For 800 investors bringing a class action following complaints about the 2004 Feltex float, it is going to be a long haul before they see any action. The Court of Appeal has given tepid support for the class action but sent everyone back to the High Court for a long think about the funding arrangements.
Investors, who bought into Feltex at $1.70 per share in the public float, were stung into action when the share price fell to sixty cents per share within two years. It is alleged that Feltex’ financial position was dressed up prior to the float, for the primary benefit of then majority shareholder Credit Suisse PE which received some $180 million from the float proceeds.
In particular, it is alleged that just prior to the float Feltex unilaterally slashed end-of-year rebates to major customers with the effect of creating a $10 million one-off boost to annual profit. This damaged customer goodwill and reduced future profits, it is argued.
It is also alleged Feltex management engaged in “channel stuffing” in the period after the float. This involves delivery of goods in excess of customer’s orders, with an immediate boost to recorded sales, despite the likelihood that some or all of this excess will be returned. Investors allege this was done to massage post-float profitability.
Legal action has been taken against Feltex directors who signed the float prospectus, Credit Suisse as promoter, and the joint lead managers: First New Zealand Capital and Forsyth Barr.
Class action litigation was filed in the names of two representative investors. A class action is the only economic way in which disparate small investors can mount a common action against a large corporate. It enables legal liability (if any) to be fixed, allowing individual shareholders to use the representative court judgment as a template to then prove for their individual loss.
There was evidence that individual investors had put $450,000 into the kitty to get litigation started. This will not be sufficient funding for complex commercial litigation.
A company called Joint Funding has been established to collect funds and direct the litigation.
The Court of Appeal ruled the class action was to remain on hold, pending full details of the legal claim and some clarity about the status of the funding arrangement for the litigation. In particular, the Court wanted to see some controls over how the litigation would be managed – to avoid the perceived abuses in US class actions where litigation funders often stand accused of pursuing unmeritorious claims to extort a settlement out of defendants.
Saunders v. Houghton – Court of Appeal (18.12.09)
04.10.002