Digital Cinema Network Pty Ltd v Omnilab Media Pty Ltd (No 2)
[2011] FCA 509
•16 May 2011
FEDERAL COURT OF AUSTRALIA
Digital Cinema Network Pty Ltd v Omnilab Media Pty Limited (No 2)
[2011] FCA 509
Citation: Digital Cinema Network Pty Ltd v Omnilab Media Pty Limited (No 2) [2011] FCA 509 Parties: DIGITAL CINEMA NETWORK PTY LTD (ACN 132 404 481) v OMNILAB MEDIA PTY LIMITED (ACN 002 585 391), OMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855) and MICHAEL GEOFFREY SMITH; OMNILAB MEDIA PTY LIMITED (ACN 002 585 391) and OMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855); MICHAEL GEOFFREY SMITH File number: VID 813 of 2010 Judge: GORDON J Date of judgment: 16 May 2011 Catchwords: CORPORATIONS – directors – fiduciary and statutory directors’ duties – whether company director breached his duties by substantially aiding a competitor – secret commissions – accessorial liability – relevant principles – whether first and second respondents were knowingly involved in the third respondent’s contraventions of the Corporations Act 2001 (Cth) – whether first and second respondents knowingly assisted the third respondent with his breaches of fiduciary duties – whether ‘lost opportunity’ relevant – Corporations Act 2001 (Cth) ss 180, 181, 182, 183
TRADE PRACTICES – misleading or deceptive conduct – incorporation of new corporate entity – whether name of new corporate entity is misleading or deceptive – mere ‘confusion’ or ‘wonderment’ insufficient – Trade Practices Act 1974 (Cth) ss 52, 82
RELIEF – injunction
Legislation: Competition and Consumer Act 2010 (Cth)
Corporations Act 2001 (Cth)
Trade Practices Act 1974 (Cth)
Wrongs Act 1958 (Vic)Cases cited: ASIC v Adler (2002) 168 FLR 253
ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 23 ACLC 929
ASIC v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553
ASIC v Maxwell (2006) 24 ACLC 1308
ASIC v Somerville (2009) 259 ALR 574
Baden Delavaux v Societe General [1993] 1 WLR 509
Barnes v Addy (1874) LR 9 Ch App 244
Beach Petroleum NL v Johnson (1993) 115 ALR 411
Biala Pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785
Boardman v Phipps [1967] 2 AC 46
Briginshaw v Briginshaw (1938) 60 CLR 336
Butcher v Lachlan Elder Realty Pty Ltd (2008) 218 CLR 592
Campbell v Back Office Investments Pty Ltd [2009] HCA 25
Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45
Canadian Aero v O’Malley [1974] SCR 592
Carl Zeiss Stiftung v Herbert Smith (No.2) [1969] 2 Ch 276
Chew v R (1991) 4 WAR 21
Coco v AN Clark (Engineers) Ltd [1969] RPC 41
Commonwealth v John Fairfax & Sons Ltd (1980) 147 CLR 39
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 14 FCR 434
Darvall v North Sydney Brick and Tile Co Ltd (1989) 16 NSWLR 260
Farah Constructions v Say-Dee Pty Ltd (2007) 230 CLR 89
Giorgiani v R (1985) 156 CLR 473
Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162
Johnson Tiles Pty Ltd v Esso Australia Limited (2000) 104 FCR 564
King Network Group Pty Ltd v Club of the Clubs Pty Ltd (2008) 69 ACSR 172
Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181
O’Brien v Komesaroff (1982) 150 CLR 310
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191
Periera v DPP (1988) 63 ALR 1
R v Byrnes (1995) 183 CLR 501
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
Taco Co of Australia Inc v Tacobell Pty Ltd (1982) 42 ALR 177
Warman International Ltd v Dwyer (1995) 182 CLR 544
Yorke v Lucas (1985) 61 ALR 307Date of hearing: 15-18 March and 4 April 2011 Date of last submissions: 6 April 2011 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 233 Counsel for the Applicant: SR Senathirajah Solicitor for the Applicant: Corrs Chambers Westgarth Counsel for the First and Second Respondents: J Peters SC with J Slattery Solicitor for the First and Second Respondents: Holding Redlich Counsel for the Third Respondent: D Crennan Solicitor for the Third Respondent: J Price
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 813 of 2010
BETWEEN: DIGITAL CINEMA NETWORK PTY LTD (ACN 132 404 481)
ApplicantOMNILAB MEDIA PTY LIMITED (ACN 002 585 391)
First Cross-ClaimantOMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855)
Second Cross-ClaimantAND: OMNILAB MEDIA PTY LIMITED (ACN 002 585 391)
First RespondentOMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855)
Second RespondentMICHAEL GEOFFREY SMITH
Third Respondent and Cross-Respondent
JUDGE:
GORDON J
DATE OF ORDER:
16 MAY 2011
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.The parties bring in orders to give effect to these reasons for decision and to deal with the next stage of these proceedings by 4:00 pm on 23 May 2011.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 813 of 2010
BETWEEN: DIGITAL CINEMA NETWORK PTY LTD (ACN 132 404 481)
ApplicantOMNILAB MEDIA PTY LIMITED (ACN 002 585 391)
First Cross-ClaimantOMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855)
Second Cross-ClaimantAND: OMNILAB MEDIA PTY LIMITED (ACN 002 585 391)
First RespondentOMNILAB MEDIA CINEMA SERVICES PTY LTD (ACN 145 363 855)
Second RespondentMICHAEL GEOFFREY SMITH
Third Respondent and Cross-Respondent
JUDGE:
GORDON J
DATE:
16 MAY 2011
PLACE:
MELBOURNE
INDEX
Content
Para No(s)
A
Introduction
[1] – [6]
B
Facts
(1) Mid 2000s up to and including 2007
[7] – [9]
(2) 2008
[10] – [32]
(3) January and February 2009
[33] – [36]
(4) March and April 2009
[37] – [41]
(5) May – August 2009
[42] – [50]
(6) September and October 2009
[51] – [58]
(7) November 2009
[59] – [63]
(8) December 2009
[64] – [72]
(9) January 2010
[73] – [80]
(10) February 2010
[81] – [94]
(11) March 2010
[95] – [107]
(12) April and May 2010
[108] – [113]
(13) June 2010
[114] – [119]
(14) July 2010
[120] – [135]
(15) August and September 2010
[136] – [146]
(16) Other Factual Matters
[147] – [152]
C
Legal Claims
(1) Summary of Claims
[153] – [154]
(2) Relevant Legal Principles
(a) Contraventions of the Corporations Act
[155] – [163]
(b) Fiduciary Obligations
[164]
(c) Damage Necessary?
[165] – [167]
(d) Accessorial Liability
[168] – [177]
(e) Misleading and Deceptive Conduct
[178] – [180]
D
Analysis
(1) Introduction
[181] – [188]
(2) Claims 1 and 2 –Disclosure to Omnilab of the VPF negotiation process etc
[189] – [196]
(3) Claim 3, 5 and 6 – Transferring DCN’s negotiations for VPF agreements to Omnilab.
[197] – [199]
(4) Claim 4 – Not pursued
[200]
(5) Claim 7– Secret Commissions
[201]
(6) Claim 8 – Knowing assistance claim against the Omnilab Parties
(i) Involvement in a Contravention of the Corporations Act – s 79
[202] – [207]
(ii) ‘Knowing Assistance’ – Breach of Fiduciary Duties
[208] – [209]
(iii) Amended case on knowledge
[210] – [211]
(iv) Lost opportunity
[212] – [215]
(v) DCN as a ‘placeholder’
[216]
(vi) Estoppel
[217]
(7) Claim 9 – Confidential Information Claim against the Omnilab Parties
[218]
(8) Claim 10 – Misleading and Deceptive Claim against the Omnilab Parties
[219] – [225]
E
Cross Claim
[226] – [227]
F
Relief
[228] – [232]
G
Orders
[233]
In these reasons for decision, the following abbreviations will be adopted:
Abbreviation
Description
Aseme
means Richard Aseme, Director of Distribution in Europe, the Middle East and Africa and Head of International Digital Cinema for Paramount.
Blinderman
means Jonathan Blinderman, a lawyer at Glaser, Weil, Fink, Jacobs, Howard, Avchen & Shapiro, LLP.
Cartledge
means Ross Cartledge, former Chief Financial Officer of AAV Australia, hired by Omnilab Media during the relevant time as a consultant.
DCI
means digital cinema initiatives.
DCN
means the Applicant, Digital Cinema Network Pty Ltd (ACN 132 404 481).
digitAll
means digitAll Pty Ltd, a company owned and controlled by the Gardiner brothers. It, inter alia, supplies digital projection and related equipment to the cinema industry in Australia and overseas.
Dell
means Kieran Dell, President of ICAA.
Disney
means The Walt Disney Company (Australia) and/or Walt Disney Studios Motion Pictures International (and/or other related Disney corporate entities), as appropriate.
Entwistle
means Ross Entwistle, the managing director, owner and operator of Limelight Cinemas Pty Ltd, in Canberra, a member of ICAA and a Board member of Screen Australia.
Fleming
means John Fleming, the General Manager of Omnilab Media Melbourne Pty Limited, a subsidiary of Omnilab Media.
Fox
means Twentieth Century Fox Film Corporation and/or other related Fox corporate entities, as appropriate.
Gardiner
means Martin Gardiner, a director of DCN.
Goyal
means Manisha Goyal, the in-house legal counsel for the Omnilab Parties.
ICAA
means the Independent Cinemas Association of Australia, the industry body representing cinema owners and operators within Australia.
James Gardiner
means James Gardiner, the brother of Martin Gardiner and a director of DCN.
Levin
means Julian Levin, the Executive Vice President of Fox (Exhibition and Non-Theatrical Sales and Distribution).
MGS
means MGS Group Pty Ltd, a company controlled by Smith.
Omnilab Media
means the First Respondent, Omnilab Media Pty Ltd (ACN 002 585 391).
Omnilab MCS
means the Second Respondent, Omnilab Media Cinema Services Pty Ltd (ACN 145 363 855) (formerly called Omnilab Media Digital Cinema Network Pty Ltd).
Omnilab Parties
means Omnilab Media and Omnilab MCS.
Paramount
means Paramount Pictures International Limited, and/or other related Paramount corporate entities, as appropriate.
Sarfaty
means Mark Sarfaty, a Board member of ICAA since 2003 and, since September 2007, the Chief Executive Officer of ICAA. His position with ICAA was part-time.
Smith
means Michael Geoffrey Smith, the Third Respondent. Smith was a director of DCN and the sole director of MGS at all relevant times.
Sony
means Sony Pictures Entertainment, and/or other related Sony corporate entities, as appropriate.
SPAA
means the Screen Producers Association of Australia.
Studios
means the film studios in the United States including Disney, Fox, Paramount, Sony, Universal and Warner Bros.
TPA
means the Trade Practices Act 1974 (Cth) (as it was prior to the enactment of the Competition and Consumer Act 2010 (Cth)).
Universal
means NBC Universal, and/or other related NBC Universal corporate entities, as appropriate.
VPF
means Virtual Print Fee.
Warner
means Warner Bros Studios, and/or other related Warner Bros corporate entities, as appropriate.
Zylberstein
means Nicolas Zylberstein, the Director of Global Digital Cinema at Disney.
REASONS FOR JUDGMENT
A. INTRODUCTION
Since the mid 2000s, cinemas around the world have been moving from analogue projection to digital projection. The cost is large. The Studios decided to assist by providing financial subsidies to cinema owners to upgrade their projection equipment from analogue to digital. These subsidies are known as “Virtual Print Fees”. The agreements with the Studios which provide the financial subsidies are commonly described as “VPF agreements”.
In these proceedings, DCN alleges that as between itself and the First and Second Respondents (the Omnilab Parties), it alone is entitled to be party to (and receive the benefits flowing from) the VPF agreements that have been made (as well as those agreements that are to be made in the future) with the Studios. Under these agreements, the Studios will provide financial subsidies to independent cinema owners in Australia as an incentive to upgrade to digital projection equipment. DCN alleges that the Omnilab Parties cannot make any agreements with the Studios, and that the Omnilab Parties hold on trust for DCN the benefits and profits obtained from one VPF agreement that has already been concluded (with Paramount). DCN further alleges that the third respondent, Smith, contravened the duties (both statutory and fiduciary) he owed DCN as a director and that the Omnilab Parties knowingly assisted and/or were knowingly involved in those breaches. DCN also alleges that each respondent was guilty of misleading and deceptive conduct, contrary to s 52 of the TPA, in the course of negotiating with the Studios.
Although this trial was limited to questions of liability, it is important to understand the several forms of specific relief that DCN claims against each of the respondents: compensation orders pursuant to s 1317H of the Corporations Act 2001 (Cth) (the Corporations Act); an account of profits; damages or equitable compensation (as appropriate); injunctions restraining each respondent – the Omnilab Parties and Smith – from negotiating with the Studios in respect of any VPF agreement; a declaration that the Omnilab Parties hold on trust for DCN the benefits and profits that accrue from the VPF agreement already concluded with Paramount; and orders pursuant to s 82 of the TPA.
As is implicit in what has already been said, the claims against Smith are founded, for the most part, on him being a director of, and thus owing duties to, DCN. The claims against the Omnilab Parties are founded in large part on the footing that the Omnilab Parties knowingly assisted Smith in his breach or breaches of duty (or were knowingly involved in the breach/es).
The evidence adduced at trial demonstrated that, on many different occasions, Smith said or wrote things that were untrue, or that were (at the very least) economical with the truth. The details of these occasions will be examined later in these reasons. It is important to bear at the forefront of consideration, however, that apart from the particular claim made about misleading and deceptive conduct, the bare fact that it is demonstrated that Smith misrepresented some fact does not, without more, establish the claims that DCN now makes, whether against Smith or against the Omnilab Parties.
In looking at the unfolding story of the dealings that was revealed in the evidence led at trial, it is useful to record at the outset some matters that are important to the ultimate resolution of the matter. First, until August 2010, in all his dealings with the Studios, Smith made plain that if the Studios were to contract for provision of VPFs to independent cinema owners in Australia, DCN was to be the contracting party. In fact, until 9 August 2010, DCN was named as the contracting party on each draft form of VPF agreement produced by the Studios and negotiated by Smith (see [139] below). Secondly, Smith gave these draft agreements to the Omnilab Parties and ICAA and it follows that both the Omnilab Parties and ICAA knew that this was the proposal put to the Studios. Thirdly, to assist Smith in his negotiations with the Studios he asked ICAA for, and ultimately was given, a letter which, after a great deal of debate both within ICAA and with Smith about including a reference to DCN, said that “ICAA has an arrangement with Michael Smith of MGS Group (and DCN) to undertake Virtual Print Fee (VPF) negotiations on behalf of ICAA members” (emphasis added) (see [83] below). Fourthly, after the Studios had provided Smith with draft VPF agreements naming DCN as the contracting party, ICAA decided that it wanted to deal with the Omnilab Parties rather than DCN. In August 2010, ICAA told Smith and DCN that it had been in “focused discussions with” the Omnilab Parties “with the full knowledge and active participation of” Smith “since early 2009”. Fifthly, after this litigation was commenced, the Omnilab Parties made a VPF agreement on behalf of ICAA with Paramount. Sixthly, ICAA was not joined as a party to these proceedings. DCN makes no claim against ICAA. Instead, DCN says that the Omnilab Parties and Smith are liable to it on the bases already outlined.
B. FACTS
(1) Mid 2000s up to and including 2007
In the mid 2000s, the Studios began providing financial assistance to cinemas to upgrade their projection equipment from analogue to digital. As described above, the financial assistance (in the form of a subsidy) was called a “VPF”. Digital cinema was the talk of the industry.
ICAA was the industry body representing independent cinemas in Australia. From at least August 2007, it was part of ICAA’s business plan to assist its members to understand the move to digital and possibly become a buying group to obtain the best deals for its members.
By 30 September 2007, the Board of ICAA was being asked to consider an industry-wide approach, with ICAA joining with Amalgamated Holdings Limited (which includes Greater Union Cinemas) to represent all cinema screens for the purposes of negotiating with Studios over the VPF and with hardware suppliers over the cost of installing the necessary equipment.
(2) 2008
At about the same time, and independently of ICAA, Smith was seeking to meet and, in fact, did meet with the Studios to discuss moving independent cinema owners in Australia to digital.
In late May / early June 2008, Smith met Sarfaty, the CEO of ICAA. They discussed independent cinemas and the digital age. Sarfaty was keen to meet Smith again to pursue the idea. Smith delayed the meeting on the basis that he wanted to get the digital plan sorted out. This is the first recorded instance of non-disclosure by Smith. It was a non-disclosure because, as at 4 June 2008, Smith was in the throes of establishing a “partnership” called “Digital Cinema Network Australia (DCN)” between MGS (his company) and digitAll, a company controlled by the Gardiner brothers. At that time, the intention was for DCN to “supply and install turn key DCI [digital cinema initiatives] solutions, Projection and Servers,” all locally networked at each location and “in turn networked back to [DCN]”. A standard conversion fee was proposed. There was no mention of VPF agreements.
By August / September 2008, DCN was further advanced. DCN was in the process of going public about its move into the digital era. A draft brochure and press release were prepared for the Australian International Movie Convention (AIMC). At that time, the focus was to convert the Sun Theatre, a theatre connected to Smith, to a fully networked and automated digital theatre as a prototype. The foot of the brochure stated that while digital conversions would not become common place until the VPF had been successfully agreed with all Studios, they would implement a digital complex and develop the system “while those negotiations [were] taking place”. There was no mention of ICAA.
Smith was to speak at the AIMC. He prepared notes. His notes record Smith introducing DCN. The last bullet point of the notes, entitled “What we are after,” effectively asked cinema owners to allow DCN to include their screens in their VPF negotiations on a non-binding basis. Smith’s presentation to AIMC was reported in an industry magazine in September 2008. That report said that Smith was negotiating the roll-out of digital cinema for 500 independent screens across Australia as Chairman of DCN and expected to reach agreement with the Studios in 2009.
On 6 August 2008, Smith (as a representative of MGS) emailed a Disney representative (Jason Brenek). Smith told Disney he had been discussing digital conversion with each of the film companies in Australia and, in turn, with their representatives in Los Angeles. Smith also told Disney that “we are negotiating a VPF on behalf of 550 cinemas in Australia (and more are still coming on board). Our company DCN is an integrator that specialises in the independent chains in Australia”. Smith then said that most of the Studios had already sent him their boiler plate VPF document to study, and asked for a copy of Disney’s standard document. The email contained misinformation. Neither DCN nor MGS had 550 cinemas on board at that time, or so far as the evidence disclosed, at any time. Smith provided the same misinformation to the Paramount representative on 12 August 2008. And, further, at this time he did not have one, let alone most, of the Studios’ boiler plate VPF agreements. By September 2008, Smith’s story had changed a little, but it was still misinformation – he told Roadshow Distribution (for Warner Bros) that DCN was negotiating VPF agreements on behalf of a number of independent exhibitors, representing about 180 screens but anticipating more to “come on board, as high as 350 screens”.
At the same time, and independent of DCN, ICAA was continuing to explore digital cinema. On 21 July 2008, Sarfaty (as the Executive Director and Vice President of ICAA) reported to ICAA members that ICAA had held discussions with the Australian Competition and Consumer Commission in relation to the creation of a digital buying group among ICAA members, and had commenced negotiations with the Motion Picture Distributors Association of Australia about VPFs. Sarfaty also advised that ICAA had held initial discussions with major digital equipment suppliers and integrators. ICAA’s recommendation to its members was that the position on digital transition would become clearer over the next 12 months. If only that had been the result. This proceeding is proof it did not.
Of course, there were other players in the Australian industry. One of those players was Omnilab Media. It described itself as Australia and New Zealand’s largest independently owned vertically integrated media company. In September 2008, Fleming was (and still is) the General Manager of Omnilab Media Melbourne Pty Ltd, a subsidiary of Omnilab Media. Fleming had attended AIMC. He heard Smith’s presentation. He does not recall DCN being mentioned. However, after the conference, Fleming met Gardiner who told him that digitAll had entered into a partnership with Smith and the partnership was operating as DCN.
On 24 September 2008, the Board of Omnilab Media met. The Board was presented with a document entitled “Digital Cinema Current Strategy”. It had a mind map attached. DCN placed considerable reliance on the contents of the mind map as evidence of Omnilab Media’s knowledge of DCN. DCN was described as representing between 200 and 400 independent exhibitors. This document also states that DCN aimed to be an integrator, and worked with ICAA. Smith and Gardiner were identified. Fleming said he obtained the information from the market. The information was considered further at an Omnilab Board meeting on 22 October 2008.
If the clock stopped then (at the end of September 2008), the relationship between digitAll and MGS would have been a quasi partnership conducted through DCN. The plans of the two entities (to be effected through DCN) included converting the Sun Theatre to digital. It had been negotiating with at least some of the Studios and telling them that DCN had the support of a large number of screens when in fact it did not. At the same time, Smith was talking to Sarfaty and Gardiner was talking to Fleming.
But the clock did not stop. On 1 October 2008, Smith emailed Sarfaty a draft proposal he had prepared for the ICAA Board. It was from Smith of the MGS Group. The draft proposal resulted from discussions between Smith and Sarfaty. The draft referred to DCN. It set out Smith’s understanding of the arrangement he was putting to ICAA and contained the following:
We are currently negotiating a VPF on behalf of approximately 200 independent cinemas, many of them members of ICAA, but not all. As has been mentioned often, these talks are progressing in the right direction, but slowly. However, with one studio we are making great progress, and expect a deal to be agreed before Xmas.
The boilerplate agreements from the studios are designed around the Digital Integrator negotiating and managing the VPF. We have suggested that studios in Australia could pay the VPF’s directly to each cinema operator, but they have made it clear they are not prepared to do so, as they want to keep separation between day to day film bookings and the VPF payment structure. However, I have mentioned the idea of an industry group being the VPF administration entity to some of the studios and they have been comfortable with the idea.
I believe there is an opportunity for ICAA to position itself to be the key organisation for all independent cinemas to access a VPF.
I propose that as we continue with our negotiations, rather than just on behalf of the cinemas we have spoken to, we do so on behalf of all ICAA members at the direction of the ICAA board.
At the point that deals are agreed between each studio, we would present the deal to the ICAA board for approval. While we will have agreements checked by our own lawyers, we would understand the ICAA board may want to use their own representatives to confirm[.]
ICAA can then be the body that administers the VPF over it’s (sic) lifespan.
The advantages in taking this approach are:
· The deal will become an ICAA deal rather than an MGS or a DCN deal, so every cinema outside of the majors wanting to access a VPF will have to join ICAA, which should be a healthy boost to the ICAA numbers.
· We have allowed 3% in our negotiations for administration of the VPF, which would go to ICAA and be able to be used to underwrite the employment of full time admin staff.
· As an industry group, it will further forge the importance and central relevance of ICAA.
· MGS will charge a fee of 1% upon successful implementation of each VPF agreement. All costs for travel, time, etc are born by MGS out of the fee. No costs are payable by any cinemas until agreements are inplace (sic) and the digital screenings have commenced.
In this proposal the negotiation of the VPF’s is a completely separate exercise from the supply of equipment, the two are not tied together.
During the negotiation period we would keep the board informed with a monthly report, and I could be available to report directly to the conference call board meetings.
(Emphasis added.)
A careful reader will notice some important matters:
1.Smith sent the email as a representative of MGS, not DCN;
2.if the deal was accepted by ICAA, the deal became an ICAA deal rather than an MGS or DCN deal; and
3.any deal was subject to ICAA Board approval and ICAA would be the body that would administer the VPF over its lifespan.
Finally, what would Smith / MGS or DCN get out of it? MGS would get the right to charge a 1% fee upon successful completion of each VPF agreement from which MGS would pay all of its costs. Sarfaty included the draft proposal in his Executive Director’s Report to the Board of ICAA dated 1 October 2008.
The following week, Smith was to travel to Los Angeles to meet with the Studios. Prior to leaving, he was busy. He needed to legitimise DCN. He had DCN business cards designed. Most importantly, he needed the support of the independent cinemas. On 15 October 2008, he emailed independent cinemas on his “vpf list” to obtain their written confirmation that he represented them when dealing with the Studios. The email was sent under cover of MGS. Again, MGS was seeking a 1% signing fee to be deducted initially from the VPF. MGS had also allowed for a 3% fee for management and distribution of the VPFs over the life of the VPF agreement. The subsequent emails Smith sent to his “vpf list” sought written confirmation for “Digital Cinema Network to negotiate a [VPF] deal to enable the digital projection conversion of cinemas”. The response was not overwhelming. A lot of the people Smith wrote to called Sarfaty and said they wanted ICAA to negotiate the VPF on their behalf, not Smith. As at 22 October 2008, Smith had unequivocal support of approximately 54 screens and an expression of support from another 28 screens; a total of 86. The Studios would only deal with an entity that represented a critical mass of screens. The number of required screens varied between the Studios. Whatever the minimum, Smith did not have the numbers. Smith concluded that he could not get the support he needed to conduct the VPF negotiations without the support of ICAA. Smith told his partners in DCN, the Gardiners, that he had been approached by Sarfaty of ICAA.
Sarfaty of ICAA received both emails Smith had sent to cinemas on 15 October 2008. During cross examination, Smith gave evidence that he and Sarfaty had been discussing VPFs throughout most of 2008 and that Sarfaty had expressed annoyance at Smith’s emails. Later on 16 October 2008, at Sarfaty’s request, Smith sent a further version of one of the emails to Sarfaty under the MGS banner. The draft was significantly different. It now included the following statements:
We have been discussing with … Sarfaty, CEO ICAA, the role that ICAA can play in the VPF’s. Most of the exhibitors we are negotiating on behalf of are ICAA members. We would like to include all ICAA members in our negotiations in these discussions, and in turn, would be prepared to hand over the management and administration of the VPF’s once in place.
…
We propose a 1% signing fee to be deducted initially from the VPF, and have allowed in our negotiations for a 3% fee on top of the nominated VPF for management and distribution of the VPF’s over the period. We would like to see ICAA handle this management and distribution of VPF role, and hence ICAA would receive the 3% fee.
…
There was no mention of DCN.
On 23 October 2008, Smith wrote to Sarfaty stating “I’m hoping we may be able to get something back from you on the VPF’s by tomorrow ready for my meetings next week”. On 27 October, Smith emailed Sarfaty again asking him to sort out a letter from ICAA recording their support for Smith’s negotiations. Sarfaty responded:
No worries. Am working on this with Kieren [the President of ICAA] and will be back to you later today. Our thought is that we send a letter to members informing them that we believe ICAA should retain a representation position in VPF discussions and in order to do that ICAA members should assign representation privileges to ICAA. We then work with you on understanding the deals you’re proposing and report back to members. How does that sound to you?
At 6:51pm on 28 October 2008, Sarfaty sent Smith a draft of a letter to ICAA members. A copy was also provided to the President of ICAA. Sarfaty sought Smith’s views on the draft. Smith was not happy with it. Smith proposed that Sarfaty defer sending the letter to ICAA members until after he returned from Los Angeles.
By 8:14am on 30 October 2008, the draft had been further amended. Sarfaty sent the latest draft to Smith attached to an email which read “below is what went to the [ICAA] Board this morning and I will be forwarding to members later today”. The letter sent to members three days later was substantially in the form of this draft. Attached to the draft was a proforma letter for members to complete authorising ICAA to represent them in the negotiations for the VPFs. Smith’s response on the same day – “Great, thanks Mark”.
By Monday 3 November 2008, a further draft to ICAA members was prepared by Sarfaty and amended by Smith. At 10:41pm on 3 November, the following letter was sent to ICAA members:
…
There are a number of issues surrounding the VPF negotiations and one of the most significant is the fact that the Hollywood studios that they (sic) will not commence negotiations with individual exhibitors, but rather with Digital Integrators on behalf of the circuits they represent. Some studios have also indicated that they will not negotiate with any entity representing less than 100 screens. …
ICAA at this time represents some 340 screens and is well placed to represent its members’ interests in the process of VPF negotiations.
…
In order to further the process of negotiating VPF’s, ICAA proposes that individual members complete the attached letter of authorization appointing ICAA to negotiate indicative VPFs on their behalf.
This letter does not compel the individual member to accept the terms of the VPF Agreement if they are deemed to be unsatisfactory. The letter merely serves to confirm the member has authorized ICAA to solicit VPF agreements on their behalf.
ICAA then proposes to engage Michael Smith of MGS Group to represent ICAA members in the VPF negotiations.
The purpose of this process is to ensure that member interests are directly represented by ICAA in all VPF discussions and negotiations between studios and integrators on behalf of independent cinemas.
Although MGS Group joint venture partner, Digital Cinema Network will be making ICAA members an offer for equipment supply in the future, at this time Michael will only be seeking to negotiate the VPF and these negotiations will not be contingent on equipment supply.
…
Michael has proposed a fee structure which will see MGS retaining a proportion of the VPF as a “signing fee” for costs incurred and services rendered, with a further proportion of the VPF being retained as an ongoing administration fee which would go to ICAA. …
(Emphasis added.)
The draft letter to be signed by ICAA members stated, in part, that the member understood that ICAA intended to engage Smith of MGS Group to negotiate VPFs on behalf of ICAA, and that the commercial terms of VPFs negotiated by Smith were non-binding and would be further negotiated subsequent to presentation in contractual form to ICAA members. ICAA received numerous signed letters of authorisation including from some to whom Smith had sent his email seeking support for DCN’s VPF negotiations. A number of significant matters must be noted. At this time, ICAA and its members engaged Smith of MGS, not DCN. Next, the ICAA members were told about Smith’s role in DCN, but that role was limited to equipment supply. Thirdly, negotiation of the VPF was not contingent on equipment supply. Fourthly, without the support from ICAA, Smith would not have continued his negotiations with the Studios. Finally, ICAA retained the final say as to the terms of the VPF agreements and who would be appointed as the deployment entity under a VPF agreement.
Over the next few days, Smith sought meetings with the Studios. On 6 November 2008, he emailed Disney and enclosed a three page document entitled “Digital Cinema Network – The Independent DCI Integrator”. The document stated that DCN was negotiating VPFs to facilitate conversion of independent exhibitors in Australia and was working closely with ICAA which represented the majority of cinemas in Australia (apart from the four major exhibitors).
Smith’s modus operandi at this stage is obvious. When working with ICAA – he is MGS and working as their agent. He refers to DCN in relation only to the sale of equipment. When talking to the Studios – he is DCN and working closely with ICAA. So, for example, on 21 November 2008, Smith emailed the Paramount representative under the heading “DCN VPF Australia”. Smith asked the representative to send their VPF boilerplate agreement.
During October, Fleming was still pursuing digital cinema opportunities for Omnilab Media. On 22 October 2008, the Board of Omnilab Media granted Fleming approval to hold discussions with digitAll and DCN about a possible partnership.
On 12 November 2008, Smith emailed Sarfaty. He reported on his meetings with the Studios and then said “… Fleming has been in touch a few times getting info for his presentation [at the upcoming SPAA Conference], I’ve kept it all general info at this stage”. On 14 November, Fleming made his presentation to SPAA.
At the Omnilab Board meeting on 19 November 2008, Fleming reported on his discussions with Gardiner and Smith – “currently no feedback”. By 10 December 2008, things had not progressed much further. Fleming was still to complete a whitepaper on digital cinema (which, on 24 September, the Board had asked him to prepare). The Board resolved that Fleming would “maintain [a] watching brief” on DCN, Gardiner and Smith.
In the first week of December, Sarfaty and Smith met. On 12 December, Sarfaty emailed Smith summarising where they had reached. The email recorded that:
1.Smith was currently engaged in seeking VPFs from the Studios; and
2.The Studios had indicated to Smith that they would only pay a VPF to an integrator supplying DCI compliant equipment to cinema operators, would require the integrator to guarantee the compliance of the equipment for the term of the VPF agreement and would require the integrator to collect and distribute the VPFs to cinema operators.
Sarfaty sought a meeting to review and discuss the contracts supplied by the Studios so that ICAA and MGS could form a business relationship for the negotiation of the VPFs. Attached to the email was a confidentiality agreement designed to allow ICAA and MGS to examine the issues that needed to be considered in order to form that business relationship. On 16 December 2008, Smith responded. He had amended the confidentiality agreement. Smith stated that he had “included both MGS and DCN in the document to protect ICAA fully”.
(3) January and February 2009
In January 2009, Smith was again communicating with the Studios. On 14 January, he emailed Fox. The email, entitled “DCN VPF for independent cinemas in Australia”, requested Fox’s revised VPF Agreement. On the same day, Smith sent an email to Universal entitled “VPF’s for Australia: DCN on behalf of Independent Cinemas”, seeking a copy of its boilerplate VPF agreement. The next day, 15 January 2009, Smith emailed to Sarfaty a copy of the Disney VPF Agreement. By 29 January 2009, Smith had received a copy of the Fox VPF Agreement and provided it to Sarfaty. By 5 February 2009, Smith had the Paramount VPF Agreement and had provided it to Sarfaty. This was all conduct consistent with an agency arrangement with ICAA.
At the same time, ICAA was speaking to Omnilab Media. On 8 February 2009, ICAA and Omnilab Media entered into a Confidentiality Agreement. Under that agreement, ICAA reserved all of its rights in relation to “Confidential Information”. “Confidential Information” was broadly defined. The Confidentiality Agreement provided that the confidential information was supplied by ICAA to Omnilab Media for specified purposes and could not be made available to any other person or entity without the express permission of ICAA. There were two specified purposes. First, to enable ICAA and Omnilab Media to consider the feasibility of entering into a business arrangement for the creation of a digital media distribution network for ICAA members. Secondly, to enable ICAA and Omnilab Media to consider the feasibility of entering into a business arrangement for exploration of business opportunities associated with digital cinema transition in the independent cinema sector. The second purpose was broad.
Notwithstanding the discussions between ICAA and Omnilab Media, on 9 February 2009 Sarfaty recommended to the ICAA Board that “ICAA instruct … Smith to pursue a ‘paramount style’ offer for ICAA members”. The ‘Paramount style’ offer involved “direct agreements with exhibitors”. In other words, under such an agreement there would be no need for DCN (or any other entity) to be a party to the agreement because there was no digital integrator. By 11 February 2009, Smith told the Gardiners that the Paramount deal had gone ‘direct to exhibitor’. On 16 March, Sarfaty told the ICAA Board that, consistent with previous Board decisions, Smith had been instructed to seek “Paramount” style agreements with the Studios.
In late February 2009, Fleming produced the White Paper that Omnilab Media’s Board had asked for in late 2008. The White Paper, dated November 2008, was described as a “collection of a lot of research notes”. The paper contained a disclaimer about the accuracy of many of the “broad sweeping claims made by parties involved in the roll-out (e.g. the number of screens they have)”, and that the interdependence and relationships of the parties mentioned was often not clear. Attached to the White Paper was a copy of the industry magazine article that reported Smith’s presentation to AIMC (see [13] above) as well as an analysis of the Australian market. Fleming drafted the analysis. The analysis referred to ICAA as a stakeholder. In relation to DCN, Fleming suggested that there was an opportunity for Omnilab Media “to align with [DCN] to be involved as an integrator for independent cinema operators”. Fleming surmised that the challenge for DCN would be funding the independent exhibitors. DCN contended that the content of significant parts of the White Paper was prepared from information provided by Gardiner to Fleming. The evidence does not support that submission and I reject it.
(4) March and April 2009
In March, the arrangements between Smith and ICAA reached a climax. On 5 March, Smith sent an email to Sarfaty entitled “VPF negotiations” outlining his thoughts on the agreement. Under the heading “VPF negotiations”, Smith listed the following points:
Michael Smith, of MGS Group P/L and [DCN] to negotiate VPF details for ICAA on behalf of members.
Arrangement is with ICAA, not individual ICAA cinemas.
Invoice for services will be to ICAA, who will in turn invoice cinemas.
MGS will charge ICAA $500 / screen for negotiating VPF deal with all major studios and primary independent distributors in Australia …
…
Process of negotiation is:
MS to negotiate with each studio
Bring results of those negotiations to liaise with Mark Sarfaty
When MS and MS believe deal is sorted, take to the ICAA board for ratification.
Negotiations for the last year have been with DCN as the integrator. Negotiations continue on that basis, but we are pushing for studios to agree that once details of deal are agreed, the local distributor could pay VPF’s to each exhibitor directly. Not all studios are prepared to entertain that idea at present.
…
(Emphasis added.)
Smith was still negotiating with the Studios. On 2 March 2009, he emailed Paramount telling them that the proposed “Failure to Play Penalties” clause in the draft VPF agreement was a major stumbling block for ICAA. On 13 March, Smith emailed Fox regarding its VPF Agreement, and said that:
[O]ur intention is that we would come to an agreement that we are both happy with, we would then have the ICAA board ratify the document (perhaps they will ask fo (sic) some changes) but it would then be presented to members on the basis that it is “the document ready to sign now” …
Smith provided the same information to Gardiner on 16 March 2009. DCN then knew that Smith was negotiating on behalf of the ICAA members and that the ICAA Board had to approve the VPF agreement before it was finalised with the Studios.
On 18 March 2009, Gardiner emailed Smith and asked him to convey to ICAA members apologies from the Gardiner brothers for not attending the ICAA conference.
On 2 April 2009, Smith emailed the Paramount representatives under the heading “DCN VPF Australia”, seeking a copy of its international VPF agreement. On 5 and 6 May, Smith emailed Fox under the heading “DCN VPF Australia”. Smith was looking to meet Fox. Smith wanted to know where Fox were up to and wanted to discuss the impact of the Paramount direct contract on ICAA’s members.
At the end of April 2009, Sarfaty was talking again to Fleming. Sarfaty sent Fleming ICAA’s Business Strategy which stated that “ICAA [was] seeking to negotiate a VPF deal with the studios”, and asked “how can Omnilab Media and MGS/DCN work together to achieve a successful outcome for ICAA members … whilst deliver[ing] appropriate returns for their individual investments” (emphasis added). The next day, they met. Fleming drafted notes of the meeting and sent them to Sarfaty on 3 May 2009. The notes recorded that “ICAA (through MGS) [would] get a VPF deal which will allow for a 3 year transition”. The balance of the notes concerned a technology transition strategy for independent cinema operators.
(5) May – August 2009
On 6 May 2009, ICAA held its May Board meeting. The notes of the meeting record that ICAA was pursuing a “collective” position on VPF. The notes do not refer to Smith, DCN or Omnilab Media. They refer to MGS in the context of equipment supply and “network administration”, envisioned to be a network that would be responsible for the operation and servicing of digital projectors. It was assumed that such a network would also “act as the interface between digital cinemas and content suppliers”.
On 11 May 2009, Fleming emailed Smith. He enclosed what were described as “draft structure charts”. There were three. Each draft structure showed ICAA holding the VPF. No less significantly, each structure included DCN and MGS. In each structure, MGS was the preferred supplier and, as a partner with DCN, responsible for theatre management systems (TMS). In each structure, Omnilab Media’s role was different. In the first, it was responsible for the Distribution Network, to “Collect Content, Prepare and Distribute” (the Distribution Network). In the second and third structure, Omnilab Media was a “partner” with DCN, and DCN was responsible for the Distribution Network and TMS.
A week later, 18 May 2009, Smith was busy. He emailed the Gardiners and told them that “[w]e have been directly assigned to negotiate on behalf of ICAA (Independent Cinema (sic) Association Australia), which represents the majority of independent cinemas in Australia”. The same day, Smith emailed Warner Bros and enclosed “an updated document regarding DCN and the VPF for independents in Australia” (the DCN VPF Document). The DCN VPF Document contained the following statements:
…
DCN is negotiating a VPF on behalf of independent cinemas across Australia and in discussions with New Zealand. We currently represent 350 screens, but we believe this could ultimately be as high as 500 screens.
…
[DCN] is a partnership between MGS … and DigitAll …
DCN are negotiating VPF’s … on behalf of independent exhibitors in Australia. We have been directly assigned to negotiate on behalf of ICAA … We also represent a number of operators who choose not to be members.
Our discussions with key operators and the CEO of ICAA have led us to propose a model for Australia that differs from the US model of integrator financed / VPF funded conversion …
Given this, the underlying role of the integrator in the standard agreements will be different and require some fundamental changes to the examples of US boilerplate contracts we have perused thus far. …
DIRECT AGREEMENT / INTEGRATOR
· Since the announcement of the “Paramount direct to exhibitor” agreement, there has been great interest in pursuing this model from exhibitors we represent. The ICAA board has directed that this is their preferred model.
· We are liaising with Paramount on the details of their agreement for Australia, so that the document is acceptable to all members once it is tabled.
· We are continuing to negotiate contracts with all other studios on the basis of being the integrator. However, at the completion of these negotiations, if the studio is prepared to entertain direct exhibitor contracts, we will allow this to happen.
…
(Emphasis added.)
The email is important. It records, as was then the fact, that although Smith of DCN would negotiate the contract on behalf of ICAA, ICAA’s preferred model was a contract directly between the Studio and each exhibitor. In other words, Smith and ICAA would settle the form of the contract that each exhibitor would sign. There was no role for a digital integrator. DCN would not be a party to the contract. How then was Smith to be rewarded? He proposed a fee per screen.
That same day, 18 May 2009, Smith pursued the direct exhibitor contract with Paramount. He sent them a marked up copy of the Paramount Agreement and a copy of the DCN VPF Document: see [44] above. Smith also sent a copy of the DCN VPF Document to Sony and Disney.
On 30 May 2009, Gardiner emailed Smith regarding the “ICAA-VPF update”. A number of emails were attached. One email was from Sarfaty to ICAA members which recorded, as was the fact, that ICAA had authorised Smith to activate VPF negotiations with the Studios and that he and Smith were meeting regularly to discuss progress and contractual design.
Throughout June, the relationship between Smith and ICAA was the subject of further discussion. On 29 June 2009, Smith confirmed their verbal discussions and direction of the ICAA Board in the following terms:
…
We are exclusively negotiating VPF’s on behalf of the ICAA member cinemas with all major and local distributors / studios.
You and I shall liaise on the content of the agreements as we negotiate, and when we have a document that we believe is acceptable, it will be tabled with the ICAA board for consideration. Upon their agreement, the agreements will be put to the ICAA members for ratification.
We will negotiate towards the following outcomes:
· Maximum financial outcome to the benefit of exhibitors
· Agreements to be directly between the distributor and the exhibitor
· If an integrator is demanded by the studio, DCN in conjunction with ICAA shall manage the requirements for ICAA members
· …
Legal review and associated costs documents to be undertaken by ICAA.
The discounted ICAA fee charged by DCN will be a total of $500+gst per screen, invoiced as 50% upon commencement of take up agreements, final 50% upon completion of at least 5 Hollywood and 5 Australian distributor agreements.
· Invoice will be to ICAA, and ICAA will on charge to exhibitors …
Should a deal be reached for ICAA members to receive VPF’s through another integrator, the details of that arrangement will be negotiated by DCN and the fee still payable.
All travel, time and overhead costs (excluding legal fees) associated with the negociation (sic) of the agreements will be borne by DCN and paid from their fee.
(Emphasis added.)
Two days later, on 1 July 2009, Sarfaty completed his CEO report. He reported that Smith had told him VPF negotiations were progressing and that an offer for Board consideration was expected at the August Board meeting. His report included the contents of the 29 June email. In this email, the relationship was said to be with DCN. The fees were to be charged by DCN – regardless of whether or not the VPF agreement was to be concluded directly with the exhibitor, or by way of a digital integrator. If there was to be a digital integrator, DCN was the named entity.
Later that month, 27 July 2009, Sarfaty emailed Smith. Sarfaty told Smith that the 29 June email had been discussed by the ICAA Board and that there was a general view that the arrangement should be put to members. Sarfaty asked Smith to put the offer into a contractual form for “legal review” so that ICAA had an offer for recommendation at its Annual General Meeting (AGM). Sarfaty also asked for copies of the current draft VPF agreements. Smith responded on 29 July 2009. Smith stated that he did not think a contractual agreement was required, as ICAA had already directed “us” to conduct the negotiations on behalf of the ICAA members, and that the letters of offer and confirmation of the verbal appointment “already in place” were sufficient. Smith’s stated reason – contracts will only complicate and delay matters. No copies of the current draft VPF agreements were provided. Sarfaty was concerned. Smith emailed Dell, the President of ICAA, who responded that a letter of appointment, countersigned by Smith, would be sufficient but ICAA needed something formally in writing to put to members. The President advised that emails were not sufficient for this purpose. The issue was resolved by August. Sarfaty’s August CEO Report stated that Smith had tabled a letter of offer to take to the ICAA AGM, and that Smith would present the details at the AGM in a closed meeting. In relation to “the question of legals”, Sarfaty reported that he had spoken to a law firm and that up to $100,000 would be charged for contract review and variation of VPF contracts globally. The report was tabled and discussed at the August Board meeting.
In addition to Sarfaty’s arrangement with Smith regarding VPF negotiations on behalf of ICAA members, by early August 2009 Sarfaty had also held confidential discussions with Omnilab Media and another entity about the viability of establishing a national digital distribution network. Fleming asked Sarfaty about Smith’s role in both advertising and what he described as “the business structure of the distribution network”. Sarfaty responded by excluding Smith from the advertising and telling Fleming that:
As I’ve said previously, I’m cautious about the notion of a vehicle that includes DCN in a capacity which is greater than as an installation company because I would have to sell it into (sic) ICAA members and at this time I’m not in a position to offer that assurance (I have some meetings in Melbourne on Friday that will offer a greater level of insight into that question). …
At the end of August, Smith was negotiating with Disney. At that time, Disney was adopting the Paramount ‘direct to exhibitor’ model of VPF agreement. Disney wanted to know whether ICAA would provide a performance guarantee. Following this, and as foreshadowed at the ICAA August Board meeting, Smith made his presentation to the ICAA AGM. The minutes of the AGM record that Smith made his presentation after the AGM and that Sarfaty was to further progress and finalise the VPFs.
(6) September and October 2009
By early September 2009, ICAA was unhappy with Smith. The issue was a lack of information. On 3 September, Sarfaty emailed Smith confirming discussions held between Smith, Sarfaty and the President of ICAA that “ICAA need[ed] to … establish a greater level of understanding and engagement with the process of VPF negotiation both in terms of detail as to what negotiations [were] taking place and with whom (a status report) and with regard to [Sarfaty] and the ICAA Board making a recommendation to members as adoption of [Smith’s] current proposal and the outcomes of any services delivered by way of VPF negotiations and outcomes”. Sarfaty expressed concern that at that moment he could not provide any of that detail to members who “of course, have authorised ICAA to act on their behalf in respect of the VPF’s”. The next day, 4 September 2009, Smith responded saying he would be in touch the following week.
On 10 September 2009, Smith forwarded the Paramount Exhibitor Agreement to Sarfaty. Smith asked Sarfaty to not disclose the agreement to anyone.
Fleming was still working on a digital cinema strategy. In early October 2009, he sent a document entitled “Digital Cinema Study” to Omnilab Media staff. It described DCN as:
A partnership between independent exhibitor and equipment supplier MGS, and content storage and management business Digitall, DCN supplies a turnkey DCI solution (projector, server, TMS) to independent exhibitors. … A solid player in the independent sector, providing the only true turnkey solution, but its capacity to scale up to cover a significant portion of the sector is questionable. Critically, Mike Smith, the principal of DCN has been leading the negotiations with studios on VPF’s on behalf of ICAA.
(Emphasis added.)
On any view, Omnilab Media knew that Smith of DCN was conducting the negotiations with the Studios and that Smith had the support of ICAA.
In Sarfaty’s CEO report to the ICAA Board in October (dated 7 October), Sarfaty recorded his dissatisfaction with Smith and, in particular, the lack of detailed information. The report referred to the discussion between ICAA and Smith in which ICAA insisted Smith provide more detailed information, include Sarfaty in final negotiations with the Studios and provide information to support the size of his fee. Smith was reported as undertaking to meet with Sarfaty in two weeks and to supply all available information.
Smith’s actions were less than satisfactory. And the position was about to get worse.
A few days later, on 11 October 2009, Smith was talking to Fleming, not Sarfaty. Smith ultimately received an “action plan development” from Fleming. In it, Fleming talked about the need to (among other things):
develop and gain agreement on an ownership structure that recognizes:
· The needs of ICAA;
· The needs of Mark Sarfaty;
· The value of and role to be played by DCN in this relationship.
At this time, ICAA (or more particularly Sarfaty) had decided to put the integrator role out to tender. That was not surprising. ICAA was concerned about the lack of information from Smith. Omnilab Media sensed an opportunity. And, it would appear, Smith sensed an opportunity with Omnilab Media.
On or about 19 October 2009, Fleming, Entwistle and Alan Engert of Omnilab Media (with the assistance of Sarfaty) prepared a feasibility study for consideration by Omnilab Media’s Board. It had a number of attachments. Critically, it contained an attachment entitled “Structure, Transition Services (NewCo)”. The attachment contained the following:
· Omnilab Media takes a 51% share of DCN
· The remaining 49% is shared between the current shareholders of DCN at their determination
· Buyout exclusive provisions on both sides – first right of refusal if either partner wishes to exit partnership
Board
·Director from ICAA – commitment for 3 years – paid position
·Director – DCN
·Director – OM
·Director – OM
·Executive Director
·Chair – Independent
·Primary Executive Role – Manager Cinema Services – Cost of Role Shared with Distribution Services 50/50
·NewCo Subcontracts the service of the OM NOC
·Administrative Support (including VPF Administration) provided by OMM
The value of DCN will be determined by:
·VPF being delivered for ICAA members
·Market Contracts … support companies, exhibitors, distributors
·TMS IP
Omnilab Media would be providing
·Guarantee of entitlements to staff
·Funding of training programs
·Sales Strategy
·Operating Capital for 3 to 6 months to establish the network of installation and support technicians
·Cashflow funding of equipment purchased to point of payment
·Administrative support
oAR
oAP
oContract Management
Maybe we can drive (sic) DCN shares of the business through key KPIs
·10% for finalized VPF
·10% for X volume of sales both in systems and in distribution contracts
·10% for completed and documented TMS
Note; DCN Software developers will provide documentation for all software and firmware systems, submit to external software/firmware audit with place software in escrow
…
(Emphasis added.)
Omnilab Media increased its efforts. At Sarfaty’s suggestion, Omnilab Media retained Entwistle, the managing director, owner and operator of Limelight Cinemas Pty Ltd in Canberra, a member of ICAA and a Board member of Screen Australia. Entwistle’s role was to assist Fleming to understand the opportunities that existed for Omnilab Media in digital cinema. On 23 October 2009, Entwistle prepared what he described as an “Opportunity Statement”. It identified the players in the industry, the size of the market and the opportunities for Omnilab Media. Significantly, the document recorded that:
1.ICAA had authorised MGS to negotiate VPF deals for the ICAA members but that ICAA’s plan lacked coordination beyond the negotiation of a VPF figure;
2.Smith, the principal of DCN, had been leading the negotiations with Studios on VPFs on behalf of ICAA;
3.The Studios had thus far shown a significant preference for dealing with integrators on VPFs;
4.Given the speed and credibility imperatives, Entwistle suggested that Omnilab Media join forces with a local partner that possessed complementary skills and resources, and that the best fit would appear to be DCN;
5.Initial discussions had taken place with DCN about the viability of a collaboration but that DCN’s suggested approach of Omnilab Media buying equity in DCN was not considered to be the preferred option because of the difficulty in valuing DCN’s business in its current state.
(7) November 2009
On 8 November 2009, Entwistle emailed Fleming with a suggested “approach”. Entwistle reported he had meetings scheduled with Sarfaty and Smith that week, deliberately scheduled in that order. Entwistle sought Fleming’s approval to approach those meetings with the aim of convincing Sarfaty that ICAA should skip the tender process and immediately enter into a “co-operative approach” with Omnilab Media while, at the same time, convincing Smith that “his only way to get ICAA [was] with an Omni-led entity”, and getting him to agree to key elements of the Entwistle’s proposed structure. That proposed structure involved the following:
…
1.Sarfaty
… [The] better approach for ICAA than creating a two horse race, may be to take a more active role in the process, via a seat at the table of an Omni-controlled “Transition Services Business”. The basic structure would be:
Board
·Director from ICAA – commitment for 3 years – paid position
·Director – DCN
·Director – OM
·Director – OM
·Executive Director
·Chair – Independent
This would provide ICAA with comfort around a number of key elements:
·led by company with credibility / professionalism / longevity (ie: Omni)
·Technical personnel to execute installations (ie DCN)
·…
·A seat at the table on VPF discussions.
2. Mike Smith
Advise Mike we have ICAA ready to commit, but conditional on the following:
1.Omni – controlled entity
2.ICAA Board Seat
Based on the above, suggest the best way forward might include:
·Omni buying DCN (in whole or part) with some kind of “earn-out” structure (ie: small % upfront, with balance from % of commissions etc)
·DCN maintaining a seat on Board, and key people to be maintained throughout transition phase
Key issues to be resolved / questions answered:
·What is the DCN business structure now?
·How do we propose to value?
…
In the middle of November 2009, the state of the negotiations between Omnilab Media and DCN was the subject of internal debate within Omnilab Media. Entwistle emailed Fleming on 18 November telling him of the need to:
a) Nail down DCN. We need them ‘in the tent’ asap, where we can get full transparency, and stop them running around on their own.
b) Get [Sarfaty] and [Smith] in the same room and force the parties to get on the same page …
As will become evident, they attempted to (and ultimately did) achieve the first objective through Smith. The structure proposed by Entwistle on 8 November (see [59] above) was adopted by Omnilab Media. The question is whether the steps that they took were lawful.
The Gardiners were aware of the Omnilab negotiations. On 30 November 2009, Gardiner emailed Smith and his brother stating that he believed “DCN need[ed] … some ground rules associated with the negociation (sic).” Gardiner stated:
…
Being a startup business, with really only six moths (sic) of trading as of the end of Dec 09, I would argue a 6x multiplier for June-Dec Profit would be a fair bases of valuation. If we wish to sell. And hell, we don’t know what that is.
…
… Also, the true (sic) is, Omnilab is interested in the commercial position and opportunities being in this position gives an organisation. What would it have cost Omnilab to try setting this up? What would be Omnilab’s risk factor?
A position to take, IF we are to enter into investigating this opportunity, and devolve commercial information about our operations, Omnilab needs to commit to a bases of valuation (a formula one to agree on), before we commit to any commercial disclosure.
This will need to be in the form of a ‘Heads of Agreement’ or a ‘Letter of Indicative Offer.’ I have attached the one ‘WAN TV’ had with Technicolor, as a reference.
Also, as part of our commitment to disclosure information, we need a formal undertaking by Omnilab that we are disclosing commercial, in confidence information, that they they (sic), as a commercial acknowledgeable (sic) of that, agree that they cannot enter the business of, purchase a business in, or partner with, another Digital Cinema installer/integrator of any form for a period of 3 years from the signing of the agreement.
I known (sic) you will think this is high, but that would be my minimum start point. And they need to commit not to screw us, because John does play hard ball. John is most likely feeling out Edge on a partnership as we speak. We need to be carefully (sic).
…
Smith responded:
I agree with everything … , I also think you start point of 6 x 6 month trade is the absolute minimum – I have suggested 5x annual profit.
Is the meeting with [Fleming] and [Entwistle] in person or on the phone. We need to talk before that, and I’d like to be there – we don’t want them trying to drive a wedge between us … which I wouldn’t put past John either.
…
No heads of agreement or formal undertaking from Omnilab Media was sought or provided.
In November 2009, negotiations with the Studios moved up a level. On 5 November 2009, Smith spoke at length to the Fox representative, who appears to have asked for a list of the exhibitors in his group and some acknowledgement that Smith was negotiating on their behalf. Smith’s response – to tell Fox that he would chase up the letter from ICAA with the list of cinemas.
To secure the letter from ICAA, Smith set to work. On 6 November 2009, Smith sent Sarfaty a draft VPF agreement he had received from Disney. By 16 November 2009, Paramount had provided versions of its VPF agreement to Smith, which Smith provided to Sarfaty. Smith also sent Sarfaty a copy of the Fox Deployment Agreements and the draft Sony VPF Agreement. After providing Sarfaty with the draft VPF agreements, Smith emailed Sarfaty on 29 November 2009 asking for a letter from ICAA that stated:
·DCN has been appointed to negotiate VPF’s on behalf of it’s (sic) members
·That members understand that this a joint process, and that we are aiming for a VPF document that all members will accept
In his email, Smith advised that this letter was “needed to get Fox to the next step”. Sarfaty did not respond.
(8) December 2009
A week later, on 6 December 2009, Smith wrote again seeking the letter for Fox.
It was around this time that the fundamental shift occurred. On 1 December 2009, Smith had attended a meeting at Omnilab Media which was attended by Sarfaty and Fleming. At that meeting, Sarfaty invited Omnilab Media (on behalf of ICAA members) to undertake the role of deployment entity for the VPFs, as well as potentially being the supplier of digital equipment. As Smith explained it, the position was that if ICAA wanted to do a deal with the support of its members, then there was nothing that he could do against it. As will become apparent, they did not mean that Smith was required to have acted, or should have acted, to the detriment of DCN.
By 15 December 2009, Fleming had drafted what was described as “Digital Cinema Update 15.12.09”. The opening line – “There has been a change”. The change? “ICAA would prefer [Omnilab] to take on the position is (sic) Integrator”. Fleming described the role as a 10 year commitment to the Studios with responsibility for VPF negotiation, management of payments, administration and the like. In further describing the role, Fleming included the following in his update:
As an Integrator it is possible to claim a fee per screen (from the exhibitor) to cover costs and legal costs. This can be somewhere between $500 and $1,500 per screen (collected by holding onto the first 2 VPF fees). $500 of this would go to DCN for their work so far. There is also a fee that can be claimed from the distributor at around $200 per screen or $10-20K per distributor.
…
Action: Understand what a Digital Cinema Integrator does.
…
Action: Get access to VPF agreements (from Michael) subject to NDA.
…
Action: Do business modelling based on new organisation structure and costs associated with VPF and identified risks.
·There is angst between [Sarfaty] and [Smith]
·This is being presented by [Sarfaty] as an issue in that it will be difficult to get key ICAA members onboard with [Smith] involved
·It could also be seen as [Sarfaty] increasing his value for pulling this alliance together
·ICAA members still support [Smith] finalizing VPF negotiation
·[Sarfaty] has opened up discussions with key members of ICAA has appears to have support
Action: Ross [Cartledge] to do research on issues with Michael [Smith].
Action: Consider compensation for … Sarfaty – success fee
…(Emphasis added.)
This update contemporaneously recorded the position at that time – tension between Smith and Sarfaty. It also recorded a number of other important facts. First, that Omnilab Media knew that DCN was negotiating VPFs for ICAA members. Why else would Omnilab Media contemplate paying DCN $500 of the fee per screen “for their work so far”? Secondly, Omnilab Media needed access to the VPF agreements to understand the role of a digital integrator and its risks and, thirdly, and most importantly, it identified the person who was to provide that information – Smith. And that is precisely what happened. The question is whether what Smith and the Omnilab Parties did was lawful – in light of the events of 30 November (see [61] above), 1 December (see [65] above) and now 15 December 2009. As will become apparent, the answer is no.
First, on 18 December 2009, Smith sent Fleming, by email, the template Universal and Sony VPF Agreements. In the Sony agreement, the deploying entity was named as “DCN”. Although the definition of ‘deploying entity’ was left blank in the Universal agreement, the document’s header stated “UNIVERSAL – DCN – Universal International DCDA Template…”. Smith told Fleming that the documents were highly confidential in nature, only for his eyes and those of his in-house counsel “for the purpose of evaluating the role, risk and liabilities inherent in being an integrator”.
One might well ask: why was Smith providing the draft VPFs to Omnilab Media when DCN (a company he was a director of) was not only proposed to be the integrator, but named in the draft agreements? And why was Smith stating that he was providing the documents “for the purpose of [Omnilab] evaluating the role, risk and liabilities inherent in being an integrator” unless Fleming had told him of Omnilab Media’s objectives?
Later that morning, Fleming forwarded the draft agreements to Goyal, Omnilab Media’s in-house counsel. The email stressed the confidential nature of the content of the email and then stated:
For the last 12 months I have been negotiating a position as a Digital Cinema Integrator. We are now getting to the pointy end. The three things that require consideration are:
·Contracting the [VPF] with the Studios
·The organisation structure of the new entity which must have an advisory board that includes industry representatives
·A purchase agreement for an existing business, Digital Cinema Network (DCN)
The immediate requirement is to review the VPF agreements to determine our commitments and build a risk profile for the Board. There are 6 agreements to be negotiated but the two attached should provide a good picture of what is involved.
Michael Smith (of DCN) has been negotiating the agreements with the Studios.
…
I am back on 11.1.10. I would like you and Michael [Smith] and I to get together that week and spend a day going through the agreement, getting his input on commercials, your input on legals and me determining the areas of cost and risk. Are you available this week and what day would suit? Michael [Smith] has to fly to LA either this week or the following week to continue negotiations so a response ASAP would be appreciated as he is trying to book flights. Additionally, if you had to fly to LA with him, are you available the following week w/c 18.1.10
…
(Emphasis added in italics.)
As at 18 December 2009, there was no doubt that Omnilab knew:
1.Smith of DCN was conducting the negotiations;
2.Smith had provided the VPF agreements to Omnilab; and
3.Smith of DCN was to provide “his input on commercials” for the benefit of Omnilab.
At lunchtime on 18 December 2009, Smith received another email from Fox. Fox again sought the information it had asked for on 5 November 2009 – a list of exhibitors in the group and some acknowledgement that Smith was negotiating on their behalf (see [62] above). The difficulty was that Smith still had not received the letter from ICAA. He needed the ICAA letter because he did not have support from a sufficient number of exhibitors independently of ICAA. During the afternoon of 18 December 2009, Smith emailed Sarfaty again in the following terms:
Fox are chasing me on this letter – they are wanting to engage, but I can’t do so without it.
Can you please get for me asap.
It needs to point out that we are negotiating on behalf of ICAA members, and that the members accept it is a group negotiation.
…
(Emphasis added.)
Sarfaty’s response on 19 December 2009 – “Sorry. Completely slipped off my radar … who does it need to be addressed to?” Smith then responded seeking a “generic letter” that he could use for other Studios, in the form of “a letter to DCN confirming that [DCN had] been appointed to negotiate the VPF’s on behalf of ICAA members, and that the contract will be a group deal”.
(9) January 2010
Nothing then occurred until 7 January 2010 when Sarfaty produced the “generic letter”. There was a difficulty. The generic letter stated that its purpose was to “advise that [ICAA] ha[d] an arrangement with Michael Smith of MGS Group to undertake … VPF negotiations on behalf of ICAA members”. It also stated that the current arrangement between ICAA members and ICAA was by way of a letter of agreement between ICAA and member businesses to negotiate VPFs on their behalf, and that the activity was being undertaken in an arrangement between ICAA and Smith. Finally, it stated that upon presentation of a draft VPF agreement by Smith to ICAA, the Executive and Board of ICAA would consider the agreement and, subject to review and Board approval, the VPF agreement would be recommended to members for adoption. In other words, ICAA held the right of veto.
Smith responded later that day, stating: “[t]he letter is great, but we probably need to note DCN, suggest you refer to “ … Smith of MGS Group and Digital Cinema Network …”. That would then cover both bases”. Five days later (12 January 2010) Sarfaty forwarded that email to ICAA’s President. Sarfaty told the President that:
The reality is that MGS is mike’s (sic) company whilst DCN is a JV with the Gardner (sic) brothers and at no stage did we agree that the Gardners (sic) were involved in VPF’s on behalf of members: My feeling is that the letter is fine as it stands.
The President responded immediately – “Agree that it is not acceptable to mention DCN”.
Then there was a further twist. On 20 January 2010, Smith received an email from Goyal. The email was also sent to Fleming and a solicitor at Holding Redlich. Attached to the email was a first draft of a memorandum that could be presented to ICAA and the Studios outlining the role each would play. The attached document recorded Omnilab Media, not DCN, as a non-exclusive integrator. This confirmed what Smith had been told on 1 December 2009: see [65] above.
Later that afternoon, Smith received an email from Sarfaty. Sarfaty refused to alter the “generic letter” to include reference to DCN. The email stated:
I’ve been through our emails and discussion notes and the relationship on VPF’s has always been on you and MGS with a specific intention to keep the role of DCN separate from VPF negotiations per your email to me of Nov 2008 (copied below) and the letter subsequently sent by me to ICAA members. I’ve discussed with ICAA board members and they are comfortable with the letter as it stands and feel it reasonably represents the position agreed upon.
The “Nov 2008” email and the letter to members is at [26] above.
Smith responded to Sarfaty on 22 January 2010 in the following terms:
A lot has happened since Nov 2008 so I feel I need to summarise much that has been discussed with you since we first started pursuing VPF’s.
·When we first started chasing VPF’s, we did so as MGS. But we were chasing a direct deal for cinemas.
·Many of the studios insisted that an integrator be involved. You have read all of the contracts, and many refer to responsibilities of an integrator – so an integrator needs to be involved.
·MGS is a partner in an Integration Company, DCN.
·We trade as DCN, and the deals are being negotiated with DCN as the integrator.
I appreciate the original discussion … referenced MGS specifically, but since soon after starting DCN has been the party negotiating with the studios.
I don’t believe there is any issue at all for DCN to be represented on the letter from ICAA. The wording “Michael Smith of MGS Group and Digital Cinema Network” doesn’t place any duress on any members, but is going to save explaining with the studios, as all of their communications relate to DCN.
…
If ICAA board members have an issue I can discuss with each of them directly …
(Emphasis added.)
In cross examination, Smith sought to distance himself from the contents of the email and said he disagreed with the statement that he was actually conducting the negotiations on behalf of DCN. His explanation was that at that time the Fox agreement was a direct exhibitor agreement and did not involve a digital integrator. I reject Smith’s evidence. He “had continued to represent [himself] as being from DCN and asked Sarfaty to acknowledge that by mentioning DCN on the letter”.
Sarfaty’s unchallenged evidence was that he met Smith on 2 February 2010 in Sydney, and they had a heated exchange about the content of the letter sought by Smith.
On 31 January 2010, the Omnilab Board considered a proposal drafted by Fleming. The proposal was for Omnilab Media to become an integrator, to negotiate a VPF with the Studios and to undertake sales installation and support of digital cinema systems for ICAA members. The business structure was a “NewCo” called “Omnilab Media Cinema Services or Digital Cinema Network (DCN)”, 100% owned and operated by Omnilab Media. Its advisory board included one current DCN director (Smith) and one ICAA director (Sarfaty). Entwistle was identified as the independent chair. Under the heading “What do ICAA want from Omnilab”, the list included “a VPF” and “a company of substance to manage the VPF and provide ongoing systems support”. The summary recommended that given the time limitations and the need to establish credibility within the exhibition community, Omnilab Media should partner with an established player – DCN. The draft SWOT (strengths, weaknesses, opportunities and threats) analysis recorded that Smith provided Omnilab Media with the best opportunity for a VPF and equipment deals. What had been foreshadowed by Fleming in December (see [65] and [66] above), and started to become reality (see [65], [69], [70] and [75] above), was now a formal proposal to Omnilab’s Board.
DCN submitted, and I accept, that Smith’s actions of disclosing information to the Omnilab Parties and transferring the negotiations for VPF agreements to the Omnilab Parties constituted a breach of Smith’s duties to DCN. First, his actions amounted to breach (or breaches) of s 180(1) because, objectively, an ordinary person with the knowledge and experience of Smith would not be expected to have disclosed the information or behaved in the way that he did if he was acting on his own behalf: ASIC v Adler (2002) 168 FLR 253 at 347. The issue may be tested in this way – was what Smith did what an ordinary person with his knowledge and experience might be expected to have done in the circumstances if he or she was acting on their own behalf? The answer is no.
Further, Smith’s actions contravened s 181(1) of the Corporations Act. In my view, Smith acted with a consciousness that what was being done was not in the best interests of the company: see, by way of example, [65], [67] – [68] above: ASIC v Maxwell (2006) 24 ACLC 1308 at [108] and [109]. His actions were dishonest. It cannot be said that between October and December 2009 Smith exercised his powers in the interests of DCN. As was said in Boardman v Phipps [1967] 2 AC 46, a reasonable person would foresee that there was a real, sensible possibility of a conflict in Smith in taking the actions that he did. Again, those actions caused detriment to DCN in breach of ss 182(1) and 183(1) of the Corporations Act: see [198] above.
Claim 4 – Smith breached his fiduciary duties to DCN on about 4 March 2010 by agreeing with Omnilab and ICAA to declare that DCN had not been negotiating VPF agreements with the US Studios to that point in time. That declaration was not true
This claim was not addressed by DCN in its final submissions and may be put to one side.
Claim 7 – Smith also breached his fiduciary duty to DCN by negotiating secret commissions to himself (and/or his company, MGS), being:
(a) a payment of $500 per screen for every cinema screen receiving VPFs under VPF agreements negotiated with the US film studios – this agreement entered into some time in 2008 or 2009 with ICAA;
(b) a payment of $500 per screen for every cinema screen receiving VPFs under VPF agreements negotiated with the US film studios – this arrangement agreed by Omnilab on about 15 March 2010 (estimated to be between $150,000 to $300,000); and
(c) a payment of $250,000 after Omnilab took over the VPF agreements – an arrangement agreed by Omnilab on about 15 March 2010.
This claim proceeds upon a fundamental misconception – that Smith concluded his negotiations with the Omnilab Parties. The evidence discloses that negotiations with the Omnilab Parties were on foot and, if concluded, would entitle Smith to substantial sums. Moreover, the evidence discloses that the terms of the draft agreements changed over time. The 15 March 2010 email (see [102] – [104] above) upon which DCN placed considerable reliance does not support DCN. None of the draft agreements (including those referred to in the 15 March email) were ever concluded. No commission arrangement was ever agreed between the Omnilab Parties and Smith (in any capacity) or ever paid. The fact that under the various versions of the draft agreements there was disparity between what Smith might have received and what DCN might have received from the Omnilab Parties does not establish that Smith breached his fiduciary duty to DCN. The claim is dismissed.
Omnilab knowingly assisted in smith’s breaches
Claim 8 – Omnilab knowingly assisted Smith in respect of each of the breaches of duty identified in claims 1 to 7
(i) Involvement in a Contravention of the Corporations Act – s 79
The essential elements are established. First, Smith breached ss 181(1), 182(1) and/or 183(1) of the Corporations Act: see [194] – [199] above.
Secondly, the facts establish that the Omnilab Parties had actual knowledge of each of the essential matters that go to make up the contravention and had that knowledge at the time of Smith’s alleged contraventions: ASIC v Australian Investors Forum Pty Ltd (No 2) (2005) 23 ACLC 929 at [114] – [115]. What then were the essential matters that went to make up the contravention and what facts establish that the Omnilab Parties had actual knowledge of each of those matters at the time of the alleged contravention?
Claims 1 and 2
The essential matters that go to make up the contravention by Smith of ss 181(1), 182(1) and/or 183(1) of the Corporations Act are summarised in [189] – [190] above. As those paragraphs demonstrate, the Omnilab Parties (and Fleming in particular) had actual knowledge of each of those matters at the time of the alleged contravention. In fact, the Omnilab Parties obtained that knowledge because of the plans drafted by Fleming, approved by the Omnilab Board and then implemented by the Omnilab Parties to obtain from Smith the information and assistance the Omnilab Parties needed to “evaluate the role, risks and liabilities inherent in being an integrator”, to do business modelling on “costs associated with VPF and identified risks” and to “determine [their] commitments and build a risk profile for the Board”. The Omnilab Parties knew this because they requested the information for a specific purpose, they then received the information sought and used it as they intended.
Claims 3, 5 and 6
The essential matters that go to make up the contravention by Smith of ss 181(1), 182(1) and/or 183(1) of the Corporations Act and his fiduciary duties are summarised in [194] – [199] above. As those paragraphs demonstrate, the Omnilab Parties (and Fleming in particular) had actual knowledge of the following matters at the time of the alleged contravention:
1.the disclosure of the information from Smith to Omnilab: see [197] above;
2.from 20 January 2010, Omnilab Media took steps to insert the name of an Omnilab entity as the deployment entity; and
3.in mid July 2010 it directed Smith to insert Omnilab MCS into the draft VPF agreements.
As Fleming said on 26 July 2010 (see [134] above), for the previous two years Smith had been open, for the most part unreserved and had provided considerable knowledge to Omnilab who entered the market from a standing start.
Conclusion
For those reasons, the Omnilab Parties were involved in Smith’s contraventions of the Corporations Act. Each aided, abetted, counselled or procured the contravention and, alternatively, by act and omission, was directly and indirectly, knowingly concerned in, or party to, the contraventions.
(ii) ‘Knowing Assistance’ – Breach of Fiduciary Duties
For the same reasons, I consider that the evidence also establishes that the Omnilab Parties “knowingly assisted” Smith in breaching his fiduciary duties to DCN in accordance with the second limb of Barnes v Addy (1874) LR 9 Ch App 244. The Omnilab Parties possessed the requisite degree of knowledge: see [204] and [205] above. The breaches of fiduciary duty by Smith were dishonest and fraudulent. The conduct, constituting the breaches of duty by Smith, was not inadvertent. Moreover, the dishonest and fraudulent conduct that gave rise to those breaches of duty was conduct in which the Omnilab Parties actually assisted Smith. They assisted him because they not only drafted and approved the plan but directed the plan. This is not one of those cases where reasonable minds could differ as to the validity or otherwise of a disputed claim: King Network Group Pty Ltd v Club of the Clubs Pty Ltd (2008) 69 ACSR 172 at [55].
I accept that, in order to demonstrate knowing assistance, (a) it is necessary to recognise that the allegation is a serious allegation that ought to be assessed in accordance with the principles in Briginshaw v Briginshaw (1938) 60 CLR 336 (Say-Dee (2007) 230 CLR 89 at 162), and (b) it is necessary for DCN to demonstrate that the Omnilab Parties had the intention of furthering that dishonest breach (Biala Pty Ltd v Mallina Holdings Ltd (1993) 11 ACSR 785 at 832). In the present case, I consider that each of those elements is satisfied. As noted above, the contemporaneous evidence disclosed that the Omnilab Parties (and Fleming in particular) had actual knowledge of each of the matters constituting the contravention at the time of the contravention. In Say-Dee at [163], the Court stated “there is a distinction between rendering liable [1] a defendant participating with knowledge in a dishonest and fraudulent design and rendering liable [2] a defendant who dishonestly procures or assists in a breach of trust or fiduciary obligation where the trustee or fiduciary need not have engaged in a dishonest or fraudulent design”. The defendant in [1] is liable. The defendant in [2] is not. Here, the Omnilab Parties clearly fall within the first category. They planned it and then executed it.
(iii) Amended case on knowledge
During closing submissions, DCN foreshadowed an application to amend its Summary of Claims to expand the ‘knowing assistance’ claim to include the other categories of knowledge identified in Baden Delavaux v Societe General [1993] 1 WLR 509. A proposed amended Summary of Claims and written submissions in support were filed and served after the hearing. The Omnilab Parties opposed DCN being granted leave to amend its claim in that manner.
Given the views I have formed, it is unnecessary to consider DCN’s application. However, it is appropriate that I indicate that if DCN had failed to establish its pleaded case, I would not have granted it leave to amend its claim at such a late stage in the proceedings. I do not accept DCN’s submission that the expanded claim was “implicit” in its pleaded claim of knowing assistance. Moreover, the expanded claim did not accord with the way in which the parties conducted the litigation.
(iv) Lost opportunity
The Omnilab Parties submitted that any allegation of dishonesty by reason of knowing involvement on their part is negated by the fact that DCN could not have pursued the VPF opportunity itself, and that the Omnilab Parties secured ICAA’s support to continue negotiating and execute (where relevant) the VPF agreements.
The Omnilab Parties submitted that for DCN to be able to pursue the VPF opportunity itself, DCN had to have the following characteristics (and it did not):
1.be a company of substantial resources;
2.have the support of a minimum number of screens; and
3.be seen by the Studios and by ICAA as having satisfied conditions (1) and (2), i.e. to be a company of substantial resources, and to have the support of a minimum number of screens.
In other words, DCN was not in a position to sign and perform the VPF agreements. The Omnilab Parties also submitted that Gardiner did not see any copies of the VPF agreements until July 2010, there were no DCN Board meetings to discuss the draft VPF agreements, DCN had no list of “confirmed screen contracts”, DCN had no plan or capacity to develop the VPF opportunity and DCN lacked the support of ICAA.
In light of those facts, the Omnilab Parties submitted that it was apparent that “no VPF opportunity was diverted (nor could commercially and reasonably be seen to be diverted) from DCN to Omnilab”.
That submission is rejected on two bases. First, it misdescribes the nature of the breaches by Smith in which Omnilab knowingly assisted and/or was knowingly involved. The breaches were not limited to a “lost opportunity”: see [192] – [204] above. Secondly, as the High Court stated in Warman International Ltd v Dwyer (1995) 182 CLR 544 at 558, it is no defence that DCN was unwilling, unlikely or unable to make the profits for which the account is to be taken or that the fiduciary acted honestly and reasonably. The obligation is strict. In any event, Smith as a director of DCN was precluded from diverting to the Omnilab Parties without the approval of DCN any business advantage for which it had been negotiating: see by way of example Canadian Aero v O’Malley [1974] SCR 592 at 606-607. In the present case, the business advantage for which DCN had been negotiating was the possibility of DCN being appointed the digital integrator. Here, the case was not concerned with the diversion of a concluded or semi-concluded business advantage (and nor does it have to be), but with the taking of steps by Smith (with the knowledge and at the direction of the Omnilab Parties) which were intended to achieve (and ultimately did achieve) the appointment of Omnilab MCS as the digital integrator in the Paramount VPF Agreement. As Fleming said, the taking of steps by Smith (with the knowledge and at the direction of the Omnilab Parties) for the previous two years had provided considerable knowledge to the Omnilab Parties, who entered the market from a ‘standing start’.
(v) DCN as a ‘placeholder’
Along similar lines, the Omnilab Parties submitted that DCN simply acted its part in the VPF negotiations until the Omnilab Parties confirmed that they were prepared to assume the obligations as the deployment entity. In other words, the Omnilab Parties’ submission was that the fact that DCN’s name appeared in the documentation had no legal significance. As will be apparent, in light of the views I have formed about the conduct of Smith and the Omnilab Parties, this submission may be put to one side. It provides no answer, or no complete answer, to either the breaches of duty by Smith or the Omnilab Parties’ knowing involvement in those breaches.
(vi) Estoppel
The Omnilab Parties submitted that because one of the directors of DCN (Smith) was present at the 4 March 2010 meeting (see [96] above), had seen the ICAA briefing note (see [95] above) and did not raise any complaint about the change from DCN to Omnilab as the nominated integrator, Omnilab was entitled to rely upon Smith’s silence and to assume that the deal struck that day constituted DCN’s agreement to it. The Omnilab Parties further submit that because of Smith’s failure to raise any objections on behalf of DCN, DCN should now be estopped from contending to the contrary. I reject that contention. Many of the breaches of duty by Smith in which Omnilab Media knowingly assisted had already occurred by 4 March. Moreover, assessment of the Omnilab Parties’ knowledge is made at the time of the contraventions. By 4 March, Omnilab Media knew most if not all of what it needed to know because it had planned and then executed the plan to obtain access to the VPF agreements through Smith.
Claim 9 – Specifically, in respect of the breach alleged in claim 1, Omnilab was aware from about September 2008 and/or November 2008 that the confidential information in question belonged to DCN and that Smith was one of DCN’s directors. Omnilab was aware of those facts as a result of what Martin Gardiner had told John Fleming on those occasions (and also as a result of Fleming reading (at AIMC 2008) the promotional material prepared by DCN describing its ambitions in relation to VPF agreements).
Given the manner in which I have dealt with claims 1 to 9, it is unnecessary and inappropriate to address this claim separately.
Claim 10 – Omnilab engaged in Misleading and Deceptive Conduct
In its final submissions, DCN’s claim under this heading was refined. DCN claimed that by incorporating Omnilab MCS with the name ‘Omnilab Media Digital Cinema Network Pty Ltd’, and by corresponding with the Studios and equipment suppliers in that name, the Omnilab Parties represented that they had purchased DCN or that they were still negotiating with DCN. I reject this claim.
In December 2009, the default name for the proposed Omnilab entity that would be signing the VPF agreements was to be “Omnilab Media Cinema Services”. On 22 July 2010, at the time of incorporation, the name was changed to Omnilab Media Digital Cinema Network Pty Ltd. No evidence was led as to why there was this name change. Fleming conceded that the name was confusing. Smith told Fleming that “Omni DCN” had a nice ring to it and asked Fleming if he could refer to it in that manner.
On 23 July, Omnilab MCS sent out a request for quotation to suppliers (including DCN’s suppliers) in the name of “Omnilab Digital Cinema Network”. In mid July Fleming asked Smith to put the name on the draft VPF contracts. Fleming conceded that he knew at the time the name was very similar to DCN but that he did not believe that it was likely to mislead people at that time because “[he] still have every intention of purchasing DCN’s business”. On 2 September 2010, the name was changed to Omnilab MCS.
DCN submitted that by inserting Omnilab Media Digital Cinema Network Pty Ltd in to the draft VPF agreements in place of DCN’s name, executives from the Studios were mislead into believing that they were still negotiating with DCN. In support of that contention, DCN referred to the evidence of Mr Zylberstein that he did not know his negotiations with the Omnilab entity were unrelated to DCN until he was contacted by Gardiner in October 2010.
As noted, DCN alleged that by using the name Omnilab Media Digital Cinema Network Pty Ltd in the circumstances identified above, the Omnilab Parties represented that they had purchased DCN or that the Studios were still negotiating with DCN.
Even if the conduct identified contained one or both of the representations alleged, there was no evidence that any of the Studios laboured under any error as a result of the use of the name, Omnilab Media Digital Cinema Network Pty Ltd. Moreover, there was no evidence that any of the suppliers laboured under any error. The only supplier called was Mr Della Tolla. When he received the Request for Quote in the name of Omnilab Media Digital Cinema Network, he was surprised and puzzled and wondered what was going on. His solution was to call Gardiner who told him that DCN had not purchased Omnilab, and then to meet with Cartledge who told him that there were discussions taking place, but that no acquisition of DCN by Omnilab had yet been completed. Mere confusion or wonderment is insufficient for the conduct to be misleading or deceptive.
This claim is dismissed.
E. CROSS-CLAIM
The Omnilab Parties contend that to the extent that they are found liable for compensation orders under s 1317H of the Corporations Act and damages or alternatively, equitable compensation by reason of the Omnilab Parties’ knowing involvement in the breaches and contraventions of Smith, they claim contribution from him at law, in equity and / or pursuant to s 24 of the Wrongs Act 1958 (Vic) on the basis that he is liable to DCN for the same damage by reason of the breaches and contraventions found against him.
This was not addressed in oral argument. The written submissions were limited to that stated in paragraph [226] above. For present purposes, it is sufficient to state that having regard to the extent of Smith’s responsibility for the damage, I consider that it is just and equitable that the Omnilab Parties should not recover a complete indemnity for the damages to be awarded against it as the Omnilab Parties stood to benefit to a greater extent than Smith. I consider that the Omnilab Parties should recover contribution from Smith to the extent of one third of the damages awarded against it.
F. RELIEF
Notwithstanding the hearing was limited to liability, DCN sought a permanent injunction seeking to restrain each respondent – the Omnilab Parties and Smith – from negotiating with the Studios in respect of any VPF agreement. DCN’s application for injunction was only sought on 2 February 2011, almost five months after the application was filed on 22 September 2010.
I refuse to grant DCN the injunction it sought. First, injunctions are not granted if damages are an adequate remedy. I am not persuaded on the evidence led at this trial limited to the question of liability that damages is not an adequate remedy. Secondly, if an injunction was granted, it would prejudice third parties – the ICAA members – from obtaining immediate access to the VPF scheme and the significant financial benefits that flow from it. Neither ICAA nor any of its members were joined as parties to these proceedings or given notice of the application. The fact that ICAA was not joined as a party to these proceedings provides the third basis for refusing the injunction. ICAA has and retains access to all relevant information. It has pursued and continues to pursue the VPF agreements with the Studios and is entitled to do so. Fourthly, as DCN is well aware, ICAA and Omnilab have continued to negotiate with the Studios. Those negotiations have resulted in the agreement between Omnilab and Paramount and the real possibility of other agreements with other Studios. Fifthly, under any VPF agreement, there is no evidence to suggest that Omnilab will perform the role of digital integrator. It is said that in any event, ICAA will not appoint DCN to that role.
Sixthly, Gardiner conceded in cross examination that he may have told Smith in August 2010 that ‘if [DCN] don’t do the VPF’s, no-one will and I will blow them up”. Over the balance of his cross examination, his evidence waxed and waned about the precise words he used. Ultimately, he suggested that he “put forward” the fact that:
… commercially, DCN was better off nobody having the VPF and it being an even playing ground than for another party to be offering a 75% rebate on equipment that they sell and set up a network in competition to DCN which would reduce [or] remove the reason for the company to exist.
Finally, the evidence disclosed that DCN was unable to perform the functions of a digital integrator to the satisfaction of the Studios – it could not provide the minimum number of screens and did not have sufficient financial resources to provide the guarantees sought by the Studios.
In all the circumstances, equitable relief in the form of an injunction is refused. The other relief sought by DCN will be the subject of further hearing.
F. ORDERS
Given the complexity of the issues raised in these reasons, I will direct the parties to confer and to submit orders to give effect to these reasons for decision by 23 May 2011 and to deal with the next stage of the proceedings. If the parties cannot agree orders, I will list the matter for further directions on 30 May 2011.
I certify that the preceding two hundred and thirty-three (233) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon. Associate:
Dated: 16 May 2011
14
9
4