Thinking of buying or selling a business or securities in a company or trust?
This recent case is a reminder that failure to disclose known facts about the affairs of a company can amount to misleading and deceptive conduct, particularly where such information cannot be known to the other party.
The essential question in determining whether to disclose information is whether the omitted information would materially impact the decision of a party considering investment and to what extent.
The case relates to circumstances where a party is relying on representations made about a company or its dealings, such as during preliminary negotiations and commercial discussion.
The appellant, Mr Stephen Porges (Porges), was the proposed new chairman of Adcock Private Equity Pty Ltd (Adcock). Porges required that Adcock purchase a number of his shares in an unrelated entity, SecureOne Corporation Inc (SecureOne).
Porges made a number of express written and implied representations about SecureOne during the negotiations, including that:
(1) it was trading at profitably;
(2) it was an attractive investment;
(3) he was involved in the day-to-day business; and
(4) he had reliable information regarding its performance.
Adcock purchased the recommended shares in Secure One.
Porges failed to disclose that he was in a disagreement with the management of SecureOne and a separate and significant claim against SecureOne had been served.
NSW Supreme Court Decision
The Equity Division of the Supreme Court of NSW required Porges to pay Adcock a sum of $941,703.38 plus interest as a result of engaging in misleading and deceptive conduct.
McDougall J noted that it was “impossible to accept that an intelligent and experienced business man” could have thought that the omitted information was of no importance to Adcock that went onto purchase the shares in SecureOne. He went on to explain that the most basic considerations of commercial honesty would dictate that Porges disclose those circumstances.
NSW Court of Appeal
Porges appealed the Supreme Court Decision on the grounds that Adcock did not rely on some of the representations he made, and that some of the alleged representations were not misleading or deceptive.
The NSW Court of Appeal unanimously dismissed this appeal.
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Author: Natasha Khamas, click here to view her profile.
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