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The spectacular collapse of dozens of finance companies
continues to play out in the courtroom, this time in the form of
criminal prosecutions of directors for allegedly defective
disclosures in prospectuses, investment statements and
advertisements (offer documents).
In February 2012, the High Court found the directors of Lombard
Finance and Investments Limited (Lombard) guilty
on charges arising from untrue statements made in offer
documents1.
Key lessons for directors
The Lombard verdict contains important reminders and lessons for
directors as they seek to comply with securities laws and their
duties as directors:
Liability under the Securities Act is not limited to misleading
statements. Directors may also be liable if offer documents contain
a material omission.
Directors may be criminally liable under the Securities Act
even if they acted honestly and were not reckless. The offence is a
strict liability offence, with no form of mental intent
required.
The purpose of offer documents is to give investors adequate
information on material matters, so that they can make decisions
for themselves. Directors cannot escape this responsibility by
arguing that investors instead relied on the directors to make
commercial judgments.
Offer documents must disclose everything of relevance that is
likely to be material to the investment decision.
If a discernable pattern emerges revealing information that is
important to investors – such as the company repeatedly
missing key management forecasts – this should be
disclosed, notwithstanding its potentially damaging effect on the
marketability of an offer.
Although directors can generally rely on information provided
by management, they must adequately monitor and test the competence
of management, and investigate further if put on notice of any
issues.
Directors cannot rely on the absence of any red flags raised by
professional advisers in substitution of their own duty to review
the offer documents.
Directors' obligations in relation to the accuracy of offer
documents may not be delegated. Directors ultimately must exercise
their own judgment about the documents.
Directors must ensure that they receive draft offer documents
in sufficient time to properly review them.
If there is a tension between downplaying risk to protect
existing investors and shareholders and complying with the
Securities Act, the Securities Act prevails.
Click here for a detailed analysis of the decision.
Footnotes
1R v Graham [2012] NZHC 265
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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