Angelis as trustee for the Angelis Family Trust v Pemba Capital Partners Fund I Partnership, LP (No 3)

[2019] NSWSC 1759

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:

Angelis as trustee for the Angelis Family Trust v Pemba Capital Partners Fund I Partnership, LP (No 3) [2019] NSWSC 1759

Hearing dates:

28 October – 11 November, 13 – 14 November and 4 – 5 December 2019

Decision date:

10 December 2019

Jurisdiction:

Equity - Commercial List

Before:

Stevenson J

Decision:

The shareholders of Coverforce remain bound by the 2017 Shareholders Agreement; Pemba would have been entitled to proceed with the sale to AUB; the Kitchin Parties are entitled to reverse the Resilium transaction or recover damages

Catchwords:

CONTRACTS – formation – agreement – whether shareholders agreed to vary the shareholders agreement

 

CONTRACTS – construction – interpretation – purported “binding” term sheet – what the term sheet was binding to do

 

CONTRACTS – construction – interpretation shareholders agreement – decisions “in relation to” subject matters which required special majority shareholder approval – what “in relation to” means in this context

 

CONTRACTS – misleading conduct under statute – misleading or deceptive conduct – representations – representations as to authority of company to enter transaction

  CORPORATIONS – contracts – formalities – statutory assumptions – persons entitled to assume document duly executed – whether person knew or suspected that assumption was incorrect

Legislation Cited:

Australian Consumer Law
Corporations Act 2001 (Cth)

Cases Cited:

Angelis as trustee for the Angelis Family Trust v Pemba Capital Partners Fund I Partnership, LP [2019] NSWSC 1646
Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472; [2001] FCA 1549
Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Gould v Vaggelas (1984) 157 CLR 215; [1984] HCA 68
Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) 46-054
Love & Stewart Ltd v S Instone & Co Ltd (1917) 33 TLR 475
Rafferty v Madgwicks (2012) 203 FCR 1; [2012] FCAFC 37
Sinclair, Scott & Co v Naughton (1929) 43 CLR 310; [1929] HCA 34
Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd (1997) 69 SASR 288
Sykes v Reserve Bank of Australia (1998) 158 ALR 710; (1998) 88 FCR 511
Travel Compensation Fund v Tambree t/as R Tambree & Associates (2005) 224 CLR 627; [2005] HCA 69
Warner v Elders Rural Finance Ltd (1993) 41 FCR 399
Watson v Foxman (1995) 49 NSWLR 315
Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97

Category:

Principal judgment

Parties:

James Angelis as trustee for the Angelis Family Trust (First Plaintiff/Second Cross-Defendant on First Cross-Claim/Sixth Cross-Defendant on Second Cross-Claim)
Jitendra Dutt (Second Plaintiff/Third Cross-Defendant on First Cross-Claim)
Nathan Brown (Third Plaintiff/Fourth Cross-Defendant on First Cross-Claim)
Antony Goldsmith (Fourth Plaintiff/Fifth Cross-Defendant on First Cross-Claim)
Copiapo Pty Ltd as trustee for FCK Consulting Trust (Fifth Plaintiff/Sixth Cross-Defendant on First Cross-Claim)
Pemba Capital Partners Fund I Partnership, LP (First Defendant/Cross-Claimant on First Cross-Claim/First Cross-Defendant on Second Cross-Claim)
Pemba Capital Partners Pty Ltd as trustee for the Castlereagh St (Swan) Co-Investment Trust (Second Defendant/Cross-Claimant on First Cross-Claim/Second Cross-Defendant on Second Cross-Claim)
Adrian Christopher Kitchin (Third Defendant/Seventh Cross-Defendant on First Cross-Claim/First Cross-Claimant on Second Cross-Claim)
Benjamin James Hastie (Fourth Defendant/Eighth Cross-Defendant on First Cross-Claim/Second Cross-Claimant on Second Cross-Claim)
Drue Jonathon Giles Castanelli (Fifth Defendant/Ninth Cross-Defendant on First Cross-Claim/Third Cross-Claimant on Second Cross-Claim)
Coverforce Holdings Pty Ltd (Sixth Defendant/First Cross-Defendant on First Cross-Claim/Fourth Cross-Defendant on Second Cross-Claim)
AUB Group Ltd (Seventh Defendant/Third Cross-Defendant on Second Cross-Claim)
Resilium BidCo Pty Ltd (Fourth Cross-Claimant on Second Cross-Claim)
Resilium OpCo Pty Ltd (Fifth Cross-Defendant on Second Cross-Claim)

Representation:

Counsel:
F Corsaro SC with H Pintos-Lopez and E Olivier (Plaintiffs)
R A Dick SC with P Flynn SC (on 4 December 2019) and E Bathurst (First and Second Defendants)
M R Elliott SC with D Ratnam (Third to Fifth Defendants)
N M Bender (Seventh Defendant)

  Solicitors:
Mills Oakley (Plaintiffs)
Herbert Smith Freehills (First and Second Defendants)
Roberts & Partners Lawyers (Third to Fifth Defendants)
Allens (Seventh Defendant)

File Number(s):

SC 2019/201647

TABLE OF CONTENTS

Judgment

Coverforce is not represented

The issues

Decision

Representation

The alleged “convention” as to the management and operation of Coverforce

Credit

The critical terms of the 2017 Shareholders Agreement

Special Board Approval

Exit

Variation

The events leading to the 31 October Term Sheet

Mr Angelis identifies Resilium as a potential acquisition

The poor relationship between Mr Angelis and the Pemba directors

Mr Kitchin decides to go it alone

Coverforce board meeting on 24 September 2018

Mr Angelis’s offer to buy out Pemba

The first Suncorp-Kitchin Term Sheet

Intervention of Mr Neal

Events leading to the 31 October Term Sheet

Coverforce board meeting on 29 October 2018

The ABL Draft Term Sheet and the ABL Draft Shareholders Agreement

30 and 31 October 2018

The 30 October 2018 emails and conversations

Conversations between Mr Angelis and Mr Kitchin

31 October 2018

The 31 October Term Sheet

The Purported 31 October Shareholders Agreement

The position as conveyed to Mr Kitchin

Events after 31 October 2018

The Stage 2 Suncorp Term Sheet

The 10 December 2018 board meeting

Events thereafter

The 13 December 2018 email communications

The 14 December 2018 email communications

22 December 2018 – the last word from Pemba

Drafting of the Resilium Transaction documents

Mr Neal’s meeting with Mr Summerhayes

Pemba communications on 19 and 23 March 2019

Execution of the Resilium Transaction documents

The Share Purchase Deed

Events leading up to completion of the Resilium Transaction

Completion of the Resilium Transaction

The sale to AUB

Was there a binding agreement between Pemba and Coverforce?

What is the effect of the 31 October Term Sheet?

Not an agreement binding Coverforce (or Mr Kitchin) to proceed with the Resilium Transaction

Not an agreement binding on Pemba to amend the 2017 Shareholders Agreement

An agreement binding in some respects

Conclusion concerning the alleged agreement between Mr Angelis and Pemba

Was any agreement void for uncertainty?

No estoppel

The result

Consequences so far as concerns the Resilium Transaction

Can the Kitchin Parties compel Coverforce to “reverse” the Resilium Transaction under the Share Purchase Deed?

Was Special Majority Board Approval required for Coverforce to enter the Share Purchase Deed?

The authority of Mr Dutt and Ms Angelis to execute the Resilium Transaction documents

Assumptions under s 129

Coverforce represented it had authority to enter the Share Purchase Deed

Ratification by Pemba

The Kitchin Parties are entitled to enforce the Share Purchase Deed

The Kitchin Parties’ right under cl 5.6(a)(ii) of the Share Purchase Deed

“Reversing the actions” – some documents unaffected

The Coverforce Call Option Deed

“Reversing the actions” – other aspects

Conclusions as to the rights of the Kitchin Parties

What is the consequence of these findings for the sale to AUB?

The Kitchin Parties’ misleading or deceptive conduct claims

Against the Angelis Parties and Coverforce

Against Pemba

Damages

Conclusion

Judgment

1. The sixth defendant, Coverforce Holdings Pty Ltd, is Australia’s largest unlisted insurance broker.

2. In 1994, the first plaintiff, Mr James Angelis, established the business now carried on by Coverforce. Mr Angelis has been the managing director and chief executive of Coverforce, and its predecessors since then.

3. Until 2012, the business was essentially an Angelis family business. To the extent that there were other shareholders, they held shares as valuable employees of the business.

4. During this period, the business was operated by Mr Angelis through a group of companies which the parties referred to as the “Coverforce Group”.

5. In late 2011, Mr Angelis received a proposal from a private equity investor, now known as Pemba Capital Partners Pty Ltd, to invest in the group.

6. On 12 April 2012, the Coverforce Group was restructured to facilitate Pemba’s investment. The newly incorporated Coverforce Holdings Pty Ltd acquired the Coverforce Group. Pemba took an equity stake and became a shareholder in Coverforce along with Mr Angelis and other minority shareholders. Those parties entered a shareholders agreement that the parties referred to as the “2012 Shareholders Agreement”.

7. Under the 2012 Shareholders Agreement, Pemba and Mr Angelis were each entitled to appoint two directors to the Coverforce board. Mr Angelis appointed himself and the second plaintiff, Mr Jitendra Dutt. Mr Dutt is also the Chief Financial Officer of Coverforce. Pemba’s current appointees are Mr George Georgiadis and Mr Mark Summerhayes. Mr Summerhayes is currently chairman of the board. The fifth director is Mr Ian Neal, appointed in April 2012 as a non-executive independent director.

8. In July 2016, Pemba transferred its equity participation in Coverforce to the first defendant, Pemba Capital Partners Fund I Partnership, LP. The distinction between the Pemba entities is not significant and, for simplicity, I will refer simply to “Pemba”.

9. By 29 November 2017, following a series of further share transfers, the shareholders in Coverforce were:

1. Mr Angelis as to 48.5%;

2. Mr Dutt as to 1.2%;

3. the fourth plaintiff, Mr Antony Goldsmith as to 1%;

4. the third plaintiff, Mr Nathan Brown as to 0.3%; and

5. Pemba as to 49%.

10. Messrs Angelis, Dutt, Goldsmith and Brown are the plaintiffs. I will refer to them as the “Angelis Parties”.

11. On 29 November 2017, the shareholders entered into an amended and restated shareholders agreement, which the parties referred to as the “2017 Shareholders Agreement”.

12. Under each of 2012 and 2017 Shareholders Agreements, if Pemba wished to achieve an “Exit”, it was entitled to compel the remaining shareholders to sell the same proportion of their shares as Pemba was selling, and at the same price and on the same terms. The parties referred to this as Pemba’s “Drag Right”.

13. The Drag Right gave Pemba, as a private equity investor in Coverforce, the ability to deliver to a prospective purchaser of its shares the entire shareholding and thus complete ownership of Coverforce. Mr Summerhayes agreed that the Drag Right was a drastic right. He said that it was “ultimate protection” for an equity investor like Pemba. Mr Summerhayes said that the right was only to be used on a “cold day in hell”. “Like today” he added.

14. Coverforce was a party to each of the 2012 and 2017 Shareholders Agreements. Each provided that if there was any inconsistency between it and Coverforce’s constitution, “this agreement prevails to be extent of any inconsistency”. Accordingly, the parties directed their submissions to the relevant provisions of the shareholders agreements, rather than those in the constitution. For the same reason, I will not refer further to the constitution unless necessary.

15. In the years up to 2018, Mr Angelis caused the Coverforce business to expand by acquiring a number of competing insurance broking businesses. Those businesses were identified and acquired by Coverforce on the recommendation of Mr Angelis.

16. In April 2018, Mr Angelis identified the business conducted by Resilium Pty Ltd as another potential candidate for acquisition by Coverforce. Resilium was then a wholly-owned subsidiary of Suncorp Insurance Services Ltd. Resilium held an Australian Financial Services Licence (AFSL) and carried on business distributing insurance products such as business and personal insurance. Resilium operated through a network of authorised representatives. Those representatives had their own portfolio of clients and who operated using Resilium’s AFSL.

17. For some months prior to April 2018, the managing director of Resilium, the third defendant, Mr Adrian Kitchin, and two senior employees of Resilium, Mr Benjamin Hastie and Mr Drue Castanelli, who are the fourth and fifth defendants, were in discussion with Suncorp about a possible management buyout (“MBO”) by them of the Resilium business. I will refer to those individuals as the “Kitchin Parties”.

18. Evidently, developments at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry had prompted Suncorp to contemplate the “divestment” of Resilium “given the risks associated with Suncorp continuing to own a vertically integrated general insurance broking business” (to adopt the language in an internal Suncorp document dated 20 July 2018).

19. Mr Angelis raised the possibility of an acquisition of Resilium at a Coverforce board meeting on 25 June 2018.

20. Between then and October 2018, Mr Angelis conducted negotiations with Mr Kitchin about the possibility of such an acquisition. Speaking broadly, those negotiations were conducted on the basis of Coverforce financing the Kitchin Parties’ MBO of Resilium, and the Kitchin Parties procuring that Coverforce acquire the Resilium business in exchange for a shareholding in Coverforce. I will set out the detail of those negotiations later in these reasons.

21. During those negotiations, Mr Kitchin made clear to Mr Angelis that there could be no agreement unless Pemba agreed to surrender its Drag Right. That was because, first, Mr Kitchin did not wish to become a shareholder in Coverforce and then be forced to “exit” as a shareholder if Pemba chose to do so and, second, because Mr Kitchin understood that Suncorp would not agree to a transaction with a party one of whose shareholders had such a right.

22. Ultimately, on 31 October 2018, Mr Angelis (for Coverforce) and Mr Kitchin executed a “Binding Term Sheet”. I will call that document the “31 October Term Sheet”.

23. That document stated that “the proposed terms and conditions” for the acquisition of Resilium included that:

1. Coverforce and Mr Kitchin would jointly acquire Resilium for $20 million;

2. Coverforce would loan Mr Kitchin the funds necessary for that acquisition;

3. Mr Kitchin would become a shareholder in Coverforce; and

4. Mr Kitchin would become a party to a shareholders agreement which would be amended and restated “in substantially the form” as a document which was attached and which was based on the 2017 Shareholders Agreement.

24. The 31 October Term Sheet is to be contrasted with two other term sheets, executed by Mr Kitchin and Suncorp on 22 October 2018 and 12 December 2018, to which I will return.

25. I shall refer to the shareholders agreement which was annexed to the 31 October Term Sheet as the “Purported 31 October Shareholders Agreement”.

26. A central issue in these proceedings is whether, by reason of these documents, and in the events that happened, the Angelis Parties and Pemba agreed to vary the 2017 Shareholders Agreement to the effect of the Purported 31 October Shareholders Agreement.

27. Pemba’s case is that the 2017 Shareholders Agreement has not been varied. It seeks a declaration to that effect as well as a declaration to the effect that the Purported 31 October Shareholders Agreement “was and is invalid, void and of no effect”.

28. On 25 March 2019, Coverforce, the Kitchin Parties and Suncorp executed a suite of documents which purported to implement what the parties referred to as the “Resilium Transaction” and to have the effect that, on settlement on 31 May 2019:

1. Coverforce advanced $20 million interest free to the Kitchin Parties to finance the MBO by the Kitchin Parties of Resilium;

2. the Kitchin Parties caused Resilium’s revenues to be transferred to Coverforce;

3. the Kitchin Parties became shareholders in Coverforce; and

4. Mr Kitchin became a director of Coverforce.

29. The result, according to the Angelis Parties and the Kitchin Parties, is that:

1. the directors of Coverforce now include Mr Kitchin, as well as Messrs Angelis, Dutt, Summerhayes, Georgiadis and Neal;

2. the shareholders of Coverforce now are, rounding up figures for simplicity:

1. Mr Angelis as to 42.1%;

2. Mr Dutt as to 1.09%;

3. Mr Goldsmith as to 0.9%;

4. Mr Brown as to 0.27%;

5. Pemba as to 43.6%.

6. Mr Kitchin as to 10.2%;

7. Mr Hastie as to 0.6%;

8. Mr Castanelli as to 0.6%; and

9. Copiapo Pty Ltd as to 0.9%;

3. Pemba no longer has its Drag Right; and

4. Coverforce is now, for all practical purposes, the owner of the Resilium business.

30. Pemba, on the other hand, maintains that the 2017 Shareholders Agreement is still in force, that Mr Angelis had no authority to commit Coverforce to the Resilium Transaction and that the documents executed on 25 March 2019 were not effective.

31. Pemba seeks a declaration that the purported issue of shares to Mr Kitchin, Mr Hastie and Mr Castanelli “was and is invalid, void and of no effect”.

32. Pemba does not seek a declaration to the effect that the 25 March 2019 Resilium Transaction documents are ineffective. However, in response to the Kitchin Parties’ Cross-Claim, Pemba pleads that the Resilium Transaction documents were not authorised by the board of Coverforce and not validly entered into by Coverforce. That issue was at play throughout the hearing.

33. On the basis that the Resilium Transaction documents were not effective, Pemba contracted to sell its shares in Coverforce to the former seventh defendant, AUB Group Ltd and, in purported exercise of its Drag Right, sought to compel the Angelis Parties to do the same.

34. This transaction was subject to Pemba providing AUB with certain due diligence information, due last Friday, 6 December 2019, and the completion of due diligence by AUB by 31 December 2019. Pemba’s ability to require Coverforce and the Angelis Parties to provide it with such due diligence information depended on whether the 2017 Shareholders Agreement or the Purported 31 October Shareholders Agreement governs those parties’ obligations.

35. For that reason, I was asked to deliver these reasons urgently.

36. Early in the hearing, the Angelis Parties withdrew their claim against AUB.

37. Yesterday, 9 December 2019, AUB announced to the market that it had terminated its contract with Pemba on the basis of Pemba’s failure to provide “as at the date agreed” that due diligence information.

Coverforce is not represented

38. Because of this dispute, there is currently a deadlock on the Coverforce board. For that reason, the board has been unable to appoint legal advisors to represent Coverforce in these proceedings.

39. No party sought any order appointing a party to represent Coverforce’s interests in the proceedings. It was common ground that, as the Coverforce business is active and highly profitable, it would have been commercially disastrous for a receiver or provisional liquidator to be appointed to Coverforce for this purpose.

40. Each of the shareholders of Coverforce has actively participated in these proceedings. As was submitted on behalf the Kitchin Parties, all of the shareholders have a keen interest in acting in this litigation in a manner that does not prejudice the legitimate interests of Coverforce. Each has had every opportunity to identify and advance arguments that would serve Coverforce’s interests. Each has done so.

41. I accept the submission made on behalf of both Pemba and the Kitchin Parties that the Angelis Parties are effective contradictors of their cases, so far as they affect Coverforce, and that the interests of Coverforce will not be adversely affected by its want of separate representation no matter what the outcome of these proceedings may be.

42. And, as a practical matter, I saw no alternative than to proceed this way.

43. The Angelis Parties drew attention to two particular matters in respect of which it was said Coverforce might wish to be heard. They were whether Coverforce might wish to exercise its rights under a dispute resolution clause in one of the Resilium transaction documents and to exercise its rights under the agreement by which it agreed to lend the Kitchin Parties the $20 million referred to at [28(a)] above. I deal with these questions below (see [585] to [586] and [507] respectively).

The issues

44. A central issue is whether the shareholders of Coverforce are bound by the 2017 Shareholders Agreement or the Purported 31 October Shareholders Agreement.

45. Pemba accepted that, if the shareholders of Coverforce are bound by the Purported 31 October Shareholders Agreement, or Pemba is estopped from asserting they are not, Pemba could not have proceeded with the sale of its shares in Coverforce to AUB.

46. On the other hand, if the shareholders of Coverforce remain bound by the 2017 Shareholders Agreement, and if Pemba is not estopped from denying that this is so, then but for AUB’s announcement yesterday Pemba could have proceeded with the sale to AUB of its shares in Coverforce and, exercising its Drag Right, the Angelis Parties’ shares in Coverforce.

47. There is also an issue as to whether Coverforce effectively entered the 25 March 2019 documents referable to the Resilium Transaction, particularly a Share Purchase Deed made between Coverforce, the Kitchin Parties and another entity pursuant to which, amongst other things, Coverforce purportedly issued shares in itself to the Kitchin Parties.

48. There is a further issue as to whether, assuming Coverforce did effectively enter those documents, it had requisite board approval to complete the transactions envisaged by those documents; particularly the allotment of shares to the Kitchin Parties and the appointment of Mr Kitchin as a director of Coverforce.

Decision

49. In substance, my conclusion is that:

1. the shareholders of Coverforce remain bound by the 2017 Shareholders Agreement;

2. Pemba is not estopped from asserting the contrary;

3. but for AUB’s announcement yesterday, Pemba would have been entitled to proceed with the sale to AUB;

4. Coverforce did have authority to enter, and did effectively enter, the 25 March 2019 Share Purchase Deed;

5. Coverforce did not have the requisite board approval to complete the transactions envisaged in the 25 March 2019 documents;

6. there has been no valid allotment of shares in Coverforce to the Kitchin Parties;

7. Mr Kitchin has not been validly appointed as a director of Coverforce;

8. the Kitchin Parties are accordingly entitled to elect either to:

1. exercise their right under cl 5.6 of the 25 March 2019 Share Purchase Deed to “reverse” the “actions” effected by the 25 March 2019 Resilium Transaction documents and to thereby, in effect, “unwind” the Resilium Transaction; or

2. recover damages from Coverforce.

Representation

50. I have been greatly assisted by the efficient manner in which the proceedings were conducted by counsel for each of the parties.

51. During final oral submissions, I was provided with extensive written submissions. Much of what follows, particularly in relation to uncontroversial background matters, is drawn with gratitude from those submissions.

The alleged “convention” as to the management and operation of Coverforce

52. In his affidavit evidence, Mr Angelis explained how he had caused Coverforce to acquire “target businesses” over the years. He explained that those businesses were acquired on his recommendation and that he considered he was “able to bind Coverforce in the relevant transaction because no one ever told me otherwise”.

53. In opening, the Angelis Parties submitted that in pursuing that strategy “the Coverforce Board and shareholders departed from the formal decision-making processes set out in the company’s constitution and shareholders agreements”.

54. In my opinion, any such convention that may have been established in regard to the acquisition of businesses prior to the transactions with which these proceedings are concerned casts no light on the issues before me.

55. This is for three reasons.

56. First, none of the previous transactions to which Mr Angelis referred involved the need to make amendments to either the 2012 or the 2017 Shareholders Agreement.

57. Second, the Angelis Parties only plead that “absent any indication to the contrary” did Mr Angelis have some kind of apparent authority to bind Coverforce “without formal resolution or formal acknowledgment of consent”. In this case, as I will describe below, there was clear “indication to the contrary” from Pemba in relation to the Resilium Transaction.

58. Finally, the Angelis Parties proffered no estoppel or any other legal theory to suggest why Mr Angelis’s subjective understanding of the circumstances in which he was able to bind Coverforce should be given legal effect.

59. These matters may explain why the Angelis Parties placed little weight on these matters in their final submissions.

Credit

60. I heard evidence from Mr Angelis, Mr Neal, Mr Dutt, Mr Summerhayes, Mr Georgiadis and Mr Kitchin. Each was extensively cross-examined.

61. The impression I gained was that each of these witnesses was doing his best accurately to recount the events with which these proceedings are concerned. I do not think that any of these men sought to give evidence before me which was not truthful.

62. However, there are some instances, which I set out below, where the evidence that Mr Angelis gave cannot be correct.

63. In this regard, I can do no better than to repeat McLelland CJ in Eq’s memorable words in Watson v Foxman (1995) 49 NSWLR 315 at 319:

“…human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.”

64. Mr Angelis’s evidence was, at times, affected by the considerations to which McLelland CJ in Eq referred.

The critical terms of the 2017 Shareholders Agreement

Special Board Approval

65. Clause 5.5(a) of the 2017 Shareholders Agreement provided:

“5.5   Simple majority

(a)   Except resolutions in relation to matters which must be decided in accordance with clause 5.6(a), all resolutions at meetings of the Board must be decided by a simple majority vote of Directors entitled to vote in respect of the relevant resolution, provided that, for so long as Pemba holds more Shares than any other Shareholder, an affirmative vote is obtained from at least 1 Pemba Director (Simple Majority Approval).”

66. As Pemba, at all times, held more shares than any other shareholder, a “Simple Majority Approval” thus required the vote of at least one Pemba director.

67. Clause 5.6(a) provided:

“5.6   Special majority

(a)   Subject to clause 5.6(b), any decision of the Directors in relation to a matter set out in Schedule 2 or as otherwise specified in this agreement, must be determined by Simple Majority Approval, provided that an affirmative vote is also obtained from [Mr Angelis] (in his capacity as Management Shareholder Director), for so long as the [Angelis Parties] hold, in aggregate, at least 30% of the Total Share Capital, in respect of the relevant resolution (Special Majority Board Approval).” (Emphasis in original.)

68. As the Angelis Parties, at all relevant times, held at least 30% of the shares in Coverforce, the effect of cl 5.6, when read with cl 5.5 was that, for there to be a “Special Majority Board Approval”, the vote of at least one Pemba director as well as the vote of Mr Angelis was required.

69. The “Special Majority Board Approval” matters set out in Schedule 2 to the 2017 Shareholders Agreement included:

“(2)   (Key Executives): the appointment or termination of Key Executives and the determination of their terms of engagement and any change to the material terms of their engagement by any member of the Group, including remuneration.

(3)   (Financial indebtedness): any decision to incur or increase financial indebtedness of any member of the Group in excess of $50,000 unless the funds obtained for the indebtedness are to be used for activities in the ordinary course of business of the Group.

…

(5)   (Share capital): the alteration of the share capital of any member of the Group, the establishment or alteration of any employee share plan and the issue of Equity Securities under such a plan.

(6)   (Merger): the entry by any member of the Group into any merger, consolidation or amalgamation whether with or into any other company (including any joint venture or partnership arrangement) or the acquisition or any interest in any other company or business or the establishment or entry into of any new business.

…

(8)   (Board Composition): any change to the board composition rules in respect of any member of the Group or the appointment or removal of Non-Executive Directors.

…

(11)   (Loans): any loan of money or provision of financial accommodation in excess of $50,000 by any member of the Group to any person other than by way of deposit with a bank or other institution the normal business of which includes the acceptance of deposits.” (Emphasis in original.)

70. The Resilium Transaction documents executed on 25 March 2019 purported to provide for:

1. the appointment of Mr Kitchin as a “Key Executive” (defined to mean an employee with a salary package in excess of $150,000);

2. the alteration of the share capital of Coverforce;

3. the acquisition by Coverforce of an interest in another company or business (Resilium); and

4. the loan by Coverforce or provision of financial accommodation in excess of $50,000 (the $20 million interest free loan from Coverforce to the Kitchin Parties).

71. No Special Majority Board Approval was ever given to the Resilium Transaction.

72. There is an issue as to whether Special Majority Board Approval was required before Coverforce entered the 25 March 2019 Resilium Transaction documents, and in particular, the Share Purchase Deed, as opposed to completing the transactions contemplated by those documents.

73. This gives rise to a question of construction that I deal with at [517] to [533] below.

74. In reply submissions, the Angelis Parties sought to draw a distinction between the “alteration of share capital” for the purposes of cl 5 of Schedule 2 and the “issue of shares”. It was submitted that the purported issue of shares in Coverforce pursuant to the 25 March 2019 Resilium Transaction documents to the Kitchin Parties “did not alter Pemba’s share capital; the Pemba parties retained exactly the same number of shares of exactly the same type following the share issue”.

75. But that is not the point. Schedule 2 of the 2017 Shareholders Agreement does not speak of alteration to “Pemba’s share capital” but of “the alteration of the share capital of any member of the Group” and thus of Coverforce itself; it being a member of the “Group”. A decision to alter that share capital required Special Majority Board Approval.

Exit

76. Clause 8.2(a) of the 2017 Shareholders Agreement provided that, subject to a number of provisions which are not relevant, “Pemba may Dispose of all or part of its Shares to a Third Party at any time”.

77. Clause 9 dealt with “Exit” which was defined to mean “a Share Sale or IPO”.

78. Clauses 9.1, 9.2 and 9.3 provided:

“9.1   Proposal to Exit

It is the intention of the parties to achieve an Exit which maximises Shareholder value.

9.2   Condition of Exit

At any time after the date of this agreement, Pemba (Selling Shareholders) may give a written notice (Sale Notice) to the Company and the Management Shareholders (Other Shareholders) stating that the Selling Shareholders wish to undertake an Exit.

9.3   Proceeding with an Exit

(a)   Subject to clause 9.4 [not relevant here], upon receipt of a Sale Notice, all Shareholders must each use their best endeavours to implement the Exit within the time period specified by the Selling Shareholders.

(b)   Without limiting clause 9.3(a):

(1)   the Other Shareholders must cooperate with, and provide all reasonable access and assistance required by the potential buyer in relation to the sale of the Shares, including access to due diligence materials and personnel involved in the management of the Group and its Business;

(2)   the Other Shareholders must, at the written request of the Selling Shareholders, sell the same proportion of Shares as the Selling Shareholders as part of the Exit at the same price and on the same terms as the Selling Shareholders; and

(3)   the Other Shareholders must do all things and execute all documents as may be required by the Selling Shareholders to implement the Exit.

(c)   The Shareholders acknowledge that as part of an Exit the Shareholders may be required to give warranties and indemnities to a buyer of the Company and that in such circumstances all Shareholders must give the same warranties and indemnities on the same basis as one another.” (Emphasis in original.)

79. The Drag Right is contained in cl 9.3(b)(2) and (3).

80. An issue arose as to the proper construction of this clause and, in particular, whether the effect of cl 9.1 was to impose on Pemba an obligation to maximise shareholder value. I dealt with that issue as a separate question on 25 November 2019: see Angelis as trustee for the Angelis Family Trust v Pemba Capital Partners Fund I Partnership, LP [2019] NSWSC 1646.

Variation

81. Clause 15.8 dealt with variation and provided:

“(a)   A variation of this agreement must be in writing and signed by the Company and all of the Shareholders other than the Small Shareholders”.

82. “Small Shareholder” was defined to mean a shareholder holding less than 5% of the total share capital of Coverforce. The Small Shareholders were thus, as at the date of the 2017 Shareholders Agreement, Messrs Dutt, Goldsmith and Brown.

The events leading to the 31 October Term Sheet

Mr Angelis identifies Resilium as a potential acquisition

83. Mr Angelis described his identification of Resilium as a potential acquisition target as follows:

“Given my participation in the insurance broking industry for over 24 years, I was aware of competitors and others in the market. I also had developed a network of contacts and associates. I made a point of trying to know and understand developments in the insurance market, and the operations and dealings of competitors. In this way, I became aware of the business and operations of Suncorp Insurance Services Limited and its related entities. I learnt that Suncorp owned and operated ‘Resilium’, an insurance intermediary, through a subsidiary Resilium Pty Ltd… I saw this as a potential target business for Coverforce, and took steps to initiate negotiations with a view to Coverforce acquiring Resilium from Suncorp.”

84. In April 2018, Mr Angelis spoke to a senior executive of a subsidiary of Suncorp about his interest in Resilium. That person suggested that Mr Angelis contact Mr Kitchin.

85. Mr Angelis met with Mr Kitchin in May 2018. They had met earlier in unrelated circumstances.

86. As I have mentioned, at that time Mr Kitchin, together with Mr Hastie and Mr Castanelli, was negotiating a possible MBO of Resilium from Suncorp. That process had started in late 2017.

87. Mr Kitchin had been looking at various options to fund the MBO, including Macquarie Bank.

88. In May 2018, Mr Kitchin told Mr Angelis that he was interested in “exploring how Coverforce could support my bid to acquire Resilium”.

89. Mr Angelis replied:

“We will be able to support you with your bid and as part of that, you would be become a Coverforce shareholder with equity in Coverforce. The value of the Resilium business that you own would equate to approximately 11-12% of the issued shareholding in Coverforce and you would be a Coverforce director. To assist you, we would provide you with the funds required to acquire the business on an interest free basis.”

90. Discussions continued to the point where, at a board meeting on 25 June 2018, Mr Angelis informed his fellow directors of “the Resilium discussions to date”. Mr Angelis told the board:

“Suncorp is getting rid of its shares in Resilium and there is an opportunity for us to acquire Resilium together with Resilium’s CEO, Adrian Kitchin. He is in negotiations with Suncorp. I will keep you informed as this develops”.

91. Mr Angelis said:

“Mr Kitchin has raised some concerns regarding Pemba’s drag rights under the 2017 Shareholders Agreement”.

92. Mr Georgiadis responded:

“[I]n order for Pemba to provide its shareholder approval for the Resilium Transaction, Pemba will require a clear pathway to [e]xit”.

93. Shortly after the meeting, Mr Georgiadis reported to Mr Summerhayes that at the meeting Mr Angelis had reported that Mr Kitchin “has raised some concerns re drag” but that Mr Georgiadis had been “very clear that we’ll need a full drag to make this work”.

94. Mr Angelis accepted in cross-examination that he knew, at this stage, that any transaction whereby Coverforce would acquire Resilium was a matter which Pemba would be interested in and that it was important to keep Pemba directors informed once the negotiations got to the point of an offer. Mr Angelis agreed that although the acquisition of Resilium was embryonic at this time, it was always something that was going to require the approval of the Coverforce board.

95. At this stage, both Mr Summerhayes and Mr Georgiadis saw the acquisition of Resilium as a potentially valuable opportunity, but considered that it needed to be verified by due diligence in due course.

96. By August 2018, Mr Georgiadis, and thus Pemba, knew that any participation by Coverforce in an MBO of Resilium would involve Coverforce making a loan to the Kitchin Parties in consideration for the acquisition.

97. What Mr Summerhayes and Mr Georgiadis did not know with certainty at this point was whether the proposed arrangement with Resilium was so valuable to Coverforce, and thus to Pemba as a shareholder in Coverforce, that its value outweighed the value of the Drag Right.

98. By 23 August 2018, negotiations between Mr Angelis and Mr Kitchin had got to the stage where Mr Angelis sent Mr Kitchin a copy of the 2017 Shareholders Agreement.

99. Shortly after Mr Kitchin received that email, he had a discussion with Mr Angelis in which he said:

“I have read the shareholders agreement. There are things in that agreement that are problematic. I am concerned about the drag rights that enable Pemba to drag shareholders in Coverforce into a sale. That would mean they could drag me into a sale. If we do this deal I do not want to get dragged into an exit and to then have to sell my shares. I do not want to do that as it will create a problem for me with Suncorp as they will not want to see me buying Resilium and then flipping it or someone else flipping it for potentially more money than what Suncorp sold it for. The major attraction for me with Coverforce being involved other than providing the loans and becoming a shareholder [in Coverforce] is to go to an IPO with Resilium as an asset down the track. It is a real opportunity for me, however, if the shareholders agreement remains the way it is, I will do the Resilium deal on my own as I do not want to be forced to sell my shares.”

100. Mr Kitchin asked Mr Angelis whether it would assist if he spoke to Mr Summerhayes and Mr Georgiadis, to which Mr Angelis replied:

“No I will deal with Pemba you deal with Suncorp”.

101. In cross-examination, Mr Angelis agreed that it was his choice not to involve Pemba in the communications with Mr Kitchin from this point in time. In fact, Pemba had no direct contact with any of the Kitchin Parties at any time.

102. On 28 August 2018, Mr Kitchin sent Mr Angelis an email stating that, having reviewed the agreement “without recourse to lawyers”:

“There is a degree of discomfort with the presence of Pemba on the share register. Suncorp and their advisors suspect that following any acquisition of [Resilium], Pemba would force an exit which would be problematic, given it is likely that there will be change of control provisions in any sale agreement

…

Naturally, if these concerns can be resolved, we can look to bring Resilium in to the Coverforce structure”.

103. Mr Angelis replied:

“I can confirm that Pemba is aligned to current managements objective to IPO the business at a time of managements choosing. Pemba’s need to exit the business is therefore satisfied through an IPO”.

104. This comment misstated Pemba’s position. As I have said, at the 25 June 2018 board meeting, Mr Georgiadis had made clear that Pemba would “need a full drag to make this work”; that is, that Pemba’s position at this point was that it would insist on retaining the Drag Right were Resilium to be acquired.

105. A few days later, on 31 August 2018, Mr Kitchin told Mr Angelis that he had “sent the Shareholders Agreement to my legal representatives for their review” but that Suncorp’s advisors, 333 Capital Pty Ltd:

“…have told me that they are aware of Pemba having a significant stake in the Coverforce share registry and have indicated that they and Suncorp are uncomfortable that a forced exit may be imposed on me and by extension Resilium, putting the Suncorp premium potentially at risk.”

The poor relationship between Mr Angelis and the Pemba directors

106. By this time, the relationship between Mr Angelis and the Pemba directors, Mr Summerhayes and Mr Georgiadis, had deteriorated. The poor relationship between these men, and the lack of trust between them, provides some context for later events.

107. For that reason, when recounting the events leading to the execution of the 31 October Term Sheet, the Purported 31 October Shareholders Agreement and the Resilium Transaction documents, I will describe how those relationships deteriorated.

108. An early indication in the evidence of the tension between Mr Angelis and Mr Summerhayes, in particular, is revealed in an email exchange a short time before the communications between Mr Angelis and Mr Kitchin to which I have just referred.

109. On 7 August 2018, Mr Summerhayes suggested that Coverforce engage external consultants to give advice as to “how we should play Resilium”.

110. Mr Angelis took offence at this suggestion.

111. Thus, on 10 August 2018, he wrote to Mr Summerhayes:

“I do not want us in conflict again but your current push to appoint advisors is dangerous for AFT shareholders because it could result in a forced exit that I may not want. Coverforce is an Angelis family business and the Angelis family has the largest shareholding. On this basis I am at the very least entitled to receiving an equal say in how an exit process is structured. I feel we need a transparent discussion to better understand each other’s objectives and agree guidelines for your exit.

My objectives in this regard are:

1.   To regain as much ownership and control of Coverforce as possible;

2.   To secure the future of my children as my successors in the business; and

3.   To grow Coverforce to become the Australian leader in insurance broking.

What I don’t want is for you to drag me into a forced trade sale.”

112. Mr Angelis then made some suggestions as to proposed “enforceable terms” that would protect him against a “forced trade sale”. Nothing came of those suggestions.

113. The email shows that Mr Angelis regarded Coverforce as “an Angelis family business” and was anxious to regain “ownership and control” of it. Mr Angelis clearly wished to bring about a situation where Pemba ceased to be a shareholder in Coverforce. He certainly did not wish to be forced into a trade sale as a result of Pemba exercising its Drag Right, and thus to lose what he saw as being a family business.

114. This led Mr Summerhayes to write to his colleague at Pemba, Mr Magnus Hildingsson:

“Fyi. Such a hard guy to deal with. We could not possibly have been more supportive yet he takes our help as pressure. Incredibly twisted man!”

115. A short time later, Mr Summerhayes wrote to Mr Hildingsson:

“Read his email again…he would NEVER sell HIS family business…

Need to pin our ears back and try for an IPO and hope we can garner trade bids along the way. He said in the meeting he would sell to trade at the right price. He just can’t handle any kind of involvement of a ‘partner’ in moving things forward and he just gets paranoid which is what triggers this kind of email”.

116. A further difficulty arose on 7 September 2018 when Mr Angelis wrote to Mr Tim Flower, a representative of the key investor in the fund management by Pemba, HarbourVest, communicating “my formal offer to purchase your [i.e. Pemba’s] shares in Coverforce”.

117. This communication infuriated Mr Summerhayes.

118. Thus, Mr Summerhayes gave this evidence:

“Q. You regarded that as being inappropriate behaviour?

A. My life is entirely dependent on Mr Flower and other people like that and for that to happen is extremely damaging to my reputation and my standing.

Q. You believe Mr Angelis would appreciate that?

A. Yes.

Q. A fairly basic concept?

A. Yes. Well [it would be like] me calling up Mr Angelis's supplier at Lloyds or something…

Q. Yes. Your state of mind was if Mr Angelis in October 2018 wants to go to talk to Mr Flower, he will surely tell me first?

A. Sure.

Q. Yes, but he kept that from you?

A. Mm-hmm.”

119. Mr Flower told Mr Angelis that he should deal with Pemba as it had “full discretion for the investment into Coverforce”. Mr Flower said that Pemba “continue to have our complete support so please could I encourage you to continue to work with them on an exit strategy that works for all parties”.

120. Mr Angelis replied on 10 September 2018:

“Appreciate your reply but the relationship with Pemba is completely broken and therefore there is little prospect of working with them to achieve anything. It’s an unfortunate situation for all stakeholders including myself”. (Emphasis added.)

121. Mr Flower replied that although he appreciated “that the situation is currently difficult”, it was “in everyone’s interest to find a way to move forward” and that Mr Angelis should work with Mr Summerhayes and Mr Georgiadis “to get a successful exit for everyone”.

122. Nonetheless, Mr Angelis endeavoured to engage in further email negotiations with Mr Flower. Mr Flower insisted that Mr Angelis deal with Mr Summerhayes and Mr Georgiadis.

123. That led Mr Angelis to write to Mr Summerhayes on 13 September 2018:

“Mark, I really want us to part ways. Please seriously consider providing me with a counter offer [to the offer Mr Angelis conveyed to Mr Flower] in a form capable of acceptance.” (Emphasis added.)

124. Mr Summerhayes replied:

“We understand very very clearly what you want.

We won’t be making a counter offer.”

Mr Kitchin decides to go it alone

125. On 21 September 2018, Mr Kitchin sent an email to Mr Angelis stating that he had “decided to proceed with the MBO on a standalone basis” and that he would not be proceeding with any deal with Coverforce.

126. He explained:

“I have reviewed the [2017] Shareholders Agreement again and some of the provisions are in stark contradiction with the legal agreement I will be signing with Suncorp. I have previously outlined my concerns in this regard with you, in particular, the ability of the shareholders of Coverforce [i.e. Pemba] to force me out and compulsorily acquire any shares I might have. This would place me in breach of my obligations with Suncorp under the sale agreement.”

127. Mr Angelis circulated Mr Kitchin’s reply to the other directors of Coverforce later that day.

128. That prompted Mr Neal to write to Mr Summerhayes to ask:

“What happened to this?”

129. The following email exchange then ensued:

“[Mr Summerhayes]:   Are you honestly surprised?

[Mr Neal]:      Yes, I thought this was a done deal.

[Mr Summerhayes]:   And now [Mr Angelis] ask[s] his mate to set it up to position it like it’s our fault. It’s so transparent.

When is he going to realise that combining our strengths and working together we can be just [sic] an unstoppable force. The evidence as to what we have achieved across the board with other ‘partners’ is unequivocal.

Or does he just enjoy treating us like shit?”

130. Mr Summerhayes agreed that his reference to Mr Angelis’s “mate” was a reference to Mr Kitchin and that he was meaning to convey that he believed that Mr Angelis was using Mr Kitchin’s position as stated in his email of 21 September 2018 to advance his own position as against Pemba.

Coverforce board meeting on 24 September 2018

131. The matter was discussed at the Coverforce board meeting on 24 September 2018.

132. Mr Angelis said that he told the board:

“It is in Coverforce’s interest and the shareholders’ interest to proceed with Coverforce participating in the Resilium deal. If we don’t remove [Pemba’s Drag Right] and meet [Mr Kitchin’s] other requirements the deal is dead for Coverforce. If Coverforce is to participate we will need to agree to [Mr Kitchin’s] terms, and that will mean that there will have to be a modified shareholders agreement that satisfies the requirements as stated in his email to me”.

133. The following day, 25 September 2010, Mr Georgiadis sent an email to Mr Angelis setting out what he said was a “summary of the principles” discussed at the 24 September 2018 board meeting including:

“In relation to dragging Resilium shareholders in to an exit, the affirmative vote of both [Mr Angelis] and Pemba would be required. This would not change any of the exit provisions in the current [shareholders agreement] at the Coverforce level”.

134. Mr Angelis agreed that he understood Mr Georgiadis’s suggestion as being a compromise on Pemba’s part, and an attempt by Pemba to achieve a solution. However, Mr Angelis said that he believed that such a proposal would not be acceptable to Mr Kitchin.

135. Hence Mr Angelis’s somewhat terse response:

“This is not what we discussed and won’t work”.

136. This caused Mr Georgiadis to send an email to Mr Summerhayes:

“As expected. He wants the 10x multiple to apply to himself too. Conflating all the issues and using the deal as a wedge for self-gain…frustrating to keep going through this pattern”.

137. Nonetheless, Mr Angelis read out Mr Georgiadis’s email to Mr Kitchin. Mr Kitchin said:

“Both provisions are unacceptable. There is nothing here for us. I am going to go it alone, if that is the position.”

138. Mr Angelis reported to his co-directors:

“I spoke with [Mr Kitchin] this morning and communicated the below. As predicted he did not feel we had anything compelling to offer. He prefers to go it alone.”

139. Nonetheless, Mr Summerhayes wrote to Mr Angelis (and the other directors of Coverforce) on 27 September 2018:

“As discussed at the Board there is appetite to help you explore creative solutions to [Mr Kitchin’s] issues in order for you to secure a deal with him.”

Mr Angelis’s offer to buy out Pemba

140. On 28 September 2018, Mr Angelis sent Mr Summerhayes and Mr Flower an email making a further offer to buy out Pemba.

141. His email read:

“Please refer [to] attached spreadsheet representing my best and very reasonable offer to purchase all Pemba shares for $47 million plus repayment of loans…

I simply want all of you out of my life”. (Emphasis added.)

142. Pemba did not respond to this offer. Mr Summerhayes said in cross-examination that he thought the offer was for significantly less than Pemba’s shares were worth.

The first Suncorp-Kitchin Term Sheet

143. On 10 October 2018, Mr Kitchin wrote to Mr Angelis stating that he was about to sign a non-binding “Term Sheet” with Suncorp. I will call this the “October Suncorp Term Sheet”. It was obviously necessary for Mr Kitchin to come to an arrangement with Suncorp, which owned Resilium, before coming to an arrangement with a prospective funder such as Coverforce. The October Suncorp Term Sheet was a step down that path.

144. Mr Kitchin continued:

“Whilst I am positive that Resilium and Coverforce could derive great benefits/synergies together in the market, as I have indicated to you previously, I would have great difficulty in agreeing to participate in the current Coverforce Shareholders Agreement.

…

I am in the process of structuring my debt and equity position moving imminently into Due Diligence with Suncorp. …

Given your call today, I am prepared to share the Term Sheet with you for your thoughts – naturally, this is confidential and solely to allow you to confirm whether you can provide the requested concessions.

Either way, I urgently need to understand your final position so I can move to finalise this sale.”

145. Mr Kitchin attached a copy of the October Suncorp Term Sheet. The October Suncorp Term Sheet forms an important background to later events. It set out the manner in which the Suncorp and the Kitchin Parties then envisaged the Kitchin Parties’ MBO of Resilium would take place.

146. It described the “Proposed Transaction” as the sale of 100% of the shares in Resilium to the Kitchin Parties for $20 million and “envisaged that further investigation of the Proposed Transaction will progress in two phases”.

147. “Phase 1” included the Kitchin Parties approaching “potential sources of equity and/or debt financing” and, following the identification of “preferred financier” (ultimately this was Coverforce), Suncorp, the Kitchin Parties and that financier seeking “to agree a Stage 2 Term Sheet that details the key terms of a Proposed Transaction”.

148. The document stated that in “Phase 2” the financier would undertake a due diligence of Resilium and that Suncorp, the Kitchin Parties and the financier “will seek to negotiate and execute definitive transaction documentation”.

149. As will be seen, the 31 October Term Sheet also envisaged a further term sheet, which was described as the “Phase 2 Term Sheet”.

150. As I describe below, a further term sheet executed by Suncorp and Mr Kitchin on 12 December 2018 constituted the “Phase 2 Term Sheet”, as contemplated by the 31 October Term Sheet, or the “Stage 2 Term Sheet”, as contemplated by the October Suncorp Term Sheet. For clarity, I will refer to this second term sheet as the “Stage 2 Suncorp Term Sheet”. These matters are relevant to the consequences for Coverforce of its entry into the 31 October Term Sheet. I return to this below.

151. Under the heading “Change of Control”, the October Suncorp Term Sheet provided:

“Suncorp will have express approval rights in the event of a change of control, material recapitalisation or material change in the capital structure or other such event that has the same effect”.

152. Thus, under this document, it was envisaged that Suncorp would have what was in effect a right to veto any change of control of the Resilium business.

153. Mr Georgiadis described this provision as a “show stopper” for Pemba, as it would have negated Pemba’s Drag Right.

154. This position was altered in the Stage 2 Suncorp Term Sheet.

Intervention of Mr Neal

155. On 16 October 2018, Mr Neal, the independent director, wrote to Mr Angelis and Mr Summerhayes:

“I note from today’s paper that Resilium is now on the market officially.

How do we get this transaction back on track?”

156. Mr Summerhayes wrote to Mr Georgiadis:

“This is so transparent. [Mr Angelis] needs a pretext to tell us he’s actually got a deal to do now…”.

157. Mr Georgiadis said of that email:

“My understanding of what Mr Summerhayes was suggesting is that Mr Angelis was working with potentially media and/or Mr Kitchin to create some impetus for the transaction negotiations to continue”.

158. Mr Georgiadis agreed that he thought it was possible that Mr Angelis, who was then in London, was engaging in a strategy “to force a deal with Pemba”.

159. Mr Angelis replied to Mr Neal’s email by forwarding to him Mr Kitchin’s 10 October 2018 email and stating that the email was:

“…self-explanatory as to what is needed to move the deal forward. I have the ability to close the deal if [Mr Kitchin’s] issues could be resolved.

I am currently in London and given communications with [Mr Summerhayes] have broken down anyway I’m happy for you to discuss it with him.”

160. Mr Neal then sent an email to Mr Summerhayes and Mr Georgiadis:

“I am not sure exactly what the matters of contention are that we need to resolve to make this happen, except I know that Suncorp and [Mr] Kitchin are concerned about the leaver conditions and anything that could disrupt the business and flow of premiums to Suncorp.

I also know that [Mr Angelis] wants to get this deal done and set up an exit and he is concerned it is slipping through our hands.”

161. Mr Summerhayes sent an email to Mr Georgiadis:

“So predictable its almost sad. He caused a dispute, tried to buy us out for nothing before setting up a sweetheart exit for all of them. Talk about acting in the best interests of all shareholders… We called it George, well done”.

162. Mr Georgiadis replied:

“Yup they would have written the term sheet together. Shameless. But potentially can make it work for everyone”.

163. Mr Georgiadis said in cross-examination that he understood that what Mr Summerhayes was suggesting was that Mr Angelis and Mr Kitchin were “in cahoots” and were “working together” to manufacture a dispute.

164. Mr Georgiadis agreed that his reply showed that he “thought there was a distinct possibility” that Mr Summerhayes’s conjecture was correct.

165. Mr Georgiadis agreed that he understood Mr Summerhayes’s reference to Mr Angelis trying “to buy us out for nothing” was a reference to the $47 million offer that Mr Angelis had made on 28 September 2018 (see [140] to [141] above).

166. Mr Georgiadis said that his comment “potentially can make it work for everyone” demonstrated that this exchange “wasn’t relevant to how I continued to evaluate the transaction”. I accept that evidence.

Events leading to the 31 October Term Sheet

167. The following day, 17 October 2018, Mr Neal wrote to Mr Angelis:

“What are the next steps to do this deal?

I am thinking that maybe we assume co operation from [Mr Summerhayes] because it is also in his best interests to do this deal.

Do we have a term sheet [for Mr Kitchin] to back him with our funds? I am thinking some paperwork to put in front of [Mr Summerhayes] to get his agreement on.”

168. Mr Neal’s inquiry as to whether “we have a term sheet” prompted Mr Angelis, on 18 October 2018, to instruct Mr Jason van Grieken from Arnold Bloch Leibler (“ABL”) to:

1. prepare a “term sheet between Coverforce Holdings and Adrian Kitchin to support his MBO”; and

2. prepare draft amendments to the 2017 Shareholders Agreement to accommodate an acquisition of Resilium on terms including that the Kitchin Parties become shareholders in Coverforce, Mr Kitchin become a Chief Operating Officer of Coverforce and that the “Exit” provisions be amended so as to accommodate the concerns that Mr Kitchin had outlined about Pemba’s Drag Right.

169. Mr Angelis did not inform Mr Summerhayes or Mr Georgiadis that he had given ABL these instructions.

170. On 22 October 2018, Mr van Grieken sent Mr Angelis a draft term sheet between Coverforce and Mr Kitchin, together with suggested amendments to the 2017 Shareholders Agreement. I will call these documents the “ABL Draft Term Sheet” and the “ABL Draft Shareholders Agreement”.

171. On the same day, Mr Kitchin signed the October Suncorp Term Sheet.

Coverforce board meeting on 29 October 2018

172. Mr Angelis first showed his fellow directors a copy of the ABL Draft Term Sheet and the ABL Draft Shareholders Agreement at a meeting of the directors on 29 October 2018.

173. The minutes of this board meeting cast no light on what was said at the meeting.

174. Mr Angelis said he told the meeting:

“I am circulating a copy of the amendments to the current shareholders agreement and a term sheet, which if agreed, will mean that the Resilium venture is back on track and we can proceed with [Mr] Kitchin and his consortium. Get back to me if there are any difficulties with Coverforce agreeing with [Mr] Kitchin on those terms.”

175. In his affidavit, Mr Georgiadis said that, during the meeting, he inquired as to the progress of the Resilium Transaction and that he said:

“Pemba is open to supporting the transaction subject to Pemba retaining appropriate [e]xit mechanisms under the 2017 Shareholders Agreement”

176. Mr Summerhayes’s recollection of what Mr Georgiadis said was that he said:

“Pemba is generally supportive of continuing to pursue this transaction but any agreement cannot erode Pemba’s exit rights under the 2017 Shareholders Agreement”.

177. Mr Summerhayes said that Mr Angelis said:

“Mr Kitchin requires amendments to the 2017 Shareholders Agreement, in particular for Pemba to give up its exit and drag rights, in order to progress with the Resilium Transaction”.

178. Mr Summerhayes recalled that, at one point, and as a compromise, Mr Angelis suggested the possibility of a “put option” and either he or Mr Georgiadis replied:

“Pemba will not agree to give up its exit and drag rights without a clear alternative pathway which might potentially include a put option but the terms of that would need to discussed and agreed first”.

179. This is the only evidence of what occurred at this meeting. It provides no foundation for the submission made in closing on behalf of the Angelis Parties that the majority of Coverforce’s directors, on this day, approved an issue of shares in Coverforce to Mr Kitchin. Nothing was agreed this day.

180. Shortly after the meeting, Mr Angelis circulated by email a copy of the ABL Draft Term Sheet and ABL Draft Shareholders Agreement to Messrs Summerhayes and Georgiadis.

181. Later on 29 October 2018, Mr Angelis sent Mr Kitchin copies of the same documents as attachments to an email which read: “Attached is the term sheet as amended between us”.

The ABL Draft Term Sheet and the ABL Draft Shareholders Agreement

182. The wording in the ABL Draft Term Sheet was adopted, without relevant alteration, as the wording of the 31 October Term Sheet. I will return to that wording below.

183. The ABL Draft Shareholders Agreement included a note:

“ABL note 1: This mark-up has been prepared on the basis that it will be amended and restated at the time that Adrian Kitchin becomes a shareholder (and that the parties will also sign an amendment and restatement deed)”.

184. The ABL Draft Shareholders Agreement relocated the provisions concerning “Disposal of Shares” from cl 8 to cl 7 and the “Exit” provision from cl 9 to cl 8.

185. The ABL draft proposed a number of changes to the provisions in cl 7 concerning “Dispose of Shares”, none of which is presently relevant.

186. The ABL draft made substantial changes to the “Exit” provisions (now in cl 8).

187. In substance, the changes were to the effect that Pemba’s Drag Right was removed and that any “Exit” by Pemba as a shareholder of Coverforce required the agreement of the Angelis Parties.

30 and 31 October 2018

188. On 30 and 31 October 2018, Mr Georgiadis and Mr Angelis exchanged a series of emails. They also had a number of conversations. There is a critical dispute between Mr Angelis and Mr Georgiadis in respect of one of those conversations.

189. According to Mr Angelis, in that disputed conversation, Mr Georgiadis said that Pemba agreed to proceed with the Resilium Transaction on the terms set out in the 31 October Term Sheet and agreed to the terms of the Purported 31 October Shareholders Agreement.

190. For the reasons I set out below, I am not satisfied that this conversation took place in the terms to which Mr Angelis deposed.

191. I accept Pemba’s submission that, under cross-examination, Mr Angelis revealed that he had difficulty remembering the specific conversations he had with Mr Georgiadis over these two days. He said that he was “not certain which conversations overlap and which ones are different conversations”. When asked about specific conversations he had with Mr Georgiadis for these days, Mr Angelis said that while he had a number of conversations, he could not specifically say which conversation was that in which Mr Georgiadis made the statements I have set out.

192. Critically, my conclusion is that, contrary to Mr Angelis’s evidence, Mr Georgiadis:

1. did not convey Pemba’s unqualified approval to Coverforce proceeding with the Resilium Transaction; and

2. made clear that, although Pemba was content for Mr Angelis to continue discussions with Mr Kitchin, Pemba would not agree to any variation to the 2017 Shareholders Agreement until issues about its exit rights were resolved and, in particular, until Pemba and Mr Angelis agreed on an alternative to Pemba’s Drag Right.

The 30 October 2018 emails and conversations

193. At 10.21 am on 30 October 2018, Mr Georgiadis sent Mr Angelis an email:

“We’ve been through the [ABL Draft Term Sheet and ABL Draft Shareholders Agreement] with the lawyers and don’t see any big issues.

We have no comments on the term sheet. On the [Shareholders Agreement] as you say the main issue was around exit where we’ll need to have some options given we’ll no longer have a drag right.

Our limited comments are included in the attached.”

194. Pemba’s “limited comments” on the ABL Draft Shareholders Agreement included:

1. a note, at the outset of the document that “[t]his document remains subject to further review and comment by Pemba”;

2. a note at the beginning of cl 7, which dealt with “Disposal of Shares”:

“Pemba Note: Given that Pemba is giving up its unilateral drag-along right, Pemba requires a clear pathway to exit. Elements of this could comprise a right of first offer in favour in management, the exit process set out in clause 8 (i.e. with other shareholder approval), and a backstop put option under which [Mr Angelis] would acquire Pemba’s shares”; and

3. a note at the beginning of the clause dealing with “Exit”, cl 8:

“Pemba Note: see note at clause 7”.

195. Shortly after Mr Angelis received Mr Georgiadis’s 10.21 am email, they had a conversation.

196. According to Mr Georgiadis, Mr Angelis said:

“The Resilium Transaction will not progress unless Pemba forfeits its unilateral drag right under the 2017 Shareholders Agreement”.

197. Mr Georgiadis said he replied:

“Pemba need[s] a clear pathway to exit. If we are going to agree to an amendment to the current exit and drag rights, this needs to be replaced with something else. If that something else is a put option in Pemba’s favour, it needs to be on terms which Pemba agrees to. I understand you are keen to progress this deal but we need to resolve this before Pemba can provide its approval as a shareholder to any amendments needed to the Shareholders Agreement for the Resilium Transaction.”

198. Mr Angelis’s recollection of the conversation was as follows:

“Mr Georgiadis:   In order to advance the Resilium deal, Pemba is willing to consider a put option, but only on terms favourable to Pemba.

Mr Angelis:   I am happy to agree to a put option. I just need to consider the valuation behind this option. Further, I would need a call option in return.

The put and call option can form a separate option deed between us. This will ensure that the Resilium deal can move forward without us getting caught up in the drafting of the put and call option.

Mr Georgiadis:   Let me get back to you.”

199. To the extent that there is any difference in Mr Angelis’s recollection of this conversation and that of Mr Georgiadis, I find the best guide of what was said to be what Mr Georgiadis set out in an email he sent to Mr Summerhayes shortly after the conversation. I find that in this, and in later emails, Mr Georgiadis had no reason to misreport to Mr Summerhayes what had been said between him and Mr Angelis.

200. In any event, assuming the correctness of Mr Angelis’s recollection of what was said in this conversation, there was no final agreement on an alternative to Pemba’s Drag Right. All that can be said is that there was some discussion about the possibility of a put and call option between Pemba and Mr Angelis.

201. That is confirmed in Mr Georgiadis’s email to Mr Summerhayes. At 11.58 am on 30 October 2018, Mr Georgiadis sent an email to Mr Summerhayes following his conversation with Mr Angelis. The email reads:

“[Mr Angelis] is happy with everything except the put option.

He’s open to it after a 3 year period but wants to be protected if he doesn’t have the capital and will only agree if:

1.   He has a call option too – though this can be at say a 20% premium to FMV while our put can be at a 20% discount to FMV[;]

2.   It only comes in to effect after we try to sell to the market (this protects both of us).

I think this isn’t a bad outcome. Just need to feel confident on the valuation point. He initially suggested 10% premium / discount but 20% is safer.

Thoughts?

From a process point of view he said if we remove the put (which can still form a side agreement between us) or include the concept above, he’ll be ok to move forward with Resilium without full drafting.

Feel free to call if helpful.”

202. The email confirms that, as Mr Georgiadis deposed, Mr Georgiadis had suggested the possibility of a put option between Pemba and Mr Angelis as an alternative to Pemba’s Drag Right and that Mr Angelis responded by suggesting that, were Pemba to have a put option, he would wish to have a call option to be exercised after three years and only if Pemba tried to sell its shares to the market. The email also records, as Mr Angelis had deposed, that Mr Angelis suggested that any put and call option could be recorded in a “side agreement”.

203. Following that discussion, Mr Georgiadis sent Mr Angelis a further email at 1.40 pm suggesting an expanded “note” to be placed at the beginning of cl 7 of the Shareholders Agreement.

204. He said:

“Further to our most recent discussion, at this point you could include the following wording in [cl 7] for now. We can then work with the lawyers to provide a full mark-up on these points.

Pemba Note: Given that Pemba is giving up its unilateral drag-along right, Pemba requires a clear pathway to exit.

This can be achieved through the following:

●   ROFO: A right of first offer in favour of management under which management has the opportunity to acquire Pemba’s shares at a price set by Pemba, and if all of Pemba’s shares are not sold as part of that process, then Pemba is free to sell all of its shares to a third party at a price no less than that offered to management;

●   Exit: The exit process set out in clause 8; and

●   Put option: If a Pemba exit has not eventuated through the above means within an agreed period of time, then Pemba has the right to require that [Mr] Angelis (or his nominee) acquires its shares. [Mr] Angelis will have a reciprocal right to acquire Pemba’s shares. The process and valuation to be applied is to be agreed between [Mr] Angelis and Pemba.” (Emphasis in original.)

205. As indicated by my parenthetical note “[cl 7]” in the preceding paragraph, Mr Georgiadis’s reference to including the wording “in that section for now” was a reference to cl 7 of the ABL Draft Shareholders Agreement, under the heading “Disposal of Shares” at which point the “Pemba Note” referred to at [194(b)] above was in the current draft.

206. Mr Angelis agreed that he understood from this email that he could put Mr Georgiadis’s proposed wording into the draft as a “Pemba Note” and that Mr Georgiadis was suggesting that Pemba, Coverforce and anyone else who needed to be involved could “work with the lawyers to provide a full mark-up” on the three dot points set out in Mr Georgiadis’s “Pemba Note”.

207. Mr Angelis also agreed that, at this time, he understood Mr Georgiadis required that the “Pemba Note” be included in the version of the Shareholders Agreement to be provided to Mr Kitchin.

208. At some time after Mr Georgiadis sent the email to Mr Angelis at 1.40 pm, they had a further conversation. Mr Georgiadis said to Mr Angelis:

“Pemba will not agree to amendments to the Shareholders Agreement, without there being further negotiation and further consideration by [Mr Summerhayes] and I, including us seeking legal advice. This was the process we undertook the last time that amendments were made to the Shareholders Agreement in 2017.”

209. Again, Mr Angelis had a different recollection of the conversation. He described it as follows:

“Mr Georgiadis:   Pemba agrees to you having a call option.

We should define what fair market value means in terms of the put and call option.

Mr Angelis:   We can agree on the specific terms of the put and call option once the Resilium venture is completed. I want to do some calculations around the valuation multiple and the discounted valuation multiple. I will do some calculations around this and get back to you.

Mr Georgiadis:   Ok.”

210. I do not accept that Mr Angelis has an actual recollection of a conversation in these terms. He could not recall it at all until prompted in cross-examination.

211. I do not accept that Mr Angelis said to Mr Georgiadis that “we can agree on the specific terms of the put and call option once the Resilium venture is completed”. If that had been said, it is likely that Mr Georgiadis would have referred to it in the account he gave to Mr Summerhayes in the email he sent following this conversation.

212. In that email, sent at 2.01 pm, Mr Georgiadis said:

“Gosh he’s difficult. Lots of time on the phone today. He wants the mutual option to be available from 12 months in based on 20% premium/discount.

He also wants it to be available at any time even if we haven’t tried to sell our shares independently.

I’ve copied the FMV process below. As we know, independent valuations can vary up and down 20% or more depending on which way the wind blows. But the 20% premium should protect us. It’s hard to see anyone valuing Coverforce less than say 9x at the moment, so 20% premium would be almost 11x which presumably we’d be happy with. I think the problem with the call if we haven’t tried to sell our shares already, is that he could exercise the call going in to an exit or e.g. a merger with AUB and take all the upside…

We could go back agreeing to the 12 months but not agreeing to it being available until we’ve tried to sell our shares?

Did you want to get involved in the discussion to help close it out? Other option is to tell him this needs IC [investment committee] approval and defer the discussion – but I think that might actually work against us as he’ll insist if we want to do the deal there’s either no put option or the option works on his terms. He seems eager to resolve this to move Resilium forward.”

213. Mr Georgiadis included in his email a copy of the provisions in the 2017 Shareholders Agreement dealing with “Fair Market Value”.

214. As Pemba submitted, it is clear from this email that, whilst there was discussion between Mr Angelis and Mr Georgiadis about a proposed put and call option, there was no agreement as to its terms at this point.

215. The email also points strongly to the conclusion that there was no agreement between Mr Georgiadis and Mr Angelis that the terms of the put and call option could be agreed “once the Resilium venture is completed”.

216. Mr Georgiadis does refer, in his email, to the possibility of “defer[ring] the discussion” about the put and call option on the basis that it would need investment committee approval. However, Mr Georgiadis’s musings that this “might actually work against us” suggests that this was a matter which was not discussed with Mr Angelis.

217. Mr Georgiadis denied in cross-examination that he told Mr Angelis that final agreement about the terms of any put and call option could be deferred until the Resilium Transaction had completed.

218. Mr Georgiadis said that, from his point of view, the put and call option had to be agreed in advance of entering into the Resilium Transaction documents and that there was “no point deferring a negotiation about something so fundamental until it’s too late”.

219. I accept Mr Georgiadis’s evidence. It is consistent with what Pemba had been saying all along about the importance to it of its Drag Right.

220. It is also consistent with an email Mr Georgiadis sent Mr Summerhayes at 11.18 am on the following day, in which he reported that Mr Angelis “fully understands he has to reach agreement with us before we’ll sign up to the [Resilium] transaction”. I will return to that email below.

221. Mr Angelis said that, later in the afternoon, he had the conversation with Mr Georgiadis to which I referred at [188] above and on which, in substance, Mr Angelis’s case against Pemba depends.

222. Mr Angelis deposed to this conversation as follows:

“Mr Georgiadis:   Pemba agrees to proceed with the Resilium Venture on the terms set out in the term sheet.

Pemba also agrees to a modified shareholders agreement which will include a right of first offer, exit process and put and call option.

We have not, as yet, agreed on the terms of the put and call option but that doesn’t matter for the moment, we can agree on the terms of this option on the completion of the Resilium venture.

[Mr Angelis]:   I agree. I think any put and call option should include that:

(A)   I be granted a call option that can be exercised from 1 July 2019, at a call option exercise price of 10 times EBITDA less debt; and

(B)   Pemba be granted a put option that can be exercised from 1 July 2019, at a call [sic: put] option exercise price of 8 times EBITDA less debt.

Mr Georgiadis:   That sounds ok.”

223. Mr Georgiadis denied that any such conversation occurred.

224. Mr Georgiadis said that during this conversation he said:

“Pemba will need a clear pathway to exit. We need to agree on what that is and what the valuation is going to be before we go ahead and amend the Shareholders Agreement. I know you are keen to move this quickly and it is not necessary for us to agree the changes to the [Shareholders Agreement] right now for you to move the deal forward. However, ultimately Pemba will need to agree to any amendments to the Shareholders Agreement before the deal goes ahead”.

225. In his oral evidence, Mr Angelis maintained that this was the conversation “that finally gets the deal done”.

226. But Mr Angelis’s evidence continued:

“Q. Right. So when you say, "finally gets the deal done" you've already accepted on a number of occasions that you've never agreed the price; correct?

A. To the put and call?

Q. Yes.

A. That's correct.

Q. So in terms of getting the deal done, there's no universe is there in which you say that there was an agreement between you and Pemba on what the price of the put and the call would be to this day?

A. There was - I agree there's an agreement to agree on the put and the call but it's a separate agreement to the term sheet.”

227. Mr Angelis thus accepted that he came to no agreement with Mr Georgiadis about the price of any put and call option between him and Pemba. He asserted there was, instead, “an agreement to agree”.

228. For the reasons that follow, I do not accept that matters even got this far (see my conclusion at [494] below).

229. Later in the afternoon, at 4 pm, Mr Georgiadis sent a further email to Mr Summerhayes:

“He called a few times then I got back to him.

He’s obviously wanting to get it all wrapped up quickly. I’m pushing that he doesn’t need this piece to move the deal forward. He’s saying he doesn’t want to highlight any shareholder issues.

The problem is he sees our drag as already practically gone, so doesn’t want to accept a put.

He’s backed down on the short term call option and willing to do a 3 yr put/call structure but only if the valuation is fixed so he knows he can fund. He’s suggested a 8x put and 12x call. Problem for us is he may wait out 3 years and try making us put an 8x. Not a terrible outcome but not great.

We could get protection on the call with a value true up if he realises value after say 6 or 12 months following the call, but for this to be in place he wants to be able to call after 12 months.

We could just drop the whole option structure if we feel comfortable with the rights around unilateral sale of our shares only. We should make it clear that the obligation on management to help sell the shares (which currently applies to whole of company exit) should apply here.

He also suggested a leveraged recap and buying us out. He proposed doing this incrementally which I don’t think would work, but this could be a chance to lay down a valuation threshold under which we’d do this. It is basically the same thing as giving me a call but he can use the company balance sheet.”

230. Mr Georgiadis said that his reference to the “piece” that he was “pushing” not be necessary “to move the deal forward” was to a detailed resolution of the terms of any put and call option between Mr Angelis and Pemba. That is consistent with his recollection of his conversation with Mr Angelis set out at [224] above.

587. Second, the Kitchin Parties accept that the charge that they have granted Coverforce over their shares in BidCo remains in force.

588. Third, the Management Services Agreement between OpCo and the Resilium companies remains unaffected and could continue for so long as the parties wish it to. The only thing that would change is the underlying ownership of OpCo. But that has no bearing on the fact and operation of the Management Services Agreement itself.

589. Fourth, the Suncorp Call Option Deed would remain in operation. The subject of the Suncorp Call Option is BidCo’s shareholding in Resilium. BidCo, which remains owned by the Kitchin Parties, is a party to the Suncorp Call Option and will remain bound by its terms to sell its Resilium shares back to Suncorp if the nominated events enlivening Suncorp’s entitlement to call occur during the option period. That will be a matter between BidCo and Suncorp.

590. The Suncorp Call Option Deed imposes an obligation on Coverforce to pay to Suncorp $8 million “where an IPO” occurs at a future date. On the face of the Suncorp Call Option Deed, that obligation enures whether or not Coverforce owns the Resilium business. If the Kitchin Parties elect to exercise their rights under cl 5.6 of the Share Purchase Deed, that will be a matter between Coverforce and Suncorp. It is not an answer to the Kitchin Parties’ entitlement to exercise their cl 5.6 right. It is a consequence of Coverforce’s failure to fulfil its obligations under the Share Purchase Deed.

The Coverforce Call Option Deed

593. The Coverforce Call Option Deed, under which Coverforce has the right to require the Kitchin Parties to sell to their shares in BidCo would, in theory, remain in operation.

594. However, as I have found that Coverforce has not issued shares in itself to the Kitchin Parties, the question arises as to whether, as the Kitchin Parties contend, Coverforce should be restrained from exercising any rights under its call option deed by reason of an implied term that those rights could only be exercised if Coverforce had in fact issued shares in itself to the Kitchin Parties.

595. In that regard, the Angelis Parties submitted that, on its face, the Coverforce Call Option Deed is a self-contained document into which it is not necessary to imply any term in order to give it business efficacy.

596. In my opinion, that submission ignores the reality that the Coverforce Call Option Deed was one of a suite of documents executed on 25 March 2019 which, together, purported to effect the Resilium Transaction.

597. It is unthinkable to suppose that the parties to the Coverforce Call Option intended that if Coverforce did not issue to the Kitchin Parties the shares contemplated by the Share Purchase Deed, that Coverforce could nonetheless call for the BidCo shares.

598. In my opinion, for reasons of business efficacy and because it is so obvious it goes without saying, this is what the parties must have intended. Thus it is an implied term of the Coverforce Call Option Deed that it could not be exercised absent the share issue called for by the Share Purchase Deed.

599. In any event, the point is moot because, as I have said, in the alternative, the Kitchin Parties have a claim against Coverforce for misleading or deceptive conduct arising from its representation that it had authority to enter the Share Purchase Deed and thereby issue shares in itself to the Kitchin Parties (see [560]ff above). To the extent necessary, I propose to make an order under s 237 of the Australian Consumer Law restraining Coverforce from exercising its call option.

“Reversing the actions” – other aspects

600. In the course of the hearing, the Angelis Parties contended that insurmountable practical difficulties would arise were I to accede to the Kitchin Parties’ submission that the transaction be “reversed” pursuant to cl 5.6 of the Share Purchase Deed. I have mentioned that references were made to the alleged impossibility of “unscrambling the egg”.

601. However, the Angelis Parties did not respond to or dispute the following submissions made on behalf of the Kitchin Parties, other than to make the general submission that, assuming they were entitled to relief, the Kitchin Parties should be confined to a claim for damages.

602. The Kitchin Parties pointed out that the fact that there may be practical difficulties associated with “reversing” the Resilium Transaction is not itself an answer to the claim. By cl 5.6 of the Share Purchase Deed, Coverforce gave the Kitchin Parties a contractual right to have the transaction “reversed” if, relevantly, Coverforce did not issue shares in itself to the Kitchin Parties. Coverforce must be taken to have understood that there may be practical difficulties associated with that exercise.

603. In any event, I am not satisfied that transition of the ultimate ownership of Resilium back to the Kitchin Parties would be unduly difficult or burdensome on Coverforce.

604. As was pointed out on behalf of the Kitchin Parties:

1. the Resilium companies operate with their own AFSL; they do not need, and do not operate under, the Coverforce licenses;

2. the Resilium companies operate with their own employees, many of whom worked for Resilium when it was owned by Suncorp;

3. the Resilium companies have their own customers and operating authorised representatives;

4. the Resilium companies and OpCo each have their own bank accounts;

5. the Resilium companies and OpCo each have their own financial and management accounts;

6. the Resilium companies and OpCo each have their own files and records; and

7. if, and to the extent that, those files and records are housed within the electronic data storage systems of Coverforce, it is a matter of extracting that data from those systems and importing it into the system is that the Kitchin Parties will establish, which is what occurred when the Resilium business was sold by Suncorp.

605. The fact that the Kitchin Parties will be required to establish premises for the business and incur other costs is a matter for them.

606. The Angelis Parties adduced evidence from Mr Dutt concerning the costs Coverforce incurred in contemplation of completion of the Resilium Transaction.

607. To the extent that those costs would not have been incurred in any event, and will now be lost if the Kitchin Parties exercise their right to “reverse” the Resilium Transaction, that is a result of Coverforce’s failure to perform its obligations under the Share Purchase Deed; in particular, its failure to issue shares in itself to the Kitchin Parties. That share issue was a fundamental aspect of the bargain to which the Kitchin Parties and Coverforce agreed.

608. If the Kitchin Parties elect to exercise their rights under cl 5.6, I will hear submissions as to the precise form of the orders that should be made.

Conclusions as to the rights of the Kitchin Parties

609. The Kitchin Parties may enforce the Share Purchase Deed by exercising their rights under cl 5.6 or by seeking damages from Coverforce.

What is the consequence of these findings for the sale to AUB?

610. It follows from these findings that there was no impediment to the sale by Pemba to AUB of its shares in Coverforce and, by reason of the Drag Right, the shares of the Angelis Parties.

611. Whether such a sale would have carried with it the Resilium business would have depended on the Kitchin Parties’ election.

612. Pemba’s entitlement to compel production of due diligence materials in respect of the Resilium business would also have depended on that election.

613. These points may now be moot in view of AUB’s market announcement.

614. As I have set out at [78] above, cl 9.3 provides that on receipt of a “Sale Notice” (Pemba sent such a notice on 28 May 2019 – see [449] above):

1. “all Shareholders” were obliged to “use their best endeavours to implement” the share sale (cl 9.3(a)); and

2. the “Other Shareholders”, that is the Angelis Parties, were obliged to “cooperate with, and provide all reasonable access and assistance required by the potential buyer” including “access to due diligence materials and personnel involved in the management of the Group and its Business” (cl 9.3(b)(1)).

615. An issue arose in this context about the nature of the obligations of the Angelis Parties. AUB’s announcement yesterday may also render this question moot. However, as the parties addressed it, I shall deal with it here.

616. The Angelis Parties submitted that, as “Other Shareholders” they did not have an absolute obligation to provide AUB with access to due diligence materials by reason of cl 3.3 of the 2017 Shareholders Agreement which is in the following terms:

“3.3   Exercise of powers

Each Shareholder, acknowledging its commitment to the success of the Business, agrees to take all reasonable steps which are within its power and are necessary to procure that:

(a)   its voting rights as a Shareholder; and

(b)   the voting rights of Directors nominated by it to the Board,

are exercised in a manner, and that it and they otherwise act, so as to ensure that:

(1)   the Company acts in conformity with this agreement;

(2)   the Directors nominated by it do not act inconsistently with this agreement; and

(3)   the Company, conducts the Business in a proper and efficient manner which maximises its profitability, and the value of the Company, in accordance with the Business Plan.”

617. The Angelis Parties submitted:

“The obligation in clause 3.3 is not an absolute obligation of the ‘Shareholders’ (as defined); rather, it requires that each ‘Shareholder’ take ‘all reasonable steps … within its power’. The effect of sub-clause 3.3(3) shows that there is a qualifier to the obligation in sub-clauses 3.3(1) and (2) – unsurprisingly the best interests of the company are not to be ignored and necessarily qualify the obligation, as is given effect to by the reference to ‘reasonable steps’. Put another way, an action which is objectively likely to harm the company is not a reasonable step.

AUB is one of Coverforce’s major competitors in the insurance brokerage market. In circumstances where a majority of Coverforce’s directors considered that granting AUB access to due diligence materials would not be in the best interests of Coverforce, and that doing so may constitute a breach of the fiduciary obligations owed by those directors to Coverforce, requiring the ‘Shareholders’ to compel those directors to facilitate due diligence plainly is not a reasonable step within the power of the relevant ‘Shareholders’.”

618. I do not accept that submission.

619. The Angelis Parties, as “Other Shareholders”, have an express obligation under cl 9.3(1)(b) to use their best endeavours to implement an Exit within the time period specified by Pemba. As Pemba submitted, that obligation is given content by cl 9.3(1)(b) and expressly includes the obligation to provide access to “due diligence materials” and “personnel”.

620. Clause 9.3(b) sets out, without limitation, the scope of the obligation in cl 9.3(a).

621. In any event, by cl 6.2(f) of the 2017 Shareholders Agreement, Coverforce itself is obliged:

“on request promptly [to] provide each…Shareholder with copies of the books and records of Coverforce…and such other information as they may request as to any matter relating to the Business or financial position of the Company”.

622. I do not see the broad statements in cl 3.3 of the 2017 Shareholders Agreement qualifying the specific obligations imposed on the Angelis Parties by cll 9.3(a) and 9.3(b)(1) and on Coverforce by cl 6.2(f).

623. Clause 3.3, relevantly, obliges each shareholder “to take all reasonable steps” to “otherwise act” to ensure that Coverforce conducts its business in a proper and efficient manner which maximises its profit and efficient manner which maximises its profitability. I do not see that that obligation can affect the very precise obligations imposed by the clauses to which I have referred.

The Kitchin Parties’ misleading or deceptive conduct claims

Against the Angelis Parties and Coverforce

624. I have dealt with the Kitchin Parties’ claims that Coverforce engaged in misleading or deceptive conduct by representing that Coverforce was authorised to enter the 25 March 2019 Resilium Transaction documents (see [557] to [567] above).

625. I will invite submissions from the Kitchin Parties as to what, if any, further findings or orders should be made.

Against Pemba

626. The Kitchin Parties allege that, on and after 31 October 2018, by silence, Pemba represented to them that it agreed:

1. to the issue of Coverforce shares to the Kitchin Parties;

2. to enter into the Purported 31 October Shareholders Agreement following completion of the Resilium Transaction; and

3. that it would not exercise its Drag Right under the 2017 Shareholders Agreement or any exit right inconsistently with the terms of the Purported 31 October Shareholders Agreement.

627. Silence can amount to misleading or deceptive conduct. In Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32, Black CJ said:

“Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive.”

628. Silence may constitute misleading or deceptive conduct if there is a reasonable expectation that the silence would be broken. This was the analysis in Rafferty v Madgwicks (2012) 203 FCR 1; [2012] FCAFC 37, where the Full Court of the Federal Court said:

“The authorities recognise that the circumstances in which silence may support a finding of misleading or deceptive conduct are not properly subject to any unifying principle. Nonetheless, the authorities also acknowledge that, if the circumstances of a particular case would give rise to a reasonable expectation that, if a fact existed, it would be disclosed, then the failure to disclose that fact may give rise to an inference that the fact does not exist. In this situation (i.e., where there is such a reasonable expectation), a failure to disclose the existence of that fact could constitute misleading and deceptive conduct. See, e.g., Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) 46-054 at 53,195; Demagogue v Ramensky at 32, 41; Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 at 114…; Warner v Elders Rural Finance Ltd (1993) 41 FCR 399 at 405; and Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd (1997) 69 SASR 288 at 296-298.

Inherent in this analysis is the proposition that the existence of a reasonable expectation depends on all the relevant circumstances of the case, including the relationships between the participants in the relevant conduct.” (At [278] and [279] (Kenny, Stone and Logan JJ).)

629. The Kitchin Parties point to:

1. the email sent by Coverforce to Mr Kitchin on 31 October 2018 attaching the 31 October Term Sheet and the Purported 31 October Shareholders Agreement; and

2. the facts that:

1. Mr Summerhayes and Mr Georgiadis were copied in on that email;

2. the notation to cl 7 of the Purported 31 October Shareholders Agreement referred the proposed amendment of that clause to make provision for a right of first offer in favour of management and the exit process in cl 8 but did not refer to a possible put and call option between Mr Angelis and Pemba;

3. Pemba would not agree to surrender its Drag Right unless the Angelis Parties agreed to an alternative exit pathway satisfactory to Pemba;

4. although there was no agreement between Mr Angelis and Pemba about an alternative to Pemba’s Drag Right, Mr Georgiadis agreed with Mr Angelis’s suggestion that the “option piece” be removed from the form of shareholders agreement to be sent to Mr Kitchin so as not to “highlight any shareholder issues” to Mr Kitchin (see [238]) above); and

5. the fact that negotiations between Mr Angelis and Mr Georgiadis as to the terms of an alternative to Pemba’s Drag Right, and in particular as to the terms of a put and call option were ongoing.

630. In those circumstances, it was submitted on behalf of the Kitchin Parties that “Mr Kitchin was led to believe…that Coverforce had committed itself to moving forward as his financier on terms set out in the [31 October Term Sheet], including with respect to the issue of shares in Coverforce to him, and that Pemba had approved this and, in the process, agreed to give up its drag rights”.

631. One answer that both Mr Summerhayes and Mr Georgiadis gave to this complaint was that they thought that Mr Angelis would convey to Mr Kitchin the true state of the negotiations with Pemba; namely that there was discussion about the possibility of there being put and call option as a substitute for Pemba’s Drag Right, but that such discussions were ongoing for no agreement was yet reached.

632. Thus Mr Georgiadis said that:

“I thought that consistent with the pattern of dealing to this point, that Mr Angelis would keep Mr Kitchin up to date with the status of negotiations with Pemba.”

And that:

“I expected that [Mr Angelis] would at least let Mr Kitchin know that the issue of Pemba’s exit rights was still alive”.

633. Similarly, Mr Summerhayes said:

“I would have thought Mr Angelis would say, ‘we’ve got some things that we’ve got to resolve, but…that shouldn’t concern you’.”

634. As I have set out above, by the end of October 2018, the relationship between Mr Angelis, Mr Summerhayes and Mr Georgiadis was very poor.

635. In that context, Mr Summerhayes gave this evidence:

“Q. You had no confidence or trust in Mr Angelis at this time, did you?

A. In his dealings with Mr Kitchin he'd been very clear and communicating to this point opposition. He actually allowed the deal to fall over back on 26 September because he relayed our position very clearly.

Q. He was someone to your understanding who was prepared to act out of self-interest. Correct?

A. In relation to our shareholding.

Q. He was motivated by self-interest, is your understanding?

A. In relation to our shareholding.

Q. You knew he was determined to proceed with the Resilium deal?

A. Yes.

Q. You told me he had a history of withholding information from you?

A. From us.

Q. Including information that you regarded as important?

A. Yes.

Q. Doing so in circumstances where you expected he would have known full well that you would want to know about that information?

A. Yes.

Q. Yes. You had absolutely no confidence that Mr Angelis would tell Mr Kitchin the truth about the put and call option, did you?

A. I think there are two different things here. One is his relationship with us and the dispute we were having in 2017 and the difficult relationship we have between us and the way he acted in that relationship. This is a different thing. It's in relation to a new business partner who he was looking to be in business with. He proved on 26 September to us that he was willing to be truthful about what our position was to the point where he'd let the deal fall over. It reasonable to conclude that he would have, you know, verbally highlighted that, ‘There are some things we need to progress as shareholders but I've got them in hand.’ That's consistent with not wanting to highlight shareholder issues as in issues that are unresolvable. These are issues that can be solved.”

636. Mr Summerhayes’s reference to what occurred on “26 September” was a reference to Mr Angelis’s accurate account to Mr Kitchin of the outcome of the 24 September 2018 board meeting (see [137] to [138] above).

637. Mr Summerhayes was, in this evidence, seeking to draw a distinction between Mr Angelis’s very poor relationship with Pemba and how Mr Summerhayes expected Mr Angelis would deal with a “new business partner” with whom he was seeking to establish a new business relationship.

638. In the last passage of the evidence I have set out, Mr Summerhayes suggested that a statement by Mr Angelis to Mr Kitchin to the effect that there were “things we need to progress as shareholders but I’ve got them in hand” would be consistent with Mr Angelis’s stated position that he did not wish to “highlight” to Mr Kitchin the “shareholder issues” with Pemba.

636. I do not agree.

637. It must have been obvious to both Mr Summerhayes and Mr Georgiadis that Mr Angelis would not say anything to Mr Kitchin inconsistent with what was conveyed in the 31 October 2018 email.

638. That email, and its attachments, conveyed the message to Mr Kitchin that Pemba had agreed to give up its Drag Right and had agreed to accept, in lieu of the Drag Right, the two matters the subject of the notation in cl 7.

639. In those circumstances, Mr Kitchin had a reasonable expectation that if, as was the fact, Mr Summerhayes and Mr Georgiadis had a different understanding they would say so.

640. In my opinion it was, for these reasons, misleading or deceptive for Mr Summerhayes and Mr Georgiadis to remain silent.

641. It was submitted on half of Pemba that, in any event, the terms of Mr Kitchin’s 12 December 2018 email (see [316] to [317] above) showed that Mr Kitchin was not misled by such silence as he was still then seeking confirmation that there be “resolution to the issues raised” in his emails concerning Pemba’s Drag Right.

642. But there is an anterior question arising from the evidence that Mr Kitchin gave about this matter in his affidavit where he said:

“I was not told, and did not understand, that Pemba’s agreement and approval to the [31 October] Term Sheet was subject to it first reaching some further agreement with Mr Angelis about what else Pemba would receive in lieu of their drag right, or that Pemba was reserving for itself the right to completely change its position about the [31 October] Term Sheet and refuse to agree to surrender their drag right unless they obtained other concessions from Mr Angelis.

If I had been told by Pemba or Mr Angelis that its agreement and approval was subject to this, I would have refused to proceed to purchase Resilium with Coverforce. I would have turned my attention to securing finance for the deal from other sources…I did not take these opportunities, because I believed that Pemba, Mr Angelis and Coverforce were committed to the position set out in the [31 October] Term Sheet.”

646. Mr Kitchin’s point here was that, had he understood that arrangements between Mr Angelis and Pemba concerning Pemba’s Drag Right were not yet concluded, he would not have proceeded further with Coverforce.

647. This evidence was not directly challenged and is, in any event, credible. It is consistent with the statements that Mr Kitchin had, on number of occasions, made prior to 31 October 2018 concerning his preparedness to proceed with the MBO of Resilium without any involvement from Coverforce.

648. I will seek submissions from the Kitchin Parties as to what further relief, over and above that which will flow from my earlier findings, they contend follows from these findings.

Damages

649. On 27 September 2019, Hammerschlag J directed the parties “to agree a single expert to provide a report on damages”.

650. On 2 October 2019, the parties informed his Honour that they had agreed to appoint Dr Hung Chu of Lonergan Edwards & Associates Ltd.

651. Dr Chu produced a report dated 2 December 2019 expressing opinions about, speaking broadly, the value of Coverforce shares as at 31 May 2019 and the value of the rights in respect of the Resilium business that Coverforce purportedly acquired on that date.

652. Counsel for each of the Angelis Parties, Pemba, and the Kitchin Parties cross-examined Dr Chu in relation to his report on 4 and 5 December 2019.

653. I have not yet received submissions from the parties in relation to Dr Chu’s evidence or the opinions expressed by him in his report.

654. On 5 December 2019, I informed the parties that I proposed to deliver my reasons on all questions other than those arising from Dr Chu’s evidence.

655. Whether further consideration of Dr Chu’s evidence will be required may depend on whether, in the light of these reasons, the Kitchin Parties make an election to exercise their rights under cl 5.6 of the Share Purchase Deed, rather than seek damages from Coverforce.

Conclusion

656. I invite the parties to confer and agree on the orders necessary to give effect to these reasons and as to the directions that should be made to progress the matter.

**********

Decision last updated: 10 December 2019