In refusing to find that a PDS was defective for failure to disclose certain risks or that the directors made misleading or deceptive statements relating to the PDS, the Victorian Court of Appeal provided some useful guidance on the operation of the PDS regime.The Court made some particularly interesting observations around what constitutes a risk, noting that the question involves consideration of a range of issues including, but not limited to, the probability of the occurrence, the degree of impact on investors, the nature of the particular product and the profile of investors.The Court also emphasised that the question of whether a statement is misleading or deceptive depends not only on the likely effect on the reader but also the mental state of the maker (and is not apt to mislead where the opinion is genuinely and reasonably held).
Mr Woodcroft-Brown represented investors in the horticultural and forestry managed investment schemes (MISs) operated by Timbercorp Group (the Group) which was placed into liquidation in June 2009.The key questions for consideration by the Supreme Court of Victoria-Court of Appeal included whether:
- Timbercorp Securities Pty Ltd (as the responsible entity of the MISs) failed to disclose in the product disclosure statements (PDSs) information about significant risks or risks that might have a material influence on the decision by retail investors (in breach of its obligations under sections 1013D and 1013E of the Corporations Act 2001 (Cth) (Act) respectively);
- the PDSs contained false and misleading statements; and
- the directors made false or misleading declarations in the PDSs.
In finding for the Group, the Court held that:
- whether a risk is a ‘significant risk’ for the purposes of section 1013D(1)(c) of the Act will involve consideration of a range of issues and is intended to be a flexible requirement tailored to the product involved and its particular circumstances. Factors to be considered include, but are not limited to, the probability of the occurrence, the degree of impact on investors, the nature of the particular product and the profile of investors; and
- the trial judge’s finding that successful management of risks may, as a matter of evidence, intercept the potential emergence of a risk of significance for the purposes of section1013D(1)(c) of the Act was correct;
- the trial judge did not err in considering the availability of information in the public domain (such as via the Timbercorp website or in announcements published on the ASX or ASIC websites) for the purposes of the exception in section 1013F that information need not be included in a PDS if it is not reasonable for an investor to expect to find it in the PDS;
- whether representations in a PDS are misleading and deceptive depends in part on the mental state of the maker of them as such representations would ordinarily be understood as statements of opinion and are not apt to mislead if the opinion is genuinely and reasonably held by the maker. Further, the obligation to disclose risks relating to the MISs depended on actual knowledge of the risks; and
- the investors in this case failed to establish sufficient reliance on the PDS in deciding to invest for the purposes of recovering damages for misleading and deceptive conduct.The Court found that the relevant investors had not read the PDS in any detail but rather acted on recommendations of financial advisors and accountants and were motivated by other considerations in investing.
See the case.