Facts and proceedings
In 2009 the Great Southern Group, an Australian promoter and operator of a number of agricultural managed investment schemes, collapsed. Following the collapse, group proceedings were commenced on behalf of investors who acquired interests in the schemes. The plaintiffs' principal claim was that Great Southern had issued product disclosure statements which were defective under the relevant provisions of the Corporations Act 2001 (Cth). In particular, the plaintiffs alleged that the relevant PDSs contained misleading statements regarding the target timber yields of plantations in which the schemes invested and regarding the financial strength of Great Southern.
In July 2014, after a trial lasting 90 sitting days over the course of a year, the parties settled the proceedings shortly before judgment was to be issued by the Supreme Court of Victoria. Despite the settlement, the Court released the reasons which would have been issued as a judgment had settlement not been reached as an annexure to the Court's judgment approving the settlement.1
New Zealand's Financial Markets Conduct Act 2013 ("FMCA") has not yet been considered by New Zealand courts. The release of the Great Southern reasons provides a useful opportunity to consider some of the differences between the Australian statutory provisions discussed in the reasons and the corresponding provisions of the FMCA and the Financial Markets Conduct Regulations 2014 ("FMC Regulations").
Known and unknown risks
The Great Southern reasons note2 that the Corporations Act and associated case law require a PDS to contain information about a "significant risk" only if the risk is actually known to the responsible person, and the responsible person has actual knowledge that the risk is significant.3
Similarly, clause 42 of schedule 3 to the FMC Regulations requires a PDS for equity securities prepared under New Zealand law to contain descriptions of circumstances that the issuer is aware of that significantly increase the risk to the issuer's financial position, financial performance, or stated plans.
However, in addition, section 57(1)(b)(ii) of the FMCA requires an issuer's register entry to contain all material information relating to the regulated offer that is not contained in the PDS. This additional requirement requires disclosure of all material risks, whether or not known, and is, therefore, broader than the Australian requirement considered in the Great Southern reasons. As a result, for New Zealand offers, the objectives of the "due diligence" process should not only include ensuring appropriate disclosure of known material risks, but also the identification (and disclosure) of any other material risks.
The Corporations Act provides a defence to an action brought against a person for a defective PDS if the defendant took reasonable steps to ensure that the PDS would not be defective.4
The court observes in the Great Southern reasons that the "reasonable steps" test is "designed to apply a flexible assessment to the circumstances of each particular case",5 but in most, if not all, cases, will "include the creation of a proper system to ensure compliance, a compliance plan, and the adequate supervision of that system".6
The court, in considering the steps taken by the defendants, noted the appointment of a due diligence committee, the process engaged in by the due diligence committee, the retainer of independent legal experts, the requests for information from, and provision of information by, Great Southern management and directors, and the ongoing monitoring role of the due diligence committee and its members while the PDS was on issue.7 It considered that the "reasonable steps" defence8 had been established by the defendants. The court's assessment is consistent with the approach of the New Zealand High Court in the Feltex proceedings.9 It is also consistent with the views expressed in the Gentrack IPO Report released by the Financial Markets Authority ("FMA")10 (in which the FMA commented favourably on the thorough due diligence process and approach of Gentrack Group Limited in preparation for its initial public offering) and with the views expressed in the FMA's publication titled "Going public: a director's guide"11, in which the FMA (when discussing the establishment of a due diligence committee) records that it will take a "balanced and pragmatic" approach to directors who make mistakes despite genuine, good faith and competent attempts to ensure appropriate disclosure.
However, as we have previously noted,12 to establish the similar defence under the FMCA,13 a director will need to establish that he or she took, not just reasonable steps, but all reasonable and proper steps to ensure that the disclosure was not defective. The court appears to recognise in the Great Southern reasons that "reasonable steps" is a lower standard than "all reasonable steps", although it does not examine the difference in any detail. Similarly, in interpreting contractual "endeavours" clauses, courts in New Zealand and England have tended to interpret "all reasonable endeavours" as requiring more than "reasonable endeavours" (ie requiring the exhaustion of all reasonable courses of action rather than just one or some). If such an approach is taken to the FMCA defences, it sets a higher standard for New Zealand directors than is required to establish the corresponding defence under the Australian statute .
The justification for a higher standard is not clear, and we note the following comment set out in the Great Southern reasons:14
Where a person takes reasonable steps, that person does not exhibit a negligent, or reprehensible, state of mind. A person who takes reasonable steps is conscientious, diligent and careful, and endeavours to abide by the law. It would be unduly harsh to hold that person liable for loss and damage, caused by a defective statement, despite that person's efforts.
We would hope that New Zealand courts will interpret the FMCA defences in a manner consistent with this statement, and look simply to determine whether the totality of the steps taken fall short of reasonable care, rather than giving too much weight to the inclusion of "all" in the terms of the defences. That said, directors should be aware of this terminology when considering due diligence processes.
Reliance and causation
In order for the plaintiffs' claims to succeed in the Great Southern proceedings, the plaintiffs would have had to have established that they relied on the allegedly misleading statements in the PDSs in applying for interests in the relevant schemes, or that they would not have invested in the relevant schemes had the "relevant matters" been disclosed, and that the alleged defects in the PDSs caused the relevant losses.15
As we have previously noted,16 the FMCA, unlike the Corporations Act, contains (in section 496) a rebuttable presumption that where an investor has acquired a financial product under an offer in respect of which disclosure has been defective, and that financial product has declined in value, the investor has suffered loss or damage because of that defective disclosure. The onus is then on the issuer to establish that the loss or damage was caused by another matter.
The presumption in section 496 was intended to address the difficulty for investors of proving causation under the previous securities regime.17 The Securities Act 1978 required investors seeking compensation to prove that they invested "on the faith of an advertisement or registered prospectus that includes an untrue statement" (ie that they had read the advertisement or prospectus and had relied on it to make investment decisions).18 The Ministry of Business, Innovation and Employment considered that this was often difficult to establish, and that it would be more appropriate for an issuer to rebut a presumption of reliance.19
However, another effect of this presumption is that directors have a greater exposure to claims, and potentially increased costs in relation to court proceedings due to the need to provide evidence to demonstrate that any decline in value was caused by "a matter other than the relevant statement, omission or circumstance", relative to the position in Australia.
The Great Southern reasons should, we expect, give Australian directors some comfort as to the application of the Australian statutory regime. They offer less comfort to New Zealand directors. The FMCA has made a number of positive developments in New Zealand securities laws. However, directors should be aware of the provisions discussed in this newsletter.
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This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.