Duke Group Ltd v Pilmer
[1999] SASC 97
•20 May 1999
THE DUKE GROUP LTD (In Liquidation) v PILMER & ORS
[1999] SASC 97
TABLE OF CONTENTS
1. THE FACTS AND THE TRIAL JUDGE’S FINDINGS................................ 1
1.1 Introduction...................................................................................................... 1
1.2 The two companies.......................................................................................... 4
1.2.1 Kia Ora....................................................................................................... 4
1.2.2 Western United......................................................................................... 6
1.3 The scheme alleged by Kia Ora...................................................................... 7
1.4 The first moves towards the takeover............................................................ 8
1.5 Nelson Wheeler Perth...................................................................................... 12
1.6 The retaining of Nelson Wheeler Perth......................................................... 13
1.7 The preparation of the report required by the listing rules............................ 13
1.8 Consideration of the Nelson Wheeler report by the directors of Kia Ora. 16
1.9 The decision to proceed.................................................................................. 16
1.10 The advice to the shareholders about the proposal.................................... 18
1.11 The extra-ordinary general meeting............................................................ 22
1.12 The Horwath and Horwath report................................................................ 24
1.13 The takeover is completed............................................................................ 27
1.14 Proceeds of sale of shares by directors and senior management............. 28
1.15 The relevance of the stock market crash..................................................... 29
1.16 The trial judge’s findings on the issue of independence........................... 31
1.16.1 Mawson Pacific...................................................................................... 33
1.16.2 Wattle Gully............................................................................................ 36
1.16.3 Cullimore Investments Pty Ltd............................................................. 36
1.16.4 Back-to-back loans................................................................................ 37
1.16.5 The Kia Ora share registry.................................................................... 381.16.6 Summary.................................................................................................. 39
1.17 Sales of shares by Parry Corporation and Autocure Ltd........................... 39
1.17.1 The Parry transaction............................................................................. 40
1.17.2 The Autocure transaction...................................................................... 41
1.18 Duty of care.................................................................................................... 42
1.19 Were fiduciary obligations owed by Nelson Wheeler to Kia Ora?.......... 44
1.20 Contract........................................................................................................... 45
1.21 Liability of the directors................................................................................ 47
1.22 Capital gains tax............................................................................................. 48
2. DUTY OF CARE IN TORT............................................................................. 49
2.1 The submission by Nelson Wheeler.............................................................. 49
2.2 Consideration of the submission.................................................................... 56
3. DUTY OF CARE IN CONTRACT................................................................. 73
4. BREACH OF DUTY......................................................................................... 75
5. CAUSATION IN TORT................................................................................... 79
5.1 Facts relevant to causation.............................................................................. 79
5.2 The judge’s reasoning...................................................................................... 88
5.3 Relevant principles.......................................................................................... 89
5.4 Application of principles................................................................................ 94
6. DAMAGES....................................................................................................... 101
6.1 Issues.................................................................................................................. 102
6.2 Principles........................................................................................................... 103
6.3 The share issue - relevance in determining the price paid.......................... 107
6.4 The value to be attributed to the shares issued by Kia Ora......................... 117
6.5 Damages for loss of use of money and of the value attributable to the share consideration provided by Kia Ora to Western United................................................................. 124
6.6 Other issues relevant to damages................................................................... 132
6.7 Statutory interest.............................................................................................. 133
6.8 Capital Gains Tax............................................................................................. 140
6.9 Conclusion on damages................................................................................... 142
7. CONTRIBUTORY NEGLIGENCE.............................................................. 143
7.1 Availability of the plea of contributory negligence..................................... 146
7.2 The duty to be independent............................................................................ 147
7.3 The test for contributory negligence............................................................. 149
7.4 Was Kia Ora guilty of fault and did it suffer damage as a result of that fault? 150
7.5 Is the conduct that constitutes fault to be attributed to Kia Ora?............... 152
7.6 Apportionment of damages............................................................................. 166
8. THE APPEALS BY SOMES AND LEE-STEERE.................................... 167
8.1 Somes’ Appeal.................................................................................................. 167
8.2 Breach of statutory duties............................................................................... 179
8.3 Appeal by Lee-Steere...................................................................................... 182
8.4 Causation........................................................................................................... 183
9. FIDUCIARY DUTY....................................................................................... 184
9.1 Introduction...................................................................................................... 184
9.2 Adequacy of the pleading................................................................................ 184
9.3 The approach of the trial judge....................................................................... 189
9.4 When do fiduciary obligations arise?............................................................ 190
9.5 Whether NWP owed a fiduciary duty........................................................... 197
9.6 Whether circumstances of conflict arose...................................................... 200
9.7 The nature of the fiduciary duty and its breach............................................ 209
10. DAMAGES FOR BREACH OF FIDUCIARY DUTY............................ 211
10.1 Introduction.................................................................................................... 211
10.2 Causation in equity........................................................................................ 212
10.3 The Interest Component of Equitable Compensation............................... 216
10.3.1 The method of calculation.................................................................... 216
10.3.2 Date of the Assessment.......................................................................... 221
10.4 Contributing Fault by the Plaintiff............................................................... 223
10.4.1 Section 27A, Wrongs Act...................................................................... 223
10.4.2 Equitable Compensation....................................................................... 224
10.4.3 Contribution and Equitable Compensation......................................... 232
10.4.4 New Zealand and Canadian Cases....................................................... 237
10.4.5 Some Criticisms...................................................................................... 241
10.4.6 Kia Ora’s Contributing Fault................................................................ 24210.4.7 Extent of the Reduction......................................................................... 243
10.5 Whether the Reduction is Precluded in This Case..................................... 244
11. NATIONAL PARTNERSHIP..................................................................... 245
11.1 Background facts and trial judge’s findings............................................... 245
11.1.1 National clients....................................................................................... 255
11.1.2 Client lists................................................................................................ 255
11.1.3 Financial arrangements.......................................................................... 255
11.1.4 National committees.............................................................................. 256
11.1.5 Professional indemnity insurance........................................................ 25611.1.6 Conclusions by the trial judge............................................................... 256
11.2 The role of this court..................................................................................... 258
11.3 The indicia of a partnership.......................................................................... 259
11.4 The formation and continuation of the arrangement................................. 260
11.5 Carrying on business..................................................................................... 264
11.6 Carrying on business in common................................................................. 265
11.7 With a view of profit..................................................................................... 270
11.8 Other considerations...................................................................................... 273
11.9 Conclusion...................................................................................................... 277
12. HOLDING OUT............................................................................................ 277
12.1 Findings of the trial judge............................................................................. 277
12.2 Section 14 Partnership Act............................................................................ 280
12.3 The representation......................................................................................... 281
12.4 The giving of credit....................................................................................... 285
12.5 On the faith of the representation................................................................ 290
12.6 Common law estoppel................................................................................... 295
12.7 Lavis, Gay and Taylor................................................................................... 295
13. THE APPEAL BY LAVIS, GAY AND TAYLOR.................................. 297
14. SUMMARY.................................................................................................... 299
14.1 Breach of duty of care by NWP.................................................................... 299
14.2 Damages for breach of duty of care............................................................. 301
14.3 Duty of care in contract................................................................................. 302
14.4 Contractual duty to act independently........................................................ 302
14.5 Contributory negligence................................................................................ 302
14.6 The appeals by Somes and Lee-Steere........................................................ 303
14.7 Fiduciary duty................................................................................................. 303
14.8 The national partnership............................................................................... 304
14.9 Kia-Ora’s appeal against Lavis, Gay and Taylor....................................... 304
14.10 The appeal by Lavis, Gay and Taylor in relation to costs......................... 304
15 REMAINING ISSUES................................................................................... 304
THE DUKE GROUP LTD (In Liquidation) v PILMER & ORS
[1999] SASC 97
Full Court: DOYLE CJ, DUGGAN AND BLEBY JJ
THE FACTS AND THE TRIAL JUDGE’S FINDINGS
1.1 Introduction
The appeal in this matter arises out litigation which took place following a company takeover. The plaintiff, The Duke Group Limited (In Liquidation) was formerly known as Kia Ora Gold Corporation NL. It is convenient to refer to the parties by reference to their capacities at first instance and the plaintiff will also be referred to as “Kia Ora”. Kia Ora completed a successful takeover bid for a company called Western United Limited (Western United) in early 1988, by which time it had acquired all of the issued capital of the target company.
In 1992 Kia Ora commenced these proceedings against the first defendants who were practising accountants in Perth. The plaintiff alleged that at the time of the takeover all the first defendants were partners practising under the name of Nelson Wheeler in Perth. It is convenient to refer to the first defendants as “NWP”. There was a dispute at trial as to whether two of them, Stokes and Munachen, were members of that partnership at times relevant to the proceedings. The trial judge held that they were and this finding has not been challenged on appeal.
Kia Ora retained NWP to prepare a report in order that the company might comply with the Main Board Listing Rules of the Australian Stock Exchange relating to takeovers in these circumstances and, in particular, r3J(3). NWP prepared the report to be placed before the Kia Ora shareholders and in it they advised that the proposed takeover price was “fair and reasonable”. Kia Ora alleged in its Statement of Claim that the report was prepared incompetently and in breach of duty under the contract of retainer. The Statement of Claim also alleged breach of duty of care in tort as well as breach of fiduciary duty on the part of NWP. According to Kia Ora it suffered loss as a result of the takeover and it was alleged that the loss resulted from NWP’s breach of the various duties owed to it by NWP.
Initially, the plaintiff commenced a separate action against 45 accountants practising in various States of Australia whom it alleged were members of a national partnership known as Nelson Wheeler. Eventually this action was joined with the present matter and these persons became the fifth defendants. They were not directly concerned with the giving of any advice in relation to the takeover, but Kia Ora claimed that they were liable under partnership law for the actions of NWP. These defendants denied the claim that they were part of a national partnership.
The second, third and fourth defendants (the director defendants) were directors of Kia Ora at the time of the takeover. The second defendants, Quilty and Singleton, acted as directors after the takeover proposal was first mooted. They assumed this role after Kia Ora had been given legal advice that independent directors should be appointed to the company board prior to the commencement of takeover procedures. Originally the director defendants were joined as third parties by the first defendants. During the trial, however, the plaintiff was allowed to amend the Statement of Claim so as to add a claim for damages against the directors. The principal allegation raised in both the third party notice and the amended Statement of Claim was that the director defendants breached their duties as directors in relation to the takeover. It was claimed that the first defendants were entitled to indemnity or contribution from them and that the plaintiff was entitled to damages by reason of their conduct.
The learned trial judge found that NWP were negligent in the discharge of their obligations to Kia Ora in preparing the report and that they were liable to the plaintiff company in contract and in tort. However his Honour refused to find that there was a fiduciary relationship between Kia Ora and NWP. He went on to find that there had been no contributory negligence on Kia Ora’s part; nor was Kia Ora estopped from pursuing its claim as had been argued by NWP.
The director defendants were all found to be in breach of their fiduciary duty as well as certain statutory duties in relation to the takeover. After reviewing the evidence on the issue of a national partnership involving the first and fifth defendants, the trial judge reached the conclusion that there was such a partnership to which all but three of the fifth defendants belonged, and that the members of the partnership were liable under partnership law for the damages to which the plaintiff was entitled. It is evident from his Honour’s reasons for judgment that if he had not concluded that there was a national partnership he would have found these defendants liable as though they were partners of NWP by reason of holding themselves out as members of the national partnership with NWP or allowing themselves to be held out as such. This type of liability arises in favour of a person who gives credit to the partnership on the faith of such a representation. (Partnership Act, 1891 s14(1)). Those found not to be part of the partnership or liable under s14(1) were the defendants Lavis, Gay and Taylor who practised as accountants in Queensland.
The trial judge ruled that the first and fifth defendants (it is convenient to refer to them collectively as the Nelson Wheeler defendants) were not entitled to indemnity from the director defendants for the damages due to the plaintiff but that they were entitled to contribution. The extent of responsibility of the defendants was assessed as follows:
Harold Abbott (one of the director defendants) 50% The Nelson Wheeler defendants 30% Lee-Steere, Somes, Quilty and Singleton (the remaining director defendants) 5% each
Damages and interest to the date of judgment were assessed at $93,863,796.81 and judgment in that amount was entered against each of the first defendants, the fifth defendants (with the exception of Lavis, Gay and Taylor) and each of the director defendants. The damages component of the award, including compensation for loss of use of the money and assets amounted to $50,393,796.81.
After judgment, appeals were lodged by the plaintiff and all defendants against whom judgment was entered. The plaintiff cross-appealed. The defendants Lavis, Gay and Taylor also cross-appealed, complaining of the trial judge’s refusal to make an order for costs in their favour. The defendants Abbott and Singleton have since withdrawn their appeals. The appeals and the cross-appeals raise a myriad of issues. Very few of the principal issues decided against any of the parties to the appeals remain unchallenged.
Nelson Wheeler argued on appeal that there was no duty of care owed by them to Kia Ora of the nature found by the trial judge. Even if a duty of care did exist, it was argued that there was no reliance by Kia Ora on the statements contained in the report prepared by NWP; nor were those statements causative of any loss to Kia Ora. In the event that the Nelson Wheeler defendants were negligent, it was claimed that the trial judge should have found contributory negligence on the part of Kia Ora. He declined to so find, because he declined to attribute to Kia Ora the relevant conduct by its directors. According to the argument of these defendants, if that decision on attribution were to stand, then the trial judge erred in holding that there was a contract between them and Kia Ora. Nelson Wheeler argued that the knowledge of Kia Ora’s directors and their actions which were contrary to the interests of Kia Ora, should be attributed to Kia Ora. It was further argued that the trial judge should have taken into account the effect of the stock market crash of October 1987, in considering a number of issues in the case, including breach of duty of care, causation and damages. There was a further challenge to the trial judge’s finding that there was a national partnership comprising the first defendants and a number of the fifth defendants with the consequence that all members of that partnership were liable for the negligence of the first defendants. The defendants Somes and Lee-Steere challenged various findings of fact by the trial judge as well as his conclusion that they had acted fraudulently and in breach of their fiduciary and statutory duties.
Kia Ora appealed against the dismissal of the action in so far as it related to the defendants Lavis, Gay and Taylor. It was argued that the trial judge should have held that at all relevant times these defendants were members of a national partnership. The plaintiff also cross-appealed against the finding that there was no fiduciary relationship between Kia Ora and Nelson Wheeler.
All parties to the appeals also challenged the trial judge’s assessment of damages in various respects. An important issue raised by the Nelson Wheeler appeal is whether the issue and allotment of shares in Kia Ora as part of the purchase price for the interest in Western United can be taken into account in assessing the loss to Kia Ora and to what extent.
1.2 The two companies
Before proceeding further, it is convenient to say something about the two companies involved in the takeover and, in particular, their relationships with each other through common directors and shareholders prior to the takeover. The trial judge concluded that the principal motivation for the actions of Harold Abbott, Lee-Steere and Somes who were directors of Kia Ora and who breached their fiduciary and statutory duties in the course of the takeover, lay in the financial benefit they and senior staff of the two companies would derive from the takeover by reason of their interests in Western United. Furthermore he found that NWP failed in its duty to be independent and to act independently when undertaking the valuation of the shares of Western United and preparing the report on that company. It is also relevant, therefore, to examine the relationships which his Honour found to have existed between certain partners in NWP and some of the directors of Kia Ora and Western United which he concluded were of significance in reaching the view that NWP did not act independently.
1.2.1 Kia Ora
Kia Ora was incorporated on 13th September 1954. Its principal business was gold mining in Western Australia. Until mid-1979 it was in business in a small speculative way. Its major asset was a 60% interest in a gold mine known as Marvel Loch in Western Australia. The remaining 40% interest in the mine was owned by Uranium and Nickel Exploration NL (Uranium and Nickel) which later became Western United.
In 1979 it was decided to reactivate these two companies and the defendant Harold Abbott became a director of both companies on 12th August 1980. The trial judge found that Abbott was in name or effect the chief executive of both companies at all relevant times thereafter. Alfred Schneider-Paas, who died in 1988, became a director of Kia Ora in 1972. Gary Abbott was appointed an alternate director for Harold Abbott, his brother, in 1980. Sir Ernest Lee-Steere, became a non-executive director and chairman in 1979 and Keith Somes, another defendant, was appointed a non-executive director in October 1981. In 1987 the defendants Francis Quilty and Keith Singleton were appointed directors for the purposes of the takeover after legal advice was received that none of the existing directors could be considered as being independent in relation to the takeover.
The Marvel Loch mine was brought back into production on 24th September 1980. At the same time, Kia Ora purchased the share of Uranium and Nickel by the issues of shares and options in Kia Ora which were allocated to share holders in Uranium and Nickel. Kia Ora operated the mine and acquired interests in other companies concerned with the provision of mining services. In March 1982 Kia Ora became the sole owner of the mine.
In the first four years after Marvel Loch was brought back into operation it made operating losses, but in the 1984 financial year it made a profit of approximately $474,000 and its net assets were valued at about $14.4m. In 1985 open pit mining was introduced and the annual operating profit was doubled, reaching approximately $2.7m. In the 1986 financial year net assets stood at about $25m. The trial judge summarised the share holdings in Kia Ora at this time:
“The issued capital was nearly 261m ordinary shares of 25 cents each, Lee-Steere held 140,000 shares and 300,000 options in his own name. The shareholding of Harold Abbott, through companies with which he was associated or controlled, increased to 4,750,259 shares and 1,350,000 options which he held personally and 200,000 which he held through companies. Schneider-Paas, and the companies in which he had a beneficial interest, held about 47m shares and 300,000 options. During this year Somes took an interest in the company for the first time by accepting 300,000 options. 2.5m options were issued by the company on 27th June 1986 and it appears that 300,000 were issued to each of the directors.”
At the end of 1986 and during the early part of 1987 Kia Ora gave consideration to selling part of its interest in the Marvel Loch mine and surrounding mining leases. An offer of $26m for a 50% interest was made by Mawson Pacific Ltd (Mawson Pacific) on 6th February 1987. The defendant Stokes, an accountant who joined NWP in 1984, was managing director of Mawson Pacific at the time. At a meeting of Kia Ora directors held on 10th February 1987 it was resolved to accept the offer of Mawson Pacific and settlement took place on 7th April 1987. The proceeds of the sale were deposited with the merchant bank of Western United. Kia Ora and Mawson Pacific operated the mine as partners until Kia Ora sold its remaining 50% interest to Mawson Pacific for $40m in September 1987. Settlement took place on 3rd November 1987. This, so it was said by the plaintiff, transformed Kia Ora into a cashbox company.
Kia Ora’s annual accounts and report for the year ended 30th June 1987 indicate that the issued capital was $67.7m represented by 67.7m one dollar shares. There were approximately 18,500 shareholders and most owned less than 1,000 shares each. The net assets of Kia Ora and its subsidiaries were shown as $41.4m.
1.2.2 Western United
This company was incorporated on 4th October 1953. It has been pointed out that the company was formerly Uranium and Nickel Exploration NL. The name was changed to Western United Holdings Limited on 30th June 1982 when it was converted to a public company limited by shares. The name was changed again on 26th September 1986 to Western United Limited. For the purposes of the remainder of this narrative it is convenient to refer to the company at all stages of its existence as Western United.
It has already been pointed out that at one time Western United held an interest in the Marvel Loch mine jointly with Kia Ora. It was also pointed out that a decision was made to reactivate the two companies in 1979 and that Harold Abbott became a director and chief executive of both in 1980. Schneider-Paas was also a director of Western United as early as 1979. Lee-Steere was appointed a director in November 1980 and Somes was appointed an alternate director for Schneider-Paas in August 1980. Gary Abbott was appointed a director in August 1984. All these directors held substantial shareholdings in Western United.
By 1983 Western United had moved away from being a mining company and had become involved in financial management and mining services. Western United Finance Limited (Western United Finance) was incorporated on 30th June 1983 as a wholly owned subsidiary of Western United to provide investment advice and financial services. Kia Ora advanced monies to Western United to enable it to establish a subsidiary business, Ray Porter and Partners, share brokers, on 8th August 1984. Western United Finance also established an insurance broking business and a metallurgical assaying business. Another company, Western United Mining Services Pty Ltd provided geological, mining, engineering and general consulting services to the Kia Ora group of companies. By the conclusion of the 1985 financial year the two groups of companies had been separated into categories: the Kia Ora group was involved with mining and investments, while the Western United group concentrated on financial and other services of the type to which reference has been made.
Prior to the takeover, the two companies were intertwined to a considerable degree by reason of common directors who held shares in both companies, common administrative facilities, inter company lending and the utilisation by Kia Ora of services provided by Western United. However the trial judge rejected a submission by Nelson Wheeler that the two companies were, for all practical purposes, a merged entity prior to the takeover. He pointed out that they operated in different fields of activity and kept separate records and accounts.
1.3 The scheme alleged by Kia Ora
According to the case presented by Kia Ora before the trial judge and on the hearing of these appeals, those controlling Kia Ora embarked on a scheme to enrich themselves at the expense of that company. In doing so they acted fraudulently and in breach of their duties as directors of Kia Ora. It was claimed that Lee-Steere and Somes assisted in the scheme but were not involved in the initial planning. The scheme was directed against Kia Ora at a time when its cash on hand was to be or had been increased substantially by reason of the sale of the balance of its interest in the Marvel Loch mine. The method used was to engineer a takeover of Western United, a company in which they were substantial shareholders, at a grossly inflated price. They were able to effect their purpose by reason of the control they exercised over both sides of the transaction. Nevertheless, the takeover had to be conducted in accordance with the Corporations Law and the Stock Exchange Listing Rules. R3J(3) of the Stock Exchange Listing Rules provided that this particular transaction had to be approved by the shareholders of Kia Ora in general meeting. The reason why that was so was the very nature of the associations which these directors had with both companies. Furthermore r3J(3) required that the meeting of shareholders be provided with an opinion from an independent expert to the effect that the proposed purchase price of the interest in Western United was a fair price. NWP was chosen as the expert by the Kia Ora directors. According to the argument presented on behalf of Kia Ora, NWP were far from independent having been associated with the directors of the companies in various ways and having prospects of gaining financially from the takeover by being given the task of maintaining the share register of Kia Ora after the takeover.
According to Kia Ora’s case, the statement in the Nelson Wheeler report that the proposed consideration for the purchase of the controlling interest in Western United was a fair price seriously misstated the position. The proposal was far from a fair price and NWP were negligent and in breach of fiduciary duty in preparing the report. The report resulted in the approval of the shareholders being given, an essential pre-condition for the takeover going ahead. The scheme succeeded and resulted in a substantial financial benefit to the director defendants, but at the expense of Kia Ora which suffered severe financial detriment.
1.4 The first moves towards the takeover
The offer by Mawson Pacific to purchase the remaining 50% of the Marvel Loch mine was received by Kia Ora on 19th August 1987. On the same day Harold Abbott, Gary Abbott and Bryan Gardiner, a Perth solicitor who, the trial judge found, played an important role in the management and control of the Kia Ora and Western United groups of companies, met with Mr J R Hayward, a partner of Freehill, Hollingdale and Page, Solicitors. Hayward was advised that Kia Ora intended to make a bid for Western United. The offer involved the allotment of shares in Kia Ora as well as a cash component. The trial judge inferred from notes made by Hayward (Hayward did not give evidence) that the suggested takeover price comprised of cash and shares amounting to in excess of $4.00 in exchange for each Western United share. At that time the share market price for Kia Ora and Western United shares was $1.15 and $1.70 respectively. Hayward also made a note that the Parry Corporation sold a large parcel of Western United shares during the previous week at $1.30 per share. Hayward appears to have been told at the meeting that the buyer of the Parry shares was unknown, but it was established by other evidence that Harold Abbott was the purchaser of a substantial parcel of those shares.
There appears to have been no meeting of the directors of Kia Ora to consider this matter prior to the meeting with Hayward. The trial judge inferred from the circumstances that the Kia Ora representatives who attended the meeting controlled the company in a practical sense and that they had probably considered the takeover before receiving the offer from Mawson Pacific on that day.
Mr Hayward wrote to Kia Ora the day after the meeting. He confirmed his instructions that Mawson Pacific had offered to purchase the interest of Kia Ora in the Marvel Loch mine for $40m cash and that, consequent upon this sale, Kia Ora would make an offer to acquire the whole of the issued capital of Western United. He observed that the offer involved paying $1.30 for each Western United share together with five fully paid Kia Ora shares for every two Western United shares. He noted that the current market price for Kia Ora shares was $1.15 and the current price for Western United shares was approximately $1.28
“The offer values the Western United shares at in excess of $4.00 each. The net tangible assets for a Western United share as at 31 March 1987 was (sic) 39.5 cents.”
Mr Hayward went on to set out in his letter the legal requirements for the proposed takeover and he remarked that, at present, no directors of Kia Ora could be regarded as being independent for the purposes of committing the company or recommending to shareholders that the proposal to make the offer be approved in a general meeting. He noted that it was proposed to appoint additional directors who would be independent for the purposes of the proposal and he recommended that at least two such directors be appointed. He added that it was most important that the new directors be seen as being truly independent and that they could not be persons who might be regarded as associates of the vendors. He also drew attention to the requirements of Listing r3J(3) of the Stock Exchange Listing Rules which requires that the notice of the meeting of share holders to consider the offer had to be accompanied by copies of reports, valuations and other material from independent qualified persons sufficient to establish that the purchase or sales price of the interest in the target company is a fair price.
He continued:
“As the proposed offer price is substantially greater than both the current market price and the net tangible assets of Western United, the independent experts and the independent directors carry a very heavy onus of satisfying themselves that the offer price is fair from the point of view of the shareholders in Kia Ora who are not participating in the offer as Vendors of Western United shares.
Reference should also be made to paragraph 3J(3)(c) which provides that none of the Vendors or their Associates may vote on the proposal at the Kia Ora shareholders meeting. The concept of who is an associate for this purpose is very broadly defined and is designed to ensure that only people who are totally disinterested in the proposal may vote.
Our principal concern is to ensure that the directors of Kia Ora are not in breach of their fiduciary obligations to Kia Ora and its shareholders. In this regard it is important that the independent valuation for the purposes of the Kia Ora shareholders meeting should pay particular attention to the reasons why it is fair and reasonable for Kia Ora to pay a substantial premium over both the market value and net tangible assets of Western United having regard to the interests of the non participating shareholders in Kia Ora. As discussed it is also important that the valuers are perceived by all concerned to be totally independent in all respects.”
There is no doubt that this was sound advice given against the background of a proposal for Kia Ora to pay a price which was well in excess of the market value of Western United, including its assets.
There was a second meeting with Hayward attended by the same representatives of Kia Ora. The trial judge concluded that it was likely to have occurred shortly after Harold Abbott received the letter from Hayward which was dated 20th August 1987. At the meeting Hayward was apparently advised that “a premium for control” of Western United would take the value of Western United shares to Kia Ora to $4.20. It is Kia Ora’s case that the proposal placed a value on the Western United shares which was demonstrably excessive and that the factoring of a premium for control into the price was no more than a device to inflate it to an unwarranted degree.
On 21st August 1987 Hayward prepared a draft offer and Part A Statement as required by the Uniform Companies (Acquisition of Shares) Code. After registration with the National Companies and Securities Commission the Part A Statement had to be served on the target company. The target company was then obliged to give a Part B Statement to the offerer and its own shareholders accompanied by a copy of an independent expert stating whether, in his opinion, the takeover offer was fair and reasonable and setting out his reasons for forming that opinion.
Mention has been made of r3J(3) of the Main Board Listing Rules of the Australian Stock Exchange Limited (the Listing Rules) and because of the importance of this provision to Kia Ora’s claim, it is appropriate to set out the relevant provisions. The rule provides:
“(3)(a)...... A listed company and/or any of its subsidiaries, shall not acquire or dispose of any assets including securities [which in the case of an acquisition includes a subscription for securities], where the consideration payable or the value of the total assets is in excess of 5 per cent of the total issued capital and reserves of the listed company as at the date to which the last audited accounts were made up without the prior approval of its shareholders in general meeting if the vendor or purchaser of such assets is -
(i).... any person who is or was at any time in the preceding 6 months a director or officer of the listed company or any of its subsidiaries;
(ii)any person or company who is or was at any time in the preceding 6 months a substantial shareholder of the listed company; or
(iii)any person or company who for the purposes of Section 9 of the Act would be regarded as a person or company associated with the listed company or its related corporations; or
(iv)any other person or company whose association with any of the persons or companies referred to above is such that in the opinion of the Home Exchange the proposed acquisition or disposal should be referred to the shareholders of the listed company in general meeting.
(b)Notice of any meeting of shareholders to approve any such acquisition or disposal is to be accompanied by copies of reports, valuations or other material from independent qualified persons sufficient to establish that the purchase or sale price of such assets is a fair price.
(c)The vendor or purchaser or any person who for the purposes of Section 9 of the Act would be regarded as a person associated with the vendor or purchaser of such assets or any other person or company which in the opinion of the Home Exchange is associated with the vendor or purchaser shall not vote on the matter at any meeting of the shareholders of the listed company convened for the purpose of approving such acquisition or disposal.
(d)The Home Exchange may require that securities issued as consideration for the acquisition of assets are deemed to be vendor securities and subject to the provisions of Listing Rules 3T(1) and (2).
(e)To supply to the Home Exchange for examination at least 5 business days before being issued 2 copies of the draft notice of meeting and other documents proposed to be sent to shareholders in accordance with paragraph (b) above." (emphasis added)
In the present case the shareholder approval was required by reason of the shareholdings and the common directorships of persons involved in both companies (paras (3)(a)(i) and (3)(a)(iii)). The directors could not proceed with the takeover without this approval.
The reference to s9 relates to the provisions in the Companies Code which set out the circumstances in which it will be deemed that one person or company is associated with another for the purposes of the Code. It is not in dispute that Kia Ora and Western United were to be regarded as being associated for the purposes of the takeover, and that shareholders who held shares in both companies could not vote on the takeover proposal.
Following upon Hayward’s advice that independent directors be appointed, the defendants Quilty and Singleton were approached by Harold Abbott. They agreed to act as directors. There is some doubt as to when they were actually appointed, and the trial judge found that they were not appointed by Harold Abbott. However he said they clearly regarded themselves as directors and acted as such during the second half of September 1987 and in October 1987. A person who acts in the position of director of a corporation comes within the definition of a “director” in s5(1) of the Companies Code.
1.5 Nelson Wheeler Perth
Before dealing with NWP’s role in this matter it is convenient to say something about the nature of the services provided by that firm. It has been pointed out that it was a firm of accountants practising in Perth. However, it was established at trial that apart from undertaking the traditional work of accountants, the firm also provided client companies with a wide range of services which were outside the traditional mould.
NWP provided what the firm perceived to be a total service to clients. It included consulting and management advisory services, assistance with corporate facilities and administration of share registries. Partners acted as directors and secretaries of companies. On occasions they held shares for clients as trustees. They assisted in the flotation of new companies, particularly in the mining industry. Stokes, Munachen and Pilmer were three partners involved in the last mentioned activity. The role of Stokes and Munachen, in particular, in the activities of companies and ventures associated with Kia Ora and Western United will be discussed later.
1.6 The retaining of Nelson Wheeler Perth
Although Kia Ora retained NWP to undertake work in relation to the proposed takeover, it is not clear exactly when this occurred or what were the precise terms of the retainer. The trial judge found that the decision to do so was made by management and not the directors and he thought that it is likely Harold Abbott made the original approach. Neither Harold Abbott nor Angus Pilmer, the NWP partner most involved in the matter, gave evidence. However Mr Newman, a chartered accountant then employed by NWP, did give evidence of the role he played in the preparation of the drafts and the final report.
The trial judge found that the first meeting between representatives of Kia Ora and NWP to discuss the matter in any detail was on 21st August 1987. The meeting was attended by Harold Abbott, Gary Abbott, Green (the general manager of Western United’s banking operations), Pilmer and Newman. The trial judge accepted the evidence of Newman that at this meeting the Kia Ora representatives indicated that they required a valuation of Western United, but the actual terms of the proposed offer were not mentioned at the meeting. Pilmer and Newman were advised that there was some urgency about the preparation of the valuation.
NWP denied that they were retained to provide a valuation of Western United or that they ever did so. They claimed that their role was restricted to providing the report required by r3J(3). However we accept the finding of the trial judge that NWP were required to undertake a valuation of Western United in the context of the proposed takeover and, if required, to prepare a report pursuant to the Listing Rule. In due course they were requested to prepare a report for the purposes of the Listing Rule and they must have realised the report would be presented to shareholders at the meeting called to consider the takeover proposal. They were aware of the date of the meeting and worked towards compiling the report in time. For reasons which we discuss later, the trial judge found that NWP were not independent of Kia Ora and should not have accepted the retainer.
1.7 The preparation of the report required by the listing rules
After the meeting, Newman set about the task of preparing the report. He requisitioned various documents and information, most of which came from Green. One of the documents provided to him was in the form of a draft report which appeared to the trial judge to have been prepared by someone at Kia Ora or Western United. It painted a rosy picture of the worth of Western United and concluded that a share price of between $3.75 and $4.25 would be fair and reasonable. Newman gave evidence to the effect that he resented receiving the draft.
Newman completed a draft report by 7th September 1987. The basis of his valuation of the shares was the capitalisation of future maintainable earnings after tax. The conclusion reached by Newman was tentative, but the effect of it was to value each Western United share at $2.72.
When the draft was shown to Green he said he wanted certain information excluded from the document. The trial judge considered that this information should have been conveyed to Kia Ora shareholders, but it was removed from the draft and the trial judge noted the influence of Pilmer in directing Newman to exclude the information. Newman then prepared a further report which placed a value of $3.22 on the shares. No mention was made of a premium for control of Western United.
The final report (the Nelson Wheeler report) is dated 22nd September 1987. The trial judge found that it was sent to Kia Ora and the office of the Australian Stock Exchange in Adelaide. It was forwarded to the Kia Ora shareholders on 9 October 1987 along with a notice calling for an extra-ordinary general meeting to consider the takeover proposal. The trial judge found that all of the Kia Ora directors met on some occasion between receipt of the last draft and the final report. He also accepted that the final report was considered by the directors before it was sent to shareholders with notice of the extra-ordinary general meeting to discuss the takeover.
The report was signed by Pilmer. It was acknowledged in the report that it was to be used in connection with the notice of the meeting for shareholders’ approval of the takeover. Under the heading “Disclosure of Interest” there was the following entry:
“Neither Nelson Wheeler nor any of the staff involved in the preparation of this report, have, at the date of this report any interest or financial relationship with Western United Limited.
Other than a fee for the preparation of this report, no pecuniary or other benefit, direct or indirect, has or may be received by Nelson Wheeler for or in connection with the making of this report.”
The valuation of $3.22 per share calculated by reference to the capitalisation of future maintainable earnings was referred to and mention was also made of a premium for acquiring control of Western United. This factor was not referred to in the earlier drafts. The summary of the opinion included the following statement:
“We consider the valuation of all the issued capital of Western United Limited and its subsidiary companies to be $82.6 million based on the financial statements prepared as at 31st March 1987, Directors’ forecasts of future trading results and performance to date in 1987/88. This equates to $3.22 per share. The price proposed to be offered by Kia Ora for the shares in Western United is the sum of $1.20 in cash for each Western United Limited share together with five Kia Ora shares for two shares in Western United or four shares in capital of Kia Ora Gold Corporation NL for each one share held in Western United Limited. The current market price for Kia Ora shares is $1.10 per share and accordingly the proposed offer values the Western United shares as between $3.95 and $4.40 per share. The current market price for Western United shares is $2.45 per share.
In our opinion it is reasonable for Kia Ora to pay a premium to acquire all of the shares in Western United. Further, we are of the opinion that, from the point of view of Kia Ora, the price proposed to be offered is fair and reasonable in all of the circumstances.” (emphasis added)
The trial judge commented on the report and the above extract from it in the following terms:
“Obviously this statement was prepared after those controlling Kia Ora had fixed upon the terms of an offer and it was altered as the terms of the offer were altered. It is a matter of considerable importance. In their work Nelson Wheeler Perth had never valued Western United at more than $82.6m and the shares at $3.22. However, by including this statement in the Nelson Wheeler report and thereby adopting it, they were acknowledging that the offer valued the shares at well in excess of their valuation and they were accepting that the excess could be regarded as a premium for control. This was, of course, the only way in which the level of the takeover offer, which, it will be remembered, was mentioned to Hayward at the outset, could possibly be justified. This matter is a further indication of subservience and lack of independence of Pilmer to those controlling Kia Ora. As will be seen, no competent valuer could have accepted and adopted such statement.”
It will be noted that although Listing r3J(3) refers to an opinion that the sale price is “a fair price” the Nelson Wheeler report concludes that the price proposed is “fair and reasonable in all the circumstances”. It also refers to the proposal to pay a premium to acquire all the shares as being “reasonable”.
As at the date of the report, the market price of Western United shares was $2.30. However on the plaintiff’s case they were virtually valueless.
1.8 Consideration of the Nelson Wheeler report by the directors of Kia Ora
According to the findings of the trial judge, the report in draft form was considered by all the Kia Ora directors including Quilty and Singleton. So also was the final report before it was sent to the shareholders. The trial judge accepted that Harold Abbott used the report knowing that it was flawed. His Honour was also of the view that when Lee-Steere and Somes read the report they would have been fully aware that the valuation was grossly inflated. He considered that they were astute businessmen who had sufficient knowledge of Western United to know that the takeover could not be justified on the basis of such a valuation. As for Quilty and Singleton, the trial judge found that they relied upon the report in the sense of accepting the valuation of Western United and the opinion that the price was fair and reasonable. He accepted that they did not have sufficient knowledge of Western United and its subsidiaries to realise that the proposed price was grossly inflated, although they knew enough about the share market price history of the shares in that company to put them on guard. It was the trial judge’s view that Quilty and Singleton were in breach of their duties as directors in not making enquiries of their own to ascertain whether they could recommend the proposal to shareholders and allow the takeover to proceed.
1.9 The decision to proceed
It is not obvious from the evidence when the takeover price was formulated, but it is clear that the final terms were in the final report of 22nd September 1987. There was a meeting of directors of Kia Ora held on 2nd October 1987 and there is a finding that the final report with alterations required by the Stock Exchange was considered on that date. The minutes record that Lee-Steere, Harold Abbott, Gary Abbott, Somes and Spencer, the company secretary, were present and that the meeting lasted for 15 minutes. It became evident during the trial that caution was required before accepting the minutes of the company as accurate. However, under the heading of the proposed takeover of Western United the following is recorded in the minutes:
“Mr. H. Abbott presented a draft document pertaining to a proposed takeover for all the issued capital of Western United Ltd.
The Directors reviewed for consideration a valuation report on Western United Ltd. compiled by Nelson Wheeler, Chartered Accountants, wherein they considered the following terms and conditions of the offer by Kia Ora Gold Corporation N.L.:
(i).... $1.20 in cash for each share held in Western United Limited and five shares in the capital of Kia Ora Gold Corporation N.L. for each two shares held in Western United Limited; or
(ii)Four shares in the capital of Kia Ora Gold Corporation N.L. for each one share held in Western United Limited;
(iii).. The number of Western United Limited shares to which Kia Ora Gold is entitled being not less than 100% at the end of the period of the offer.
(iv)The Kia Ora shares issued and allotted in accordance with the offer will not participate in the proposed June 1987 dividend of Kia Ora however they will rank pari passu with all other Kia Ora shares thereafter.
(v)... Kia Ora Gold shall apply for official quotation of the Kia Ora Gold shares issued and allotted in accordance with the offer on all member exchanges of the Australian Stock Exchange Limited.
The Directors, after due consideration of the valuation report, decided to proceed with the proposed offer on the basis of the valuation of Nelson Wheeler of $3.22 for each Western United Ltd share.
Mr H Abbott declared his interest in Western United and refrained from voting.
IT WAS RESOLVED to call an Extra-Ordinary General Meeting of the Company for the purpose of putting the following resolution:
‘To authorise the Company to proceed with the proposed takeover of Western United Limited on the basis of four shares in the capital of Kia Ora Gold Corporation N.L. for each one share held in Western United Limited or five Kia Ora gold Corporation N.L. shares for two shares in Western United Limited together with $1.20 in cash for each Western United Limited share.’ ”
The trial judge found that Harold Abbott did not disclose his interest at the meeting. Somes said in evidence that he had no recollection of a disclosure taking place and that all those present knew of the relevant share holdings of the directors. Somes also said that the meeting lasted for two hours.
Although the evidence as to this meeting was unreliable in a number of respects, the judge was able to find that it was on this occasion that the decision to proceed with the takeover was made by the directors who were present.
1.10 The advice to the shareholders about the proposal
The extra-ordinary general meeting was arranged for 26th October 1987 at the New Esplanade Hotel, Perth. Kia Ora notified shareholders of the meeting by letter dated 9th October 1987 signed by Quilty but which, according to the finding of the trial judge, was prepared by management. A copy of the Nelson Wheeler report accompanied the letter.
In view of the importance of the letter it is appropriate to set it out in full:
“Dear Shareholder,
Kia Ora Gold Corporation (‘Kia Ora’) is seeking your approval to make an offer to acquire all of the issued shares in Western United Limited (‘Western United’). Western United is one of the few listed Merchant and Investment Bankers in Australia which has comprehensive interests in merchant and investment banking, stockbroking, insurance broking, assay laboratories and mining services.
Should you agree to this proposal, the resulting company would be poised to be one of the largest publicly listed merchant bank/mining finance houses in Australia, committed to expansion in both the financial services and mining/resources sector.
Furthermore, with a paid up capital of approximately $140 million it will have the capacity to grow on a global scale in key markets, including London, Sydney, Melbourne and the Pacific Rim.
The rationale for this acquisition is to combine Kia Ora’s resources behind a company with an exceptional growth pattern to provide substantial returns for shareholders including attractive dividends on a consistent basis.
Shareholders will note that this new scenario contrasts vividly with that prior to the sale of our Marvel Loch interests. Then there was much uncertainty as to Kia Ora’s future without substantial capital raising, with the expectation that any such capital raising would also certainly impact adversely on Kia Ora’s share price. The cash component of the proposed offer will be met entirely from the company’s own resources.
Today, with your support and continuing involvement, Kia Ora can look forward to a new era of growth, profitability and a new deal for its shareholders.
Western United Limited
The fast growing Western United Limited Group is one of the few listed merchant bankers in Australia. The group is active in:
-....... The full range of merchant and investment banking services which include money market, corporate lending, corporate advisory, share margin trading, arranging and financing mergers and takeovers and the trading in securities.
-Stockbroking (through the ownership of the rapidly expanding sharebroking firm, Porter Western Limited).
-....... Assay laboratories (it owns two highly profitable gold and minerals assay laboratories at Kalgoorlie and Southern Cross).
- Insurance broking.
-....... Gold and resources exploration, and provision of mining services (through ownership of Western United Mining Services).
Your decision to support Kia Ora’s takeover of Western United will result in substantial growth for a Group which we believe will have a long term and highly profitable future both in Australia and in the world’s key capital markets.
Furthermore, the proposed formation of this new Mining-Finance House will be enhanced by the synergy of interests existing between Kia Ora and Western United, especially in relation to gold mining and resources activities.
Synergy of Interests
Both Kia Ora and Western United are very strongly orientated towards gold and resources activities.
The formation of the new Group will ensure that it has the in-house capabilities in terms of financing, and the provision of technical and mining expertise, to extend the interest of the Group into new and profitable areas of mining and mineral enterprises.
Mention has already been made of Western United’s own gold and minerals activities and its desire to continue to grow in this direction. These include Western United’s highly profitable mineral assay laboratories; its gold and energy exploration companies; its ownership of Western United Mining Services; and its extensive experience in underwriting gold and energy listings. In addition to gold and resources, Kia Ora has investment in other areas which will be enhanced by Western United’s merchant banking and financial capabilities.
More specifically, the major investments are in George Moss Limited - Australia’s premier manufacturer of underground mining equipment and rolling stock; and Rotair Limited, the Main Board listed manufacturer of a new concept in air powered motors. Between them Kia Ora and Western United have a controlling interest in Rotair Limited.
Kia Ora Shareholders will benefit
Kia Ora shareholders have the opportunity to participate in the future growth of a dynamic Mining-Finance House should they agree to the takeover of the Western United Group.
......... Stability and growth in both earnings and assets and with the introduction of the tax imputation system in Australia, dividends declared should be tax free.
. Diversification of products and activities.
......... The future developments of major gold mining and resource projects via in-house financing, underwriting capabilities and mining expertise.
. A solid return for shareholders.
......... The ability to participate in both the resources and fast growing financial services sector of the company.
.Participation in a dynamic Group which is set to become a major force within its field - both in Australia and in the world’s key capital markets.
By virtue of Listing Rule 3J(3) Kia Ora may not proceed with the takeover offer unless the shareholders have first given their approval to the acquisition of shares in Western United from the directors of Kia Ora in general meeting. The Notice of the meeting must be accompanied by copies of reports valuations or other materials from independent qualified persons which are sufficient to establish that the purchase price for (sic) to be paid by Kia Ora for the Western United shares is a fair price.
Listing Rule 3J(3) further requires that neither the directors nor any of their associates may vote on the resolution to approve the takeover.
The takeover will not proceed unless the shareholders give the approvals necessary to enable the Directors of Kia Ora and their associates to participate in the offer.
The consideration proposed to be paid for the shares in Western United is four shares in the capital of Kia Ora Gold Corporation N.L. for each one share held in Western United Limited or five Kia Ora Gold Corporation N.L. shares for two shares in Western United Limited together with $1.20 in cash for each Western United share. A detailed valuation prepared by Messrs. Nelson Wheeler, an international firm of Chartered Accountants, is enclosed for your consideration. This report values each Western United share at $3.22. However, in the opinion of Nelson Wheeler it is reasonable to pay a premium to acquire all of the shares in Western United and they have advised that the price being offered is fair and reasonable from Kia Ora’s point of view.
Any shares issued pursuant to this offer will not participate in any dividends in respect of the financial year ended 30th June 1987. The shares issued, however, will rank equally with existing shares in respect of the dividends to be declared in respect of the 1987/88 financial year.
We believe the price to be fair and reasonable and one which should ensure the success of the takeover bid.
Finally, I refer to you to a (sic) “family tree” which identifies the expanded interests of the Kia Ora Group and we recommend that you vote in favour of this proposal.”
The trial judge commented on the letter in the following passage:
“For present purposes, it is sufficient to say that anyone with even a basic knowledge of the affairs of Kia Ora and Western United and having considered the consequence of the proposed takeover even in a general way, could not have accepted that the letter was appropriate to send to shareholders about a matter as serious as the proposed takeover. During the course of addresses various submissions were made as to the obligations of the directors in the sending of such a letter to shareholders. Some submissions were in the nature of justification. In my view the letter contained inaccurate and misleading information to the knowledge of anyone who had even basic knowledge of the two companies and could not be justified on any basis.
This letter was little more than a hard selling document to the shareholders with the intention of persuading them to the takeover which was obviously in the personal interests of the directors and those associated with them. The letter says a great deal about the intentions and motives of those controlling Kia Ora at the time.”
It was the view of the trial judge that neither Quilty nor Singleton could have held the extravagant views expressed in this letter and that it was unlikely they gave any serious consideration to its contents.
Kia Ora also made a press statement on 9th October to the effect that notices for the extra-ordinary general meeting had been sent out. It described the resolution to be put to the meeting and stated that the directors with shares in Western United and their associates proposed to sell their shares to Kia Ora.
1.11 The extra-ordinary general meeting
The next event of significance was the major share market crash which took place on 19th and 20th October 1987. Nelson Wheeler contended that the share market crash has considerable relevance for a number of issues in the case including the contents of the Nelson Wheeler report, whether reliance was placed on the report, causation and damages. These matters are discussed below. Despite the share market collapse, the extra-ordinary general meeting went ahead as planned on 26th October. Lee-Steere, Harold Abbott, Gary Abbott, Somes, Singleton, Quilty, Schneider-Paas, Spencer and 19 shareholders attended. Singleton chaired the meeting. It was announced that the directors would not be voting. Nothing was said by the directors about the share market crash. A poll was taken on the takeover proposal. 539 shareholders representing approximately 12.5m shares voted in favour of the motion. 554 proxy forms were tabled. The identity of the proxy shareholders is not known. 22 shareholders representing 121,381 shares voted against the proposal. It is relevant to note that out of a total of 18,133 shareholders on the register, 6% were from Western Australia, 47.1% were from interstate and 46.9% were from overseas.
The resolution of the meeting read as follows:
“For the purposes of Listing Rule 3J(3) of the Australian Stock Exchange Limited Listing Requirements the Directors of the Company are hereby authorised and empowered to cause the Company to offer to purchase the whole of the issued shares of Western United Limited for a consideration of either:
Four (4) fully paid ordinary shares in the Company for every fully paid ordinary share in Western United Limited.
Five (5) fully paid ordinary shares in the Company for two (2) fully paid ordinary shares in Western United Limited together with one dollar twenty cents ($1.20) for each Western United Limited share.
Notwithstanding that the Directors of the Company or their associates as defined in Section 7 of the Companies (Acquisition of Shares) (Western Australia) Code hold shares in Western United Limited and propose to sell such shares for one or either of the foregoing considerations and to allot to the Directors and their associates such shares in the Company to which they may be entitled by virtue of their acceptance of the abovementioned offer.”
A meeting of the Kia Ora directors was held immediately after the extra-ordinary general meeting. The minutes record that those present were Lee-Steere, Harold Abbott, Schneider-Paas, Somes, Singleton, Quilty, Gary Abbott (by invitation) Gardiner (by invitation) and Spencer. It is recorded that a decision was made to notify Western United of Kia Ora’s intention to “proceed with the formal takeover of that Company following the overwhelming approval by the shareholders at the E.G.M. held earlier in the day”. The minutes continue:
“The poll conducted at the meeting resulted in 12,499,852 shares voting for and 121,381 shares voting against the resolution.
Messrs. H. Abbott, Sir E. Lee-Steere and K. Somes confirmed their intention to accept the offer of 4 fully paid K.O.G. shares for each W.U.L. share held.”
A meeting of Western United directors was held on 26th October. It was attended by Lee-Steere, Harold Abbott, Gary Abbott, Schneider-Paas, Somes, John Thornton, Ian Viner and the secretary, Roberts. Harold Abbott advised the meeting that following the decision of the Kia Ora shareholders made earlier in the day, the shareholders of Western United would soon be receiving a takeover offer from Kia Ora.
The Part A Statement was registered on 5th November 1987 and served on Western United on the following day.
1.12 The Horwath and Horwath report
A meeting of directors of Western United held on 6th November 1987 recommended acceptance of the Kia Ora offer. Western United had commissioned a report on the share offer from Horwath and Horwath, chartered accountants. The future maintainable earnings method was used to value the Western United shares. The report reached the following conclusion:
“The value of the offer to Western shareholders is between $2.40 and $2.55 per share.
This compares to the value placed upon the shares by ourselves of $1.74 each, and the recent quoted price of $1.90 per share on the Australian Stock Exchange (Sydney) Ltd., at the date of this report.
It is our opinion that Kia Ora are offering a premium over the value of Western shares in order to gain control of the company. We consider it reasonable giving consideration to the interests of Western Shareholders that a premium be paid due to:
(i).... the fact that Western is a tightly controlled company, with the major top 20 shareholders holding approximately 75 percent of Western’s issued capital, and
(ii)the current uncertainty existing in the share market, which would be more likely to seriously undermine the value of a company which is not tightly controlled.
In our opinion and in the present economic climate the shareholders of Western face a higher risk in accepting shares in Kia Ora with its wider capital base than they presently experienced with their investment in Western. Considering these factors, it is reasonable that the Western Shareholders receive a premium for accepting an offer by Kia Ora for their shares in Western.
In the absence of a higher bid and having regard to the interests of Western Shareholders, we consider that the offer made by Kia Ora for each Western share is fair and reasonable.”
The trial judge considered that the Horwath and Horwath report was of considerable relevance in a number of respects. He said: (J113):
“According to Easton, the Horwath & Horwath report was inaccurate in various respects. However, this report is important for various reasons. It demonstrated to the associated directors of Kia Ora who received it on about 6th November 1987 (albeit in their capacities as directors of Western United) that Horwath & Horwath had a very different view of the value of Western United than that of Nelson Wheeler Perth which may have been due to the share market crash, or only partly so. It showed that Horwath & Horwath had assessed future maintainable earnings at a lower figure and had adopted much more modest price earnings multiples than Nelson Wheeler Perth, which should have given cause to re-consider the valuation by Nelson Wheeler Perth. Also, it showed the likely negative impact of the takeover upon the value of Kia Ora shares which is something about which Nelson Wheeler Perth had not expressed an opinion and which was of importance to Kia Ora shareholders. No such information was ever given to them. As will be seen, common directors, Lee-Steere, Harold Abbott, Somes and Schneider-Paas had this information well in time to stop the takeover had they been minded to do so.”
The trial judge also noted that Pilmer and Newman had assisted Horwath and Horwath in their work. They had received instructions from Kia Ora to do so. His Honour concluded that the reason for giving this assistance was something more than mere professional assistance. He said that Pilmer must have realised that he should not influence Horwath and Horwath and yet the evidence leads to the conclusion that he gave the assistance to please those controlling Kia Ora. The trial judge considered that the absence of Pilmer and Harold Abbott from the witness box assisted him in drawing relevant inferences from the evidence. He went on:
“It is likely that Horwath & Horwath had expressed concern about aspects of the takeover proposal and the valuation of Western United in view of the share market crash, and probably regardless of the share market crash, and had expressed those concerns to Green or whoever was instructing them. In consequence, Pilmer was asked to assist and did so. The full extent of that assistance and who asked Pilmer for it is not disclosed by the evidence but given Harold Abbott’s hands-on role in the takeover, it is reasonable to infer that he sought Pilmer’s assistance.
. . .
If he [Pilmer] was merely assisting a colleague in a professional manner, it may only be a matter of questionable judgment given his independent role. If, however, he was assisting Horwath & Horwath to reach an opinion compatible with the takeover offer, he would not have been acting independently. This matter must be considered along with all of the other circumstances which touch on the question of whether Nelson Wheeler Perth were truly independent. The evidence justifies the conclusion that the reason for giving this assistance was something more than merely helping a colleague. Given his independent role, Pilmer must have realised that he should not influence Horwath & Horwath. All of the evidence about Pilmer’s conduct leads to the conclusion that he gave the assistance to please those controlling Kia Ora. His conduct as to what was excluded from the Nelson Wheeler report suggests a sufficient measure of subservience to Harold Abbott to afford the reason for assisting Horwath & Horwath.”
Those recorded as being present at the meeting of Western United on 6th November 1987 were Lee-Steere, Harold Abbott, Gary Abbott, Somes, Ian Viner, John Thornton, Jeff Roberts and Gardiner. The minutes go on to state:
“Mr. G. Abbott reported that the Directors had been aware of the proposal from Kia Ora Gold Corporation N.L. to take over Western United Limited for some time and were not surprised when they received a Part A Statement on 6th November 1987.
In anticipation of the receival of the Part A the Directors had prepared a draft Part B Statement to the shareholders of Western United.
Mr. G. Abbott tabled the draft Part B and asked Mr. Gardiner to read through it and incorporate any amendments the directors thought necessary.
The Chairman advised that the meeting was required to authorise the Part B Statement and that Messrs. H. Abbott, K.C. Somes and Sir Ernest Lee-Steere would abstain from voting because they were also directors of Kia Ora Gold Corporation N.L. Mr. Schneider-Paas is also a director of Kia Ora Gold Corporation but was not at the meeting.
IT WAS RESOLVED to authorise the Part B Statement, as amended, and that Mr. R.I. Viner and Mr. J. W. Thornton be authorised to sign the document on behalf of the directors.
Mr. B. Gardiner was instructed to make the necessary amendments and lodge the Part B with Corporate Affairs in Adelaide as soon as possible.
Evaluation of offer by Horworth & Horworth (sic)
Mr. G. Abbott tabled a report from Horworth & Horworth, Chartered Accountants, which stated that in their opinion the offer to Western United shareholders was ‘fair and reasonable’. The directors reviewed the report and were advised that it would be delivered to shareholders with the Part B.
Sir Ernest Lee-Steere complimented the executives responsible for the preparation of the takeover document.”
1.13 The takeover is completed
The Part A Statement had to be corrected and amended in certain respects and the Kia Ora offer in its final form was forwarded to Western United shareholders on 23rd November 1987. Acceptance had to be notified no later than 24th December 1987. The offer by Kia Ora was made conditional on Kia Ora receiving acceptances of not less than 90% of the shares to which it was not already entitled.
The takeover was discussed at a meeting of directors of Western United held on 4th December 1987. Lee-Steere, Harold Abbott, Gary Abbott, John Thornton, Ian Viner and Roberts attended. The minutes record that Gary Abbott advised that the acceptances for the takeover had been a little slow, although there had been no negative responses from shareholders. It was decided that a telephone campaign would commence in the following week to encourage people to send in their acceptances. The likelihood that Kia Ora would soon make the offer unconditional and extend it for one month was also mentioned at the meeting.
It was reported to a meeting of Kia Ora directors held on 10th December 1987 and attended by Harold Abbott, Singleton and Somes that acceptances totalling 15,258,000 shares representing 59.2% of the issued capital of Western United had been received. It was resolved to declare the takeover scheme free from conditions. On 11th December a letter was sent out to Western United shareholders under the hand of Gardiner who was described in the letter as Chief Executive. He advised that the Kia Ora offer had been declared unconditional and continued:
“We note that we have not yet received your acceptance and now that the offer is unconditional it is our opinion that it is in your best interests to accept the offer forthwith. Please return your acceptance form with the share certificate(s) attached so that the settlement can proceed.”
At a further meeting of Kia Ora directors held on 16th December 1987 and attended by the same directors it was resolved to extend the offer to 25th January 1988. Eventually acceptances with respect to 97.06% of the Western United shares were received. Western United became a wholly owned subsidiary of Kia Ora and was delisted as a public company. There was a reverse takeover in June 1988 when Kia Ora acquired the assets of the Duke group of companies and the Duke group acquired the issued capital of Kia Ora thereby gaining control of Kia Ora which went into liquidation on 11th July 1989.
1.14 Proceeds of sale of shares by directors and senior management
The ascertainment of precise amounts received by directors and senior management of Kia Ora and Western United following the sale of Western United shares owned or controlled by them is made difficult by reason of the number of nominee companies listed as shareholders. However the trial judge reached the following conclusions:
“Those most closely associated with Kia Ora and Western United at the time of the takeover were the common directors: Lee-Steere, Harold Abbott, Somes and Schneider-Paas; and Gary Abbott, Viner and Thornton as directors of Western United, Gardiner, Roberts, Green, Woolhouse, Thornton and other employees of one or both of the two companies, Milligan, Newton and other friends or associates of the companies, directors or senior employees. They all had shares personally, indirectly or as a nominee in Western United. Also there were many nominee companies which held shares in Western United. It has not been possible to get behind all of these companies and establish on whose behalf the shares were held. All of these associates or nominee companies accepted the shares and cash offer. Harold Abbott and Gary Abbott and companies associated with them received not less than $4,880,148 and Lee-Steere and his family company received $732,798. Somes, Cook, relatives and companies and trusts associated with Somes received $554,356 or thereabouts. Schneider-Paas and companies associated with him received $2,103,118. Milligan and companies associated with him received $494,549, Gardiner and his company Maclare received $641,998.80. Thornton and his relatives and companies associated with him received $759,946 and Viner, through his company, received $120,000, Thompson, Green, Woolhouse, Thornton, Thomas and other staff nearly $200,000. National Nominees received $7,332,547.20 and Bowyang Nominees received $2,660,280.
Of course, all of these people and companies also received five Kia Ora shares for every two Western United shares which substantially increased their shareholding in Kia Ora.
It may readily be seen that a substantial part of the consideration paid by Mawson Pacific for the second half of the Marvel Loch mine found its way into these hands.”
1.15 The relevance of the stock market crash
Reference has been made to Nelson Wheeler’s arguments as to the importance of the stock market crash to various issues raised in the case. The submissions went as far as asserting that the share market crash rendered the Nelson Wheeler report irrelevant. The report was premised on market conditions which had changed dramatically following the stock market crash. Furthermore, it was argued that the directors’ actions in proceeding with the takeover after the crash constituted a novus actus interveniens. There was no obligation on the directors to continue with the takeover after the extra-ordinary general meeting, but they went ahead despite the effects of the crash.
There can be no dispute about the far reaching effects of this event on the market generally. As for the two companies, the price of Kia Ora shares dropped from $1.08 to 75 cents almost immediately. However the drop in the price of Western United shares was not as sudden. On 19th October 1987 the highest price was $2.90. On 23rd October 1987 the price was $2.40 and on 30th October 1987 it was $1.70.
However the trial judge rejected the argument that the crash negated the Nelson Wheeler report. Whilst acknowledging the severity of the crash, the fact that it would have had a considerable effect on the market generally by the time of the extra-ordinary general meeting, and the fact that it had a significant adverse effect on the value of the issued capital of Western United, the trial judge accepted the evidence that there was caution and a wait and see attitude in relation to the crash in the community at the time. It was not known at the time that the extra-ordinary general meeting was held that the effects of the crash would be as far reaching and permanent as turned out to be the case. Furthermore, NWP had not withdrawn the report by the time of the extra-ordinary general meeting or suggested that it should be modified in any way.
The trial judge expressed his views on the Nelson Wheeler arguments in the following passages in his judgment:
“I expect that many of the votes in favour of the takeover were cast by proxy. Some may well have been marked in favour of the takeover before the share market crash given the substantial number of overseas shareholders, but there is no precise evidence about those matters. I do not think the share market crash rendered the Nelson Wheeler report irrelevant. Obviously, the mere difference in the dates of the report and the meeting could not be decisive because, in the nature of things, there would usually be such a difference. A report of this nature is necessarily given well before the requisite meeting is held. Given the perception of the share market crash at that time, as has been mentioned, I do not think the crash negated the Nelson Wheeler report and is a reason for concluding that there was no reliance upon it. Also, it must be remembered that Nelson Wheeler Perth had not withdrawn the report after the share market crash.
. . .
For the reasons clearly expressed, that stock market crash did not render the Nelson Wheeler report obsolete by the time of the extra-ordinary general meeting and it was reasonable for the shareholders to rely upon it during that short time after the share market crash. At the time of that meeting the Nelson Wheeler report secured its purpose. It enabled those determined to proceed with the takeover to proceed. The effects of the share market crash by that time did not constitute a breach in the chain of causation.”
1043 There is no evidence that in fact the directors or any of them relied on the representation in deciding to send the report out to shareholders. Likewise, there was no evidence of any shareholder relying on the representation at or before the 3J(3) meeting. The only way that Kia Ora could possibly succeed is if the court were, by the nature of the representation, to infer reliance upon it by the various organs concerned.
1044 It may well be, where a report of a professional adviser which recommends or advises certain action is placed before a person or a meeting, and the person or meeting then decides to take the action recommended, that it can properly be inferred that the person or meeting relied on the report in taking the action. Particularly is this so if it was unclear beforehand whether the action could or should be taken. The inference of reliance can be drawn because in such circumstances the recommendation is the principal subject of the report. It is why the report was commissioned, so that the persons concerned could act on it with some assurance that the action taken was the best course to follow. However, merely because reliance may be inferred on one part of a report does not mean that it may be inferred in respect of every part.
1045 We assume for present purposes that the 3J(3) report and its annexure represented that NWP had partners outside the Perth office. If an inference of reliance on that fact is to be drawn in the absence of any other evidence, it can only be drawn because the Court will infer that a reasonable director or shareholder as the case may be would rely on that information in deciding to act on the opinion contained in the report. In our opinion the reasonable director and shareholder would want to know that the firm was a competent and reputable firm, qualified to express the opinion for which it was commissioned, and they would probably rely on an assertion to that effect. However, reliance on such matters is not relevant for the purposes of s14 of the Partnership Act. In our opinion it probably would not matter to the reasonable director or shareholder whether the firm had partners outside the office from which the advice emanated, if the firm appeared competent and reputable.
1046 In the 1980’s Perth was well‑known as a commercial and corporate centre for many of the companies, large and small, engaged in entrepreneurial mining activity. It was to be expected that the city would provide legal, accounting and other professional services appropriate to that activity. In the absence of direct evidence as to reliance, one could infer perhaps that whoever read the report would rely on its contents. One could infer that they would rely on the fact that the opinion was expressed by a reputable firm based in Perth. In our opinion, it could not be inferred that they relied on the fact that the opinion was expressed by a firm which had partners in other States or even that it was a “national” firm having only offices in other States.
1047 We have already referred to the Court of Appeal decision in Nationwide Building Society v Lewis [1998] 2 WLR 915. Rimer J at first instance had held that there was a rebuttable presumption that the plaintiff had acted on the solicitors’ report on title in reliance on the representation contained on the firm’s letterhead that Williams was a partner of the firm. That finding was upset on appeal. In the course of his judgment Peter Gibson LJ said at 922‑924:
“Mr Patten submitted that it would make the doctrine of holding out wholly artificial and unworkable if a person claiming an estoppel had to prove that he actually relied on the holding‑out. I do not accept this. It does not seem to me to be impractical or unjust for the law to require a person claiming an estoppel to have to prove in a partnership context what he would have to prove in other contexts. Given that reliance is a necessary requirement, it is not obvious that there should be a presumption in favour of the person who claims reliance and is in a better position to know whether he did rely on the holding‑out and who should thereby be able to prove it. The person held out, who is not in fact a partner, may well have difficulty in proving the negative, that the other person did not rely on the holding‑out. Of course, there may be circumstances from which it would be appropriate for the court to infer that there was reliance on a holding‑out. As is stated in Spencer Bower and Turner on Estoppel by Representation, 3rd ed. (1977), pp.114‑115:
‘Though on questions of fact the onus will be upon the representee, it may happen that the probability of inducement from a given set of facts is so great, or in other words the materiality is so plain and palpable, as to justify a finding of the inducement itself merely from the circumstantial context;... but it must be remembered that the inference so made is one of fact and not of law.’
...There is no evidence that anyone in the plaintiff noted from the letter that Mr. Williams’s name appeared as a partner, still less that it was relied on by the plaintiff. It was not suggested that there was some personal characteristic of Mr. Williams that would bring him to the attention of the plaintiff. It is merely the fact that Mr. Lewis had a partner that is said to be significant. I have to say that this seems to me unrealistic. It did not matter to the plaintiff whether or not Mr. Lewis was the sole principal when the plaintiff retained the firm. Why should it matter to the plaintiff whether or not Mr. Lewis was the sole principal less than a week later when it received the letter of 10 May and the report on title?...
...I, of course, accept that the plaintiff did rely on the report on title and the representation contained in it that the title to the property to be mortgaged was sound. It does not follow from that that the plaintiff relied on the suggested representation that Mr. Williams was a partner giving his authority to that report.”
1048 Sir Christopher Slade and Evans LJ expressed similar views. We respectfully agree with the approach taken in that case, and it is equally applicable to this one. There is no room for any inference that either the directors or the shareholders relied on any representations as to the composition of the firm.
1049 It is not difficult to infer that anyone reading the report in the context in which it was produced would rely on the content of the report in so far as it expressed an opinion as to the fairness to Kia Ora of the takeover price. However, when it comes to inferring reasons why the readers might have relied on the report in making their decision to approve or proceed with the takeover, one enters the realm of speculation. They may have relied on the reasoning behind the opinion; they may have relied on the fact that it was produced by an apparently reputable firm of chartered accountants; on the fact that the firm had a geographically wide spread of activities and affiliations. There may have been other factors - perhaps even something said at the meeting or in the accompanying letter. The more diverse the possible factors become, the more difficult it is to infer reasons for reliance on the report or reliance upon factors peripheral to the essential thrust of the report, such as the fact that the adviser was a national firm or, if the representation amounted to that, that there were partners elsewhere in Australia.
1050 If it is necessary to do so, we would hold that there was no evidence on which it could properly be found that if credit was given in any relevant sense by Kia Ora, its directors or shareholders, it was given on the faith of any representation as to the composition of NWP. Liability cannot be attached to the fifth defendants by virtue of s14 of the Partnership Act.
12.6 Common law estoppel
1051 Estoppel at common law would seem to have a wider application than s14 of the Partnership Act, largely because there is no requirement at common law to give credit upon the faith of the representation. The position at common law is adequately summarised by Lord Esher MR in In re Fraser; Ex parte Central Bank of London [1892] 2 QB 633 at 637:
“The doctrine of ‘holding out’ is a branch of the doctrine of estoppel. If a man holds himself out as a partner in a firm, and thereby induces another person to act upon that representation, he is estopped as regards that person from saying that he is not a partner. The representation may be made either by acts or by words; but the estoppel can be relied upon only by the person to whom the representation has been made in either way, and who has acted upon the faith of it.”
1052 There must therefore be a representation by which a person holds himself out or permits himself to be held out as a partner, action taken on the faith of the representation, such action being to the detriment of the person to whom the representation is made.
1053 For reasons we have already given we consider that there was no relevant representation as to the composition of the firm, and if there was, there was no evidence of reliance, and the circumstances were insufficient to enable reliance by any of the relevant parties to be inferred. It follows that Kia Ora cannot succeed against the fifth defendants at common law either.
12.7 Lavis, Gay and Taylor
1054 It remains to deal briefly with Kia Ora’s appeal against the defendants Lavis, Gay and Taylor. They had practised in Brisbane for some time under the name Nelson Wheeler. At trial they successfully argued that if a national partnership existed, they were not part of it at the time of the preparation of the 3J(3) report. Their situation and their withdrawal from the Nelson Wheeler association was the subject of much evidence at the trial. Having found that a national partnership did exist, the learned trial judge found that Lavis, Gay and Taylor had been part of it, but that they had ceased to be so from no later than 1 June 1987. Kia Ora’s claim for damages against those three defendants was accordingly dismissed. Kia Ora has appealed against that order.
1055 In the circumstances it is not necessary to traverse the evidence or the details of the learned trial judge’s findings. We have concluded that there was no national partnership, and it follows that the defendants Lavis, Gay and Taylor were never part of such a partnership. Should we be wrong in that, however, we have no reason to doubt the learned trial judge’s conclusion that Lavis, Gay and Taylor were not part of the partnership, at least from 1 June 1987.
1056 Although in the circumstances it would not require detailed consideration, we mention here one aspect of the case against Lavis, Gay and Taylor because it also has a bearing on their appeal which we consider below. Lavis, Gay and Taylor in their defence had admitted that during July to December 1987 they carried on practice in Queensland as a firm of chartered accountants under the name Nelson Wheeler, but denied that they did so in partnership with Arnold and Wenham. They sought leave to withdraw that admission, and it was referred into the trial. The trial Judge concluded that the admission was made by the solicitors for the Nelson Wheeler defendants without instructions from the Brisbane defendants, and as in the case of the South Australian firm, had been made upon the basis of the registration of the business name current at the relevant time in Queensland. As the admission had been made without instructions, his Honour considered that the admission should not be allowed to be used against them, and he gave them leave to withdraw the admission and to amend the defence. He also observed that, as they were not in fact partners, no relevant prejudice to the plaintiff arose.
1057 Kia Ora complained that the trial judge should not have allowed the admission to be withdrawn. We consider that, in the circumstances as his Honour found them, there was good reason for him to allow the application. In view of our conclusion as to the existence of a national partnership, those reasons become even stronger. The trial Judge did not err in allowing withdrawal of the admission.
1058 For reasons we have already given, Lavis, Gay and Taylor were also not liable under s14 of the Partnership Act or by virtue of any estoppel at common law. However, should our conclusion as to that be wrong in so far as it concerns the fifth defendants generally, we would nevertheless hold that Messrs Lavis, Gay and Taylor were not held out by NWP as being partners of the firm at the relevant time. That is because the learned trial judge found that as from 1 June 1987 another office had been opened in Brisbane under the name Nelson Wheeler. This had been done at the instigation of the national executive of Nelson Wheeler, and was conducted as a 50/50 joint venture of the Melbourne and Sydney offices of Nelson Wheeler. After that date any work required to be done in Brisbane was referred to the new office.
1059 The inference is irresistible that any holding‑out by NWP after that date as to the composition and location of the offices of Nelson Wheeler related, so far as Brisbane is concerned, to the new office supervised by Mr Pastellas, and operated as a joint venture by Nelson Wheeler Melbourne and Nelson Wheeler Sydney.
1060 It follows that Kia Ora’s appeal against the dismissal of the action against Lavis, Gay and Taylor must be dismissed both for the reasons we have given generally in relation to the fifth defendants and for these additional reasons.
THE APPEAL BY LAVIS, GAY AND TAYLOR
1061 In entering judgment in the action, the trial Judge reserved the question of costs and subsequently heard argument as to the appropriate cost orders that should be made. Lavis, Gay and Taylor sought an order for costs in their favour. The trial judge made no order that they should pay any part of the plaintiff’s costs, but also declined to make any order for costs in their favour. They have appealed against that refusal.
1062 Lavis, Gay and Taylor had common representation with the other Nelson Wheeler defendants until they sought to withdraw the admission that they practised at the relevant time as Nelson Wheeler. Thereafter they were separately represented, his Honour presuming that this was because of a possible conflict of interest brought about by the initial admission having been made without instructions. His Honour said that the plaintiff should not have to bear the cost of that separate representation. In separate reasons published on 1 June 1998 (Judgment No S6699) his Honour concluded (at pages 17-18):
“These defendants did not succeed in their denial of the existence of a national partnership. They were undoubtedly members of it but not later than 1st June 1987. A search of the registration of the business name in Queensland would suggest that they were members of the national partnership after that date and at relevant times and affords an explanation as to why they were sued. Their presence at the trial did not cause additional expense in counsel fees until the separate representation. Obviously there would have been some additional solicitor’s fees and costs by reason of their having been sued but I expect that the amount of these costs is relatively small. Each of them gave evidence at the trial but I do not think the plaintiff should bear those costs. They had to give evidence in support of their application to withdraw the admission and their evidence supported the case of the other fifth defendants that there was not a national partnership.
I think the just result is that the plaintiff should not have an order for costs against the Queensland defendants and they, in turn, should not have an order for costs against the plaintiff.”
1063 To the extent that Lavis, Gay and Taylor incurred costs in opposing the finding of a national partnership, they are in no different position from the other Nelson Wheeler defendants apart from NWP. That position will no doubt be influenced to a large extent by the outcome of the appeal with respect to the national partnership issue.
1064 To the extent that they separately incurred costs in successfully defending their own position at trial , we consider that the exercise of the discretion by the trial Judge miscarried, and that they were entitled to an order for costs in their favour.
1065 In declining to make any orders for costs in respect of Lavis, Gay and Taylor, the trial Judge took the view that the plaintiff had been put to extra cost by virtue of their separate representation as a result of a conflict of interest for which the plaintiff was not responsible, and also by their leading evidence in support of the application to withdraw the admission. His Honour also appears to have been influenced by the fact that in giving their evidence they supported the case of the other fifth defendants that there was not a national partnership - an issue which they lost at trial.
1066 However, in our opinion it cannot be assumed that the separate representation arose solely out of a conflict of interest based on the improper admission. Had proper instructions been taken it would have been apparent at an early stage that there was a conflict of interest anyway, simply by reason of the denial that, if there were a national partnership, the Queensland defendants at the material time were part of it. They could not properly have assumed that their interests would necessarily be protected by common representation with the rest of the Nelson Wheeler defendants. Indeed, if there were any liability to the plaintiff, it might well be in the interests of the other Nelson Wheeler defendants to spread that liability as widely as possible. The interests of Lavis, Gay and Taylor were never identical with those of the other fifth defendants.
1067 In order reasonably to defend their position the Queensland defendants would quite properly have made common cause with the other fifth defendants on the common national partnership issue, but from the outset they had their own position to defend, regardless of the outcome of the national partnership question. It is difficult to imagine how the trial would have taken any different course from the one it did, had the admission not been made. Lavis, Gay and Taylor would still have to have given evidence themselves and to have led the other evidence they did on both the national partnership issue and their own involvement, or lack of it, in the latter half of 1987. That evidence would have been led if the admission had never been made.
1068 True it was that they lost at trial on the national partnership question, but whether there was a national partnership which extended to Brisbane was inextricably bound up with their withdrawal from the arrangement. They succeeded on the latter point and should have had their costs.
1069 The only additional cost to which the plaintiff may have been put was in respect of the leading of evidence as to the lack of instructions as to the making of the admission, and of some time in argument over the application to withdraw it and to amend the defence. This is probably a relatively small proportion of the overall costs involved. In our opinion, Lavis, Gay and Taylor should have been awarded their costs against the plaintiff less some relatively small amount for costs thrown away by the plaintiff in relation to the application to withdraw the admission and to amend the defence, and less their own costs of that application and amendment. We invite the parties concerned to attempt to reach some agreement as to that amount, failing which we will apply a reasonably broad axe in the light of any further submissions that may be made as to the costs thrown away on that account. We would propose that the trial Judge’s order for costs be varied by ordering that the defendants Lavis, Gay and Taylor should have their costs of the action incurred by their separate representation, less any allowance so fixed.
SUMMARY
1070 It remains for us to summarise our conclusions.
14.1 Breach of duty of care by NWP
1071 The trial judge accepted the argument that he should be guided by the principles discussed in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords in considering whether NWP was liable to Kia Ora in tort. He found on the evidence that NWP knew, or ought to have known, that Kia Ora would rely upon the valuation and the Nelson Wheeler report in that the directors would rely upon the valuation to fix the takeover price and the shareholders would rely upon the valuation and the report to make decisions relevant to the takeover proposal. He found that a sufficient relationship of proximity existed in order to support a duty of care to Kia Ora and that NWP was negligent in a number of respects in relation to the preparation of the report. Finally, he held that there was actual and relevant reliance by the directors and shareholders of Kia Ora in the sense discussed in Esanda. Accordingly Kia Ora was entitled to be compensated for loss caused as a result of such negligence.
1072 We have reached the same conclusions as the trial judge on these issues, but on a somewhat different basis. We have accepted the argument of Mr Myers QC that the use made by the directors of the Nelson Wheeler report did not constitute reliance on the report in the sense discussed in Esanda. We have also expressed the view that his Honour may not have been justified in holding that, by virtue of the decision of the shareholders, Kia Ora entered into the transaction in reliance upon the report provided by NWP. However, we have expressed the view that the particular circumstances of this case give rise to a relevant duty of care owed by NWP to Kia Ora to protect it against loss of the type which occurred. In reaching this conclusion we have drawn attention to the fact that it was reasonably foreseeable that loss would or might result to Kia Ora if the report was prepared carelessly; that the report was provided to Kia Ora pursuant to a contract between Kia Ora and NWP which required NWP to exercise their professional skill and judgment; that NWP had knowledge of the circumstances which gave rise to the risk of the proposed price being excessive; that the use made by the Kia Ora directors of the advice by NWP was foreseeable; and that loss might result if the shareholders gave their approval for the takeover to proceed and the directors proceeded to implement the proposal for the takeover after such approval.
1073 We have held that there was a clear breach of the duty of NWP to exercise reasonable care and skill in expressing their opinion concerning the share price and that this breach was causative of loss to Kia Ora which was foreseeable by NWP. The share market crash could not be considered as an event which broke the chain of causation. We have found that the loss suffered by Kia Ora is not too remote and that the share market collapse was an event of a type which was foreseeable and was foreseen. In our view the finding that NWP is responsible for loss as a result of a breach of duty of care owed to Kia Ora must be upheld.
14.2 Damages for breach of duty of care
1074 The loss suffered by Kia Ora as a result of the breach of the duty of care owed to it by NWP is to be calculated by reference to the difference between the price paid for the Western United shares and the value of those shares. In addition there is the claim for loss of use of money.
1075 We have held that the trial judge was correct in rejecting the argument that Kia Ora suffered no loss by allotting its shares to sellers of shares in Western United as part of the consideration for the purchase of those shares. It follows that it is appropriate to have regard to the value attributed to the shares which Kia Ora allotted to the shareholders of Western United in assessing damages for the loss to Kia Ora. We have agreed with the trial judge’s approach of assessing damages by reference to the date of the acquisition of the Western United shares. This is when the loss was sustained. We are not persuaded that the trial judge erred by selecting a single date, within the period over which the acquisition took place, as a basis for the relevant calculation. Nor are we persuaded that the trial judge erred by accepting the evidence of Mr Easton in preference to that of Mr Hall as to the value of the shares in Kia Ora and Western United.
1076 We have had to make some adjustments to the trial judge’s calculations by reason of the fact that, although he accepted Mr Easton’s valuation of the Kia Ora shares at 82¢, his Honour used the figure of 81¢ when he came to make his calculations. We have made a significant adjustment to the damages as a result of our acceptance of Kia Ora’s argument that the trial judge failed to take into account the depreciating effect of the transaction upon the value of Kia Ora shares by reason of the transaction. The trial judge had regard to the value of the Kia Ora shares after the acquisition, instead of immediately before the event. Whereas his Honour found that the value of the Kia Ora shares which were issued amounted to $30,055,000 we have adjusted his figure to $55,720,438. This has required a reconsideration of the interest to be allowed for the loss of the use of Kia Ora’s money for the period from 1 January 1988 to 30 June 1988. We have substituted the sum of $1,310,607.82 for the amount of $600,000 allowed by his Honour. In arriving at that amount, we have awarded interest for the same period as did the trial judge, and at the same rates. After deducting the value received by Kia Ora as a result of the transaction we have assessed the plaintiff’s total loss at $76,769,842.91 in lieu of the trial judge’s assessment of $50,393,796.81.
1077 Finally we have considered afresh the amount which should be awarded by way of interest under s30C of the Supreme Court Act in order to compensate the plaintiff for being left out of its money. We have awarded interest for seven and a half years, from 1 July 1990 to 30 January 1998 (the date of the judgment). Using a rate of 7% we have allowed $40,304,000 for this component. The total amount of the damages in tort plus interest is $117,073,842.91.
14.3 Duty of care in contract
1078 We have accepted that there was a contract between NWP and Kia Ora for the provision of advice and that there was a breach of a contractual obligation to exercise reasonable care and skill in the preparation of the reports. The contractual measure of damages for that breach is the same as that in tort. The loss in each case is the difference between the price paid for the shares in Western United and their true value, together with consequential losses.
14.4 Contractual duty to act independently
1079 We are not satisfied that such a contractual duty exists at all. Nor are we satisfied that failure to act independently, by itself, was productive of any material loss. In the light of our finding that there is coextensive liability in tort and contract for breach of duty to exercise reasonable care and skill it has not been necessary to consider further the consequences of any such possible breach of contract. As we have pointed out, the issue of independence is relevant to the topic of fiduciary duty.
14.5 Contributory negligence
1080 We considered the argument that the damages should be reduced on account of contributory negligence on the part of Kia Ora. For the reasons set out above, we have reached the view that Kia Ora, by its directors, failed to take reasonable care for its own protection. In our view this is to be regarded as the conduct of Kia Ora for the purposes of determining whether Kia Ora is guilty of contributory negligence, even though the conduct by the directors was fraudulent. We have expressed the view that Kia Ora’s damages in tort as against NWP should be reduced by 35% on account of its own fault. The amount of these damages and interest in tort is therefore $76,098,106.78. However the position is different in relation to the claim for damages for breach of contract. In Astley v Austrust Limited [1999] HCA 6 the High Court held that the contribution provisions in the Wrongs Act have no application to a claim for damages for breach of contract, even though the breach is constituted by a failure to comply with a contractual duty to exercise reasonable care which is coextensive with a tortious duty of care. Accordingly, the damages to be awarded to Kia Ora in contract are not subject to the reduction which we have considered appropriate for the damages in tort. The amount of damages and interest payable by NWP for the breach of contract is $117,073,842.91.
14.6 The appeals by Somes and Lee-Steere
1081 We have set out our reasons as to why the appeals of Somes and Lee-Steere should be dismissed. There was ample evidence upon which to base the findings by the trial judge that they were liable in damages by reason of breach of fiduciary and statutory duties and that the third party claim against them by NWP for breach of duty in tort was also well founded.
14.7 Fiduciary duty
1082 The trial judge dismissed the claim for damages for breach of fiduciary duty by NWP. We have rejected the argument that this cause of action was not pleaded adequately. We have also held that fiduciary obligations were imposed upon NWP by reason of the circumstances which gave rise to a conflict of interest and duty. These circumstances required NWP to avoid putting itself into a position of conflict by declining to undertake the preparation of the 3J(3) report. There was a breach of fiduciary obligations owed by NWP to Kia Ora constituted by the provision of the report by NWP. The breach caused loss to Kia Ora which could be foreseen and was linked causatively to the breach. We have held that the measure of those damages is the same as that for the breach of duty of care and breach of contract. Furthermore, we have held that it is not inconsistent with the principles underlying equitable compensation to allow a reduction of Kia Ora’s damages by reason of its contributing fault. We have assessed the extent of the reduction at 35%. However, on the assumption that the equitable compensation to which the plaintiff is entitled is less than the compensation assessed for breach of contract, the plaintiff is entitled to the full extent of the damages for breach of contract. As far as interest is concerned we have awarded as against NWP the same amount as we awarded in respect of the claim in contract.
1083 So far as the breach of fiduciary duty by the directors is concerned (which was not the subject of an appeal except by Somes and Lee-Steere), there is no reduction for contributing fault and the amount of the damages and interest is to be compounded from 1 January 1988 to the date of judgment.
14.8 The national partnership
1084 We have concluded that there is no national partnership to which NWP belonged, and that liability cannot attach to the fifth defendants either on the basis of a holding out of the nature referred to in s14 of the Partnership Act or on any principle of estoppel. We would grant leave to withdraw the admission that the South Australian partners carried on business as chartered accountants with Wenham, Grellman, Bryden, Simmons and Pratt. The fifth defendants cannot be made liable for Kia Ora’s damages. The judgment against these defendants must be set aside.
14.9 Kia-Ora’s appeal against Lavis, Gay and Taylor
1085 As there was no national partnership, it follows that Lavis, Gay and Taylor were not members of such a partnership. Even if there had been a national partnership, we agree with the learned trial judge’s conclusion that Lavis, Gay and Taylor would not have been members of it, at least from 1 June 1987. We also think the trial judge was correct in allowing the admission by Lavis, Gay and Taylor to the contrary to be withdrawn.
14.10 The appeal by Lavis, Gay and Taylor in relation to costs
1086 We have expressed the view that Lavis, Gay and Taylor should have been awarded their costs against the plaintiffs less a small reduction for costs thrown away by the plaintiff in relation to the application to withdraw the admission and less their own costs of that application.
REMAINING ISSUES
1087 There are several issues which call for consideration and further argument in the light of our decision. We invite further submissions on the appropriate order for contribution as between defendants as well as the form of the judgment order which should be made in this respect. Questions of contribution arise both between NWP and the directors on the one hand and as between the directors themselves on the other. Some of these issues, including whether the directors should have been given liberty to apply to seek contribution against NWP were the subject of written submissions on the appeal. They may require reconsideration in the light of these reasons. We wish to hear the relevant parties on the calculation of the interest component in the equitable compensation for which the director defendants are liable. Finally, we will hear further submissions on the appeals against the orders for costs other than in respect of Lavis, Gay and Taylor. As to Lavis, Gay and Taylor, we will need to hear further submissions as to the amount or proportion by which their order for costs of the trial should be reduced. We will also need to hear submissions on the costs of the appeal.
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