The court case
In a recent High Court decision (Financial Markets Authority v Carrington Securities LP) the court confirmed the FMA's view that the "deferred payment" offers made by Bernard Whimp and associated limited partnerships (dated on or around 15 to 18 March 2011) to buy shares in TrustPower Limited, Vector Limited, Guinness Peat Group plc, Contact Energy Limited, DNZ Property Fund Limited and Fletcher Building Limited, breached section 13 of the Securities Markets Act 1988. Section 13 of the Act provides that a person must not engage in conduct, in relation to any dealings in securities, that is misleading or deceptive or likely to mislead or deceive.
Each of the "deferred payment" offers involved what appeared to be very attractive offers to purchase shares for prices in excess of the respective current market share prices. The impression given by the offers was that full payment would be made immediately or promptly and that since the offer was on a "first come, first served" basis shareholders may miss out on a commercial bargain if they did not respond quickly to the offer. However, buried in the fine print payment terms of the offers, payment was to be made in ten annual instalments. Further, no interest was payable on the outstanding instalments and any returns on the shares during the 10 year period would accrue to the relevant limited partnership. This meant that the present value of each offer was significantly below the figure being offered and, in effect, the consideration for the acquisition of the shares was, to the extent of 9/10ths, an unsecured loan to the limited partnerships.
In order for the offers to be in breach of section 13, the court noted that it was not necessary to show actual deception. What was necessary is "there be a likelihood or reasonable possibility that persons to whom the offer is directed will be misled."
The offers were very similar to offers made through an Australian company, National Exchange Pty Limited, which was subject to similar proceedings brought by the Australian Securities and Investments Commission in 2003. In that case, the offers were held to be misleading and deceptive even though they were clearer and less deceptive than the offers made in this case, in so far as they showed more prominently on the front page of the offer the fact that the payments were to be deferred over 15 years. As such, the court drew heavily on the remarks of the court in the Australian case.
The court granted a permanent injunction against Mr Whimp and the limited partnerships from making further offers in the same (or substantially the same) form. In addition, in respect of the "deferred payment" offers already made, the court gave orders (with the exception of a small number):
- cancelling the contracts;
- requiring any shares which had already been transferred to be returned to the shareholders; and
- restraining the registration of any shares acquired by the limited partnerships.
A small number of shareholders were excluded from the orders because they had responded to a communication from Mr Whimp confirming they wished to continue with the sale of their shares despite the court proceedings. With respect to those shareholders, the FMA was given the opportunity to verify the genuineness of their confirmation.
Warning statements required for future offers
In addition to the court proceedings noted above, the FMA has also used its new powers under section 49 of the Financial Markets Authority Act 2011 to order Mr Whimp and associated persons (which includes any limited partnership or company that Mr Whimp may form after the date of the order) to include a warning from FMA at the beginning of any unsolicited offer they may make.
The order can be found at Warning Disclosure Order under Section 49 of the Financial Markets Authority Act 2011. The order requires that:
- any offer document containing an unsolicited offer by Mr Whimp, a number of limited partnerships associated with Mr Whimp (the Whimp partnerships), or any associated persons, must contain, at the beginning of that offer document, a warning statement in the form attached to the order (warning statement);
- the warning statement must be printed in a particular font size, colour and layout; and
- Mr Whimp and the Whimp partnerships must provide a copy of the order to their associated persons.
The warning statement states that the "Offers from Mr Bernard Whimp may not be in your best interests" and cautions investors to check important aspects of the offer such as: how much they will receive per share; when they will get paid; and who is making the offer. It also warns them that, if they accept the offer, they may receive less than if they sold the shares through a sharebroker.
A person who does not comply with an order made by FMA under section 49 of the Financial Markets Authority Act 2011 commits an offence and is liable on summary conviction to a fine of up to $300,000.