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Director escape hatch

By Shoeshine

Friday 28th March 2003

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Investors who bought into the Vertex float might like to consider what value the directors have added to the company by employing a top QC to second-guess the Securities Commission.

Managing director Paddy Boyle refused to tell Shoeshine how much Julian Miles' legal opinion cost. Given Miles' standing in the QC pecking order the bill will have amounted to several thousand dollars.

The commission, after a six-month investigation, found the prospectus for Vertex's share issue breached the Securities Act because it was likely to mislead investors. Miles concluded, six days later, that it didn't.

It's hard to see what purpose commissioning Miles' report served other than patching the directors' tattered reputations and trying to scare shareholders out of taking legal action. It's just an opinion and would have no standing in court.

Vertex might argue that, as the company itself might be sued, it needs to take independent advice on where it stands.

But the directors' duty is to the company ­ that is, to all shareholders.

The beneficiaries of a successful action would be the IPO shareholders. Spending money on investigating legal defences is hardly in their interest.

Shareholders' money is also being spent paying a public relations firm to tell all and sundry why the board disagrees with the commission and with market surveillance panel and Stock Exchange findings Vertex breached a listing rule.

With the departure this week of chairman Jon Hartley and directors Simon Pillar, of PEP, and Barry Watts, perhaps the board will finally stop blowing cash on butt-covering and get on with salvaging some shareholder value.

The Miles opinion hasn't impressed the Shareholders' Association, which is pressing ahead with what is likely to be some sort of class action.

The best line of attack seems to be s56 of the Securities Act, which allows shareholders who subscribed to the IPO (initial public offering) to seek compensation from Vertex and/or its directors.

Those investors are down about 32c in the dollar.

To be successful the plaintiffs would first have to convince the court that the prospectus was misleading. The commission has already found it was but the court doesn't have to accept that finding.

Then it would have to be shown that being "misleading" is the same as containing "an untrue statement."

To Shoeshine's knowledge this has never been tested in court and will make for an interesting argument. Can a document be misleading but nonetheless contain no statement that is untrue?

The biggest challenge, however, will be the gigantic director escape hatch provided by the act's s56(3).

This reads: "No person shall be liable ... in respect of any untrue statement included in a ... registered prospectus ... if he proves that ... he had reasonable grounds to believe and did ... that the statement was true."

The active words here are "proves" and "reasonable grounds." From the point of view of Vertex litigants it would be a very tough nut to crack.

The commission's report detailed what sounded like an extensive prospectus due diligence process involving directors, executives, lawyers and observers from the lead manager, JB Were, and the auditor, PricewaterhouseCoopers.

That should provide good ammo for the "reasonable grounds" defence.

As for "proof," the commission said it had "not found evidence to suggest that the Vertex directors believed the offer document was misleading." If a six-month commission investigation failed to unearth any smoking documents you'd have to think nobody else is likely to.

On the other hand, for those who can afford to it's always worth taking your chance in court. So much depends on the judge.

A recent case in point is Justice Judith Potter's judgment in the Perry Corporation equity swaps case.

In brief the case went like this. Perry disclosed a 4.9% interest in Rubicon. It had, it argued, an economic but not a "relevant" interest in a further 11.1% held in equity swaps by Deutsche Bank and UBS Warburg.

Perry's legal advice was that the swap shares didn't have to be declared as its own. Judge Judy agreed, provided the swaps were just swaps and were not accompanied by an "arrangement, agreement or understanding" as described in the Securities Act's s5(1)(f).

Perry, and executives from UBS and Deutsche, said no such arrangement existed.

Judge Judy treated the bank executives' evidence as neutral, saying they were too far from the action to know what was going on.

She simply thought Perry was lying and, in effect, fined it $8 million, plus forfeiture of Rubicon dividend rights.

Judge Judy's conclusion was arrived at by relying on evidence of somewhat tangential relevance to whether an arrangement existed ­ that is, what Rubicon said and did while the swaps were in place.

She seems to have got her dates a bit muddled. The judgment three times quotes a "telling" email from Rubicon chief executive Luke Moriarty. But it was sent three days after the swaps were unwound and the shares declared as Perry's.

Vertex litigants will have to hope their case is tried by someone with Judge Judy's forthright incredulity.

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