Lawyers, duds and money

It is only a few years since Doug Rathbone, chief executive and major shareholder of chemicals giant Nufarm, seemed headed for the rarefied air of Australia’s billionaire club.

Back in 2008, as markets surged and food security became a hot issue, Rathbone’s wealth soared to over $600 million. But his fortune has sunk quickly in the last few years due to Nufarm’s poor financial performance and a series of profit downgrades.

If the sharp drop in Nufarm’s shares wasn’t enough for Rathbone, this morning law firm Slater and Gordon has announced it is putting together a class action to sue Nufarm for misleading and deceptive conduct.

At the centre of the claim is a profit downgrade Nufarm made in July, when it said its profit for the 2009-10 year would be of $55-$65 million, compared to its forecast in March that profit would be $110-$130 million.

“Nufarm has sought to blame its downgrade on poor weather in North America and Europe, as well as the depressed pricing for glyphosate-based herbicide. We have concluded that these are matters that Nufarm’s management was or ought to have been aware of at the time it provided its profit guidance on March 2, 2010. Indeed, these are the same factors that Nufarm blamed when it downgraded its guidance in the previous financial year,” Slater and Gordon Ben Phi said this morning.

“The proposed class action had received strong support from institutional investors, but “mum and dad” investors would be expected to join.”

The class action is the latest in a string of similar legal claims launched against companies who have delivered profit downgrades and/or poor performance.

Slater & Gordon has a class action running against OZ Minerals, while class actions have also been mooted against Elders, RiverCity Motorway (which operates the Clem 7 Tunnel in Brisbane) and engineering and construction group WDS.

The message is clear – if you get your shareholder updates repeatedly wrong and investors suffer, the big law firms could well be coming after you.

While listed companies are really the ones in the spotlight here, the class action trend does suggest that litigation by disgruntled investors is something that is going to become a lot more common.

At an SME level, entrepreneurs should realise that shareholder agreements have to be in place, and they need to be well constructed.

The hope is that these shareholder agreements never see the light of day, and that everything remains rosy between founder and investors. But where problems do occur, you need a document that clearly sets out and regulates everyone’s behaviour.

Further, the class actions should make entrepreneurs think carefully about what they promise investors. Problems that hurt the bottom line can and will occur, but investors are right to question the competency of managers who cannot accurately forecast what will happen to their business.