About 8500 mum and dad shareholders in collapsed carpetmaker Feltex were yesterday asked to stump up $980 apiece to fund a lawsuit against the company's directors and two brokers who participated in its initial public offering (IPO) in May 2004.
Investment banker Tony Gavigan and Christchurch lawyer Garry Wakefield are spearheading the legal action after failing last December to prevent the High Court putting Feltex into liquidation. To issue representative proceedings, they have written to IPO investors, asking them - and those who bought Feltex shares on market before the end of March 2005 - to join the group in a bid to recover their losses. An initial payment of $600andasigned consent is required.
Gavigan says time is of the essence because some Fair Trading Act recovery rights have time limitations. About 600 Feltex investors late last year forked out $380 apiece - or $228,000 - in an abortive bid to save the company from liquidation. The balance is held in Wakefield's trust fund to cover the cost of writing to investors and bringing the action to trial. Christchurch barrister Chris McVeigh QC will act for the group and an expert opinion has been obtained from Professor Alan Robb, who recently retired from Canterbury University's accounting department.
Gavigan says the key issue is whether the IPO document painted an untrue picture of the company's accounts and future prospects. He notes the prospectus forecast a net $24 million surplus in the year ending June 2005. Instead Feltex lost the lot, he says, and reported a shortfall of $20m in the first two years. Gavigan says that rather than suing the IPO board under the directors' duties provisions of the Companies Act, he and Wakefield are concentrating on Fair Trading Act and Securities Act actions. "Just like the Ribena situation, there wasn't a lot of vitamin C in this box."
He says the group needs at least $1m to bring the matter to trial and he expects at least 1000 people to join the action. The median loss for Feltex investors is about $10,000. Included as defendants in the court action will be those directors who signed the IPO - Tim Saunders, Michael Feeney, David Hunter and Peter Thomas - and the company's vendors and lead brokers, First NZ Capital and Forsythe Barr.
Gavigan says director John Hagen will not be part of the lawsuit as he was not a director at the time of the IPO; nor will the shareholder group be suing Feltex's auditors, lawyers or any other members of the NZX. To succeed in a Fair Trading Act suit, the plaintiffs must prove misleading or deceptive conduct or conduct that is likely to mislead or deceive. The Securities Act causes of action will include technical matters required when companies issue a prospectus before seeking money from the public.
The High Court put Feltex into liquidation last December, owing at least $13.1m to unsecured and employee creditors. There was a $A19m shortfall to the debenture holder, the ANZ Bank. This followed a fierce courtroom battle between Gavigan and the would-be liquidators, insolvency specialists McDonald Vague and Associates.
Gavigan was seeking a court order to become a Feltex director. This, he said, would have enabled him to resuscitate the company by calling a shareholders' meeting, appointing more directors, relisting and recapitalising Feltex, auditing its expenditure and the actions of its directors for the past six years, investigating the IPO and the claims made in its prospectus, coming to a scheme of arrangement with creditors and recasting Feltex's most recent accounts. There was at least $50m in value remaining in the company in the form of tax losses, he told the court. But Justice Rodney Hansen said the law was clear. If Feltex was insolvent, it had to be liquidated.