By Rachel Gowing
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.
Footnotes1R v Graham  NZHC 265
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