Ms Challis attempted to chart the consequences of all those cross-references, to demonstrate inconsistencies and a number of non-sequiturs that the cross-referencing involved.
[23] I did not take Mr Forbes to resist Ms Challis’s point that, in this particular context, the cross-referencing was an inadequate means of particularising the pleadings relied on to attribute Fair Trading Act liability to Forsyth Barr for the conduct up to the allotment of the shares.
[24] Ms Challis submitted that the same concerns arose in respect of para 37B, which is a parallel pleading in relation to First New Zealand Capital. I am satisfied that both paragraphs should be re-cast so that they contain the essence of the conduct and omissions relied upon, even if, in matters of some detail, residual elements are dealt with by cross-reference. Before including any pleading by way of cross- reference, the plaintiff is to ensure that the extent of cross-reference is directly and accurately applicable to the scope of the allegations intended to be made. If any element of uncertainty as to the applicable allegation remains, then cross-referencing should not be used.
Para 42
[25] This paragraph in D3ASC appeared as a component of a separate cause of action just against Mr Magill in relation to liability alleged under s 9 of the Fair Trading Act for conduct subsequent to the allotment of shares. The basis of the cause of action is that Mr Magill’s conduct disguised the misleading content of the prospectus, thereby depriving the shareholders of a statutory remedy under s 37A of the Securities Act 1978 which they might otherwise have exercised to avoid the allotments of shares they had subscribed for. As presently drafted, it appears that all the allegations are in respect of conduct or omissions on Mr Magill’s part that were undertaken in the course of, and within, his job responsibilities.
[26] On behalf of Mr Weston QC, Mr Galbraith argued that para 42 made cross- references that were nonsensical, and that the factual matters relied on to allege personal liability against Mr Magill were not pleaded.
[27] After discussion, Mr Forbes accepted that the sequence of matters alleged thus far in paras 40 to 43 needed to be re-ordered, and the content reconsidered to meet these concerns. The cross-referencing in para 42 was in error, intending that the references were to be to paras 32.6 and 32.7. The re-pleading should focus on the respects in which Mr Magill’s direct involvement are claimed to be relevant, and the ways in which that conduct is alleged to trigger personal liability under s 9.
Paras 47 to 51
[28] The pleading of a claim in negligence begins with an acknowledged reliance on substantial parts of the pleading in the statement of claim up to that point. Paragraph 48 then alleges, in terms expressed consistently for all defendants, the series of steps that they all took or allegedly contributed to in relation to the IPO as giving rise to a duty to take reasonable care. Paragraph 49 then alleges that the relationship of proximity between each of the defendants, and the conduct in relation to the matters pleaded in para 48, were such that all defendants should reasonably have foreseen that carelessness on their part would be likely to cause the risk of loss to investors in Feltex and that those risks could be avoided by the exercise of reasonable care on their parts.
[29] Ms Challis objected that the generalised formulation was insufficient for what she contended would be a novel duty of care owed by the lead manager in an IPO to investors. She submitted that the circumstances alleged to be relevant, and the indicia of the existence of a duty of care owed by Forsyth Barr to investors, had to be addressed on an individual basis, reflecting the extent and circumstances of Forsyth Barr’s involvement. For instance, were the factors contributing to the imputation of a duty of care alleged to be affected by a decision on whether Forsyth Barr was to be treated as a promoter for the purposes of its responsibilities under the Securities Act?
[30] Ms Challis was also concerned that global cross-references intended to apply uniformly to all defendants could not be pleaded to by Forsyth Barr and that this was
another respect in which the plaintiff had to analyse on an individual basis and, if necessary, repeat earlier allegations to ensure that they reflected what was intended to be alleged against Forsyth Barr.
[31] Mr Forbes accepted an obligation to re-plead the negligence cause of action as it is to be advanced against First New Zealand Capital and Forsyth Barr. He also accepted that the plaintiff will identify any differences in the relevant indicia, if it considers that the status of the lead managers as a promoter (or finding that they were not promoters) is relevant to the circumstances giving rise to the imputation of a duty of care.
[32] Within the negligence allegations, para 51 might be better cast to allege that the defendants knew or ought to have known that the provisions of the Securities Act pursuant to which the prospectus was issued had, as its purpose, investor protection through disclosure of accurate and sufficient information to enable potential investors to make an informed decision on investment.
[33] The settled form of the plaintiff’s statement of claim is to be filed and served by 30 August 2013.
Security for costs
[34] The timetable contemplated in my 19 July 2013 judgment for progressing the provision of further security for costs identified two dates. First, proposals as to the means by which the plaintiff intends to comply with the requirements stipulated in my judgment are to be conveyed to the defendants by Friday, 16 August 2013. Secondly, the next stage of security was to be in place by Friday, 30 August 2013.
[35] I am now unavailable until early September. In the event that the parties are unable to agree on a mutually acceptable form in which the security is to be provided, compliance with the obligation to have the next stage of security in place will inevitably slip from 30 August until the earliest date in September on which it can be addressed.
[36] I am due to hear further interlocutories on 16 September 2013.
Costs on further particulars
[37] Costs entitlements on the particulars sought are reserved.
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 defendantsJones Fee, Auckland for fourth defendant
McElroys, Auckland for fifth defendant
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