The decision highlights the importance of a clear and prominent disclaimer in any disclosure document. The disclaimer is critical in determining whether a party will be considered to have made a representation, despite any role which they may have played on the due diligence committee or in drafting the disclosure document.
On 12 January 1999, New Cap Reinsurance Holdings Limited (NCRH) carried out a convertible note issue, in which the six appellants invested approximately A$40 million. Within months after issuing the notes, NCRH was placed in liquidation and the notes were valueless. The appellants contended that they had each suffered substantial damages for which the thirteen respondents were liable.
The thirteen respondents included an investment bank and two of its subsidiaries (acting as lead manager, underwriter and broker for the note issue) (the Investment Bank).
Amongst other things, the appellants alleged misleading and deceptive conduct against the Investment Bank. The conduct in question was said to have occurred before the prospectus was issued, in a series of roadshow representations made to an individual representing certain sub-underwriters (Sub-underwriters’ Representative). It was alleged that on the strength of those representations, the Sub-underwriters’ Representative entered into sub-underwriting contracts on behalf of some of the appellants that gave rise to loss.
The Investment Bank acted as lead manager, underwriter and broker for the note issue. It was also a member of the due diligence committee and was closely involved in the drafting of the prospectus.
However, the Court of Appeal found that the Investment Bank had not engaged in misleading and deceptive conduct because it acted as a “mere conduit” in providing information derived from others involved in the preparation of the prospectus.
A party may have acted as a “mere conduit” if they:
are not the source of the information, and
expressly or impliedly disclaim any belief in the truth or falsity of the information, and
do no more than communicate the representation of another, without adopting or endorsing that representation.
In applying these principles, the party’s conduct will be assessed as a whole. All relevant factors may be taken into account, including the effect of the conduct, any disclaimers, and all other circumstances which might qualify the character of that conduct.
No representations by the Investment Bank
Despite its involvement in the note issue, the Investment Bank was found to have made no relevant representations to the Sub-underwriters’ Representative, because:
the information in the prospectus, which the Sub-underwriters’ Representative regarded as influencing his decision to enter into the sub-underwriting contracts, was not information that the Investment Bank had provided, and
the prospectus contained a disclaimer, which caused the Sub-underwriters’ Representative to understand that the Investment Bank was not making any representation in the prospectus.
What to include in the disclaimer
The critical statements included in the disclaimer were along the following lines:
The Investment Bank did not accept any responsibility or liability for the contents of the prospectus.
None of the Investment Bank’s directors, officers, employees or advisers made any warranty or representation as to the accuracy of the information in the prospectus.
The Investment Bank excluded and disclaimed all liability, except where it may not lawfully be excluded, for losses incurred as the result of that information being inaccurate or incomplete.
The Investment Bank made no recommendation as to whether readers of the draft prospectus should participate in the sub-underwriting.
The Investment Bank made no representations or warranties concerning the capital raising.
Readers of the draft prospectus should make their own decisions whether or not to participate based on their own inquiries and information contained in the draft prospectus and other information provided.
“Reliance” is a necessary element
In addition to finding that the Investment Bank acted as a “mere conduit”, the judgment confirms that in order to establish misleading and deceptive conduct, reliance must be proven by the plaintiff.
The concept of “fraud on the market” or “indirect causation” continues not to be accepted in this context by the Supreme Court of New South Wales.
Accessory liability not considered in this case
The Appeal Court did not consider concepts of accessory liability, and this was not raised by the appellants.
As a result, this case does not give any guidance as to when an investment bank involved in a prospectus process may be liable as an accessory to misleading and deceptive conduct.
However, it is important to remember that to be found liable as an accessory, an investment bank must:
have actual knowledge of the essential elements of the particular contravention, and
have a degree of participation in the particular contravention.
Always include a clear and prominent disclaimer in the prospectus.
Make it clear to investors, brokers and sub-underwriters to whom you may be making representations that you have no responsibility for the relevant representations, nor the information that formed the basis for those representations. Check that the people you are dealing with understand this.
Investment banks and prospectus issuers.
Consider use and content of disclaimers used in offering documents and related materials in capital raisings.