09 April 2014

Feltex: Credit Suisse v. Houghton

Lack of rules governing class actions has left Feltex shareholders wandering through a maze as they attempt to recover compensation for alleged wrongdoing in 2004 at the time of the $250 million Feltex public offer.   Credit Suisse tried to argue that shareholder delays mean some investors are out of time, having lost any right to sue.
Shareholders who in 2004 bought into Feltex at $1.70 per share allege they were misled about the company’s prospects when taking up the offer.  The share price dropped two-thirds in the subsequent two years.  By December 2006, Feltex was in liquidation.  Legal action has been taken against the then directors of Feltex, the promoters of the offer (Credit Suisse) and brokers managing the public offer (First NZ Capital and Forsyth Barr).  Legal action is underway in the name of a Mr Houghton from Upper Moutere and a Mr Jones from Dunedin, acting on their own behalf and as representatives of similarly affected shareholders.
Unlike Australia and the United States, there are no explicit rules in New Zealand for class actions, allowing one individual to take legal action on behalf of a number of people all affected in a similar manner.   The Feltex litigation is attempting to piggyback a class action into the New Zealand courts on the back of High Court procedural rules which allow one person to bring a claim on behalf of others where they have “the same interest in the subject matter”.   This procedure requires prior court approval.
The court was told the process has been in some disarray.   Court proceedings were filed back in February 2008.  There were then delays over finding funding for the litigation and then questions about the suitability and legality of any claim being funded by a commercial litigation funder.   Investors were contacted and invited to join the litigation before the High Court had approved forms they were asked to sign.  Lawyers initially acting for the investors withdrew from the case in March 2009 and there was a three month delay before new lawyers took up the case.
With little progress made, investors were running up against time limits.  The court was told part of their case would possibly become statute-barred by early June 2010.  The exact date was not known.  Because Feltex investors are taking a novel approach to create a class action, it was not known at which stage individual investors were considered to have commenced legal action such that the clock stopped ticking and time stopped running.
Time limits are imposed to prevent endless litigation and protect defendants from dormant claims being commenced long after contemporary evidence is no longer available.
Feltex investors are suing for negligence (which has a six year time limit running from the date of the alleged negligence) and for breaches of the Fair Trading Act (which has a three year time limit running from the date any loss was discovered or should have been discovered).
The Supreme Court ruled that the critical date for Feltex investors was the date Mr Houghton filed his action in the High Court and the court nominated him as a representative of all those who bought shares in the Feltex public float.  This date is 26 February 2008.  From this date, all the investors Mr Houghton represents are considered to have commenced legal action, even though they signed forms at a later date to “opt-in”.  The court was told that as at February 2012 a total of 2,852 shareholders have opted to join the representative action.   Investors have yet to have their day in court arguing the merits of their claim.
Credit Suisse v. Houghton – Supreme Court (9.04.14)
 14.016