Wayne Gordon Dodge v Ian Bruce Snow

IN THE COURT OF APPEAL OF NEW ZEALAND

CA21/99

BETWEEN	WAYNE GORDON DODGE
Appellant

AND	IAN BRUCE SNOW
Respondent

Hearing:	14 February 2000
Coram:	Blanchard J McGechan J Fisher J
Appearances:	M J Stewart-Wallace for Appellant G A Hair for Respondent
Judgment:	22 February 2000

JUDGMENT OF THE COURT DELIVERED BY BLANCHARD J

This is an appeal from a decision of Master Venning in the High Court at Christchurch on 10 December 1998 finding that the defendant/respondent, Mr Snow has an arguable defence to the plaintiff/appellant’s claim and refusing an application for summary judgment. It raises questions about the construction and application of sections of the Securities Act 1978 (“the Act”). It concerns the appellant’s purchase of shares held by the respondent in Get Met Titles Ltd (“Get Met”), a company incorporated on 3 June 1997. Its directors at relevant times were Mr Snow, a Mr Crooks and a Mr Lilley. Shortly after incorporation, with the apparent concurrence of Mr Snow, Mr Crooks placed an advertisement in a local newspaper. The advertisement appeared on 7 June but may also have been published subsequently on one or more occasions, there being no specific evidence except as to the 7 June date. The advertisement appeared on that date in the following terms:
Investment and employment opportunity. We are seeking an investor, with management skills in sales and marketing to buy into a growing company already well established in New Zealand and with immense potential growth in Australia. Write to Investment Opportunity, PO Box 25 269, Christchurch or phone 021 393-744.
A Mr Green approached the company as a result of that publication. A proposal was made to him concerning acquisition of shares for $2,500 each and employment with the company. Mr Green did not take up this offer. His contacts with the company ceased, it seems, by the middle of July 1997.
No prospectus was ever registered. It does not appear that anyone invested money in the company on the strength of the advertisement.
In the meantime, on 25 June 1997, there was a share issue and thereafter the shares in Get Met were held as follows:
Mr Crooks     200
Mr Lilley       200
Mr Snow       600
_____
  1000
  ====
Mr Snow’s shares were said to be held by him as trustee of the “Collective Trust.”
Mr Dodge first came into contact with Mr Snow in late November 1997. He knew nothing of Get Met and had never seen the advertisement. Mr Snow and the Dodge family attended the same church. Their children played together after church. Mr Dodge went to the Snow home to collect his daughter and fell into conversation with Mr Snow. Mr Dodge was engaged in a business venture relating to electric bikes. He apparently learned from Mr Snow something about Get Met’s business which involved the publication of a trade directory and the selling of “privilege club cards.” He decided to place an advertisement for the bikes in the directory and shortly afterwards, he says the next day, he was visited at home by Mr Snow and signed an advertising contract.
There were subsequent meetings in the early part of December. The parties in their affidavits give differing accounts. It is enough for present purposes to record that Mr Dodge was engaged in the exercise of selling a poultry farm and was anticipating receipt of funds. He became interested in working for and investing in Get Met. He started work at Get Met’s office in Christchurch in mid December and on 18 December agreed to purchase from Mr Snow 80 shares for $60,000, i.e $750.00 each. He paid for them by a deposit of $5,000 on 18 December, an instalment of $2,500 on 19 January 1998 and the balance of $52,500 on 30 January.
On 5 March 1998, having received payment for the farm, he purchased another 80 shares from Mr Snow for $40,000 - $500 per share. (He also bought 40 shares from each of Messrs Crooks and Lilley but the present claim does not relate to those purchases.)
Within a few months Get Met was unable to pay Mr Dodge’s wages. He took legal and accounting advice. This proceeding and the application for summary judgment were issued on 10 September 1998. The Statement of Claim alleges that Mr Snow’s shares in Get Met were offered by him to Mr Dodge as a member of the public and to other members of the public without a registered prospectus and that the respondent has failed to repay to the appellant the consideration for the shares within two months after the date of sale as required by s37(6) of the Act. The appellant sought summary judgment for $100,000 and interest.
The relevant provisions of the Act are:
2. Interpretation-
"Offer" includes an invitation, and any proposal or invitation to make an offer; and "to offer" has a corresponding meaning:
3. Construction of references to offering securities to the public-
(1) Any reference in this Act to an offer of securities to the public shall be construed as including-
(a) A reference to offering the securities to any section of the public, however selected; and
(b) A reference to offering the securities to individual members of the public selected at random; and
(c) A reference to offering the securities to a person if the person became known to the offeror as a result of any advertisement made by or on behalf of the offeror and that was intended or likely to result in the public seeking further information or advice about any investment opportunity or services,-
whether or not any such offer is calculated to result in the securities becoming available for subscription by persons other than those receiving the offer.
(2) None of the following offers shall constitute an offer of securities to the public:
(a) An offer of securities made to any or all of the following persons only:
(i) Relatives or close business associates of the issuer:
(ii) Persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money:
(iii) Any other person who in all the circumstances can properly be regarded as having been selected otherwise than as a member of the public:
(b) An invitation to a person to enter into a bona fide underwriting or sub-underwriting agreement with respect to an offer of securities:
(c) A take-over offer within the meaning of Part I of the Companies Amendment Act 1963.
(d) An offer of securities made pursuant to any takeovers code that is in force under section 28 of the Takeovers Act 1993.
(3) A person shall not be precluded from being regarded as a member of the public in regard to any offer of securities by reason only that he is a purchaser of goods from, or an employee or client of, or a holder of securities previously issued by, the issuer or any promoter of the securities.
(4) Any reference in this Act to an offer of securities to the public shall be construed as including a reference to distributing an advertisement, a prospectus, a registered prospectus, or an application form for the subscription of securities.
(5) Proof of an offer of securities to one person selected as a member of the public shall be prima facie evidence of an offer of securities to the public.
…
6. Previously allotted securities-
(1) Subject to this section, nothing in sections 33, 34, 37 to 38A, 38C to 44, and 44B to 59 of this Act shall apply in respect of a security that has previously been allotted.
(2) All the provisions of this Act shall apply in respect of a security that has previously been allotted (whether in New Zealand or elsewhere) if the security was originally allotted with a view to its being offered for sale to the public in New Zealand and the security has not previously been offered for sale to the public in New Zealand.
…
(5) For the purposes of subsection (2) of this section, unless the contrary is proved, a security shall be deemed to have been allotted with a view to its being offered for sale to the public if it is shown-
(a) That an offer of the security for sale to the public was made within 6 months after the allotment; or
(b) That, at the date when the offer was made, the consideration to be received by the allotter in respect of the security had not been received.
33. Restrictions on offer of securities to the public-
(1) No security shall be offered to the public for subscription, by or on behalf of an issuer, unless-
(a) The offer is made in, or accompanied by, an authorised advertisement that is an investment statement that complies with this Act and regulations; or
(b) The offer is made in an authorised advertisement that is not an investment statement; or
(c) The offer is made in, or accompanied by, a registered prospectus that complies with this Act and regulations.
37. Void irregular allotments-
(1) No allotment of a security offered to the public for subscription shall be made unless at the time of the subscription for the security there was a registered prospectus relating to the security.
…
(6) If any subscriptions to which this section applies are not so repaid within 2 months after the date on which the subscriptions were received by or on behalf of the issuer (or, in any case to which subsection (2) of this section applies, within 5 months after the date of the registered prospectus), the issuer and all the directors thereof shall be jointly and severally liable to repay the subscriptions, together with interest at a rate prescribed from time to time by regulations made under this Act from the date on which the subscriptions were received by or on behalf of the issuer:
Provided that a director shall not be so liable if he proves that the default in the repayment of the subscriptions was not due to any misconduct or negligence on his part.
There is no dispute that the shares were a “security”.
In summary, the argument made on behalf of Mr Dodge before the Master and again in this Court was along the following lines. The advertisement published on 7 June was an invitation to make an offer (an invitation to treat) and thus an offer as defined in s2. It was an offer to the public of securities in breach of s33(1). So was the offer later made to Mr Green. The shares were then allotted but s6(2) applied as they were allotted to Mr Snow with a view to being offered for sale to the public. (This point was not made in counsel’s submissions in relation to this part of the argument but in order to recover the purchase price under s37(6) it would be necessary to treat Mr Dodge’s payments as subscriptions for an allotment by the company.) The offers to sell shares made to Mr Dodge in December 1997 and March 1998 by Mr Snow were also offers made to him as a member of the public. It is enough to show an offer to one person so selected (s3(5)). Those offers did not fall within any of the exceptions in s3(2) – in particular, Mr Dodge was not a “close business associate” of Get Met (or Mr Snow), and he was not properly to be regarded as having been selected otherwise than as a member of the public. But, even if Mr Dodge was a person within either of those classes in s3(2)(a), so that a prospectus would not normally have been required in the particular circumstances, s37(1) forbad each of the allotments (transfers) to him because back in June there had been an offer of the same securities to the public (by the advertisement and the offer to Mr Green): s37(1) requires that a security which has already been offered to the public at any time cannot afterwards be the subject of any allotment (to the public or otherwise) unless there is a current registered prospectus.
Master Venning was of the view that the advertisement was “an offer to the public in terms of s3(1)(c)”, saying that in real terms it was an invitation to the public to come forward and take up shares in the company. The use of the phrases “investment opportunity” and “to buy into…” made that clear. Counsel for the respondent accepted that the offer to Mr Green was an offer in terms of s3(1)(c) but appeared to question whether the advertisement by itself constituted an offer. It is unnecessary to determine this point, as plainly the offer to Mr Green was caught, but we are inclined to think that the advertisement, standing alone, could amount to an offer to the public in the form of an invitation to treat for securities. The Master concluded, as he was entitled to do, that Mr Snow authorised or adopted the advertisement.
The Master then said that it was at least arguable for summary judgment purposes that the offer to the public constituted by the advertisement was not the offer which led to the “allotment” of shares to Mr Dodge. He was not aware of it. The details of the offers to him were “very different” from the offer to Mr Green. It was arguable for the respondent that the effect of the earlier offer was spent. While the company and/or its directors might in the circumstances be in breach of s33(1) by reason of the earlier offer, and thus liable to criminal proceedings, it did not follow that a person in Mr Dodge’s position could rely upon the earlier offer to pursue civil relief under s37(6). The concluding portion of s3(1) (“whether or not any such offer is calculated to result in the securities becoming available for subscription by persons other than those receiving the offer”) did not affect the position. The question was, what was relevant offer? For liability under s37(6) the subscription had to follow and be related to the offer.
In general terms, we agree. The literal reading of s37(1), which Mr Stewart-Wallace urged upon us, would lead to absurdity. Mr Hair gave an example in his well prepared written submissions:
[i]In 1995 a company makes an offer to an individual in breach of s33 without shares being allotted or transferred;
[ii]In 1998 the company has a complete change of shareholders and directors;
[iii]In 1999 the company offers and allots shares to one of the directors as part of a renewed employment package and under an exemption provided by s3(2). (Another example would be if the company in 1999 offered and allotted shares to an habitual investor like a merchant bank.)
It would be a complete waste of time and money, serving no good purpose, if in these circumstances a registered prospectus was required at step [iii]. We think that s37(1) does not prevent an allotment (or a transfer caught by s6(2)) unless there is a connection between the unlawful offering of the security to the public for subscription and the subscription actually made and pursuant to which the allotment occurs. The nexus may be quite weak. There may have been supervening events and changes to the terms of the offer. For example, if Mr Dodge had been put in contact with Get Met and Mr Snow because of a recommendation by Mr Green, s37(1) might then have stood in the way of an allotment to him, even on terms quite different from those offered to Mr Green. The advertisement might be seen as an operating factor leading to the acquisition of shares by Mr Dodge. But in circumstances where the allottee knows nothing of the unlawful offer, and it has played no part in attracting the allottee towards the issuer, we consider that there is no breach of s37(1) in the making of an allotment and that accordingly s37(6) cannot operate – unless of course the offer to the allottee is by itself in breach of the Act because it is an offer to that person as a member of the public.
Moving to this latter question, the Master referred to this Court’s description in Securities Commission v Kiwi Co-Operative Dairies Ltd [1995] 3 NZLR 26, 31-2 of what is necessary before an offeree can be considered to be a “close business associate” and took the view that Mr Dodge was not such, at least when the first tranche of shares was offered in December:
At that time the only business connection between the Plaintiff and Defendant and Get Met Titles Ltd was the fact the Plaintiff had placed an advertisement through Get Met Titles Ltd. A one off transaction such as that clearly does not constitute the parties as “close business associates”.
But by March when the second tranche was offered the position was different, for Mr Dodge had worked in the business of Get Met for almost three months and would have been in contact with Mr Snow on a regular basis. He knew the business of Get Met well; he was actively involved in it. In that situation, despite s3(3) which it makes it clear that an employee or a holder of existing securities in an issuer may nevertheless be regarded as a member of the public, in the Master’s view there was a good argument for Mr Snow that the offer of shares in the March transaction was made at a time when the parties were close business associates. Mr Dodge was rather more than an employee.
We entirely agree with this analysis.
It was also submitted on behalf of Mr Snow that in any event Mr Dodge was selected otherwise than as a member of the public. The Master’s judgment traversed the affidavit evidence of the parties concerning the way in which they came in contact with one another and how Mr Dodge came to purchase shares. On Mr Dodge’s account there had initially been no suggestion from Mr Snow of any shareholding. Mr Snow had explained to Mr Dodge that he was looking for someone to help out in the office of his business. Such a person would require general office skills and would become a director. It was only later when Mr Dodge followed the matter up with Mr Snow that the issue of investing in Get Met was raised. According to Mr Snow, it was the appellant who initiated inquiries about the business operations of Get Met. Some days later the parties came in contact and at that time Mr Dodge asked Mr Snow how he got on with finding investors. He was told that they were “not strictly looking for passive investors but for an appropriate person to resume [sic] the management of the company who may at some stage be an appropriate person to also take some financial interest in the companies”. Mr Dodge then indicated an interest in becoming a shareholder in Get Met and taking on a marketing role. After discussions with Get Met’s accounting adviser the investment was made.
The Master noted variances in the evidence of the parties, saying that the evidence was very relevant to the issue of whether or not the offer was made to the plaintiff otherwise than as a member of the public. If Mr Snow’s evidence were ultimately accepted, then in the Master’s view there was an arguable defence to the claim on that basis. Again, it is enough for us to say that we agree.
Master Venning also addressed an argument for Mr Snow that by reason of s6(1) nothing in ss33 and 37 applied to the situation. The shares were previously allotted securities. Referring also to subs(2) and (5) of s6, the Master said that the December offer for 80 shares was caught by s6(5) but the March transaction was outside the six month period. The deeming provision in s6(5) is, however, a rebuttable presumption. The issue then became whether the shares were originally allotted with a view to being offered for sale to the public. If Mr Dodge were able to satisfy the Court that the shares were so allotted, then s37 would apply, a matter which would involve a consideration of whether the plaintiff was chosen otherwise than as a member of the public. For the reasons already given by him, the Master said that the defendant had an arguable case on that issue for summary judgment purposes.
It seems to us that there is a factual issue which cannot be determined on the present state of the affidavits concerning the intention of Get Met and its directors when the parcel of 600 shares was originally allotted to Mr Snow as trustee of the Collective Trust. Mr Dodge may be able to show at trial that the security was allotted with a view to being offered for sale to the public in New Zealand. The question would then arise whether the security (the shares sold to Mr Dodge) can be said to have been previously offered for sale to the public because of the dealing with Mr Green. It is not clear from the affidavits which shares were being offered to him. These are factual questions which cannot be resolved at this time. There may also be a further issue concerning whether the moneys paid by Mr Dodge were, in terms of ss6 and 37, subscriptions payable in respect of an allotment. We do not know from the affidavits whether the purchase price or part thereof went to the company.

For these reasons the Master was correct to conclude that Mr Snow has an arguable defence to the claim for summary judgment. The appeal is dismissed. The appellant is to pay costs of $3,000 together with the respondent’s reasonable costs relating to the appeal, including travel and accommodation costs of counsel.

Solicitors

Helmore Macdonald & Stanley, Christchurch for Appellant

Wills & Associates, Christchurch for Respondent

[2000] NZCA 20

22 February 2000