Yesterday the Supreme Court issued judgment in the long running Feltex class action. The Court's decision related to "Stage 1" of the proceeding, which was to determine the issues common to all represented shareholders (such as whether the Feltex IPO prospectus contained an untrue statement).
At a high level, the Supreme Court held that the Feltex IPO prospectus contained one untrue statement. Accordingly, the proceeding will now move to "Stage 2" which will address issues specific to individual shareholders such as reliance and loss, as well as the availability of defences to the respondents.
Untrue statement – FY04 revenue forecast
The forecast revenue figure in the Feltex IPO prospectus was held to be an untrue statement for the purposes of s 56 of the Securities Act 1978. The Supreme Court observed that such a forecast will be misleading (and thus untrue under s 56) if it was based on assumptions that were not reasonable in a way that affects the forecast, or the forecast outcome was not reasonably assessed as the most probable outcome in light of the stated assumptions. The Supreme Court also held that a statement in a prospectus need not be misleading to a material extent to be "untrue" for the purposes of s 56 (although the statement must be on a topic that may be relevant to a decision to invest).
Because it was known by the time of allotment that Feltex's revenue would likely fall short of the forecast (and in light of Feltex's particular circumstances), the Supreme Court held that the forecast revenue figure was untrue as at allotment. The Supreme Court, however, rejected the appellant's arguments that various other aspects of the IPO prospectus were untrue.
The Supreme Court's holding that there is no applicable materiality threshold will have limited implications for any claim brought under the Financial Markets Conduct Act 2013, given the current statutory framework expressly requires that false or misleading statements or omissions are "materially adverse" from the point of view of an investor. In addition, although the Financial Markets Conduct Act requires that a statement about a future matter be based on "reasonable grounds", this is unlikely to necessitate a departure from the Supreme Court's approach to whether the forecast revenue figure in the Feltex IPO was misleading under the Securities Act.
The Supreme Court held that, as it had found the revenue forecast was misleading in the form and context in which it was included in the prospectus, it also followed that there was a breach of s 9 of the Fair Trading Act 1986. The provisions in the Securities Act and Fair Trading Act precluding a party from being liable under the Fair Trading Act for conduct regulated by the Securities Act came into effect after the events in issue in this proceeding and did not have retrospective effect. (There are analogous provisions in the Fair Trading Act precluding liability for certain conduct regulated by the Financial Markets Conduct Act.)
Due diligence defence not available
The Court held that the statutory "due diligence" defence (s 56(3)(c) of the Securities Act) cannot apply in circumstances where the untruth of a statement is known, even if the defendants reasonably believe that the statement is only untrue to an immaterial extent. However, it left the High Court to determine whether the defendants could be relieved of liability pursuant to the court's discretion under s 63(1) of the Securities Act (which allows courts to relieve persons from liability who have acted honestly and reasonably in all the circumstances).
Issues for Stage 2
The Supreme Court rejected the appellant's argument that he was statutorily entitled to damages equivalent to his total investment, but left a number of issues to be determined at "Stage 2" in the High Court:
- Whether each represented shareholder invested "on the faith of the prospectus" in terms of s 56 of the Securities Act. The Supreme Court held that such reliance can be inferred without any requirement that the investors read the prospectus. However, such inference can be displaced in certain circumstances (including, for example, if the investor knew the truth and invested anyway).
- Whether each represented shareholder suffered any loss "by reason of" the untrue statement in terms of s 56 of the Securities Act. This will ordinarily require claimant investors to prove that the price they paid for the shares was greater than the market value the shares would have had if the untrue statement had not appeared in the prospectus.
- Whether any represented shareholder is entitled to a remedy pursuant to the Fair Trading Act, including the determination of issues of causation and loss.
- Whether relief under s 63(1) of the Securities Act from any liability should be granted to the defendants.
Appeal dismissed against joint lead managers of the IPO
Finally, the appeal was dismissed in its entirety as against the joint lead managers of the Feltex IPO, on the basis that:
- They were acting solely in their professional capacity and accordingly were not "promoters" of the offer in terms of the Securities Act. The Supreme Court could not reach agreement on the exact approach to the "instrumentality" limb of the definition, but noted this was neither of importance to the outcome in this case nor of precedential importance, since the Financial Markets Conduct Act contains no equivalent definition.
- The appellant had not established that the statement about the revenue forecast was a statement by the joint lead managers (or pursued his allegation that they were parties to it) and accordingly there could be no liability pursuant to the Fair Trading Act.