Feltex shareholder says Appeal Court wrong to rule sales forecasts not 'material'
Former Feltex Carpets shareholder Eric Houghton says the Court of Appeal was wrong in finding two months of sales that were about 20 percent below forecast didn't amount to "material" information that should have been provided to investors in its 2004 initial public offering.
Houghton's lawyer, Colin Carruthers QC, was setting out his appeal in the Supreme Court in Wellington. In 2014, Houghton lost a representative action on behalf of 3,639 former shareholders of the failed carpet-maker seeking $185 million from directors and IPO promoters for alleged disclosure failings in its 2004 prospectus. He was also knocked back by the Court of Appeal last October, which ruled that the only conduct that could be deemed misleading or deceptive wasn't material enough to cause loss.
But in dismissing his appeal, the Court of Appeal left the door open for today's challenge in the Supreme Court by concluding that a forecast for 2004 revenue in the prospectus amounted to an untrue statement, although it concurred with the High Court that the untrue statement wasn't material.
The prospectus forecast operating revenue for the 12 months ended June 30, 2004, of $335 million but the actual result reported in September of that year was revenue of $328 million, a miss of about 2.3 percent.
However, Carruthers said the crucial period was when the offer was open - from the registration of the prospectus on May 5, 2004, until the allotment of shares on June 2 - and what the company knew about actual sales during that period. What directors knew would have included internal monthly sales reports for April and May which showed a "significant" shortfall in sales against budget and forecasts of about 20 percent.
Carruthers told the Supreme Court that armed with the monthly sales figures the company could have amended the prospectus or withdrawn it prior to allotment "but it cannot go to allotment without disclosing".
The Court of Appeal had rejected that notion, saying there was "ample evidence that sales figures can fluctuate significantly from month to month and there were explanations for that shortfall which suggested the downturn was temporary." In response today, Carruthers said that "whatever explanation was given by the directors, the investor would be entitled to ask why should you believe (it) when sales were 20 percent out".
"Surely an investor is entitled to have that information to make their own decision," he said. "What I'm challenging is what material means and what the Court of Appeal has interpreted as material is wrong."
Houghton's other lawyer, Patricia Mills, told the Supreme Court brokerages First NZ Capital and Forsyth Barr, which managed the IPO and were fourth and fifth defendants in the original lawsuit, should also be held liable. She argued that as brokers they didn't have the opt-out option of other company advisers such as lawyers because they had taken up a firm allocation of shares in the IPO that they were then under pressure to sell, which was "clearly a matter of self-interest."
Receivers were appointed to Feltex in September 2006 and Australian carpet maker Godfrey Hirst ended up buying the assets.
The hearing is set down for three days.