Houghton v Saunders and Ors

JurisdictionNew Zealand
JudgeWinkelmann J
Judgment Date12 October 2016
Neutral Citation[2016] NZCA 493
Docket NumberCA578/2014
CourtCourt of Appeal
Date12 October 2016
Between
Eric Meserve Houghton
Appellant
and
Timothy Ernest Corbett Saunders, Samuel John Magill, John Michael Feeney, Craig Edgeworth Horrocks, Peter David Hunter, Peter Thomas and Joan Withers
First Respondents
Credit Suisse Private Equity Inc
Second Respondent
Credit Suisse First Boston Asian Merchant Partners LP
Third Respondent
First New Zealand Capital
Fourth Respondent
Forsyth Barr Limited
Fifth Respondent

[2016] NZCA 493

Court:

Ellen France P, Randerson and Winkelmann JJ

CA578/2014

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal against a High Court (“HC”) decision which found investors in Feltex Carpets Ltd (“Feltex”) were not entitled to compensation under the Securities Act 1978 (“SA”) for allegedly untrue statements in the company's share prospectus — the appellant had commenced proceedings in a representative capacity for himself and for others who had been allotted shares in Feltex's initial public offer — the investors claimed that the prospectus was misleading and they had invested on the faith of it — Feltex went into liquidation in 2006, leaving the shares worthless — what was the meaning of “untrue statement” under s55 SA (interpretation of provisions relating to advertisements, prospectuses, and registered prospectuses) — whether the HC erred when it imported into s56 SA (which persons are liable for misstatements) a requirement that the untruth had to be material to trigger civil liability — whether the HC erred in the application of the prudent non-expert investor test — whether 63A SA (no liability under Fair Trading Act 1986 if not liable under the SA) and s5A Fair Trading Act 1986 (“FTA”) (no liability under Act if not liable under SA) applied to preclude a claim under the FTA.

Counsel:

C R Carruthers QC, P A B Mills and G R Abdale-Weir for Appellant

A R Galbraith QC, D J Cooper and S V A East for First and Third to Seventh named First Respondents

T C Weston QC for Second named First Respondent

J B M Smith QC, A S Olney and C J Curran for Second and Third Respondents

D H McLellan QC and J S Cooper for Fourth Respondent

A C Challis and D P Turnbull for Fifth Respondent

JUDGMENT OF THE COURT

A The appeal is dismissed.

B Costs memoranda to be filed in accordance with [314]–[317] of the judgment.

REASONS OF THE COURT

(Given by Winkelmann J)

Table of Contents

Para No

Relevant background

[6]

Credit Suisse buys interest in Feltex

[6]

Feltex's trading history

[8]

The decision to make an initial public offering of shares

[11]

The prospectus is registered: 5 May 2004

[13]

Due diligence

[22]

Feltex's performance post allotment

[24]

High Court proceedings

[32]

Case on appeal

[34]

Grounds of appeal relating to test under ss 55 and 56 of the SA

[37]

Policy of the SA

[42]

Analysis

[43]

Meaning of “untrue statement” and the materiality requirement

[46]

Judgment

[47]

The argument on appeal

[49]

Discussion of s 55

[51]

Discussion of s 56

[57]

Did the Judge err in his application of the prudent non-expert investor test?

[74]

Judgment

[76]

Analysis

[77]

Grounds of appeal relating to factual findings

[83]

Undisclosed adverse trends and revenue forecast for FY04

[84]

Appellant's argument

[84]

Factual background

[87]

Judgment

[93]

Discussion

[99]

FYO5 projection

[117]

Factual background

[118]

Judgment

[120]

Analysis

[122]

Tufting machines

[125]

SIP grants and page 85 of the prospectus

[145]

Factual background

[145]

Analysis

[149]

Second bottom line

[151]

Judgment

[160]

Analysis

[164]

JLMs' proposal to pay $9 million dividend for FYO4

[174]

Discussion

[180]

Equity incentive plan

[191]

Judgment

[195]

Discussion

[197]

Conclusion on factual grounds of appeal

[204]

Ground of appeal: Due diligence defence

[205]

Ground of appeal: Judge erred in definition of promoter

[214]

JLMs' role

[217]

Judgment

[226]

Argument on appeal

[229]

Discussion

[238]

The concept of promoter at common law

[238]

The concept of promoter in the SA and its legislative history

[248]

Our interpretation

[255]

Do the JLMs fall within the definition of promoter?

[263]

Professional capacity exception

[267]

Credit Suisse

[274]

Judgment

[275]

Argument on appeal

[276]

Discussion

[277]

Ground of appeal: Do s 63A of the SA and s 5A of the FTA apply to preclude a claim under the FTA?

[280]

Legislative provisions

[281]

Judgment

[287]

Analysis

[290]

Ground of appeal: Loss

[299]

Analysis

[309]

Ground of appeal: The Judge was wrong to require the appellant to disclose work product

[312]

Result

[313]

1

Feltex Carpets Ltd (Feltex) was a carpet-manufacturing company. On 5 May 2004 it issued a combined investment statement and prospectus for an initial public offer for the sale of shares (IPO). Mr Houghton, the appellant, subscribed for and was allotted shares in the IPO. In September 2006 Feltex went into receivership and in December 2006, liquidation, leaving the shares Mr Houghton had purchased effectively worthless. Mr Houghton commenced proceedings in a representative capacity for himself and for others who had also been allotted shares in the IPO. He claimed he and other shareholders had invested on the faith of a misleading prospectus and that they should be able to recover their full investment. He brought claims against all respondents under the Securities Act 1978 (SA) (the legislation then regulating the issue of prospectuses and allotment of shares), the Fair Trading Act 1986 ( FTA) and in negligence.

2

Mr Houghton sued Feltex's directors (the first respondents). He sued Credit Suisse First Boston Asian Merchant Partners LP (CSAMP) as vendor and issuer of the majority of shares offered in the IPO. He sued the following parties alleging they were promoters of the prospectus: Credit Suisse Private Equity LLC 1 (CSPE, listed in the prospectus as promoter), CSAMP (as noted, the vendor), and First NZ Capital Ltd (First NZ) and Forsyth Barr Ltd (Forsyth Barr). These latter two were appointed organising participants and joint lead managers of the IPO by Feltex. We refer to them collectively as the JLMs.

3

In a judgment dated 15 September 2014, Dobson J found that Mr Houghton's primary cause of action, the FTA claim, could not succeed because the application of the FTA was excluded by the SA. 2 He dismissed the negligence claim. He found that the relationships between investors in the IPO and the defendants was not such as to give rise to a duty of care being imposed in tort. 3

4

As to the claims under the SA, the Judge said that although a number of the criticisms of the prospectus had some justification, in no case had Mr Houghton made out materially misleading content or omissions triggering liability under the SA. 4 And the Judge said if he had found that the prospectus was materially misleading, the defendants may still have been able to avail themselves of the defence under the SA that they exercised due diligence in the preparation of the prospectus. 5

5

On appeal Mr Houghton argues that the Judge was wrong:

  • (a) in his interpretation of provisions in the SA which create liability for “untrue statements” (ss 55 and 56) and in his interpretation and application of the concept of prudent investors; 6

  • (b) in his interpretation of the term “promoter” as it appears in s 2 of the SA;

  • (c) in key factual findings;

  • (d) in his conclusion that the due diligence defence is available where statements are known by the directors to be untrue;

  • (e) in concluding that the SA excludes the application of the FTA in this case; and

  • (f) in findings he made in relation to reliance and loss.

Relevant background
Credit Suisse buys interest in Feltex
6

In 1996 Mr Peter Thomas was head of Credit Suisse First Boston's (CSFB) Asian-Pacific private equity division. He became aware of an opportunity to purchase shares in Feltex from its then principal shareholder, a company understood by Mr Thomas to be in receivership. 7 His recommendation that CSFB acquire Feltex was accepted and in December 1996 CSAMP, which was controlled by CSFB, acquired 85 per cent of the shares in Feltex with the balance of shares acquired by senior Feltex executives. Mr Thomas was appointed as a director of Feltex and continued in that role through the time period material to this proceeding.

7

CSAMP is constituted as a limited partnership in the United States under the laws of Delaware. Its investment in Feltex was managed by the second respondent,

CSPE, a company incorporated in the United States also under the laws of Delaware. There is an issue on the appeal as to the exact nature and effect of the relationship between CSAMP and CSPE but, other than where that issue falls for consideration, we refer to them jointly as Credit Suisse for the purposes of this judgment
Feltex's trading history
8

Feltex experienced mixed trading results for the years immediately following the acquisition by Credit Suisse. In May 2000 Feltex purchased the Australian operations, Shaw Industries Australia Pty Ltd (Shaw), of United States carpet company Shaw Industries Inc. The directors of Credit Suisse and the board of Feltex believed that the purchase of Shaw would create value through the opportunity to access its parent company's expertise, technology and products, and through greater access to the Australian market.

9

Shaw's managing director, Mr Magill, was appointed joint managing director of Feltex. Following the acquisition he spear-headed the...

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