The
over three thousand disgruntled Feltex investors who joined a class action
demanding compensation after the 2004 public float were left bereft after a
High Court ruling that the float prospectus was not materially misleading as to
content or omissions and that even if it were no compensation would have been
payable since the share price did not drop noticeably immediately after the
float.
Shareholders buying
into Feltex in 2004 saw the share price drop by two-thirds over the next two
years, with Feltex then going into liquidation.
A class action followed, claiming investors were misled when investing.
The 2004 public float
enabled Credit Suisse First Boston to sell down its interest in carpet
manufacturer Feltex. While the
prospectus identified numerous risks facing the business it generally portrayed
an improving financial position for the company. The issue price at $1.70 per share implied a
gross dividend yield of 9.6%. Six months
after the float, directors reported trading results that were up on the
previous period, announcing an interim dividend 15% higher than the interim
dividend projected in the prospectus.
Then two months later, directors warned of a profit downgrade. The quoted share price all but halved over
the next two days trading.
Not surprisingly,
investors considered they had been stung: the company’s prospects had been
oversold in the float prospectus. The
Securities Commission investigated. In a
2007 report, it concluded that the Feltex prospectus was not misleading in any
material respect.
Justice Dobson reached
the same conclusion after an eleven week hearing in the High Court. In their class action, investors alleged the
prospectus was misleading under a number of broad headings: undisclosed adverse
trading trends; misstatements or omissions as to business risks; misleading or
unreasonable assumptions as to future financial performance; misleading
presentation of financial data; misstatements regarding management’s equity
incentive plan; discrepancies between descriptions of how the final price would
be set and how the book build did take place; and misrepresenting share value
by painting Feltex in a more positive light than was justified.
Justice Dobson said
the test as to whether a prospectus is misleading is through the eyes of a prudent
non-expert who at least has a basic understanding of the narrative. A prudent non-expert who does not understand
a material part of any prospectus is obliged to get clarification before
proceeding. Content does not have to be
“dumbed down” for less sophisticated readers.
The Feltex prospectus was 148 pages long.
There is some sympathy
for investors where cautionary signals and descriptions of risk are buried near
the end of a long document, His Honour said, but this was not such a case. The Feltex prospectus signalled potential
risks upfront.
In the investment
statement headed “What are my risks?” Feltex included an extensive disclaimer
cautioning potential investors not to place undue reliance on forward-looking
statements. Justice Dobson said this
disclaimer removed the basis for any claim that investors were entitled to rely
on prospectus projections.
While there were
justifiable criticisms of some content in the prospectus, he said, none of the
criticised content was material.
Relying on expert
evidence regarding efficient market theory, Justice Dobson said no damages
would be payable even if there had been material misstatements or omissions in
the prospectus. Efficient market theory
stipulates that the market price for publically traded shares will quickly
assimilate the price effect of new information.
Once a less than fully informed market becomes fully informed, the
impact of new information is very quickly reflected in the share price.
Feltex said since the
share price exhibited no significant drop post-float until nine months after
the prospectus was issued then any misstatement or omission in the prospectus
was, nine months later, no longer relevant to the market price.
Investors had the
opportunity to sell into the market at any time, rather than waiting until
Feltex went into liquidation and then attempt to recover the price paid.
Houghton
v. Saunders – High Court (15.09.14)
14.042