Former Orcon boss loses court battle against lawyer

UPDATED with comment from Greg McAlister

Former Orcon chief executive Greg McAlister says he will appeal a High Court case he has lost against an Auckland law firm and one of its partners.

As reported by NBR in March, Mr McAlister sued Anderson Creagh Lai and partner Jeffrey Lai, alleging they played a part in misrepresenting the amount of equity in the $38 million deal to buy Orcon from Kordia in 2013.

Mr McAlister was part of a consortium of investors led by Warren Hurst, who funded part of the acquisition and was advised by Mr Lai. Mr McAlister became chief executive of Orcon as part of the deal.

He tipped in $200,000 but when Orcon was sold to CallPlus a year later, he got nothing back because Orcon’s debtors were prioritised over equity owners.

He alleged that, had he been aware about the amount of actual equity and that the deal was almost entirely funded by debt, he would have never invested in Orcon.

Although Mr Hurst had a substantial part in the alleged misrepresentation, he has been bankrupted twice so Mr McAlister didn’t see any point in pursuing him.

In a recently released April judgment, Justice John Fogarty said Mr Hurst breached the Fair Trading Act and Mr Lai, through his silence, contributed unwittingly to the breach.

“This breach caused Mr McAlister’s loss. However, I am not satisfied that Mr Lai was directly or indirectly knowingly concerned in that breach. I, therefore, exercise my discretion not to award a remedy under s43 of the Fair Trading Act,” he said.

How the deal was structured
The $38 million purchase of Orcon was divided into three parts — a $22 million loan from ASB, $10 million in vendor financing from Kordia, and $6 million in equity.

The $6 million equity was divided into a further three parts — $2 million investor funds, a $750,000 “cash sweep” of Orcon’s bank account by Kordia, and $3.25 million worth of internet modems that Kordia leased to Orcon (customer premises equipment).

Mr McAlister alleges that Messrs Hurst and Lai told him the $6 million was investor equity and not made up of further funding from Kordia.

Mr Hurst also wanted to merge his company, Vivid Networks, with Orcon, taking supposed equity to $8.5 million.

Equity? What equity?
The judgment says Mr Lai said he could not recall any mention of $6 million in “equity” and told Mr McAlister he was not acting for him so he should get legal advice.

Mr Lai said if any representation was made, it would have been by Mr Hurst, and he could not be held liable for his silence.

Justice Fogarty said he had no doubt the actions of Mr Hurst were “capable of misleading a reasonably sophisticated investor like Mr McAlister.

“It needs to be kept in mind that the context here was Mr Hurst seeking to persuade investors to put up money to purchase a small tech company. His comments about there being equity of $6 million in the purchase naturally refers to the net value after deducting the borrowing from the settlement figure,” the judge said.

“To talk about there being $6 million of equity in this context amounted to telling a sophisticated businessman like Mr McAlister, who was also on an offer to become the chief executive of the company, that $6 million of the purchase price of $38 million was not borrowed money.”

The judge found Mr Lai contributed to Mr Hurst’s breach by not cautioning Mr McAlister about the nature of the equity.

The question then turned to if Mr Lai explained how much equity there was, would Mr McAlister have invested?

Justice Fogarty said, given Mr McAlister’s business expertise, he probably wouldn’t have advanced the $200,000 if he knew about the nature of the equity.

But the judge said, “I am not positively satisfied that [Mr Lai] did in fact turn his mind to whether the assumed equity, being used to calculate the formula for the convertible note, was itself misleading or capable of misleading Mr McAlister.

“Mr Lai is an experienced commercial lawyer and a principal in his firm … Having seen and heard Mr Lai I do not think that he knowingly was party to misleading conduct.

“Rather, the better explanation is that on a very busy day, he used the $8.5 million equity figure to calculate the share entitlements of Mr McAlister, amidst many other attendances on the settlement, without consideration as to whether this assumption of the presence of capital was misleading Mr McAlister.”

Appeal
Mr McAlister tells NBR he is taking the case to the Court of Appeal because he believes the High Court has erred by saying Mr Lai’s knowledge of the misrepresentation was needed.

The judgment had a puzzling conclusion because until the end it seemed as if things were heading his way, he says.

Costs were reserved.

Read the judgment here.