The dispute over “misleading statements/behavior” in equity transactions: analysis of Li v Mikkelsen and implications for investors’ duty of care

Facts

The Mikkelsens’ business is a retail business selling natural products. Mrs Mikkelsen initially operated it as a sole trader before incorporating the business, with both Mrs and Mr Mikkelsen as key participants. Between June and September 2016, the Mikkelsens allegedly made representations to the plaintiffs about the business’ financial performance, claiming it had a stable net profit margin of 30% and a certain amount of annual net profit. Based on these representations, the plaintiffs entered into a share sale agreement on 8 September 2016, acquiring a substantial interest in the business based on the expectation of represented profitability.  The plaintiffs subsequently discovered discrepancies in the financial documents provided during due diligence and claimed that the Mikkelsens’ representations were misleading.  They alleged that, had they known the true financial state, they would not have purchased the shares or invested.

Issues

1. Misrepresentation: Whether the Mikkelsens’ representations about the business’ financial     performance amounted to misleading and deceptive conduct under the     Australian Consumer Law (ACL).

2. Negligent Misstatement: Whether the Mikkelsens breached a duty of care to provide accurate financial information, thereby making a negligent misstatement.

3. Contributory Negligence: Whether the plaintiffs contributed to their loss by failing to conduct adequate due diligence.

4. Relief Sought: Whether the plaintiffs were entitled to rescission of the share sale agreement and damages for the alleged loss.

Decision

At first instance, Judge Burchell ruled in favor of the plaintiffs, finding that the Mikkelsens’ representations about the business’ profitability were indeed misleading. However, the court applied a 15% reduction in damages due to contributory negligence by the plaintiffs, who had failed to investigate fully the financial statements provided.

1. Misleading or Deceptive Conduct: The court held that the representations regarding the business’ profitability constituted misleading or deceptive conduct under Section 18 of the ACL. This conclusion was based on the evidence showing that the profit margins and figures presented by the Mikkelsens were not supported by the actual financial condition of the business.

2. Negligent Misstatement: The court also found that the defendants breached their duty of care to provide accurate financial information. Given the defendants’ involvement in the business, they were expected to know the financial reality and refrain from presenting figures likely to mislead.

3. Damages: The court awarded damages to the plaintiffs, recognizing that they suffered financial loss due to reliance on the misleading representations. The damages were discounted by 15% for contributory negligence, as the plaintiffs could have taken additional steps to verify the financial statements and projections provided.

4. Legal Costs: The court ordered the defendants to pay the plaintiffs’ legal costs, reflecting the substantial impact of the misleading conduct on the plaintiffs’ financial decision-making.

Conclusion

Li v Mikkelsen underscores the importance of accuracy in making representations during commercial transactions and obligations of the seller in providing reliable information. The decision illustrates the potential consequences of misleading conduct under the ACL and the impact of contributory negligence on damage awards in cases where buyers fail to perform adequate due diligence.