Futuris Corporation Limited (ACN 004 336 636 v ERG Limited

[2001] FCA 1126

FEDERAL COURT OF AUSTRALIA

Futuris Corporation Limited (ACN 004 336 636 v ERG Limited
(ACN 998 112 625) [2001] FCA 1126

TRADE PRACTICES – misleading or deceptive conduct – precontractual representations – content – reliance

CONTRACT – construction of contract – surrounding circumstances – rectification – settlement of dispute involving contested acquisition of corporation.

DAMAGES – mitigation – loss of opportunity – expert evidence – opinion evidence – admissibility questionable – no weight

Trade Practices Act 1974 (Cth)

Metropolitan Gas Co v The Federated Gas Employees’ Industrial Union (1925) 35 CLR 449 cited
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 cited

FUTURIS CORPORATION LIMITED (ACN 004 336 636), FUTURIS INVESTMENTS PTY LTD (ACN 009 134 963) v ERG LIMITED (ACN 998 112 625) and SIMMONDS CAPITAL LIMITED
WAG 27 OF 1996

FRENCH J
15 AUGUST 2001
PERTH

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAG 27 OF 1996

BETWEEN:

FUTURIS CORPORATION LIMITED (ACN 004 336 636)
FIRST APPLICANT

FUTURIS INVESTMENTS PTY LTD (ACN 009 134 963)
SECOND APPLICANT

AND:

ERG LIMITED (ACN 998 112 625)
FIRST RESPONDENT

SIMMONDS CAPITAL LIMITED
SECOND RESPONDENT

JUDGE:

FRENCH J

DATE OF ORDER:

15 AUGUST 2001

WHERE MADE:

PERTH

THE COURT ORDERS THAT:

1.        The application be dismissed.

2.        The applicants are to pay the respondents’ costs of the application.

3.        The cross-claim is dismissed.

4.        The first respondent is to pay the applicant’s costs of the cross-claim.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAG 27 OF 1996

BETWEEN:

FUTURIS CORPORATION LIMITED (ACN 004 336 636)
FIRST APPLICANT

FUTURIS INVESTMENTS PTY LTD (ACN 009 134 963)
SECOND APPLICANT

AND:

ERG LIMITED (ACN 998 112 625)
FIRST RESPONDENT

SIMMONDS CAPITAL LIMITED
SECOND RESPONDENT

JUDGE:	FRENCH J
DATE:	15 AUGUST 2001
PLACE:	PERTH

REASONS FOR JUDGMENT

Introduction

1. In 1995 Exicom Limited (“Exicom”) and subsidiary companies in the telecommunications industry were in serious financial difficulty.  They required a substantial financial injection.  Rival contenders with recapitalisation proposals were Futuris Corporation Limited (“Futuris”) and ERG Limited (“ERG”), both substantial publicly listed companies.  In November 1995, ERG formed a consortium with two other prospective bidders, Simmonds Communications Limited now known as Simmonds Capital Limited (“Simmonds”) and Zilkha Limited (“Zilkha”).  The latter two companies had jointly acquired an option from the Exicom Group’s bankers over its debt to the bank and the bank’s associated securities.

2. Zilkha subsequently withdrew from the consortium leaving ERG and Simmonds pitted against Futuris.  On 7 December 1995, Futuris made an agreement with ERG and Simmonds that it would withdraw from the contest provided that it could assume their rights in respect of the bank debt in the event that they decided not to proceed with the recapitalisation proposal. 

3. The recapitalisation proposal was approved by a meeting of shareholders of Exicom on 23 February 1996, but the group’s  financial position was deteriorating and on 13 March 1996 ERG and Simmonds decided to withdraw on the basis that a number of conditions precedent to their proposal had not been satisfied.  There was exchange of correspondence with Futuris in which Futuris attempted to acquire control of the bank debt.  In the event the option expired before that could happen.  Futuris and its subsidiary, Futuris Investments Pty Ltd (“FIPL”) now sue ERG and Simmonds for misleading or deceptive conduct by reason of alleged precontractual misrepresentations to Futuris’ Chief Executive Officer, Alan Newman by ERG’s Chief Executive Officer, Peter Fogarty.  It also sues them for breach of warranty and contract in relation to the bank debt.

4. The narrow range of facts giving rise to the causes of action are set in a complex matrix of documentary and other evidence relating to the dealings between the two companies and the position of their target, Exicom. 

   Exicom Limited 1995 – A Failing Company

5. Exicom was, in 1995, a publicly listed company incorporated in Australia and carrying on business as a manufacturer of telephones and telecommunications equipment.  It leased premises at Villawood in New South Wales.  It had two major clients in Telstra, to whom it supplied TF200 and TF400 touchphones, and Nortel Australia Pty Ltd (“Nortel”), a subsidiary of Bell Canada Enterprises Ltd.   Exicom had a Distributorship Agreement, dated 30 June 1993, under which it agreed to distribute Nortel Meridan PABX systems in Australia and a Technology and Manufacturing Deed dated 4 March 1994 in relation to the development and manufacture of a series of P-phones on behalf of Nortel.  The company had only one domestic competitor for Telstra’s business from 1994 to early 1996.  That was Alcatel Australia, a wholly owned subsidiary of a French company which had a manufacturing plant in Sydney. 

6. Exicom was in difficulty towards the end of 1995.  It was indebted to the Commonwealth Bank of Australia Ltd (“CBA”) in an amount of not less than $20 million and contingently liable to the CBA under non-cash credit facilities for a further $5 million. It was in dispute with Telstra concerning allegations by Telstra of faulty components in the Touchphone telephone and related equipment known as TF200.  The Financial Statements of the company for the year ended 30 June 1995 (X 41) showed accumulated losses of $99,113,000.  The operating loss after income tax for that year was $31,167,000.   The independent auditors, Deloitte Touche Tohmatsu, qualified their report of 28 September 1995 on the Financial Statements.  The report had been prepared on a going-concern basis which contemplated “continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business”.  Recapitalisation of the company by a consortium of Simmonds and Zilkha , which will be referred to in more detail later, was then the subject of due diligence inquiries by that consortium.  The auditors said:

   “The ability of the economic entity and the company to pay their debts as and when they fall due is dependent on the successful completion of the recapitalisation of the company, including the provision of sufficient working capital, and the continuing support of the economic entity’s bankers.”

   If  that recapitalisation were not to proceed the ability of the economic entity and the company to pay their debts as and when they fell due would be dependent on the continuing support of their bankers until either an alternative recapitalisation proposal could be put in place or the economic entity were able to generate adequate cash flows and return to profitable trading operations. 

7. A draft report by KPMG dated October 1995 and prepared for Simmonds and Zilkha described the position as at 30 June 1995 by observing that:

   “Exicom is not a going concern at the present moment in time without the successful recapitalisation of the group or the continuing support of the group’s bankers.  This is the major issue with regard to the group and any comments on the balance sheet should bear in mind that the financial statements as at 30 June 1995 have been prepared on a going concern basis.” (X42 p 971)

   The report also referred to Exicom’s past history as one of “…over optimistic budgeting and a failure to achieve budget, often by spectacular margins”.  It was nevertheless noted that the current management team had adopted a pragmatic and conservative approach to setting the 1995/96 budget to avoid past problems.  KPMG saw the historical financial performance of Exicom and its situation as at 30 June 1995 as having “..little to commend it to a potential investor aside from certain manufacturing processes in the Villawood factory and the relationships built up with Telstra and Nortel”.  On the positive side, however, the company was seen as involved in an industry forecast to be at the forefront of economic growth into the twenty first century and offering tremendous opportunities for growth.

   Futuris – A Prospective Acquirer

8. Futuris is the principal entity of a group of companies which is involved, inter alia, in the acquisition and restructuring of other companies and businesses where opportunity presents.   FIPL is a subsidiary of Futuris.  Another subsidiary, Futuris Administration Pty Ltd operates as an administrative, banking, loan company within the group. (T236)  The Chief Executive and Managing Director of Futuris is Alan Newman.  He is an accountant by profession.  He worked for an investment broking house from 1966 to 1972 and at Elders Australia Ltd as an investment banking executive from 1972 until 1980.  In 1980, he commenced work at the Bell Group Ltd, initially as treasurer and later became managing director.  He has been CEO of Futuris since 9 January 1989.  He is its only Executive Director. The principal executives within the Futuris Group in 1995 and 1996 were:

   1.Tony Davies, then General Manager, Finance and Administration.  He was primarily responsible for the economics of transactions, dealing with issues of pricing, tax and interface with brokers, advisors and institutions.

   2.Paul Depiazzi, who was Financial Controller for the Group.

   3.Lawrence Clark, who was Company Secretary.

   4.David Gilham, who was General Manager.

   5.Bruce Griffiths, who was responsible for running Air International, another subsidiary of the Group.

   6.Phil Patterson, who was responsible for running Bristile Ltd.

9. Newman had considered the possibility that Futuris might acquire a telecommunications business since 1993.  He regarded Exicom as a potential acquisition because it was Australia’s only domestic manufacturer of telephones.  Futuris took a 5% shareholding in Exicom in that year but as the share price rose it disposed of its interest to ERG which had itself taken up a 4.9% shareholding (X56).

   ERG Limited – Another Prospective Acquirer

10. ERG is a publicly listed company involved in information and telecommunications technology. One of its principal businesses is the supply of telecommunications equipment particularly paging units and cellular base stations (X242). Its Chief Executive is Peter Fogarty, a legal practitioner, who joined the Board of ERG in 1984 and became its Chief Executive Officer in 1986.  Other persons associated with ERG in connection with the present proceedings were its Chief Financial Officer, Peter Harley, its Manager, Corporate and Treasury, Dom Del Borrello, David Gordon, a partner in Freehill Hollingdale & Page, Sydney, the solicitors for ERG, (“Freehills”) and Lynton McRostie, a consultant retained by the company. 

11. ERG had considered the possibility of strategic alliance or investment in Exicom for a number of years prior to 1995 (T749).  It acquired a 4.9% shareholding in Exicom in 1993 with a view to building on that holding and possibly acquiring the company.  It purchased Futuris’ shares  in Exicom.  The listed price of Exicom’s shares subsequently strengthened and the company issued additional shares.  ERG regarded the purpose of the share issue as the dilution of ERG’s holding and regarded the Exicom Board as generally antagonistic to ERG.  It was unable to meet with the Board to put to it a proposal for the restructuring of Exicom.  In the event, ERG decided not to proceed with a takeover bid and sold its shareholding in Exicom in February 1994. 

12. Early in 1995, the Exicom share price was falling and its former Chief Executive, Cruickshanks, was replaced by Stephen Newman.  Fogarty contacted Barry Capp, the Chairman, and Charles Plumridge of ANZ McCaughan, consultants engaged by Exicom.  Plumridge told Fogarty that Exicom was considering a recapitalisation and was already dealing with three separate groups doing due diligence checks.  He did not want to expand the number of parties with whom Exicom was dealing and in any event, had been instructed not to deal with ERG.  Fogarty continued to contact Plumridge from time to time in the following months but until October 1995 made no progress.

13. Fogarty believed that Exicom was not performing to its maximum capabilities. ERG was looking to expand its own operations.  He took the view that it would make sense to merge the two companies.  But in order to make Exicom a valuable entity it would be necessary to inject additional business and do a lot of other things with it in order to make it succeed.

14. In mid 1995, the ERG management was following the company closely and gathering detailed information on its activities and performance (X56).   A note in an ERG Board paper produced in July 1995 assessed the strengths of Exicom as its total manufacturing capability and experience in manufacturing high volume items (X22A).  The main weaknesses were identified as its lack of financial strength, a lack of flexibility in marketing and a failing technology transfer with Nortel.  This assessment was done for the purpose of evaluating Exicom’s prospects of securing a manufacturing contract with a United States company, ADC, which was looking for someone in Australia to manufacture products for it.  In the event ERG signed a Memorandum of Understanding with ADC in 1995.  The history of ERG’s involvement with Exicom will follow in the appropriate chronological order.

    Exicom and Futuris Discuss Recapitalisation – June 1995

15. Early in June 1995, Bill Beischer, the Chairman of Futuris, telephoned Alan Newman and told him of a meeting with Bob Cruickshanks, the Deputy Chairman of Exicom that morning.  Cruickshanks had said that Exicom was in financial difficulty and required recapitalisation.  He had asked whether Futuris would be interested in taking a position in Exicom.  He had told Beischer that:

    1.Exicom was going to report a trading loss of $4 to $5 million for the 1994/95 financial year – a prediction borne out in the annual report which showed a loss of over $4 million before abnormal items and tax (X41).

    2.Exicom had a major problem with Telstra which had been estimated at between $30 and $40 million.

    3.Exicom had problems with the CBA who wanted to be replaced or wanted further comfort.

    Beischer told Newman that Cruickshanks had said he could deliver control of Exicom to Futuris.  Newman said he would consider the transaction but the most important issue was going to be price. Cruickshanks told him, in a subsequent telephone conversation, that Exicom needed a substantial injection of capital in order to survive and that its Board had approached all shareholders of note and had not been successful in raising sufficient equity for its needs, which Cruickshanks estimated at $10 million.  Cruickshanks also disclosed that Exicom was involved in a dispute with Telstra regarding one of its products which it could not settle and that the company had lost the confidence of its bankers.  Newman said that Futuris would consider the matter.

16. Newman requested Tony Davies and Lawrence Clark to obtain background information on Exicom.  That information came to hand at the beginning of June in the form of a document entitled “Exicom Group Forecast – 1996” (X214).  Newman also reviewed the 1994 annual report for Exicom (X5).  He formed the view that the acquisition of the Bank’s secured debt over Exicom was crucial to control of the company.  The extent of the debt and the security held by the lender would govern any recapitalisation especially if the debt could be acquired at a discount off its face value. 

17. On 8 June 1995, Newman spoke with Beischer and told him that it would be necessary to conduct a due diligence examination of Exicom.  The following day Newman received a facsimile from Beischer advising that Cruickshanks would forward a confidentiality letter and was ready to make available the information necessary to evaluate Futuris’ interest in the company (X10).  A confidentiality agreement was executed (X11).  Newman asked Davies and Clark to conduct a due diligence examination of Exicom.  They commenced that exercise.  Newman spoke to Cruickshanks on 19 June 1995.  The substance of their discussion was:

    1.Futuris wanted an exclusive period of due diligence of between four to eight weeks before it could ascertain whether it would make a capital injection into Exicom.

    2.Cruickshanks said he could not deliver an exclusive period.

    3.Cruickshanks said he was seeing Mr O’Brien of the CBA and would try and ascertain what the CBA’s base position was.

    4.The Board of Exicom was not fully aware of the discussions with Futuris and he was reluctant to tell the Board at that time.

18. Even though he was aware that Exicom had a significant debt Newman believed it likely that the company would retain support from its creditors to enable it to recapitalise if a proposal could be put forward reasonably quickly.  He believed that there would be significant growth in the telecommunications sector in the immediate future and that Exicom was uniquely placed in the Australian market to take advantage of that growth. He considered that Exicom had an urgent need for a substantial injection of capital and for strong management if it was to gain the confidence of its creditors and to survive.  Futuris could supply both of these things and ensure that Exicom could continue to develop as an Australian telecommunications business. Newman was aware of the Telstra dispute and that Nortel had sent a notice of breach to Exicom in January 1995.  He regarded the notice as Nortel “agitating for leverage” (T255).  He was not concerned about negative reports relating to Exicom.  He said, in reference to the KPMG report which he had not seen:

    “…I held the view then, as I held the view right throughout the process, that when people prepare reports such as this, they usually only talk about the negatives.  They never talk about the positives.” (T254)

    A person with vision and understanding would see the opportunity behind the bleak picture presented by such reports (T254).  He placed some store on the need for a domestic manufacturer of telecommunications technology.  Domestic industry would want it because “… there was always the need for just in time speedy delivery” (T254). 

19. On 28 June 1995, Davies sent a letter to Exicom.  It expressed interest in investing equity funds in Exicom but said that an accommodation had to be reached with the CBA and asked for Exicom’s formal approval for Futuris to discuss the matter with the CBA.  The letter said it was fundamental to the future of the Exicom Group that agreement be reached with Telstra with regard to alleged malfunction of Exicom telephones and Exicom’s position as an ongoing supplier.  The approval of the Board was sought for Futuris to discuss those matters with Telstra.  A period of eight weeks to carry out a due diligence investigation was requested with Futuris to be given exclusive access for that purpose. Newman and Davies were of the view that come-what-may Telstra had to deal with Exicom as the only Australian manufacturer of telephones.

    Futuris Does a Limited Due Diligence – July 1995

20. On 5 July 1995, Newman and Beischer met with Cruickshanks and Stephen Newman in Melbourne.  They agreed that Futuris would conduct a short “due diligence” examination of Exicom to confirm the matters discussed during the meeting.  Davies and Clark carried out the inquiries in July 1995.  Their inquiries included discussions with officers of the CBA.  Newman was informed by Davies in July 1995 that the CBA had reached the view that the shareholders’ funds of Exicom had been dissipated to the point that the CBA was prepared to sell its Exicom debt and securities at a twenty five per cent discount off face value subject to any necessary approval by the Exicom Board.  If Futuris wished to make a counter-offer the counter-offer should be submitted by Exicom. Late in July 1995, Newman again met with Cruickshanks.  Cruickshanks told him that the Board of Exicom was meeting to consider proposals for Exicom including the Futuris proposal on 28 July 1995.  A request for Futuris representatives to be present was denied.

    Futuris Makes a Proposal – July 1995

1. On 27 July 1995, Davies sent a letter to Capp (X13) with a proposal summarised as follows:

   “In summary our proposal is that Futuris injects sufficient equity, subject to the matters set out below, to recapitalise the company and to enable it to expand.  While the quantum will be defined during the due diligence process, Futuris is committed to a minimum of $10 million. 

   .The Commonwealth Bank accepting an offer from Futuris to acquire the Exicom debt and security at a discount of 40% to face value with Futuris accepting the contingent liability at face value.  This offer is based on the Exicom debt being approximately $21 million and contingent exposure approximately $3 million

   .A “due diligence” investigation of Exicom acceptable to the Board of Futuris.  A period of eight weeks will be needed for this process

   .Agreement with the Exicom Board as to the terms of the equity injection

   Satisfactory resolution of key issues; particularly Exicom’s relationship with Telstra

   .Necessary shareholder, Stock Exchange and any other approvals.”

   The letter stated that there was an underlying business at Exicom that, with suitable financial restructuring could survive and expand.  Futuris was an Australian public company and a strong supporter of the development of technology and the growth of manufacturing businesses in Australia.  It intended to retain and expand existing customer relationships and to provide secure employment opportunities for both management and staff.  It would give consideration to the position of shareholders notwithstanding that the equity base of Exicom had been extinguished. 

2. The letter also contained a thinly veiled threat expressed thus:

   “The Bank’s position, and the terms proposed by Telecom in their “without prejudice” offer for settlement of the warranty dispute, may well raise concerns for directors, given their responsibilities under Section 588G of the Corporations Law and the potential civil and criminal liabilities for breach.

   To assist directors in this regard, we feel that it may be appropriate to further clarify Futuris’ position in relation to an equity injection into Exicom.”

   According to Newman, this was a logical threat to make in any proposal (T278). He agreed in cross-examination that the letter went forward with his knowledge raising the prospect of the directors’ personal exposure under the insolvency provisions of the Corporations Law notwithstanding that he then had no belief that the company was in fact insolvent. His object was to see the reaction of the directors “…to see whether the butterflies flew or the butterflies landed or whether they had any other party”. The period of eight weeks requested for due diligence inquiries was a negotiating position. Futuris would not need that amount of time. Conditioning the proposal upon satisfactory resolution of key issues including the Telstra relationship again did not represent his commercial position, but was merely the way the offer was framed (T280). Newman regarded the approach to commercial communication reflected in the letter and explained in his testimony as entirely legitimate notwithstanding that it involved what he considered to be an incorrect statement about the solvency of the company. He was candid about this commercial realpolitik and perhaps this is understandable as it was against his interests to concede in these proceedings that Exicom was insolvent at the time. He conveyed the impression generally in his testimony that for him commercial communication was a tool or a probe for assessing the positions, the strength and weaknesses of others, rather than conveying truly held opinions or positions of his own. This approach has implications for the assessment of his evidence. For there is a risk that his recollection of contentious events would have been coloured by his adversarial temperament. It should be treated with caution and tested against independent evidence.

3. Newman had a thoroughgoing scepticism about commercial communication from others.  No doubt this was prudent although at times he seemed to overstate  it to the point of self parody.  He referred to an Exicom information memorandum of 9 June 1995 as a “selling document” and said “I didn’t believe it”.  Having regard to the projected increase in turnover from $160 million in 1994/95 to $230 million in 1995/96 which was set out in the document, that scepticism was well-founded.  This was of some significance because the projections were in part relied upon by Futuris’ expert witness, Willis, in relation to the quantification of its loss. Newman presented himself generally as a person who relied substantially on his own judgment and not upon the representations of others.  On a document relating to Exicom forecast for 1996 (X214) he wrote the word “price” and explained it in his evidence thus:

   “It’s all a function of price;  don’t let emotion get in your way;  don’t let the seduction of the opportunity get in your way; keep a focus on price; “Now tell me about price.  Is there a price at which it can and should be bought?”” (T257)

4. On 28 July 1995, the Exicom Board responded to the Futuris letter of 27 July stating that it hoped to be in a position to consider a number of proposals and to make a decision in the near future about which of them would be in the best interests of shareholders.  Any suggestion that the directors might be in breach of their legal obligations was “emphatically denied” (X14). Newman regarded the letter as a Clayton’s response to a Clayton’s offer.  Nobody, he said, was really serious at that time (T281).

5. On 18 August, Stephen Mead, Group General Counsel for Telstra, sent a letter to Davies pointing out that, contrary what was said in Futuris’ letter of 27 July to Exicom, no offer had been made by Telstra for the settlement of its dispute with Exicom.  Telstra was willing to discuss a settlement with Exicom on certain terms but those terms fell “… a long way short of constituting any offer capable of acceptance” (X17).  Again Newman was sceptical.  He did not believe the letter reflected Telstra’s true position.  He believed that they were willing to negotiate with the highest bidder.  He said:

   “It would be crazy for them to say that they had a firm offer that they were prepared to accept from any one party.  They would just keep playing the game.” (T302)

   Futuris Addresses the Exicom Board – August 1995

6. Newman appointed Charles Fear of Poynton Corporate on 3 August 1995 to act as Futuris’ advisor in respect of the transaction.  Fear prepared a strategy document for Futuris dated 3 August 1995 (X267) and an updated version dated 9 August (X270).  The first element in his strategy was the acquisition of an option over the CBA debt or the debt itself subject to satisfactory discussions with Telstra.  A “Velvet Glove” approach was outlined involving reassurances about Futuris’ objectives and capabilities.  An “Iron Fist” approach, to be adopted if the Velvet Glove failed, contemplated a destabilisation strategy against Futuris.  That strategy would involve:

   ·    Notification to Exicom shareholders, bank and government sources that Futuris was not being given an adequate opportunity;

   ·    Going public on Exicom’s financial position via selected “leaks”;

   ·    Increasing pressure on Telstra and the government for an Australian solution

   The “Iron Fist” strategy also required the application of market pressure by approaches to major shareholders to acquire a strategic holding in Exicom and strategies to drive the share price down with a view to destabilising the CBA and the Board and other potential parties.  Newman said he accepted parts of the strategy.  He said it would not be necessary to destabilise the company because it was already fairly destabilised.  Notification to shareholders, the CBA and to government sources that Futuris was not being given an adequate opportunity was a logical thing to do.  He said he did not knowingly adopt a strategy of driving the share price down.  While the share price would have been important if Futuris had sought to acquire Exicom, he preferred to keep Exicom as a separately listed public company.  Acquisition of the whole of the company was not his preferred option.  The share price was only relevant to the pricing of any recapitalisation (T284).  On 8 August, Fear met with Capp and ascertained that there were two other parties interested in the company of whom only one was “real” (X269).  Newman’s attitude reflected that of Davies’ in his notes that if a foreign company were to try to acquire control of Exicom, Futuris would fight it through the Foreign Investment Review Board (“FIRB”) approval process.  This was put to Stephen Newman  by Davies.

7. On 9 August, Futuris was invited by Exicom to make a presentation to the Board on 18 August.  On 10 August, Newman received a copy of a facsimile from ANZ McCaughan addressed to Davies outlining the matters which the Exicom Board wanted Futuris to address (X15).  Newman regarded the letter with some disdain.  He said of it:

   “It was mumbo-jumbo to protect the directors and the adviser to ensure that he looked to be going through a process of fairness rather than trying to encourage particular parties to get up who at this stage, I think, had not tangibly appeared.”

   When asked by the Court whether anybody ever believed anything anyone said, Newman responded:

   “Only the principals like me, your Honour.  You never believe the advisers.” (T 300)

   Newman’s notes on the letter received from ANZ McCaughan included a warning to that firm to be “very careful” which he thought was conveyed to them verbally through Clark or Davies or Fear.  This was a warning not to favour one party over another.

8. Newman authorised Davies, Clark and Fear to attend the Exicom Board meeting on 18 August and make their presentation.  He also authorised a letter to be given to the Board on that day.  This referred to Futuris’ letter of 27 July 1995 and an earlier letter of 28 June 1995 and withdrew the offers contained in them.  In lieu of the previous proposals Futuris offered to inject sufficient equity into Exicom to enable it to promote a scheme of arrangement with the purpose of recapitalising and restructuring the company.  The outcome would be that control of Exicom would pass to Futuris.  Futuris would invite other parties to participate in the equity injection required for the recapitalisation but would itself require an equity level of at least thirty five per cent.  Futuris would negotiate the purchase of the CBA debt and was prepared to become banker to the company.  Pending approval of the scheme but conditional on the acquisition of the debt, Futuris would make available to Exicom immediately a $5 million secured working capital facility.  It was also prepared to make available a further $5 million secured working capital facility if required.  Exicom would thus be enabled to continue trading while the restructuring was being implemented.  The offer would remain open until 5pm, 18 August 1995 (X18).  Newman did not expect anything more than an in-principle acceptance of the offer.  Given the timeframe imposed by the letter even that outcome must have seemed highly unlikely to him. 

9. On 21 August, Newman was told by Stephen Newman that the Futuris offer was not acceptable to Exicom because it was not capable of acceptance.  He said the Board was considering its options and requested Futuris to submit a formal proposal by 1 September 1995.  This was reiterated in a facsimile from ANZ McCaughan to Davies (X19).  In that letter it was said:

   “The Board requests that you submit a firm offer by close of business on Friday, 1 September.  The firm offer should clearly state the prices and terms and conditions of any securities that you require Exicom to issue.  The firm offer should state who is making the offer, any arrangements between parties making a joint offer and to whom securities would be issued.”

10. At about this time Newman was aware that Davies had been in touch with John O‘Brien of the CBA (T303).  On 21 August, the CBA sent Exicom a letter (X20) indicating its position with respect to its debt.  The letter stated the CBA’s desire to meet on the following day with all parties that had expressed an interest in investing in Exicom.  The CBA sought an acknowledgment from all parties that any offers that might subsequently be made would provide for:

    1.a minimum return of seventy five cents in the dollar in respect of direct credit lines provided by the CBA to Exicom and its subsidiaries; and

    2.no discounting in respect of contingent liabilities, payroll and other sundry exposures.

    Newman became aware, from reports by Davies or Clark, that this was the CBA’s position.  His perception was that the CBA was keen to sell its debt.  On 22 August, the CBA wrote to Davies that it would allow Exicom to manage its recapitalisation provided a given return was achieved by the CBA.  It noted that Exicom had been told Futuris was in discussion with the CBA about the acquisition of Exicom’s debt.  Exicom had requested that traditional banker/client confidentiality be respected and the CBA would do that.  The letter concluded:

    “Given current circumstances, should Futuris wish to pursue an investment in Exicom then it will need to progress such via means other than acquisition of CBA’s debt.  Should our position change, we will let you know.” (X22)

    In Newman’s opinion, the CBA took this stance in order not to upset the company’s position and jeopardise its own security (T303-304).  Notwithstanding this it was Newman’s understanding, reflected in earlier notes by Davies, that the CBA would be willing to talk to anybody who was prepared to buy the debt as long as it was commercial (X276) (T306).

11. Towards the end of August Newman became aware that a New York-based party was considering taking a position in Exicom (T305).  On 28 August, with his approval (T308), Fear wrote to the FIRB alerting it to the possibility that “a foreign person” would be notifying the Board of its intention to acquire a substantial shareholding in Futuris.  Fear argued that Futuris’ interest in Exicom was relevant to the FIRB examination of any proposal to acquire a shareholding in or assets of Exicom and that Futuris represented a “bona fide Australian solution to the future of Exicom” (X277).  The New York-based interest was Zilkha, a merchant bank and investment house.  It was exploring investment in Exicom in conjunction with Simmonds, a telecommunications manufacturer based in Canada.  Simmonds had commenced operation in 1991 and in 1994 had acquired from Nortel its PCB manufacturing operation.  It was supplying Nortel and had a good relationship with it.  It had become involved with Exicom through its Nortel connection.

12. There was a preliminary meeting between Telstra and Zilkha and Simmonds on 23 August 1995.  In a letter of that date Mead wrote to Zilkha and Simmonds pointing out that Telstra would not be in a position to conclude any arrangements with them or to commit to particular supply arrangements.  Detailed discussions would need to be held if they wanted to conclude any arrangements prior to finalising their offer to Exicom (X465). 

    Futuris Acquires Exicom Shares and is Sued by Exicom – 30-31 August 1995

13. In August 1995, the NRMA Group owned about 19.8 per cent of the issued share capital of Exicom.  Newman asked Fear to approach the NRMA to ascertain whether it would give Futuris a proxy for its voting rights in Exicom.  Fear advised him that NRMA would prefer to sell its shares and would be likely to accept an offer at 7 cents with a call option over the shares at 10 cents.  Terms of the agreement reached with NRMA were set out in a memorandum from Fear to Newman, misdated 28/2/95.  This appears to have been an error for 28/8/95 (X221).  Futuris was to buy on-market NRMA’s 19,200,780 shares in Exicom at 7 cents per share.  It would grant NRMA a call option exercisable at 10 cents per share for a period of twenty four months.  The option would not be capable of exercise for six months except in the event that Futuris promoted a Scheme of Arrangement or capital reconstruction for Exicom and the value of the Exicom shares in that Scheme exceeded 10 cents.  In the event that NRMA called the shares they would be obliged to vote in favour of the Scheme.  Alternatively, the option would be exercisable earlier than six months if a takeover offer were made by another party at a price greater than 10 cents and Futuris and NRMA wished to accept the offer.  In that event they would agree to share equally any profit above 10 cents per share on the sale of the shares into the takeover bid. 

14. There was discussion between Fear and Clark about the possibility that the acquisition of Exicom shares could constitute insider trading (X269). They concluded that the information  they had was not materially price sensitive.  Fear regarded Exicom’s budgets as meaningless.  He also thought the company unable to pay its debts even if it were to settle with Telstra  Clark considered Exicom’s shares to be of no value.  Newman did not have as sanguine a view about the budget information as Fear did.  The only budgets he had seen were those contained in an Exicom Information Memorandum of 9 June 1995 (X9) (T290).  They included the prediction, on which he placed no weight, that the turnover would increase to $230 million in 1995/96.  He agreed with Clark’s view, in the note of his discussion with Fear concerning insider trading, that history had shown Exicom had not been successful with achieving budgets (T 291). 

15. Newman saw the acquisition of the Exicom shares as a way of testing out the reaction of other parties:

    “It would test out whether they were themselves able to buy shares…It tested out their financial capability.  It tested out their resolve.  It tested out their ability to match our strength…”. (T310)

    Asked whether the crossing of such a large parcel of Exicom’s shares at significantly less than market price would put pressure on the Board, Newman said:

    “Again, without the definition of “pressure”, I would have thought their antenna would have gone up a bit further.” (T310)

16. On 30 August, Clark wrote to the secretary of Exicom, Peter Patterson, confirming the acquisition of the shares by Futuris’ subsidiary, FIPL.  Anticipating an insider trading allegation, the letter went on:

    “Futuris has been in a position to deal in respect of these shares for some time being in possession of generally available information.  Indeed you have previously communicated to Futuris that you have kept your major shareholders fully informed of your financial position.

    Furthermore, Futuris believes that since commencing due diligence on Tuesday, 22 August it has not come into possession of any information which is not generally available or which is of a nature which might have a material effect on the price or value of Exicom’s securities.” (X24)

17. The acquisition was quickly public knowledge, articles about it appearing in newspapers on or about 30 August (X278).  It was also the subject of a public announcement by Futuris on 31 August (X222).    In the announcement Futuris said that “…at the invitation of the Exicom Board” it had been reviewing whether it should participate in a recapitalisation of Exicom.  It referred to its two “proposals” submitted to the Exicom Board on 28 June and 18 August and the Board’s requirement that any “firm offer…clearly state the prices and terms and conditions of any securities” Exicom would be required to issue as part of its recapitalisation.  It referred to Exicom’s advice that the offer would be subject to completion of arrangements with the CBA and Telstra.  It then said:

    “The arrangement with Telstra will require the resolution of the present dispute between Exicom and Telstra and the compromise of any claim Telstra may have against Exicom.

    The arrangement with the Bank relates to the acquisition or compromise, at a discount, of the secured debt due by Exicom to the Bank.”

    The notice concluded with a statement that Futuris intended to participate in the recapitalisation of Exicom.

1. Fear sent a letter to the ASX on the same day confirming telephone advice of Futuris’ acquisition.  Fear said it was Futuris’ view that trading in Exicom shares should be suspended pending the outcome of the recapitalisation process.  At that time there was a “trading halt” on trading of Exicom shares in the market.  He went on to say:

   “The Sydney marketplace has been aware of the fact that Exicom’s bankers have been anxious about the recovery of their debt and indeed have been prepared to compromise or sell their debt at a discount.  The marketplace has also been aware of the need by Exicom to settle a dispute with Telstra, Exicom’s major customer.”  (X223)

2. Asked why  the trading suspension was proposed, Newman said:

   “Quite simply that the company had begun a process.  We had made it sufficiently clear to the company on what basis we would recapitalise the company.  They clearly were, using your own words, talking with somebody else and if those persons had made an offer, then it was in our view that the company had price-sensitive information and they should disclose it to the market.  It was a test to see how far the company would go in the disclosure of their discussions with other parties.  We clearly knew our position … but we didn’t know the other positions so it was an effort to try and flush out that information.” (T313)

3. At a meeting on 30 August, the Board of ERG authorised its management to acquire up to nineteen per cent of Exicom to a maximum price of 25 cents per share.  Management was also instructed to prepare “a detailed plan on the path to control”.  The meeting considered the possibility of Exicom going into receivership and noted that a shareholding of nineteen per cent would place ERG in a dominant position in relation to discussions with Exicom’s bankers and Telstra.  Given the requirements of the United States company, ADC, with whom ERG wanted to secure a manufacturing contract, and the opportunity to further develop relationships with Telstra and Nortel, the Exicom organisation offered it substantial opportunities

4. The acquisition of its shares by Futuris led Exicom, on 31 August, to initiate proceedings in the Equity Division of the New South Wales Supreme Court. Futuris and FIPL were named as the defendants. Exicom alleged that the acquisition of its shares by Futuris involved contravention of the insider trading provisions of the Corporations Law. An ex parte interlocutory injunction was granted restraining Futuris and FIPL from dealing with any shares or securities in Exicom until further order. It also restrained them from approaching or otherwise dealing with the CBA in relation to any bank account maintained by Exicom with the CBA and any debt or other liability owed by Exicom to the CBA until further order. Confidentiality orders were made in respect of the contents of the affidavits supporting the application. The final relief claimed included orders for divestiture and cancellation of any agreement entered into by either Futuris or FIPL for the acquisition of securities in Exicom. Damages were claimed (X25). Futuris retained Blake Dawson Waldron to act on its behalf. Newman regarded this proceeding as a defensive action by Exicom’s management or the management in conjunction with other parties who were proposing recapitalisation together with ANZ McCaughan (T313-314).

5. Davies sent a letter to Telstra on 31 August advising of Futuris’ acquisition of Exicom shares and its interest in participating in the company’s recapitalisation.  However given Exicom’s position, Futuris was “…only prepared to participate in this process in a prudent manner”.  The letter advised that Futuris would draw comfort if there were an understanding, short of a legally binding commitment, of the terms on which Telstra was prepared to resolve matters in dispute.  Indicative settlement terms were submitted for discussion on the basis of a lump sum payment in satisfaction of all claims by Telstra and an agreement for a four year supply contract on conditions acceptable to Futuris, Exicom and Telstra for the supply of products from Exicom to Telstra.  Asked if it were his negotiating position to tell the world that Exicom was in dire financial circumstances, Newman said it was not necessary to tell the world as the world already knew (X279, T314-315).  As to the condition of the long term supply contract, that was a negotiating position which was never dropped as no final agreement was ever reached with Telstra (T315). 

   Simmonds and Zilkha  Prepare to Make an Offer to Exicom – August 1995

6. Simmonds and Zilkha had not been idle while Futuris was moving on Exicom’s shares.  Harold Morton, the Director-Business Development for Simmonds, and Chris Green, a Simmonds’ employee, had prepared a report on Exicom entitled “The Exicom Group A Business Assessment” (X26).  The assessment contained an overview of Exicom’s current business activities, an initial outline proposal for restructuring the business and an assessment of its requirements for capital injection over the following twelve months.  The “turn around project” proposal involved building on the “new Exicom Management 1995/6 budget”.  Implementation of a three year business plan would be supervised for at least the first two years by the creation of a post of turn-around manager reporting to the Simmonds/Zilkha joint venture.  Working capital requirements were assessed at $7,330,000 to reduce creditor balances over sixty days to zero, $2,670,000 for short-term working capital and non-cash facilities totalling $8,500,000. 

7. Morton, together with David Gordon and Andrew Pike of Freehills, acting on behalf of Simmonds and Zilkha, also met on 30 August with representatives of Telstra.  On 31 August, Freehills sent Telstra a draft “Letter of Comfort” to be sent from Telstra to Simmonds and Zilkha setting out matters they had agreed in principle.  These included payment to Telstra of $7.5 million, a standard two year rolling supply contract with Telecom Technologies for supply of TF400 telephones subject to six month quality reviews and as part of the supply contract a discount totalling $5 million over and above the negotiated price of the telephone.  Telstra was to use its best endeavours to procure supply contracts for additional products over and above current core business levels to the value of $15 million per annum at normal commercial terms.  Simmonds would provide Telstra with a right of first refusal to commercially exploit in Australia certain of its product and technology and Telstra and Telecom Technologies would provide an immediate unconditional release of their claim against Exicom.  The proposed Letter of Comfort was said to reflect an in principle agreement not involving the creation of a legally binding obligation on any party.

   Simmonds and Zilkha Make an Offer to Exicom – 1 September 1995

8. On 1 September 1995, Morton submitted to the Exicom Board a proposal by Simmonds and Zilkha relating to the restructure and recapitalisation of Exicom. Simmonds and Zilkha requested a period of thirty business days designated as the “Exclusivity Period” to allow them to perform the due diligence inquiries necessary to evaluate the feasibility of the proposal and to effect settlement agreements with the CBA, with Telstra and with the landlord of Exicom’s leased premises at Villawood.  Under the proposed transaction they would ensure that sufficient funds were provided to Exicom by way of debt or equity or both to retire the cash component of the CBA facilities, to meet any cash payment required for settlement of the Telstra warranty claim and to provide the company with sufficient funds for working capital purposes.  The letter referred to the “non-binding agreement in principle” they had reached with Telstra for the settlement of the warranty dispute and for an ongoing supply contract.  A copy of Telstra’s Letter of Comfort was attached.  The letter also indicated that Simmonds and Zilkha had held discussions with the CBA and were confident that the CBA and Exicom would be able to reach an agreement under which the cash component of the CBA facilities would be retired with the CBA accepting a discount of between 25% and 35% on the face value of the cash component with the non-cash component of its facilities remaining on foot.  The proposal was expressed to be conditional on the termination of research and development arrangements to which Exicom had become a party in 1990.  The precise mix of debt and equity to be provided to Exicom would depend on further analysis and the outcome of the due diligence investigations. It was also conditional upon final agreement with Telstra and the CBA, the termination of the company’s research and development arrangements, and completion of the restructure of the capital of the company by reduction of capital or similar means (X27). 

   Nortel Welcomes Simmonds’ Involvement – 1 September 1995

9. On 1 September 1995, Brian Davis, the Managing Director of Nortel Australia, wrote to Exicom indicating that Nortel would welcome Simmonds’ involvement in Exicom and that it believed the already strong relationship between that company and Exicom would be further enhanced with Simmonds’ involvement.  Subject to a satisfactory recapitalisation of Exicom occurring, Nortel foresaw further business opportunities arising between Exicom and itself (X29).  Telstra also wrote on that day to Freehills setting out the terms on which it was prepared to negotiate a settlement of outstanding claims against Exicom arising from the supply of faulty TF200 telephones between February 1993 and February 1994 (X403).  The letter reflected broadly the terms of the Letter of Comfort

   Futuris Writes to Exicom – 1 September 1995

10. Futuris wrote to Exicom on 1 September saying it was prepared to submit a firm offer to the Board in accordance with the invitation from ANZ McCaughan but was unable to do so:

    “… because by reason of the injunction it cannot resolve issues sufficiently to remove unnecessary conditions.”

    Futuris expressed its concern that the injunction had prejudiced its position to make a firm offer to Exicom, particularly since it constrained Futuris from dealing with the CBA.  It expressed confidence that if discussions with the CBA and Telstra were to continue its offer would not be conditional upon resolution of settlements with them.  Subject only to the acquisition of the CBA debt and its related security, Futuris would immediately provide Exicom with additional working capital facilities pending the convening of the necessary shareholder meetings.  Futuris considered it to be imperative that Exicom inform the CBA of the contents of its letter.  Any failure by the Board to do that or give Futuris the opportunity to finalise and submit an unconditional bid could occasion loss to Exicom.  The letter  threatened the Board:

    “As a major shareholder of Exicom, Futuris wishes to put the Board of Exicom on notice that it will hold the Board liable for any loss suffered by the shareholders arising from the Exicom Board’s acceptance of a proposal which offers less value to shareholders than the Futuris offer or which carries greater completion risk.” (X28)

    Futuris required that Exicom give it reasonable notice of its intention to accept any offer and asked for its confirmation by the following Monday, 4 September, that it would give such notice.  Notwithstanding the statement of intention to submit an unconditional offer, a draft letter of the same date setting out the proposal in detail contained a conditional offer.  It was conditional upon delivery to the shareholders of an Independent Expert’s Report on the proposed transaction, completion of arrangements with the CBA and completion of arrangements with Telstra (T320).  In the event, no unconditional offer was ever put (T321).

    Futuris Proposes Settlement Terms to Telstra – 1 September 1995 

11. Telstra wrote to Futuris on 1 September proposing a basis for negotiation, albeit in somewhat different terms.  The lump sum figure proposed was $10 million with no provision for a $5 million claw-back in relation to the supply of TF400 telephones. If Exicom were to become a wholly owned subsidiary within the Futuris group, Exicom would be included as a party to a Deed of Cross Guarantee (X226).  Newman saw the letter. He maintained that he had no concern about securing from Telecom a contractual commitment to a particular volume of products.  A restructured Exicom would be able to demonstrate to Telstra not only that it was able to meet the quality level required but would be able to provide increased volume.  His proposition to Telstra would be:

    “Don’t give me a long-term contract.  Give me an opportunity and I will demonstrate to you that I can be a continuous supplier to you.” (T322)

12. Reminded of the indicative settlement terms provided on 31 August with Telstra which included a proposal for a four-year supply contract (X279), Newman dismissed that as representing a “…starting negotiating position” (T322).

    Futuris Writes to Exicom and Various Advisors – 3-5 September 1995

13. On 3 September, Fear wrote to ANZ McCaughan expressing Futuris’ dissatisfaction about the constraints imposed upon it by the injunction and its surprise at Exicom’s strong reaction to its acquisition of shares in that company.  The letter concluded:

    “Futuris, as a major shareholder in Exicom, has requested that I obtain from you details of your mandate including full particulars of your brief and fee arrangements.” (X227). 

    Fear also wrote to the Capp on 4 September 1995 reiterating that in order for Futuris to submit an offer it needed to resolve issues with the CBA and asking whether it was Exicom’s intention to lift the injunction restraining Futuris from approaching and dealing with the Bank (X228).

14. Internal strategy notes within Futuris indicate that Futuris officers were contemplating  proceedings against the Exicom directors for breach of fiduciary duty.  The need to get the insider trader injunction lifted expeditiously was recognised. They thought that Fear should talk to the press.  Newman agreed in cross-examination that, although he couldn’t say whether the support of the media was enlisted at that time, it would be natural for them actively to solicit the press to help their cause (T325).  The former Federal Treasurer John Dawkins was to be briefed with a view to making representations to the FIRB on behalf of Futuris (T325). 

15. Futuris’ solicitors, Blake Dawson Waldron, wrote to Exicom’s solicitors, Corrs Chambers Westgarth (“Corrs”) on 4 September seeking an undertaking that Exicom would not be a party to any agreement with another bidder that contemplated the acquisition of the Commonwealth Bank debt except on the basis that it would be conditional on shareholder approval.  The letter was minatory in tone, heavy with warnings of potential breaches of duty by Exicom directors if they proceeded to make an agreement with another bidder (X284).  A letter was also sent by Davies to Exicom’s auditors, Deloitte Touche Tohmatsu on 4 September.  It was written on behalf of Futuris in its capacity as a shareholder.  It referred to the “heavily qualified” audit opinion on Exicom for the year ended 30 June 1994 and conveyed the view that adequate provision should be made in the June 1995 accounts for:

    ·settlement of the Telstra dispute

    ·writing off research and development costs which could not be supported

    ·the cost of restructuring the company (X285)

    Newman described the objective of the letter as:

    “A tactic to test out how everybody was thinking including the auditors, and as to whether they considered the company to be a strong on going viable concern, not so strong or weak.  It was just a testing mechanism.” (T334)

    On 5 September, Clark  wrote to Exicom requesting that Futuris be offered two seats on its Board with immediate effect (X31).  A copy of the letter was sent to the ASX (X230).  Asked if he expected the request to be met, Newman said he thought it was “an each-way proposition” (T335).  I do not accept that this reflected his state of mind then or in retrospect. The evident purpose of the flurry of threats and demands from Futuris was to exert pressure on the Exicom Board and to build up a stockpile of ammunition for use in subsequent litigation.

16. On 5 September, Blake Dawson Waldron wrote to Freehills putting their clients, Simmonds and Zilkha, “on notice that, in the event that your clients were to proceed to conclude agreements with Exicom and/or the CBA, our clients reserve their right to institute proceedings seeking to set aside the transaction on the basis of the issues as to breach of directors’ duties mentioned above.” (X286)  The letter was sent in accordance with Newman’s instructions (T336).

17. On 6 September, Exicom wrote briefly to Futuris stating that the request for Board representation was obviously “not even a matter for consideration until the legal status of your purported shareholding is clarified in the Courts” (X32).

    Futuris Contacts the Stock Exchange and the CBA – 6 September 1995

18. Following the exchange of correspondence between Futuris and Exicom and their advisors, Futuris resolved to requisition a meeting of the shareholders of Exicom to consider the appointment of two Futuris nominees to the Board.  This was announced to the Australian Stock Exchange (“ASX”) on 6 September 1995 (X33).  The announcement was calculated to inflict damage on the Exicom share price and the resolution of its Board. Futuris expressed its concern about the future of Exicom, a concern which it said was shared by the market.  It stated that a number of significant institutional shareholders had, in recent months, sold down their interest in Exicom or departed the Register altogether.  It said that Exicom’s banker was understood to be dissatisfied with its Board and management.  It pointed out that immediately prior to the suspension of Exicom shares on 1 September 1995 its market capitalisation was $14 million whereas eighteen months previously it had been in excess of $115 million.  It directed attention to Exicom’s reported losses of $66 million over the past five years and that its 1995 results should reflect a substantial loss if the Board were to provide for losses arising from the Telstra dispute and were to write down the carrying value of intangible assets.  It also reported that Futuris had made three offers to the company, none of which had been embraced by the current Board.  Futuris expressed its want of faith in the Board’s ability to resolve outstanding issues for the benefit of all shareholders. 

19. Asked why the ASX announcement referred to the CBA’s dissatisfaction with Exicom, Newman said it “was just reaffirming to the world what the world already knew.  It was just heightening the awareness”.  (T336)  It was put to him that the purpose of including the statement and statements about a deterioration in Exicom’s shares and trading performance was to destabilise the Board.  Newman replied, “No, not necessarily” (T336).  These were facts already known.  The purpose of including them in the announcement was to “highlight the pressure on the Board”.  It was “…testing out the resolve of all the parties concerned, including the other combatants who may want to recapitalise the company” (T337).

20. Futuris wrote to the CBA on 7 September expressing its wish to recapitalise Exicom on terms acceptable to the CBA and the shareholders.  It asked the CBA to advise whether it would require the agreement of Exicom and its Board as a condition of the acquisition of Exicom’s debt and whether it would require any other purchaser of the debt to be subject to the same conditions (X287). The CBA responded on 8 September stating that its discussions and negotiations with respect to Exicom’s banking arrangements would continue to be via that company’s managing director and/or its non-executive directors (X288). 

    Exicom and Simmonds/Zilkha Reach Agreement – 7 September 1995

1. On 7 September, Exicom executed an amended proposal from Simmonds and Zilkha in the form of a letter of that date from their solicitors, Freehills.  On the amended proposal the exclusivity period to enable Simmonds and Zilkha to perform due diligence was to run from the date of signing of the “Letter Agreement” until midnight on 20 October 1995.   Exicom undertook not to appoint or take any steps to appoint any directors to its Board during the exclusivity period or commit itself in any other way to any material transaction without the prior written consent of Simmonds and Zilkha. The amended proposal included certain warranties by the parties (X34).  Exicom announced its agreement with Simmonds and Zilkha describing it as an agreement “… for a far-reaching recapitalisation of Exicom which [would] enhance its presence in the global telecommunications business”.  Exicom’s announcement said that, following discussions with Exicom’s bankers and one of its major customers, Telstra, the agreement also provided for restructuring of the group’s bank facilities and an amicable settlement of the outstanding dispute with Telstra (X35).

   Futuris Responds – September 1995

2. On 8 September, Blake Dawson Waldron wrote to Corrs  pointing out that Futuris had been in the process of completing the necessary steps to finalise a proposal for submission to Exicom.  Futuris, it said, was in a position to put forward, for immediate and urgent consideration by Exicom’s Board a proposal which was summarised in that letter.  The proposal involved the provision of a minimum of $30 million to Exicom by way of a mix of debt and equity.  The offer was made conditional on the CBA agreeing to discount its debt in accordance with its letter to Exicom of 23 August 1995 and agreement being reached with Telstra for an immediate and complete settlement of its dispute and claim against Exicom on the terms set out in a letter from Futuris to Telstra dated 1 September 1995.  Futuris sought access to Exicom to carry out due diligence inquiries.  The letter alleged that the want of an even-handed approach by Exicom’s directors in relation to the bidding process indicated that they were in breach of their duties in failing to explore all commercially available opportunities for maximising benefits to Exicom. (X289) 

3. Newman saw the Futuris offer as a tactical step.  The best way to find out how to compete with the Simmonds and Zilkha proposal was to “… whack in a new offer, put any new conditions around that you like and get the running go again and ask for due diligence in the process.  It was a responsible offer.  We should see all of the offers.” (T340)  That was one of the things the letter was meant to achieve (T340).  He accepted that before any working capital could be provided under the proposal, an agreement would have to be reached with the CBA (T341).

4. On 11 September, Exicom announced an operating loss of $4 million before abnormal items and tax for the year ended 30 June 1995.  Provision was made in the accounts for the Telstra dispute and the termination of the research and development syndication.  These gave rise to two abnormal items totalling $28.4 million after tax as shown in the profit and loss account (X231). 

   Futuris Develops its Acquisition Strategy and Prepares Takeover Documents – 13 September 1995

5. On 13 September, Fear sent Exicom a document entitled “Futuris Corporation Limited Exicom Acquisition Strategy” (X291).  Objectives of the strategy included applying pressure to the Board by continuing to emphasise its duties, killing the insider trading issue and winning the deal.  Newman said it was important to kill the allegation of insider trading.  This was “a heinous crime if you’re dealing in the securities market” (T342).  Asked if he saw the Exicom injunction as preventing another offer from Futuris, Newman denied that it should be assumed he always wanted to put an offer that could be achieved.  Part of Futuris’ tactics were to keep pushing offers through, to keep reminding the Board of Exicom that they had an offer and to keep reminding the Bank particularly that “we would always stump up”.  Nobody put a genuine alternative offer to the company until much later so it was in Futuris’ interest to keep a level of high anxiety “… to test out where all parties were – the CBA, Telstra, Nortel, the company, the board, the other subscribers intending to inject equity into Exicom”.  Futuris had been prepared right from the beginning to buy the debt from the CBA and if it could have done that, sight unseen, unconditionally, it would have.  All that it was doing at this stage was pushing through to see whether that option or any other option could emerge.

6. Fear’s strategy document under the heading “Press Pressure” said:

   “Have spoken to Frith who may, now that Coles issue is quietening down, be prepared to pick up Exicom story and run with some vigour.” (sic)

   This was a reference to Brian Frith, a financial journalist.  Newman was aware that Fear was providing him with information in the hope that Frith would write an article favourable to Futuris’ position (T343).

7. By 13 September, draft documents had been prepared by Bennett & Co, also acting for Futuris,  for a takeover offer from FIPL to Exicom shareholders (X343, X344 and X351).  The offer was expressed to be subject to a condition that no administrator be appointed to Exicom during the period commencing on the date of service of a Part A statement on the company and ending on the expiry of the Offer Period (cl 7.2).  Another condition was that no settlement occur with Telstra or the CBA.  Newman’s instructions about that condition were that it was to be left in abeyance until he had determined which was the better way to go (X343).  A draft Part A statement was also prepared (X359).  It was characteristic of Newman’s approach, as will appear, that he wanted Futuris at all times to be in a position to move quickly in adopting whatever course of action it decided upon.

8. On 14 September, Futuris formally requisitioned the directors of Exicom for an extraordinary general meeting, pursuant to s 264(1) of the Corporations Law to consider the appointment of Newman, Davies and Clark to the Exicom Board.  The requisition also enclosed a draft notice together with consents by their proposed appointees (X37).  Fear sent a fax to Davies and Clark attaching a copy of a file note of a conversation he had had that day with Capp.  He had told Capp that Futuris wanted assurances that the Exicom Board had not, and would not, enter into a transaction with Simmonds and Zilkha that involved a sale of any of Exicom’s assets or resulted in Exicom having any liability to Simmonds and Zilkha or any claim by them against Exicom in the event that the Exicom shareholders were to disapprove the proposal.  Newman was briefed in general terms about Fear’s discussions (X292, T344).  The possibility of suing the directors of Exicom was still under active consideration at the time and Futuris was also positioning itself to have completed its Part A statement by the end of the third week in September (X293).  Newman saw Capp as being very much in favour of the Simmonds/Zilkha proposal at this stage and very much opposed to Futuris (T346). 

9. Futuris publicly announced its requisition for an extraordinary general meeting on 18 September.  In the announcement it stated that it had requested the ASC to “…investigate the level of disclosure by Exicom of price sensitive information prior to and post the invitation by the Exicom Board to Futuris to submit recapitalization proposals to the Exicom Board”.

10. Futuris approached the NRMA on 20 September by way of a letter from Fear seeking a variation of the profit sharing formula under the Call Option Agreement so that the 50/50 split for a share price exceeding 10 cents would apply “in all conceivable circumstances”.  As a fall-back position it sought acknowledgment that the profit sharing arrangement would apply to the case in which Futuris received and accepted “an offer to be taken out” (X295). 

11. On 26 September, Nortel’s Brian Davies wrote to Exicom acknowledging the agreement it had made with Simmonds and Zilkha.  His letter was in substantially similar welcoming terms to that which he had written on 1 September (X29) in anticipation of the agreement.

    ERG Considers Its Position with Respect to Exicom – 27 September 1995

12. On 27 September 1995, the directors of ERG met.  Fogarty updated the meeting on the status of Exicom. He referred to “discussions held with the preferred investor in the company”.  He said that there was an opportunity to pick up a sizeable portion of Exicom for little money and to optimise ERG’s position with Exicom’s technologies and manufacturing facilities.  At that time he had not met with Simmonds and Zilkha.  All of this was recorded in the minutes of the meeting.  Fogarty could not recall the discussions referred to in the minutes (T821).  Nor did he recall what was the “opportunity” to which he had referred (T821).  The directors authorised him to purchase up to twenty million shares in the company to a maximum of 15 cents per share (X38). On the same day he sent to Colin Squires of SBC Warburg a draft of a fax to Freehills expressed to contain “information that will assist your client’s understanding of our operation” (X39).  It does not appear whether the fax reflecting the terms of the draft was ever sent (T821).  The authority given to Fogarty to purchase shares in Exicom was never acted on (T820). 

    Futuris – More Strategic Thoughts – 28 September 1995

13. Fear prepared a further “Acquisition Strategy Update” dated 28 September (X296).  Newman maintained a scepticism about the strategy which reflected his approach to professional advisors generally.  He nevertheless agreed with Fear’s advice that it was desirable to keep up pressure on Exicom particularly pressure to disclose details of the agreement with Simmonds and Zilkha and to submit it to a vote of shareholders.  Fear advised maintaining what he called “the press barrage”.  Newman said he discouraged Fear from talking to the press on his behalf.  However he had earlier accepted, in cross-examination, on strategy notes prepared by Fear at the beginning of September, that it would be natural for Futuris actively to solicit the press to help its cause (T325).  He agreed that Futuris should seek an explanation of the grant of exclusivity to Simmonds and Zilkha and that it should endeavour to discredit, in the eyes of the market, their financial capability to perform the transaction (T349).  He distinguished this tactic from discrediting the individuals concerned.  He did not think it necessary to discredit the directors of Exicom as Fear suggested.  They had, in his view, already been discredited (T349).  As it turned out, Futuris did launch strong personal attacks upon the directors of Exicom in subsequent public statements and correspondence. 

    Exicom’s Annual Report and Financial Statements for the Year Ended 30 June 1995

14. The Financial Statements for Exicom for the year ended 30 June 1995 were published at the end of September (X40).  They showed accumulated losses of $99,113,000 for the end of the year.  Accumulated losses to 30 June 1994 had been $67,709,000.  The balance sheet showed net assets of $23,304,000.  Newman said he probably would have thrown them in the bin.  They did not tell him anything he did not already know:

    “I’d done due diligence.  I knew all the major issues as to the financial viability of the company, the value of the company, so I’d challenge you to find anything that I did in relation to analysing these accounts.” (T350)

15. Exicom’s annual report for the year ended 30 June indicated that provision had been made in the company’s accounts for resolution of the Telstra dispute.  The Board had also decided to terminate its Research and Development Syndication and had “fully provided against the carrying value of the Marketing Licence which form[ed] part of the syndication agreement” (X41). 

16. In early October Simmonds and Zilkha and their lawyers at Freehills were endeavouring to finalise, their due diligence inquiries, agreements with Telstra and the CBA and the detailed form of a proposed agreement with Exicom as well as a timetable for necessary approvals from shareholders and the FIRB (X46).  KPMG was engaged on 6 October to produce a Financial Due Diligence Review on Exicom, a draft of which was put in evidence (X42).   On 11 October, Gordon sent a fax to Zilkha  indicating that he had met with O’Brien at the CBA and discussed, inter alia, an option “to buy out the CBA position” (X43) and the provision of new bank facilities for Exicom. 

17. Nortel  wrote to Exicom on 13 October demanding reduction of its debt to Nortel with a proposed schedule of repayments totalling $US9.7 million to be made by 31 December and incorporating repurchase of inventory.  Nortel requested a “prompt written commitment” to the reduction of its debt and the associated inventory purchase (X44).  Newman knew that a demand had been made involving a substantial amount in the range of millions of dollars.  He also considered that Nortel would not act so precipitously as to bring Exicom down until such time as all propositions had been fully worked through.  He was dismissive of the demand saying:

    “So it was a typical threat of a major supplier looking for leverage or customer looking for leverage.” (T351)

    The Bank Option is Signed – 13 October 1995

18. On 13 October, Capp wrote to O’Brien stating that Exicom had “no objection to the Bank selling its debt or granting an option to sell its debt to Simmonds/Zilkha upon the in principle terms outlined”.  The “in principle” terms were not set out in the letter.  However on the same day an Option Deed was executed between the CBA and Simmonds and Zilkha (X448).  The Deed referred to Simmonds and Zilkha as “the Investors”. The operative clause of the deed, cl 2.1, provided thus:

    “2.1  Grant of Option

    (a)In consideration of the payment of the Option Fee by the Investors to CBA and the Investors continuing to carry out due diligence referred to in Recital A, CBA grants to the Investors jointly (but not severally) the Option for the Investors (or their nominees) to purchase the Exicom Facilities and the Exicom Securities.

    (b)      CBA acknowledges receipt of the Option Fee.”

19. The Investors were entitled to exercise the option at any time during the option period which was defined as meaning the period from and including the date of the deed up to and including 5pm (Sydney time) on the Option Expiration Date (cl 1.1).  The Option Expiration Date was defined as the date which is the earlier of:

    “(a)the date which is 15 Business Days after the general meeting of shareholders of Exicom Limited to approve the recapitalisation of the Exicom Group by the Investors; and

    (b)29 February 1996.”

20. Clause 2.3 provided for expiration of the Option in other circumstances thus:

    “2.3  Expiry of Option

    The Option expires automatically if the Exicom Group fails to comply with the Exicom Obligations (and that failure has not been rectified (if capable of rectification) within 10 Business Days of notice being given by CBA to Exicom Limited and to the Investors) during the Option Period.”

21. Payment following the exercise of the Option was governed by cl 2.2(b) and (c).  Within two business days after receipt of the Option Notice, CBA was to advise the Investors of the Exicom Cash Amount and provide documentation detailing its calculation.  Completion of the purchase of the facilities and securities under the exercise of the Option was to occur within five business days after the Investors received the information referred to in cl 2.2(b). (cl 2.2(c)).  The CBA covenanted not to sell or transfer the Exicom facilities or securities or grant any other option inconsistent with the Option or enforce any rights or take any other action under the Exicom Facility or Exicom Securities before the end of the Option Period or the expiry of the Option, whichever was the earlier.   Moreover unless required by law the CBA could not do anything which would prejudice or be likely to prejudice the Investors’ rights under the deed (cl 2.5). 

22. The CBA also undertook at any time during the Option Period to do all things reasonably required of it by the Investors including the execution of documents for the novation of arrangements between CBA and the Exicom Group in order to restructure the arrangements between the CBA and the Investors as set out in the deed so as to minimise transaction costs.  Notices and other communications were to be sent to the CBA at Level 8, Corner Pitt Street and Martin Place, Sydney marked for the attention of Mr John E O’Brien.  Notices to the Investors were to be sent to Freehills also in Sydney marked for the attention of Mr David Gordon.  Notice was regarded as being given by the sender and received by the addressee, if by facsimile transmission, whether or not legibly received, when transmitted to the addressee, but if the delivery or receipt were on a day which was not a business day or was after 4pm at the addressee’s time it would be regarded as received at 9am on the following business day (cl 5.1(a)(3)).  There was a confidentiality clause in the Option as follows:

    “5.3  Confidentiality

    (a)Subject to clause 5.3(c), no party may disclose any information in respect of this deed, other than for the purpose of enforcing this deed or as required by law.

    (b)Each party must use its best endeavours to ensure that none of its employees, servants, agents, officers or advisers disclose any such information.

    (c)This deed may be disclosed for the purposes of obtaining any approvals or consents required for the purposes of the recapitalisation referred to in Recital A.”

    There was a prohibition on assignment in cl 5.8 thus:

    “5.8  Assignment

    Subject to the terms of this deed, rights arising out of or under this deed are not assignable by one party without the prior written consent of the other party.”

    And under cl 5.12 time was made of the essence of the deed.

    More Futuris Strategy Development – Mid-October 1995

23. A further internal Futuris document setting out tactics in the ongoing battle was prepared about mid-October (X297).  It was accepted by Newman as a fair summary of steps under consideration by his management team (T351).  The document described the Futuris objective as obtaining “control of Exicom at the lowest possible price”.  Newman did not accept that as a statement of his objective at the time.  His objective was:

    “To recapitalise the company and have something less than a controlling interest but if we had to have a controlling interest, then so be it, but to keep it as a separately listed public company.”

    One of the steps in a strategy for obtaining that objective was to frustrate the Simmonds and Zilkha deal.  In elaboration under that heading in the document it was proposed that an injunction be sought restraining the holding of the meeting to consider the Simmonds and Zilkha proposal.  Handwritten notes by Davies at about the same time canvassed a similar suggestion (X298). 

24. Newman said he had told Davies and Clark from the outset that the Exicom transaction was theirs.  He wanted to see if they were good enough to do it without his full involvement (T356).  After a time however, he felt that Futuris wasn’t doing as well as it should be and he became more involved in reviewing strategy.  Notes he made in October contained a reference to ERG under the heading “Other Parties”.  He did not know, but suspected, that ERG was interested in Exicom.  It was only a question in his mind when he would speak to Fogarty because he knew that he had previously been interested (T354).

    Exicom Announces Anticipated Receipt of Simmonds and Zilkha Proposal – 16 October 1995

25. On 16 October, Patterson, the secretary of Exicom, published an announcement in the following terms:

    “The Board of Exicom wishes to advise that, in accordance with the agreement entered into with the Simmonds/Zilkha consortium of 7 September, 1995, the consortium will be submitting its proposal for a recapitalisation of the Company to the Board on Friday, 20 October.

    The Board expects that a final agreement will be entered into with the consortium during the week commencing Monday, 23 October.  Any agreement entered into will be subject to all necessary approvals.

    Full details of the final agreement will be released immediately after it has been signed with the consortium.” (X237)

    Futuris Turns Up the Heat – 17 to 19 October 1995

1. The term “assign or otherwise transfer or make available…all right benefit or interest held by the Investors in the Bank Option” has to be read against the definition of the term “Bank Option” which identifies Simmonds and Zilkha as the option holders.  It was known to all that ERG was not a party to the Option and that was recognised in the definition.  Given, as I have found, that Futuris had access to the Option prior to the execution of this agreement it was also known to all that the Option was not capable of assignment without the consent of the CBA.  Indeed, although I do not regard it as part of the factual matrix for any constructional purpose, that requirement was effectively disclosed in the Australian Newspaper on 29 November 1995 in an article by Brian Frith based in part upon the option document itself which had been provided to him by Fear, acting on behalf of Futuris.  In my opinion, however, that does not affect the construction of cl 5.

2. The obligation imposed by cl 5(a) was capable of satisfaction in a variety of ways.  Legal assignment of the Bank Option was theoretically open subject to the consent of the CBA.  Given the extended definition of the term “Bank Option” in the agreement legal assignment would also be applicable to the debt if the Option were exercised prior to an election by Futuris.  The obligation imposed by cl 5(a) was ambulatory in character and, as a matter of language, covered a range of possible mechanisms for providing Futuris with the benefit of ERG and Simmonds’ “right benefit or interest in the Bank Option”.  It contemplated that a range of possible rights, benefits or interests might be held by ERG and Simmonds.  For although Futuris had a copy of the Option and knew that Zilkha was not part of the consortium involving ERG and Simmonds, it did not know the nature of the relationships between ERG, Simmonds and Zilkha and what might have to be done to put it in “the position” of ERG and Simmonds.

3. The Futuris case as pleaded does not go to the capacity of ERG and Simmonds to convey the benefit of the Bank Option to it.  For the pleading in par 35A of the further reamended statement of claim is that:

   “In breach of the ERG/Simmonds Agreement on 14 March 1996 ERG/Simmonds failed or refused to forthwith assign, transfer or make available to Futuris all the right title or interest held by ERG/Simmonds in the Bank Option despite request in writing by Futuris on 14 March 1996.”

   And although by its defence ERG has pleaded it was ready, willing and able to make available the benefits of the Bank Option, this does not elevate the Futuris case into a cause of action based on want of capacity to perform.  As counsel for ERG submitted in closing, if Futuris sought to make such a case outside the pleadings, ERG would be entitled to reopen its case to bring evidence of the relationship between itself, Simmonds and Zilkha and their rights and obligations with respect to the Bank Option following Zilkha’s withdrawal from the Consortium.  Moreover it would be open to argue that, absent a legal right, ERG had the practical ability to obtain the benefit of the option for Futuris through a process of nomination by Simmonds and Zilkha or indeed a commitment or undertaking to nominate which would not contravene the prohibition on assignment of the Option itself as it would give rise to no right to the nominee to exercise the Option as against the CBA.  The latter of course, having regard to the timeframe and the imminent expiry of the Option, would have been more than a little academic.  In this respect the documents “Marked for Identification 485 and 486” will not be admitted as they are not relevant to the pleaded case. 

4. The question for present purposes is what did Futuris do on 14 March, what, if anything, were ERG and Simmonds required to do and what did they do?  Their requirement to act “forthwith” derives its content from the nature of the right, benefit or interest held in the Bank Option by ERG and Simmonds and what it is necessary to do in order to assign or otherwise transfer or make available the right, benefit or interest.  If, for example, the Option had been exercised and, pursuant to the Memorandum of Understanding, ERG and Simmonds actually held the debt and securities a straight forward assignment might have been effected  to Futuris’ nominee with notice to Exicom.  The content of the obligation must depend upon the practical steps necessary to give effect to it not the external circumstances or the fact of the imminent expiry of the Option.  Given that the direct legal title to the Option was held jointly by Simmonds and Zilkha and given the prohibition on direct assignment of it without consent of the CBA, a process of nomination of a party (in this case a Futuris nominee) pursuant to the terms of the Option was open.  The fact that it may have taken more time to implement than was left before the Option expired does not put ERG or Simmonds in breach of their contractual obligations.  The expiry of the Option occurred before the occasion of a breach of their obligation could reasonably be said to have arisen.  In the circumstances, they did no less than they were required to do.  There was no breach of the contract. That being the case, the warranty claim falls by the wayside.  The warranties in cl 5 do not of themselves expand the obligations which ERG and Simmonds had to perform under that clause.

5. It may be noted that the election by Futuris on 14 March did not specify a nominee or indicate, in default, that FIPL would take the benefit of the Option.  It may be that the letter is properly construed as indicating that Futuris was its own nominee.  On the following afternoon, on 15 March, with 84 minutes to go on his own calculation, Paganin sent a fax to Fogarty specifying Futuris Administration Pty Ltd as the nominee.  This being Futuris’ formal nomination it may be seen, in accordance with the construction of the clause to which I have already referred, as completion of its written election. If that be right, it strengthens the conclusion that there was no breach. Paganin received a response from Gordon an hour and twenty minutes later indicating a readiness to nominate Futuris Administration Pty Ltd.  By that time, of course, the Option was on the brink of expiration.

   Damages

6. Having regard to my conclusions about the causes of action, it is strictly unnecessary to consider the question of damages.  I will nevertheless express my conclusions on the claim for damages.  For it is when consideration is given to that issue that an air of unreality settles on the whole proceedings.

7. Futuris pleads that by reason of the breach of contract and breach of warranty it has suffered loss and damage.  One element of its claim was for $2,100,000.  This was, in effect, the amount which it would have received under its agreement of 7 December had ERG and Simmonds proceeded with the recapitalisation of Exicom. That did not proceed and there is no basis for a claim for loss of opportunity in respect of the $2.1 million. The substantive submission for Futuris in relation to damages for breach of contract reduced to the contention that by reason of the failure to deliver to it effective control of the CBA debt Futuris lost the opportunity on 15 March 1996 to recapitalise Exicom.  This opportunity was said to have a monetary value.  The Court, it was said, should have regard to the following factors which would have influenced the probability of the opportunity succeeding

   1.Futuris would have had the right to, and would have exercised the Bank Option.

   2.Futuris was the only prospective bidder for Exicom.

   3.Without a recapitalisation proposal it was inevitable that Exicom would go into liquidation.

   4.In Futuris’ view the value of Exicom had not changed.

   5.Futuris did not have a fixed proposal for recapitalisation but was fluid in its approach.

   6.Unless Futuris moved quickly the company would disintegrate.

8. Futuris’ position in this respect is seriously undercut by its failure to take the opportunity to acquire the Exicom debt directly from the CBA.  As I have found, Griffiths told Gordon early on 14 March that the CBA would be happy to receive an offer of 75 cents in the dollar for the cash facilities. Gordon informed Paganin of that fact at 3.30pm that day.  Futuris by its advisors was in receipt of the information that it was in a position to acquire the debt in a far more direct and less complicated fashion than by reliance upon its agreement with ERG and Simmonds.  The acquisition of the right to the Bank Option itself as distinct from the debt would have conferred little or no practical advantage as it was on the brink of expiry in any event.  And in my opinion, even if Paganin had not communicated Gordon’s advice to Futuris management it would not have been beyond their commercial wisdom to have seen the acquisition of the debt was a plausible possibility.  Cambourne’s negative reaction to Bennett & Co’s letters to the CBA is perhaps not surprising having regard to their somewhat challenging tone and the assertion of what was essentially portrayed as a right as against the CBA. 

9. Even if the acquisition of the debt direct from the CBA were not a practical possibility, I am unpersuaded by the evidence of Futuris’ expert witness, Justin Willis,  which purported to quantify the value to Futuris of the recapitalisation of Exicom.  Willis based his opinion of the potential value of Exicom upon reports prepared by Invetech, KPMG and Grant Samuel.  The Invetech report was a draft report prepared for Futuris entitled “Preliminary Review of Exicom Villawood Operations” and dated 1 September 1995.  The KPMG report was the one prepared for Simmonds and Zilkha in October 1995.  The Grant Samuel report was that prepared for ERG and Simmonds and dated 29 January 1996.

10. Willis approached his estimate of the potential future value of Futuris’ equity interest in Exicom by valuing the potential future enterprise value of Exicom.  This depended on assessing future maintainable earnings and capitalising them.  In determining an appropriate estimate of Exicom’s future maintainable earnings he gave consideration to:

    (a)Earnings forecasts prepared by Exicom and presented in an Information Memorandum dated 9 June 1995.

    (b)The likelihood that Exicom’s historical financial pressures including the CBA debt facilities and the shortage in working capital, had impacted on recent historical financial performance.

    (c)Potential future earnings growth from investments in overseas expansion.

    (d)Future earnings from sale contracts to Telstra and Nortel.

    (e)Potential cost savings at Exicom’s Villawood manufacturing facilities as identified by Invetech in its draft report.

    (f)The positive impact of synergistic and operational benefits which may have been brought to Exicom by Futuris.

    Willis justified his reliance upon Exicom forecasts by reference to KPMG’s observation that:

    “Exicom’s past history is of over optimistic budgeting and the failure to achieve budget often by spectacular margins.  Nevertheless the current management team have adopted a pragmatic and conservative approach to setting the 1995/1996 budget to avoid problems.”

    He referred to revised forecasts for Exicom for the year ended 30 June 1996 which were included in the Grant Samuel report.  He made a comparison of these forecasts.  He considered the forecasts in the 1995 Information Memorandum a reasonable basis for determining appropriate future levels of earnings in his capitalisation of maintainable earnings as part of the determination of the potential future enterprise value of Exicom.  Willis was basing his valuation ultimately upon forecasts by third parties who were not in Court.  That is to say his opinions were based upon other opinions.  There is much to be said for the view that this evidence was not properly admissible.  In my opinion, however, it is sufficient to say that it cannot be given any weight. 

11. Another witness called in relation to the issue of loss of opportunity damages was Stephen Wilson, the author of the Grant Samuel & Associates report (X115).  He verified that the report reflected his opinion.  His purpose in preparing it was to evaluate whether or not the ERG and Simmonds’ recapitalisation proposal was fair and reasonable from the perspective of independent shareholders in Exicom.  He had concluded that if the recapitalisation did not proceed then Exicom would go into some form of insolvency administration and shareholders would receive no value for their shares.  His report calculated a value for Exicom implied by the ERG and Simmonds’ offer.  That was a figure of $53 million (T524).  He did not conduct a valuation of Exicom per se (T526).  In my opinion his report was not addressed to and did not give rise to a valuation of Exicom’s potential future value as at 14 or 15 March 1996. 

12. A commercially realistic assessment of the presence or absence of future potential value in Exicom is reflected in the decision of ERG and Simmonds to withdraw following what was demonstrably a lengthy, expensive, detailed and exhaustive exploration of ways in which the various conditions precedent which were commercially relevant to the recapitalisation, could be satisfied and the recapitalisation made to work.  The difficulties which ERG and Simmonds encountered were real.  Their process of exploration was genuine right up to the point of the decision to withdraw.  I do not accept the implied suggestion that at some point it became an elaborate charade never intended to be consummated by recapitalisation. A realistic assessment of the position of Exicom at the time at which administrators were appointed also emerged from the evidence of McIntosh.  It may be accepted that there is a difference between a firm operating as a going concern and the value of its component parts and assets.  Nevertheless even allowing for that difference, the scale of Exicom’s insolvency as at March 1996 makes it inherently improbable that any recapitalisation would have saved it.  This is particularly so given the problems in terms of product quality, its relationships with its major customers and suppliers and the difficulties with the Villawood premises.

13. I do not believe that in the circumstances Futuris, which foreshadowed a degree of fluidity in its possible approaches to recapitalisation at March 1996, would have fared any better.  Indeed, I find it improbable that Futuris, if it had acquired the Bank Option on 14 March, would have committed itself to paying out in the short term remaining before the Option expired, the $20 million necessary to acquire Exicom’s facilities and securities from the CBA.  The risk of a substantial loss, given the real state of Exicom at the time, would have been too great as against the tenuous promise of future potential.

14. In my opinion, even had Futuris made out a breach of contract or warranty in this case, it would not have established any quantifiable loss of opportunity of any value.

15. For the preceding reasons, the application for Futuris and FIPL will be dismissed.

    Cross-Claim

16. ERG cross-claims for rectification of the agreement with Futuris.  It is sufficient to say that having regard to the fairly intensive negotiation that occurred in relation to the actual terms of cl 5, I am not prepared to say that the words that were ultimately agreed were not capable of giving effect to the common intention of the parties.  The cross-claim will be dismissed.

I certify that the preceding four hundred (400) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.

Associate:

Dated:             15 August 2001

Counsel for the Applicants:

Mr ML Bennett with Ms JM Hill

Solicitor for the Applicant:

Bennett & Co

Counsel for the First Respondent:

Mr WS Martin QC with Ms EC Hensler and
Mr B Dharmananda

Solicitor for the First Respondent:

Counsel for the Second
Respondent:

Solicitor for the Second
Respondent:

Mallesons Stephen Jaques

Mr RJ Price

Freehill Hollingdale & Page

Date of Hearing:

20, 21, 22, 23, 24, 27, 28, 29, 30 November and 1, 4, 5, 6 and 7 December 2000

Date of Judgment:

15 August 2001

INDEX

Introduction   1  -  2
Exicom Limited 1995 – A Failing Company   2  -  3
Futuris – A Prospective Acquirer   4
ERG Limited – Another Prospective Acquirer   4  -  6
Exicom and Futuris Discuss Recapitalisation – June 1995   6  -  8
Futuris Does a Limited Due Diligence – July 1995   8 
Futuris Makes a Proposal – July 1995   9  - 11
Futuris Addresses the Exicom Board – August 1995  11 – 15
Futuris Acquires Exicom Shares and is Sued by Exicom
- 30-31 August 1995  15 -  18
Simmonds and Zilkha Prepare to Make an Offer to
Exicom – August 1995  18  - 19
Simmonds and Zilkha Make an Offer to Exicom
- 1 September 1995  19 – 20
Nortel Welcomes Simmonds’ Involvement – 1 September 1995           20
Futuris Writes to Exicom – 1 September 1995  20 -  21
Futuris Proposes Settlement Terms to Telstra –
1 September 1995  21 -  22
Futuris Writes to Exicom and Various Advisors
- 3-5 September 1995  22 -  23
Futuris Contacts the Stock Exchange and the CBA
- 6 September 1995  23-  24
Exicom and Simmonds/Zilkha Reach Agreement
- 7 September 1995  25
Futuris Responds – September 1995  25 -  26
Futuris Develops its Acquisition Strategy and Prepares
Takeover Documents – 13 September 1995  26 -   28
ERG Considers its Position with Respect to Exicom
- 27 September 1995  28
Futuris – More Strategic Thoughts – 28 September 1995  28 -   29
Exicom’s Annual Report and Financial Statements for the
Year Ended 30 June 1995  29 -  30
The Bank Option is Signed – 13 October 1995  30 -  32
More Futuris Strategy Development – Mid-October 1995                   32 -  33
Exicom Announces Anticipated Receipt of Simmonds
And Zilkha Proposal – 16 October 1995  33
Futuris Turns Up the Heat – 17 to 19 October 1995  33 -  37
ERG Opens Dialogue with Simmonds and Zilkha
- October 1995  37 -  39
The Simmonds/Zilkha Offer – 25 October 1995  39 -  40
Simmonds and Zilkha Negotiate with ERG
- 27, 28 and 29 October 1995  40
Fogarty Reports to the ERG Directors – 27 October 1995                   40
ERG’s Directors Meet – 30 October 1995  40 -  41
Futuris has Discussions with Zilkha and the CBA
- 27 October 1995  42
Futuris’ Application for Leave to Appeal Dismissed
- 30 October 1995  42
Exicom Obtain an Extension of Time for its Annual General
Meeting – 31 October 1995  42-  43
Futuris Appeals Against the Extension of Time
- 3 November 1995  43 -  44
ERG Explores Settlement with Futuris – 4 November 1995                  44 -  45
ERG Enters Agreement with  Simmonds/Zilkha
- 6 November 1995  45 -  47
Futuris Threatens the CBA – 7 November 1995  48-  49
A New Bank Option is Executed – 7 November 1995             49
Fogarty Reaches In Principle Agreement with Telstra
- 8 November 1995  49 -  50
Futuris Writes to Exicom Shareholders – 8 November 1995                 50
Exicom Makes a New Employment Agreement with its
Chief Executive, Stephen Newman – 8 November 1995  50
Fogarty Meets Nortel – 9 November 1995  51
Fogarty Speaks to Newman Again – 9 November 1995  51 -  52
The CBA Extends Exicom’s Facilities – 10 November 1995     52
Davies’ View of Exicom – 10 November 1995  52 -  53
Fogarty Speaks with Newman – 13 November 1995  53 -  56
Newman’s Notes On the Conversation of 13 November 1995  56 -  58
Fogarty’s Memorandum to ERG Directors – 13 November 1995         58
Exicom Writes to Fear and Fear Replies with an Offer
- 13 and 15 November 1995   58 -  60
Futuris Seeks a Meeting of Exicom Shareholders
- 15 November 1995  60
Telstra Puts Pressure on Exicom – 15 November 1995            60 -  61
Zilkha Withdraws from the Consortium – 16 November 1995   61
Fogarty Meets Newman Again – 17 November 1995              61 -  63
Australian Stock Exchange Seeks Information about the

Bank Option – 17 November 1995  63 -  64
Futuris Receives Copies of Discovered Correspondence
- 17 November 1995  64
Exicom Writes to Shareholders – 17 November 1995              64 -  65
The ERG and Simmonds’ Recapitalisation Proposal is
Finalised – 19 November 1995  65
Newman Puts a Proposal to Fogarty – 20 November 1995                  65 -  67
Confidentiality Orders Relating to Documents in the
Administrative Appeals Tribunal and the New South Wales
Supreme Court – 20 November 1995  67 -  68
Draft Agreement with Futuris Sent for Execution
- 21 November 1995  68 -  69
The Administrative Appeals Tribunal Gives its Decision
And the Insider Trading Litigation Commences
- 22 November 1995  69
Further Exchanges between ERG and Futuris – 22-24 November        69 -  72
The CBA Extends the Option – 23 November 1995  72
Bennett & Co threaten the CBA – 24 November 1995            72 -  73
Whether and When Futuris Became Aware of the Option   73 -  78
Support for ERG from Telstra and Nortel – 27 and 28
November 1995  78 -  79
Federal Court Dismisses Appeal against AAT Decision
- 29 November 1995  79
ERG/Simmonds’ Recapitalisation Proposal Accepted
- 29 November 1995  79 -  81
Futuris Considers the Insider Trading Litigation  82 -  83
Fogarty Speaks to Nortel  83
Fogarty and Newman Re-open Negotiations
- 3-7 December 1995  83 -  90
Correspondence with the CBA – the Option is Extended
- 7 December 1995  90
The Settlement Agreements – 7 December 1995  90 -  93
The Rocky Path Towards Recapitalisation – December 1995
To 23 February 1996  94 – 116
ERG’s Input to Capp’s Announcement – 232 February 1996    116 – 117
The Meeting of Exicom’s Shareholders – 23 February 1996                 118 – 119
More Exicom Phone Failures – 26 February 1995  119 – 121
Recapitalisation Looks Increasingly Difficult – 27 February
to 29 February 1996  121 – 123
The CBA Sends Notice of Breach and Termination of the
Option – 1 March 1996  123 – 124
Futuris Re-enters the Fray – 1 March 1996  124 – 126
Count Down to Abandonment of Recapitalisation –2-12
March 1996  126 – 130
ERG Withdraws its Recapitalisation Proposal – 13 March 1996           130 -  135
Futuris Elects to Acquire Assignment of the Bank Option
- 14 March 1996  136 – 139
Administrators are Appointed to Exicom – 15 March 1996                  139
Futuris Identifies its Nominee for the Bank Option
- 15 March 1996  140 – 141
The Administration and Liquidation of the Exicom Group  141 – 145
The Causes of Action   145 - 152
The Causes of Action in Misleading or Deceptive Conduct                   152 - 153
           Par 11(b) – The Nortel Representation  153 – 154
           Par 11(c) – The Concluded Agreement with Telstra                 154
           Par 11(d) – The Benefit of the Bank Option  154 – 155
           Par 11(e) – Renegotiation of the Villawood Rental  156
           Par 11(f) – The Financial Position of Exicom                156
           Par 11(g) – The Effect of the Settlement Transaction     157 – 158
The Cause of Action for Breach of Contract and Breach of
Warranty  158 – 162
Damages   162 – 165
Cross-Claim  166