Network Limited v Speck
[2009] VSC 235
•17 June 2009
IN THE SUPREME COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
No. 2039 of 2006
| NETWORK LIMITED (ACN 091 780 924) | Plaintiff |
| and | |
| LYNTON AINSLEY SPECK & ORS (according to the schedule attached) | Defendants |
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JUDGE: | PAGONE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 4 – 7, 11 – 14, 18 – 20 May 2009 | |
DATE OF JUDGMENT: | 17 June 2009 | |
CASE MAY BE CITED AS: | Network Limited v Speck & Ors | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 235 | |
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CONTRACT – Duty of good faith – Whether term providing for notice of termination wholly for benefit of plaintiff or for all parties – Whether notice of termination served in good faith or for a collateral purpose.
EVIDENCE – Expert evidence – Relevance of witness’ specialised knowledge to the facts.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A Rodbard-Bean with Mr O Bigos | Thomson Playford Cutlers |
| For the Defendant | Mr P Corbett | Hall & Wilcox |
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HIS HONOUR:
The main dispute in this appeal is about whether it is the plaintiff (“Network”[1]) or the defendants who are entitled to an amount of $250,000 which had been paid by Network to the defendants as a deposit under an agreement for the potential purchase of a business and assets.
[1]The plaintiff has changed its name to OoH! Media Group Limited but it will be more convenient for me to refer to it in these reasons as Network.
On 1 November 2005 the plaintiff and defendants entered into an agreement styled a “Memorandum of Understanding” (“the MOU”). Clause 4.1 of the MOU provided that the parties were in good faith to use their best endeavours to negotiate and enter into certain agreements giving effect to the intent and substance of the transactions defined in clause 1.27 and described in a schedule to the MOU. That obligation was subject to clause 5 which provided for the undertaking of final due diligence. Clause 4.2 of the MOU (also subject to clause 5) provided for the payment of a deposit of $250,000 (“the MOU deposit”) which was to be applied towards any subsequent deposit which may have been payable under acquisition agreements, if entered into, but was otherwise to be dealt with as provided for by the MOU. Network paid the MOU deposit but maintains that it is entitled pursuant to the terms of the MOU to have it returned. In contrast, the defendants deny Network’s entitlement to the repayment of the MOU deposit and by counterclaim seek declarations that they are entitled to retain the MOU deposit pursuant to the terms of the MOU maintaining that Network forfeited any right or entitlement to repayment of the MOU deposit.
Network’s claim to a repayment of the MOU deposit is based upon clause 6.5. That clause provides that “the sellers”[2] were obliged to repay the deposit to Network immediately after “expiry or termination” of the MOU. That obligation was, however, conditional upon one of two circumstances. The first, not relevant to this proceeding, was whether it had been applied towards any subsequent deposit payable under any acquisition agreements entered into in respect of the acquisition of shares as contemplated by the MOU. The second condition, critical to this proceeding, was that the sellers had complied with their obligations under the MOU and that the MOU had validly been terminated by the sellers. In that case the sellers could retain the MOU deposit and treat it as fully forfeited by Network. The defendants rely upon this provision in the MOU to maintain their claim to retain the MOU deposit. In contrast Network contended that the MOU had expired or terminated and that the defendants had not established that they had complied with their obligations or had validly terminated the MOU. Network’s case is, in essence, that it, rather than the defendants, had validly terminated the MOU pursuant to clause 6.2.3 which permitted Network to terminate the MOU if it had given notice of a material adverse effect under clause 5.4.2.
[2]Who were defined in the MOU to mean all of the present defendants as distinct from the “vendors” who were defined in the MOU to mean only the first and second defendants.
Clause 6.2.3 of the MOU permitted Network, but not the defendants, to terminate the MOU if Network had given notice of becoming aware of a material adverse effect under clause 5.4. Clause 5.4 was one of the provisions dealing with final due diligence and required Network to give a written notice to the defendants immediately after the process of Final Due Diligence (as defined) had been completed. Network then had one day thereafter to provide a further written notice as to whether or not the Final Due Diligence (as defined) had revealed a Material Adverse Effect (as defined). I will need to return to each of these provisions later but for the present it will be sufficient to note that “Material Adverse Effect” was defined in clause 1.18 to mean Network becoming aware of cumulative information through the due diligence process that would have resulted in Network (acting reasonably) seeking to reduce the amount of the proposed purchase price (including for work in progress) by an amount of $500,000. Network maintained that the final due diligence revealed a material adverse effect (as defined) and that, therefore, it was permitted to give the further notice under clause 5.4.2 and then elect to terminate the MOU under clause 6.2.3. Network had given notices to trigger these provisions and, for its part, sought recovery of the MOU deposit. The defendants, for their part, gave notice of termination of the MOU on 7 December 2007 in reliance upon clause 6.4.2, maintaining that they were entitled to do so after the Effective Date (as defined). They also contend that on 7 December 2005 they accepted what they allege to have been Network’s repudiation of the MOU.
Network is a publicly listed company on the Australian Stock Exchange with a market capitalisation of $62m as at 4 December 2007. In 2005 its market capitalisation on the evidence of Mr Brendon Cook, its chief executive officer and managing director, was around $15m. Since 2002 it has conducted a business through which it has derived revenue from the sale of advertising space on billboards. Mr Cook described Network as having been the market leader in 2005 in outdoor media businesses in Brisbane and Adelaide and as also owning assets throughout the rest of Australia, but that its presence in Melbourne at that time was less significant. The business involved the acquisition of leasehold and other rights over billboard signs at sites throughout Australia for sale to advertising agencies and others of the right to use the space on the billboards over time. At times Network’s business involved it building signs and negotiating with owners and lessors of sites and, where necessary, with relevant local councils. Its strategy in 2005 was to grow its assets throughout Australia by acquisition of businesses as they became available.
In early 2005 Mr Cook heard rumours that the business conducted by the defendants might be available for sale. The third defendant (“Adspace Outdoor”) and the fourth defendant (“Premium Outdoor Advertising”) were then owned by the first defendant (Mr Speck) and the second defendant (Mr Jarick). Together the companies conducted a business (“the Adspace business”) of owning and developing a number of high quality large format advertising assets in Victoria, and of selling the advertising space over those assets to advertising agencies. By early 2005 Mr Cook had known Mr Speck for about four years as a competitor in the industry. He knew that “Adspace”[3] owned the leasehold of approximately 28 sign locations and considered that these would add significant strength to the Network portfolio because of the predominance of the Adspace business in the Melbourne metropolitan area where Network did not then yet have a significant presence.
[3]“Adspace” was used by other parties loosely to refer (depending on the context) at times to the business conducted by some or all of the defendants and at times to the enterprise and owners.
Mr Cook’s evidence was that in or about March or April 2005, he made contact with Mr Speck to discuss the opportunity that might be available to purchase the Adspace business and assets, and was informed that Mr Speck and Mr Jarick intended to sell the Adspace business and the shares in Adspace Outdoor and Premium Outdoor Advertising. He was also told, on Mr Cook’s evidence, that Mr Speck was already dealing with or considering dealing with other potential purchasers in the industry including the two largest companies in the outdoor media industry at that time. Mr Speck told Mr Cook that the whole transaction was to be completed by the end of 2005 and preferably in November 2005. Mr Cook’s evidence of that conversation included reference to Mr Cook telling Mr Speck words to the effect that Network was a listed company with a market capitalisation of around $15m and that Network would probably be interested in the acquisition of Adspace. According to Mr Cook, Mr Speck said words to the effect that the Adspace business and assets were worth at least equal to or more than Network’s capitalisation and that he would be looking for an offer of at least Adspace’s value.
There were then a number of discussions between Mr Speck and Mr Cook in relation to the possible purchase by Network of the Adspace business and relevant shares and whether Network might make an offer for them. In one of those discussions Mr Cook sought an indication of whether an offer in the range of $15m to $20m might be accepted and was told that it would. In July 2005 a confidentiality agreement was executed by Network and individual confidentiality undertakings were signed by its relevant employees to enable Network to review and communicate with “Adspace” for the possible acquisition by Network of the Adspace business and shares in the relevant companies.
In late July 2005 Mr Speck gave Network information of the Adspace business and assets, including details of total rentals and the addresses of the portfolio of sites. Mr Cook gave that information to Mr Simon Yeandle, Network’s chief financial officer, who was asked to use the information to produce a financial model to value each of the sites of the Adspace business. The Adspace business was fundamentally the derivation of income by selling the use of billboards and signs in various locations. Network set about determining the capital value of the assets (essentially of the cash flows) by reference to its expected revenue flows from the sites over their expected economic life. This required identifying each site, the terms upon which each site was held, the term for which each site was held, the revenues each site produced and the various costs and outgoings that each site incurred. Once the annual operating profit for each site was calculated Mr Yeandle was told to multiply the amount by four and also by six to determine, in effect, a capitalised value. Mr Cook explained that the multiples of four and six were chosen to produce the ranges of earnings before interest, tax and depreciation allowed (“EBITDA”) that the Network Board had determined that any business it acquired should fall between. To assist in the process Mr Yeandle produced a spreadsheet updated with the relevant information as it became available to him. The spreadsheet included such things as an identification of the site, the expected tenure of each site from 1 October 2005, the expected percentage period of yearly occupancy by customers from each site, expected gross sales, expected costs and an estimated profit on a site by site basis.
On 19 September 2005 Mr Cook was asked by Mr Speck to provide a written offer of the amount Network would pay for the Adspace business and shares including work in progress. The emails and correspondence between Mr Cook and Mr Speck between 19 and 20 September 2005 adopted a potential purchase price for further discussions in excess of $50m divided between the existing business ($18.25m) and work in progress ($32m). The purchase then contemplated by Network was larger than its then stated market capitalisation.
A meeting between Network and the defendants was held on 6 October 2005 at the office of Darrer Muir Fleiter, who were the solicitors acting for the defendants in connection with the possible sale of the Adspace business. Those present included Mr Cook, Mr Speck, Mr Darrer, Mr Muir, Mr Christopher Bregenhoj (Network’s executive chairman), Mr Adrian Tembel (a partner of the law firm Thomson Playford Cutlers, solicitors acting for Network on the proposed acquisition) and Chris Eddy (a corporate advisor from Convergence Capital). The meeting ended with the expectation of a written proposal from Network for a process leading to the possible purchase of the Adspace business by Network.
A proposal for a process by which Network would acquire Adspace was sent by Mr Cook on 11 October 2005 contemplating the acquisition of “Adspace” for a total of $48m divided between built assets ($18m) and work in progress ($30m). A step in that process involved the undertaking of an initial due diligence which occurred over a two to three day period commencing around 19 October 2005. The Network team conducting the initial due diligence over that time included Mr Cook, Mr Yeandle, Mr Tembel, Mr Bregenhoj, as well as Ms Marshall and Ms Roland of Thomson Playford Cutlers and Mr Neil Cooke and his staff from the firm of Grant Thornton (an international organisation of chartered accountants, business advisers and consultants). The solicitors Thomson Playford Cutlers were to undertake the due diligence assessment of the legal issues arising from the proposed acquisition and Grant Thornton were to undertake a due diligence of the financial issues. Also present was Mr Gerard Hart, Network’s acquisition manager in Melbourne with some 20 years experience in the industry. Mr Cook’s evidence was that Mr Hart’s presence during the initial due diligence was to assist Network with questions about the Melbourne metropolitan sites.
Around 22 or 23 October Mr Cook instructed Mr Tembel to draft what became the MOU. On 24 October 2005 Mr Cook received a financial due diligence report prepared by Grant Thornton in respect of Adspace Pty Ltd. The terms of the MOU were then negotiated during the end of October and at about 2.00 am on 1 November 2005 the MOU was signed on behalf of Network. Mr Cook’s evidence was that Mr Bregenhoj and he were at their office in Sydney receiving advice from Mr Tembel over the telephone in relation to his negotiations about the MOU with Mr Darrer. The executed copies were exchanged by facsimile transmission and the MOU deposit, which is the subject of this proceeding, was paid into the trust account of Darrer Muir Fleiter, the solicitors for the defendants acting on the proposed transaction.
The MOU as executed contemplated acquisition agreements (as defined) around 10 November 2005. The MOU did not, and expressly provided that it did not, constitute an agreement recording the final agreed terms in relation to the sale of shares, assets or work in progress. Rather, what the MOU did was to provide a tight timetable and structure within which the parties were to conduct final due diligence before the “Effective Date” (as defined). The agreed intention of the parties was that, in effect, Network had until 10 November 2005 (being the “Effective Date”) to undertake the final due diligence and thereafter that they would enter into binding agreements to purchase the relevant shares and assets for $18.25m. Payment for the work in progress was to be dealt with by transfer of relevant assets to a new company (“Newco”) and the payment of additional sums by Network under a formula set out in the schedule to the MOU. The “Effective Date” was extended by agreement on two occasions first, from 10 November 2005 to 17 November 2005 and then to 21 November 2005.
On 28 November 2005 Network gave notice that the process of final due diligence had been completed. Upon the giving of that notice Network had, pursuant to clause 5.4.2, one day to give a further written notice of whether the final due diligence had revealed a material adverse effect. Unless Network gave notice under clause 5.4.2 it was obliged by clause 5.6 to provide within one day the Finance Warranty and Supporting Verification (as defined). The Finance Warranty was defined to mean, in effect, a warranty to the sellers that Network had the funds to complete its purchase obligations. The Supporting Verification was defined to mean, in effect, a certified copy of proof from the ANZ Bank that it would advance the moneys Network needed. On 29 November 2005 Network gave notice in which it claimed that the final due diligence had revealed a material adverse effect. The defendants contended that the purported notification by Network that the final due diligence had revealed a material adverse effect was invalid because it was not given in good faith but for the collateral purpose of either obtaining a further indulgence within which to secure funding to complete the purchase or to renegotiate the terms of the sale otherwise agreed to by the MOU.
Network maintained that the obligation to exercise a contractual power in good faith did not arise in deciding whether the due diligence process had revealed a material adverse effect. The obligation of good faith does not apply to all of the rights and powers conferred by a commercial contract and whether it is to be implied depends upon the principles of ad hoc implication.[4] In Tote Tasmania Pty Ltd v Garrott[5] it was said:
Whether a power conferred upon a party to a contract is fettered by a duty of good faith depends upon the terms in which the power is expressed. Without purporting to compile an exhaustive list, there are at least three types of contractual powers which suggest different results. One is a provision conferring a power in an agreement, such as a partnership agreement, which is concerned with co-operation between the parties to produce a result which benefits all the parties to the contract. In such an agreement, a court might readily imply an obligation to act in good faith in that the party upon whom the power is conferred must have regard to the interest of all the parties to the agreement. Another type of provision is one which confers a power if the donee of the power considers that a certain state of affairs or condition exists. In this case, a court may well hold that the power can only be exercised by an honest decision that the state of affairs or condition does exist, but the honest exercise of the power will not be reviewed by the court. Yet another type of provision is one conferring a power that is quite unqualified. Here, a court may conclude that the power can legitimately be exercised in the interests of the party upon whom it is conferred and that party is to be the sole judge of where its interests lie and may exercise the power for any reason it sees fit. [6]
Counsel for the plaintiff relied upon this passage drawing attention to the three categories of contractual powers identified by the Court. In that regard the plaintiff contended that the power to determine that there was a material adverse effect in this case was wholly for the benefit of Network and capable of being exercised by Network without qualification.
[4]Tote Tasmania Pty Ltd v Garrott [2008] TASSC 86, [16] (Tennent J, Buchanan JA and Mandie J); BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266.
[5][2008] TASSC 86.
[6]Ibid, [17] (Tennent J, Buchanan JA and Mandie J).
I am unable to accept that submission. I note in passing that the list set out in Tote Tasmania was expressly said by their Honours not to be exhaustive. However, whether exhaustive or not, I am not able to construe the power given in the MOU as one exercisable by Network wholly for its own benefit or which it could exercise “for a purpose extraneous to the contract”[7] or without needing to exercise it in good faith with “loyalty to the promise”.[8] The requirement in clause 5.4.2 of the MOU was to give notice as to whether or not the Final Due Diligence had “revealed a Material Adverse Effect”. There may be some superficial attraction to the proposition that the formal step of giving notice under this clause is an unfettered power which Network could give without considerations of good faith or loyalty to the promise. Indeed the structure of the MOU was such that Network was not obliged to terminate the MOU under clause 6 if final due diligence revealed a material adverse effect. Such a construction, however, gives no weight to the careful balancing of rights and obligations between the parties in the MOU permitting a notice under clause 5.4.2.
[7]Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558, 573 (Sheller JA, Beazley JA and Stein JA).
[8]Sir Anthony Mason “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000) 116 Law Quarterly Review 66, 69; see also Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310, [120] (Byrne J); Bropho v Human Rights and Equal Opportunity Commission [2004] FCAFC 16, [86] (French J) and Jetstar Airways Pty Ltd v Free [2008] VSC 539, [47] (Cavanough J).
The definition of “Material Adverse Effect” in clause 1.18 provides:
“Material adverse effect” means that as a result of Network becoming aware of cumulative information disclosed by or identified during the Initial Due Diligence and Final Due Diligence process including, without limitation, risks in connection with the Shares, the Ad Business, the Business Assets and the Transactions generally, Network acting reasonably would have sought to reduce the amount of the S & B Purchase Price and/or the WIP Purchase Price by (in aggregate if applicable) more than $500,000.[9]
This definition expressly imposed a substantial limitation upon Network acting other than reasonably and in good faith. Network was not given an unfettered right to declare that there was a material adverse effect, nor was the existence of a material adverse effect made to depend upon the subjective opinion of Network or its officers. Rather, the trigger capable of resulting in a notice under clause 5.4.2 was described as Network becoming aware of something disclosed or identified which, acting reasonably, would have resulted in Network seeking to reduce the amount of the purchase price by $500,000. What the parties agreed to was that a material adverse effect for the purposes of the MOU, with all the consequences which would (or could) flow for both parties, was to be determined objectively.
[9]S & B Purchase Price was defined as meaning the amount payable in respect of the Shares and Businesses (including Business Assets) as specified in the Schedule.
At the very least there was imposed upon Network an obligation to act in its own interest by reference to a standard of reasonableness.[10] In that regard I draw attention to a number of matters in the definition of the words “Material Adverse Effect” in clause 1.18 which was incorporated into clause 5.4.2. First, that the definition of “Material Adverse Effect” was not expressed to be inclusive with its meaning at large. Secondly, and significantly, that a necessary condition to the existence of a material adverse effect (as defined) was an hypothesis of what Network “would have” sought to do presupposing Network “acting reasonably”.[11] The need to determine the existence of a material adverse effect by reference to a standard of reasonableness suggests an objective standard,[12] and, at very least, prevented Network’s reliance upon a contractual hypothesis that was not reasonable. Thirdly, that the definition of a material adverse effect depended upon the predication or prediction that Network (upon the test of reasonableness just described) “would have sought” to reduce the relevant price. The use of the words “would have” may be usefully contrasted with such other words as could have been, but were not, used like “might have sought” or “could have sought”. The words “would have” are words requiring a confident prediction about what Network would have done in the circumstances approximating certainty and not mere possibility.[13] Fourthly, that the definition contemplated the prediction that Network would have sought a reduction of the purchase price of an amount capable of calculation to some degree of precision; that is to say, the definition contemplated that it would be possible to predict that Network would have sought a reduction of “the amount” of the purchase price, if not by an exact figure (as the use of the definite article might ordinarily suggest), but at least by some amount capable of calculation in excess of $500,000. Fifthly, that the result that Network would have sought to reduce the purchase price was a result caused by objective information, namely that “disclosed by or identified during the due diligence process”; that is to say, that the occasion of the awareness of a material adverse effect had to be found in objective facts and circumstances capable of identification. Sixthly, that the adverse effect which permitted Network to give a notice under the clause was both described as “material” and specifically defined as being “more than $500,000”.
[10]Cf Meehan v Jones (1982) 149 CLR 571, esp 581 (Gibbs CJ); CGU Investments Ltd v Porthouse (2008) 235 CLR 103, [64] (Gummow, Kirby, Heydon, Crennan and Kiefel JJ).
[11]Cf Meehen v Jones (1982) 149 CLR 571, 581 (Gibbs CJ).
[12]Semble: CGU Insurance Ltd v Porthouse (2008) 235 CLR 103, [64] (Gummow, Kirby, Heydon, Crennan and Kiefel JJ).
[13]CGU Insurance Ltd v Porthouse (2008) 235 CLR 103 at [64].
These are clear indications that the clause permitting Network to give notice of a material adverse effect was not wholly for the benefit of Network but sought to balance the rights of both parties to the MOU. Indeed, it would be surprising if it were otherwise. The parties to the MOU had entered into a commercial agreement and had specifically agreed about the purchase price to be paid subject to due diligence investigations about the matters upon which that price was based. Network was not likely to be given a unilateral right to reduce the price at which it could buy the Adspace business and assets if due diligence inquiries had supported the figure agreed upon. The intention of these commercial parties was not that Network could reduce the price, but rather, that it could terminate the agreement under clause 6.2.3 if the result of due diligence investigations had objectively revealed a state of affairs of the Adspace business and assets that a reasonable person in Network’s position would have sought to reduce the purchase price. The parties thus sought to balance their respective commercial risks by reference to an objective standard independent of the subjective acts or conduct of the parties themselves. Indeed, the notification of a material adverse effect would not of itself produce any consequence unless Network then decided to terminate the MOU under clause 6.2.3. The right to terminate the MOU may well be a right which Network was able to invoke without any consideration of the interest of the defendants, but not the power to give notice under clause 5.4.2.
The obligation on Network to give notice in good faith under clause 5.4.2 of a material adverse effect being revealed (within the meaning of the definition in clause 1.18) is not something which requires implication[14] but arises from the language of the provisions themselves.[15] Whether implied or not, however, the content of the restriction on the exercise of the contractual power to act in good faith and fairly:
imposes an obligation upon that party not to act capriciously. It would not operate so as to restrict actions designed to promote the legitimate interests of that party. That is to say, provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied.[16]
In this matter the evidence satisfies me that Network had not given notice under clause 5.4.2 with “loyalty to the agreement” or reasonably “to promote its legitimate interests”; but, rather, to secure a collateral advantage namely to secure a further indulgence within which to secure funding to complete the proposed purchase or to renegotiate the terms of the sale otherwise agreed to by the MOU.
[14]Cf Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
[15]Semble: Shanmugam v Commissioner for Registration of India and Pakistan Residents [1962] AC 515, 527 (Lord Radcliffe).
[16]Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903, [37] (Finkelstein J); see also Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558, 573 (Sheller JA, Beazley JA and Stein JA); Mangrove Mountain Quarries Pty Ltd v Barlow [2007] NSWSC 492, [28] (Windeyer J); J F Keir Pty Ltd v Priority management Systems Pty Ltd [2007] NSWSC 789, [27] (Rein AJ); Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228, [24] (Buchanan JA); Varangian Pty Ltd v OFM Capital Ltd [2003] VSC 444, [165] (Dodds-Streeton J)
It is arguable that clause 5.4.2 permitted the giving of notice of a material adverse effect from information disclosed or revealed only in the final due diligence. That may be so because the further written notice contemplated in clause 5.4.2 was expressed as an obligation upon Network to give notice as to whether or not the final due diligence had revealed a material adverse effect. In other words, the clause is expressed to require notification of a narrower and more specific matter than the definition of Material Adverse Effect that clause 1.18 contemplated. The definition in clause 1.18 was not limited to Network becoming aware of matters only by or from “the Final Due Diligence” but, rather, from cumulative information disclosed by or identified during both the initial due diligence and the final due diligence. It is not entirely clear whether the drafting of clause 5.4.2 was intended to restrict Network in giving a notice under clause 5.4.2 solely to what may have been revealed by the final due diligence. If so, there might be a mismatch between the occasion for the further notice under clause 5.4.2 and the broader inquiry permitted by the definition of material adverse effect in clause 1.18. For present purposes, however, one may accept a construction favourable to Network namely that the obligation in clause 5.4.2 adopted fully the definition of Material Adverse Effect in clause 1.18 such that the further notice under clause 5.4.2 permitted revelation of a material adverse effect, not only from what had been revealed by the final due diligence, but more broadly, from information disclosed by or identified during the initial due diligence and the final due diligence process. I take this approach because counsel for the defendants appeared to accept that construction in oral submissions and because the point was not otherwise addressed by the parties. I should say, however, that if I am wrong in that approach then the case for the defendants is appreciably stronger; that is, that the reasons which led me to conclude against Network have greater force if the proper construction of clause 5.4.2 limited the further notice “to whether or not [only] the Final Due Diligence [had] revealed a Material Adverse Effect” without regard to what might have been revealed by or through the initial due diligence. I should add, however, that although the construction is not one which I adopt, it is one which has much to commend it, especially in light of the pre‑contractual evidence before the MOU was executed that Network would not seek to reduce the purchase by reason of information supplied and obtained through the initial due diligence.
I proceed from an assumption, therefore, that the further written notice which clause 5.4.2 required Network to give was one about whether or not the final due diligence process had revealed a “Material Adverse Effect” as defined by clause 1.18, and thus to include the awareness of cumulative information from both the initial due diligence and the final due diligence. The definition of a material adverse effect, therefore, was not that Network did seek to reduce the purchase price by the amount stipulated but, rather, that it would have sought to do so acting reasonably as a result of it becoming aware of cumulative information disclosed by or identified during the initial due diligence and the final due diligence process. Critical to the existence of a material adverse effect (to trigger the subsequent provisions in the MOU) was a prediction upon the hypothesis that Network was acting reasonably. Both parties agreed, and the proceeding was conducted upon the basis, that whether the reasonableness criterion was satisfied when Network gave the notice under clause 5.4.2 was to be determined by an examination of the actual conduct of Network leading to its decision to give the further notice. Neither party contended that whether the conditions in clause 1.18 were satisfied depended upon objective facts and circumstances independent of Network’s actual conduct. The approach taken by the parties is supported by the words of clause 1.18 which required consideration of whether “Network”, as distinct from some hypothetical unnamed purchaser, would have sought to reduce the amount of the relevant purchase price. The question, in short, is what would Network have done upon the hypothesis that Network was acting reasonably.
The conclusion that Network would have sought to reduce the amount of the purchase price by more than $500,000 is, in the context of all the facts, improbable. Mr Cook gave evidence that he received from Mr Tembel on 22 November 2005 a document entitled “Draft Legal Due Diligence Report” which he reviewed carefully over the course of the subsequent few days. Much of what was contained in that document had been known to Mr Cook and Network for some time already. However, even confining a consideration of Mr Cook’s decision making upon the basis that he was considering the position for the first time upon receipt of that document, the evidence does not support the conclusion that Network, and not some other hypothetical purchaser, acting reasonably in all the circumstances, would have sought to reduce the amount of the purchase price (as defined) by more than $500,000.
The actual steps described by Mr Cook as the process of his decision making was that at some point of time (presumably close to, if not on, 28 November 2005; but in any event some days after 22 November) he considered the report received from Mr Tembel and made notes which were subsequently typed up and tendered in evidence. The notes contained some errors (which for the moment I will ignore), but constituted little more than a three page summary of the much more extensive draft document which Mr Tembel had provided to Network. On the notes there are listed the sites said to be at risk and the values of the sites as identified in the draft final due diligence report. The notes are incomplete (a fact which may also be ignored for the moment), but reveal no evaluation or assessment of the value of any of the sites thought to be at risk. The spreadsheet that had been prepared, and upon which the proposed purchase price of $18.25m had been based, had assumed values for each of those sites. The final legal due diligence report might, for this purpose, be assumed to have identified one or more of those sites as carrying risks, but Mr Cook’s notes reveal no evaluation of how much of the quantum previously assigned as a site’s value was at risk or by how much it was to be reduced. Rather, what Mr Cook’s notes reveal is a gross inclusion of the whole of the value of the sites which the report had identified as being at risk. Network, acting reasonably, would not have sought to reduce the purchase price for the Adspace business and shares by the whole of those amounts.
In addition, I do not believe that Mr Cook genuinely turned his mind to whether the risks identified in Mr Tembel’s report from a legal point of view would impact upon Network’s evaluation of the purchase price. Mr Cook’s witness statement purported to deal with the question of his assessment of the legal due diligence report by stating that six sites had been identified at risk of redevelopment. The six sites were also identified in his notes, although he conceded in cross-examination that there were some errors in the notes. His notes, and his witness statements, erroneously recorded that the aggregate value of the six sites was $3,921,177 but Mr Cook conceded in cross‑examination that the figure ought to have been some $600,000 less. The error is a further, and independent, indication of a lack of consideration by Mr Cook, or others at Network, of whether Network acting reasonably would have sought to reduce the purchase price by any part of the value of any of the sites at risk, assuming the risks that had been identified in the legal due diligence report provided by Mr Tembel. That is to say, that errors of the kind which were plainly disclosed by the overstatement of the amount of the risks, clearly shows that neither Mr Cook nor anyone at Network asked themselves what value, if any, ought to be ascribed to any of the sites taking account of the risks that the sites might be thought to carry.
Mr Cook nonetheless went on to state in his witness statement that based on his experience of over 26 years in the industry, he had taken the view that in real terms at least one quarter of the sites “with a redevelopment risk was likely to be redeveloped and therefore effectively lost” (my emphasis). Upon that basis, Mr Cook concluded that the assets and “therefore Adspace” were worth “at least approximately $1m less than” Network had previously valued them. Mr Cook’s witness statement ended this part of this evidence by concluding that “the purchase price for Adspace should be reduced by approximately $1m”. There is in all of this evidence, however, a striking absence of any attempt at quantification of the risks as distinct from the wholesale inclusion of the amount of value previously assigned to the site. There was no attempt to value any of the assets thought to be at risk either by discounting or by revaluation. Nor, in that context, was there any attempt by Mr Cook to take into account the warranties which had been sought and offered from the vendors. Clause 5.5.1 of the MOU provided that Network would reasonably balance the extent and nature of its final due diligence activities “against warranty protection proposed to be offered” by the sellers under the acquisition agreements. Clause 5.5.2 provided that Network would “reasonably consider relying on” warranty protection to the extent that it was proposed to be supported by adequate financial substance from the sellers. The sellers had offered warranty protection and $1.85m by way of bank guarantee to secure warranty protection. None of these matters were taken into account as was revealed by Mr Cook’s notes, his witness statement and his oral evidence.
Whether Network would have sought to reduce the amount of the defined purchase price by more than $500,000 “acting reasonably” also requires a consideration of all of the facts and circumstances within which the MOU was entered into. The agreement reflected in clause 1.18 was not designed as an abstract exercise in accounting but was the result of commercial parties striking a bargain to secure their respective interests. Network, and Mr Cook in particular, was always aware that Mr Speck and Mr Jarick were keen to sell the shares and interests in the Adspace business and that they were not prepared to deal exclusively with Network. The essence of the MOU was to give to Network an entitlement to purchase the business and assets at an agreed price subject, of course, to due diligence. The MOU, therefore, secured for Network a bargaining position that gave it an entitlement over and above any other potential purchaser by being able, provided the terms of the MOU were complied with, to require a sale to itself at an agreed price. For its part, however, Network needed to secure the funds that would permit it to complete the proposed purchase. The fulcrum to the deal (and the balance of the competing interests struck) was that the agreed purchase price would be within a range of $500,000 after completion of the due diligence process. Each party assumed its risk through the definition of material adverse effect in clause 1.18 upon the assumption that all parties were otherwise ready, willing and able to perform. The evidence, however, reveals that Network was not able to perform because it did not have in place the financial accommodation from financiers needed to complete the transaction. It is that inability which led Network to give notice of a material adverse effect. Network was obliged by clause 5.6 to provide the Finance Warrant and Supporting Verification (as defined) within one day of giving notice under clause 5.4.1 that the process of Final Due Diligence had been completed. Network was not able to do so.
The MOU had imposed a tight timetable for the parties to undertake due diligence in anticipation of final contracts and sale. The process of information gathering, however, had begun several months previously. Indeed, it is important to bear in mind that the proposed purchaser (Network) was experienced and established in the same industry as the business and assets it sought to acquire. Network was not a novice entering into an unknown market or a new business operation. Rather, it knew full well the nature and basis upon which the Adspace business was conducted. Mr Speck gave evidence that he had sent Mr Cook an information pack containing colour photographs of all the Adspace advertising sites with their location, details and sizes, as early as July 2005. Further site information was provided to Mr Cook by Mr Speck on 22 July 2005. This information bore upon the risks of the sites at least in relation to such matters as any redevelopment risks which figured so largely in the notes upon which Mr Cook subsequently relied and the evidence he gave in his witness statement. Two witnesses, proffered by the parties as expert witnesses, each gave evidence that risks of redevelopment should have been identified early in Network’s consideration. Indeed, one might think it curious that so much emphasis could have been placed by Mr Cook so late in the contractual process upon redevelopment risks since, of their nature, they were the kind of risks which to some extent would depend upon matters capable of being inquired into by Network making its own enquiries at an early stage. Indeed, the initial due diligence team assembled by Network around 19 October 2005 had included Mr Hart to assist Network with questions about Melbourne metropolitan sites. In that regard I note that Mr Hart was not called by Network to give evidence although he was still employed by Network, lived in Melbourne, and was thought by Mr Cook (on his own evidence) to be sufficiently important to participate in the initial due diligence because of his knowledge of the Melbourne metropolitan sites of Adspace.
The way in which the redevelopment risks were subsequently dealt with in the report by Mr Tembel of the final due diligence, and by Mr Cook, tells against the reasonableness of Network’s behaviour (both the hypothetical behaviour contemplated by clause 1.18 and in fact) in a variety of ways. In that regard it may be useful to draw attention to one of the sites by way of illustration. Site numbered “M45” was described as “Southbank, 31-49 Queensbridge Street” in the spreadsheet prepared by Network as the basis upon which to strike the purchase price. It was identified both in Mr Cook’s notes and in his witness statement as one of those he purported to identify for his conclusion that at least a quarter of the sites had a redevelopment risk. His notes identified the value ascribed to that site as $985,558. That appears in his notes under the heading “Reference 1.3.11”, being a reference to the paragraph of that number in the report provided by Mr Tembel. The paragraph in Mr Tembel’s report does identify “M45” as “not secure because the sites are subject to early termination for redevelopment purposes”. In fact, however, “M45” had not been valued for $985,558 but for $317,097. It is “M44” (described in the spreadsheet as “Melbourne, 474 Flinders Street”) which was valued at $985,558, although it was not identified as at redevelopment risk. Indeed, the lease summary for site “M44” specifically identified no redevelopment risk for that site. The redevelopment risk identified for site “M45” in the legal due diligence report of Mr Tembel was, consistent with an analysis of leases, merely a reference to a clause in the relevant lease that the entitlement to use the space might cease if for any reason the lessee was unable or not permitted to erect or exhibit illuminated advertisement at all on the sign or was required by law to remove the structure. In other words, the risk stated in the report was a potential risk that could occur if another circumstance were to arise. There was, so far as I am able to discern, no evaluation whatsoever undertaken on behalf of Network of any actual risk of redevelopment.
The conclusion expressed in the due diligence report that the sites were not secure may well be a misstatement of the conclusion to be drawn from the lease summaries. The lease summaries sought to identify such matters as, for example, whether the leases allowed the lessor or government to redevelop the site or to reallocate the sign. In the case of the six leases identified with redevelopment risks, there were provisions in the leases which secured to the lessor rights as against the lessee in such circumstances as unilateral action by government to redevelop the site. I would not myself have regarded this analysis of the leases as warranting the conclusion that the six sites themselves were not secure for the reason given, namely, that the sites were “subject to early termination for redevelopment purposes”. In any event, at no stage since Network first became interested in acquiring the Adspace business was there any attempt to evaluate the risk of any actual redevelopment of the sites, as distinct from the conditional theoretical risks under the lease in the event of redevelopment. In other words the legal due diligence undertaken by Thomson Playford Cutlers of “M45” (and of the other sites) was an analysis of the terms of the leases. At no stage did Thomson Playford Cutlers seek to determine whether there was an actual risk of redevelopment which might trigger the lease terms. Yet Mr Cook’s witness statement misstates the conclusions he claimed to have drawn from the report as being that six sites “with an aggregate value of $3,921,177 were at risk of redevelopment” (my emphasis). Mr Cook’s subsequent statement that the sites themselves were at actual risk of redevelopment because of their location was made without any attempt to quantify or assess any commercial or economic value of each or any of those sites with those risks.
That Network would not have sought to reduce the price as a result of what was revealed in the due diligence process may be seen also by Network’s conduct from the time of the initial due diligence. The initial due diligence was conducted around 19 October with a proposed $18m purchase price having been mooted between 6 October and 11 October 2005. On the latter date Mr Cook on behalf of Network wrote to Mr Speck and his solicitors proposing a tight timetable for a process which contemplated the acquisition of existing assets of Adspace at up to $18m and of the work in progress at up to $30m over the first 12 months. Initial due diligence then took place around 19 October during which substantially all of the relevant leases were provided by the defendants and were looked at by Network and its advisers. Information request numbered 2, made as part of the final due diligence on 2 November 2005, was the only request for further leases which had not previously been provided. However, the two specific leases sought in that request, as far as I can see, do not feature in Mr Cook’s notes or evidence, and the two leases which did feature in his notes about redevelopment had only been sought by that request for verification purposes. The lease summaries in the final due diligence report upon which Mr Cook purported to place such weight in his notes and evidence had been prepared soon after the initial due diligence which had occurred around 18 and 19 October. Further requests were made as part of the initial due diligence investigations, and before entering into the MOU, which were answered promptly by Mr Darrer on behalf of the defendants. Amongst the issues raised before entering into the MOU were queries about redevelopment of the very six sites which were subsequently to feature so prominently in Mr Cook’s notes and evidence.
On 25 October 2005 Mr Darrer gave to Mr Tembel his clients’ responses to the latter’s request for legal due diligence issues numbered 1 and 2, including information about redevelopment clauses. Significantly, on that day Mr Speck wrote by email to Mr Cook expressing concerns about delays and, in relation to “redevelopment clauses” said that they were “not unusual in outdoor leases”. Mr Speck added:
You would have seen plenty of them before. We have never had a case of a redevelopment clause being utilised by a property owner.
Within minutes Mr Cook responded by email reassuring Mr Speck that the main queries he was interested in were that the leases were provided since some leases had not been seen. In relation to redevelopment, Mr Cook said:
Redevelopment is again a reasonable request as you have the history we don’t, we understand risk when we build sites with those clauses, we like anyone had to understand risk given it is our turn to take risk on and you are being paid six years and more future revenue now.
Later on the same day Mr Tembel sent an email to Mr Darrer after he had received the due diligence responses that had previously been made. Mr Tembel wrote (in part):
I refer to our telephone conversation earlier this afternoon.
I confirm that as the result of the due diligence responses you provided to me this afternoon, Network will now accept the identified redevelopment and mortgagee consent risks and accordingly they will not impact on the $18.25 million. We will need to review the outstanding documents that you say are now available for inspection at your office, however we do not expect, based on our experience with our lease review to date, that this will impact on the $18.25 million.
I further confirm that our second stage of due diligence and its breadth is primarily attributable to the need to structure the transaction as a share sale. I can assure that our due diligence approach will be of a standard and unexceptional nature given the share sale structure.
This correspondence bears against whether Network, acting reasonably, would have sought to reduce the amount of the purchase price by more than $500,000 for the reasons put forward by Mr Cook in his witness statement. Whether or not Mr Tembel may not have got around to analysing the leases until November, the fact is that as between the contracting parties, the implication was clear that as at 25 October 2005 the very matter which subsequently featured so prominently in Mr Cook’s notes and evidence had been put aside as something that would impact upon the purchase price. In those circumstances alone I do not consider that Network, acting reasonably, would have considered the very thing subsequently relied upon by Mr Cook in his subsequent notes and subsequent evidence. I also consider these matters to reveal a lack of acting in good faith by Network when exercising the contractual power to give notice of a material adverse effect.
Whether Network, acting reasonably, would have sought to reduce the amount of the agreed price by more than $500,000 on becoming aware of cumulative information disclosed or identified during the due diligence process may also be judged by reference to the various offers that were made to increase the purchase price before the giving of formal notice purporting to terminate the MOU. On 8 November 2005 Network made a formal proposal to increase by $1m the non-work in progress component of the purchase price. Amongst Network’s proposal was that it would acknowledge that its results of the final due diligence would not be a basis to withdraw from acquisition but only to seek amendment to the terms of the acquisition agreements. The offer was not accepted, probably because by about that date the vendors may have lost all faith in Network’s ability to complete the purchase. As at that time, the effective date under the MOU was still 10 November, and as at that date the transactions contemplated in the schedule to the MOU provided for a purchase for the aggregate price of $18.25m payable by a deposit of $1,825,000 payable at the time of execution and exchange of contracts in anticipation of settlement within 30 days. Network’s proposal on 8 November 2005 to increase the purchase price, therefore, far from indicating an ability to perform on those transactions in the time contemplated by the MOU, sought 20 days more time with an offer of a further $250,000 as a break fee if Network defaulted.
On 21 November 2005 Grant Thornton provided their final financial due diligence report prepared for Network and the ANZ Bank. The scope of Grant Thornton’s engagement was understandably broad given the reliance that would be placed both by Network and its proposed financier on the proposed acquisition of the Adspace business if it proceeded. The report was tendered in evidence and a director, Mr Neil Cooke, was called to give evidence. No material risks or financial risks were identified from a financial due diligence point of view and the implied multiple in the proposed price was recommended as reasonable in light of historical figures and the current EBITDA multiples paid by competitors in the industry sector. Indeed, on 23 November 2005 Mr Bregenhoj wrote on behalf of Network to the defendants by making a further offer to increase the purchase price in return for additional time under the MOU. It is clear from this letter that Network’s problem was that it did not then have the funds to complete the transaction and that it needed more time, and some assistance, to secure its desired outcome. By this stage Mr Bregenhoj was able to indicate to the defendants only that Network had finance facilities available from ANZ and Fortress “to fund the deposit” pending shareholder approval and acquisition.
Network’s difficulty lay in securing institutional investment in what Mr Bregenhoj described as “Network’s generic growth proposition”. Mr Bregenhoj candidly noted in his letter that the difficulties were “Network’s challenges” but sought the assistance of the defendants to resolve them and offered “to compensate and reward” the defendants for doing so. It is clear from the letter that Network continued to be eager to secure Adspace without any suggestion, as late as 23 November 2005, of becoming aware of any Material Adverse Effect within the meaning of the MOU. The letter made clear that Network’s problem was that of securing funds and that it needed time to do so. The letter was marked “without prejudice” and, curiously, some attempt on behalf of Network was made to exclude it from evidence. I say “curiously” because the existence of the letter was affirmatively relied upon by Network, its details and broad contents were referred to by Mr Bregenhoj in his witness statement tendered as evidence on behalf of Network, and the letter itself was specifically referred to in Mr Bregenhoj’s witness statement as something to which my attention was directed. In those circumstances I ruled against any claim that the letter might have had as a “without prejudice” communication. It is yet one more element fortifying my conclusion that Network, acting reasonably, would not have sought to reduce the amount of the agreed purchase price by more than $500,000 as a result of becoming aware of the cumulative information disclosed by or identified during the initial due diligence and the final due diligence process.
I do not consider it strictly necessary to consider whether Mr Cook, or anyone else at Network, actually did turn his mind or their minds to whether the purchase price ought to have been reduced by more than $500,000. That is because the view I take of the construction of clause 1.18 is that the test is to be determined objectively by seeking to hypothesise what Network would have done (rather than what it did) based upon the information of which it became aware during the due diligence process. However, I would not accept the evidence of Mr Cook if I were required to consider the matter from the point of view of whether he, or anyone else at Network, actually had taken the view that Network would actually have sought to reduce the amount of the contracted price by more than $500,000. In that regard I find it unlikely that Mr Cook would have formed the view which he asserted to have formed, in the context of such eagerness by Network to secure the Adspace assets based upon information which had been available to Network before entering into the MOU and which by 25 October 2005 Network had indicated would not be relied upon to reduce the purchase price. Furthermore, I formed the view that Mr Cook’s evidence was generally unreliable. On a number of occasions the evidence in his witness statement was couched in terms to convey assertion or inference which I found was not borne out by contemporaneous or other evidence. In that regard I note that on at least two occasions Mr Cook’s witness statement purported to convey the inference that the dealings between Network and the defendants had agreed to be on the basis of exclusivity of dealings between them. The evidence does not bear that out and, rather, is clearly to the contrary. It was always clear to Network (and in particular to Mr Cook) that the defendants were not willing to negotiate for a sale with Network to the exclusion of other potential purchasers. It is also clear that it was known to Network (and in particular to Mr Cook) that the defendants had been dealing with other potential purchasers. What Network had secured was an entitlement to purchase at an agreed price provided that the terms of the MOU were complied with (including the results of the due diligence). That gave Network a measure of contractual comfort and certainty as against any other potential purchaser who might well have offered more but who did not have the right to compel performance on the MOU. Network’s right was, however, conditional upon the terms of the MOU which, as events turned out, it was not able to satisfy.
Mr Cook’s implication by his witness statement that exclusivity had been agreed to is also inconsistent with the unsuccessful attempts by Network’s solicitor, Mr Tembel, to secure exclusivity by an express provision in the MOU. The first draft of the MOU had provided for exclusivity of dealings with Network, but that term was rejected and found no place in the executed terms of the MOU. Mr Tembel’s explanation in oral evidence was that he did not pursue the issue, after discussions with his client, because of a view that the agreed terms about best endeavours and good faith would mean in practice that the vendors would have to give priority to his clients through the operation of the MOU.
I also found Mr Cook’s evidence unreliable concerning what he was prepared to say about the availability of finance. As early as 11 October 2005 Mr Cook had written to Mr Speck and his lawyers asserting a state of the finances available to Network which the evidence does not bear out. On the second page of a letter on that date (to which I have previously referred) Mr Cook said about Network’s value:
Given the current business values, the ANZ Bank has agreed to facilitate;
$28 million in Acquisition Finance.
$10 million in various work in capital funding packages from its facilities including $2.5 million in this finance. (my emphasis)
On the third page of that same letter he said:
You have also been given a copy of a letter from our new bankers – ANZ, confirming that we have a $20 million acquisition finance facility to enable us to fund the initial purchase consideration up to $18 million, such bridging facility to be retired from the equity raising, after which it is available to be drawn for future acquisitions of the Adspace WIP as they present themselves. (my emphasis)
In fact the ANZ had made no such firm commitment as these statements would suggest (if not affirmatively assert). Mr Cook had no doubt that Network’s ability to finance the deal was critical to the vendors who continuously sought assurance that Network had the money. Indeed, it is hardly surprising that the vendors would want such assurances given the size of the proposed purchase in relation to Network’s then market capitalisation. The defendants’ insistence upon such assurance was reflected in clause 5.6 which required that by completion of final due diligence Network had to provide the Finance Warranty and Supporting Verification unless a material adverse effect had been revealed.
The ANZ appeared to have been interested in securing Network as a customer and there were various attempts between the ANZ and Network to draft a letter of commitment which could be shown to the defendants, and perhaps to others. On 30 September 2005 the best the ANZ was prepared to give for that purpose was a letter indicating that it was “currently putting in place a finance facility for Network” for acquisition finance. The letter made clear that the finance was “based on satisfactory due diligence of Adspace and other acquisition targets” (my emphasis). As at that date the scope of due diligence was yet to be determined and depended upon receipt of a memorandum of information from Adspace and other acquisition targets. Mr Bregenhoj was confident that funds would become available (and I am confident that he believed that to be true), but he accepted when giving evidence that there was no formal offer of any facility from the ANZ Bank in relation to the acquisition of Adspace right up to the time of termination of the MOU.
In contrast to Mr Cook’s assertion of funds to complete the purchase being available, he and others at Network were actively involved in attempts to raise funds from various investors. On 7 November 2005 Mr Cook sent an email to various people on the topic of “capital raising and timeline” in which there was reference to the seeking of funds from “Fortress on a timeline that required Network to negotiate an extension with Adspace”. The best which counsel for Network could point to by way of commitment from Fortress was a letter dated 18 November 2005 to Mr Cook by which Fortress Credit Corporation (Australia) II Pty Ltd was “pleased to provide an indicative proposal” (my emphasis) for a finance facility, which Fortress said it was willing to consider to provide on the terms and conditions set out, and adding, specifically, that it was subject to satisfaction of the terms and conditions in the letter and timesheet. Amongst the 10 principal conditions precedent in this “offer” from Fortress was the existence of sponsor equity to the minimum of $8m to be available at close of the transaction. The terms in the indicative proposal were expressly stated to expire at close of business on 23 November 2005. Mr Yeandle gave evidence that as at 11 November 2005, and in communications with Fortress, there was, on at least one scenario, an $8.5m “cash hole”.
Mr Cook was well aware of the precise state of the funding available to Network, however confident, perhaps rightly confident, he may have been that Network might ultimately be able to secure the necessary funds. However, on 9 September 2005 he wrote to Mr Speck confirming the formal offer to acquire the Adspace business which he described as then including “the ability via ANZ Bank to complete” the business transaction “for cash at the agreed settlement date”. On the same day Mr Speck responded to Mr Cook asking for a copy of written confirmation from the ANZ Bank regarding their line of funding. Mr Cook’s reaction was an email to Mr Bregenhoj saying “can you discuss what letter we think we can get”. In cross-examination about this email correspondence, Mr Cook at first said that as he recalled it “ANZ had advised either verbally or in writing” that Network’s position was that the ANZ would be funding the business. He conceded, however, that at that stage he had no offer in writing from the ANZ committing to any position.
Mr Yeandle had prepared a draft letter for the ANZ, said to have been “as discussed” with Mr Cook, in which the ANZ would say in clear terms that the ANZ was “prepared to advance cash” to enable Network to complete the acquisition of Adspace”. On the same day, 13 September 2005, Mr Speck continued to press Mr Cook for confirmation of the ANZ line of funding and was told at 10.24 am that the ANZ was to be in at “10.30 to finalise” the letter. The draft that came from the ANZ dated 13 September 2005 proposed to give confirmation that the ANZ had given Network a “non binding expression of interest document” outlining specific facilities for acquisition of Adspace. This was sent to Mr Speck whose response was, in effect, that more certainty was required. Indeed, Mr Speck’s response by email of 15 September 2005 specifically recorded other negotiations taking place with other parties and that if they were to be suspended and the defendants were to deal with Network that it was “imperative” for Mr Speck to be satisfied that Network was without doubt able to fund not only the acquisition of the business, but to have funds available over the following 12 to 24 months to acquire the work in progress. In short, Mr Speck required from Mr Cook confirmation that Network had available funds from the ANZ of the actual amount of the proposed facilities and sought other details concerning the funding. The formal letter that was ultimately received by Mr Cook from the ANZ is that dated 30 September 2005 to which I have previously referred and which was less than a commitment to fund the proposed acquisition.
Mr Cook was, nonetheless, content to enter into the MOU which provided for, amongst other things, “a certified true and correct copy of a letter of offer, or facility agreement, from the ANZ Bank” which provided for the advance to Network of monies required to complete various parts of the transactions in the schedule, in particular the payment of the purchase price of $18.25m and a bank guarantee or similar facility for $10m from the ANZ Bank in favour of a new company, Newco, proposed to be set up for the purpose of acquiring the work in progress. However confident Mr Cook may have been, and however comfortable he may have felt in representing that the funds were available, the fact is that there were no funds ultimately available from the ANZ and no one from the bank was called to give evidence on Network’s behalf. In contrast to Mr Cook’s evidence, Mr Tembel’s evidence was that the capital raising or finance raising aspects were not progressing as had been anticipated. Mr Bregenhoj also accepted that there was no formal letter from the ANZ Bank and accepted that as at 11 November 2005 no one had committed to investing in the company and that Network had still to find a source of funding. Indeed, on that date Mr Bregenhoj sent an email to the ANZ exploring other possibilities with potential investors including Fortress, a US hedge fund. In these circumstances I do not consider Mr Cook’s testimony sufficiently reliable when he asserted that he actually or genuinely sought to determine whether the information disclosed a material adverse effect before purporting to terminate the MOU.
It may not be strictly necessary for me to say anything about the evidence tendered as “expert” evidence by both parties, but it may be desirable to confine myself to some brief remarks. Each party sought to rely upon the evidence of witnesses proffered as expert witnesses. The plaintiff sought to rely upon the evidence of John Anthony Dollisson who is the chairman of a company called Australasian Marketing Group Limited. The defendant sought to rely upon contrary evidence proffered as expert opinion evidence by David Barkley Nettlefold. I found the evidence of each wholly unhelpful to my task. The formulation and tendering of expert evidence requires particular care. The overriding consideration in tendering expert evidence is that it may assist the judge (or other decision maker) without usurping the judicial or other decision making function. In Makita (Australia) Pty Ltd v Sprowles[17] Heydon JA said:
In short, if evidence tendered as expert opinion evidence is to be admissible,
it must be agreed or demonstrated that there is a field of “specialised
knowledge”; there must be an identified aspect of that field in which the
witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be “wholly or substantially based on the witness's expert knowledge”; so far as the opinion is based on facts “observed” by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on “assumed” or “accepted” facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert's evidence must explain how the field of “specialised knowledge” in which the witness is expert by reason of “training, study or experience”, and on which the opinion is “wholly or substantially based”, applies to the facts assumed or observed so as to produce the opinion propounded. If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge. If the court cannot be sure of that, the evidence is strictly speaking not admissible, and, so far as it is admissible, of diminished weight. And an attempt to make the basis of the opinion explicit may reveal that it is not based on specialised expert knowledge, but, to use Gleeson CJ's characterisation of the evidence in HG v The Queen (at 428 [41]), on “a combination of speculation, inference, personal and second-hand views as to the credibility of the complainant, and a process of reasoning which went well beyond the field of expertise”.[18]
Neither witness statement, nor counsel in submissions, demonstrated specialised knowledge of the kind that might qualify the evidence of either purported expert. Some of the evidence of each of them might be admissible, and conceivably of assistance, if more care had been taken to identify precisely what specific evidence each could give that might assist the Court in deciding the case without the witness purporting to give evidence of the very thing for the Court to decide or otherwise engaging in unhelpful argument.[19] It is not surprising that a non-legal witness put forward as an expert may not, without assistance, produce reports or evidence in a relevant, admissible and probative manner. Such witnesses are usually not versed in rules of evidence and can not be expected instinctively to produce reports that will satisfy the complex rules for the admissibility of expert evidence which have been developed in large part to produce fairnesses between the parties and to give assistance to the Court.
[17](2001) 52 NSWLR 705.
[18]Ibid, [85]; see also Australian Securities and Investments Commission v Rich [2005] NSWCA 152.
[19]See the helpful observations in Australian Securities and Investments Commission v Vines (2003) 48 ACSR 291; and Trade Practices Commission v Arnotts Ltd (1990) 92 ALR 527, 532 and 533 (Beaumont J).
The evidence of Mr Dollisson and Mr Nettlefold are largely competing contentions of what they, and of persons they postulate as reasonable people, would have done based upon the information revealed to Network from the due diligence reports. The fact that others might have sought a reduction in the purchase price on the information revealed from the due diligence, or that an experienced man like Mr Nettlefold would not have sought to do so, is interesting but does not assist in my inquiry about what Network itself, acting reasonably, would have done in all of its circumstances. The written reports and witness statements have not assisted me either in form or by their content in considering the questions I must determine. I am not satisfied that the evidence is admissible as expert evidence in form or content but, in any event, it has not borne on the principal issues required for my determination; namely, in short, whether Network would have sought to reduce the purchase price or, alternatively, whether it was acting in good faith when purporting to give notice of a material adverse effect.
The evidence, for the reasons explained above, satisfies me that Network was not acting in good faith when it purported to give notice of a material adverse effect. I conclude that Network did not become aware of a Material Adverse Effect (as defined) from the cumulative information disclosed or identified from the due diligence process. I also conclude that it gave the further written notice of an adverse material effect for the collateral purpose of securing further time to secure funding to complete the purchase or to renegotiate the terms of the proposed sale. The notice given by Network on 29 November 2005 that the final due diligence had revealed a material adverse effect and that Network was therefore terminating the MOU, amounted to a repudiation by Network of the MOU which the defendants accepted on 7 December 2005.
Network contended that in a commercial context the contractual duty of good faith is owed mutually between the parties[20] and that the defendants had failed to discharge their duty under the MOU. A large part of this allegation concerned the part played by the subsequent sale of the Adspace business and assets to Cody Outdoor Advertising Pty Ltd (referred to in the proceedings as “APN”).
[20]Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443, [91] (Warren J).
The Adspace business and assets were sold to APN by agreement dated 16 December 2005. Until about 8 November 2005 APN had (albeit unknown to Network) ceased to be engaged in discussions with the defendants for the acquisition of the Adspace business and assets. Until that date all of the evidence is that the defendants’ only prospect of a sale was to Network and that all of their efforts were directed to securing that as the only outcome then available to them. Accordingly, the plaintiffs are unable to make out any contention of a lack of responsiveness, diligence or duty before 8 November by reason of any prospect of a dealing with APN. In contrast, however, Network was having substantial difficulties in meeting its obligation.
Mr Tembel’s evidence about any lack of co-operation by the defendants was, at its highest, that there may have been some information that may not have been flowing as promptly as Network would have liked. In cross‑examination, however, he accepted that his requests for information were met and that full access was given by the defendants as required for the due diligence. On 8 November 2005, Mr Tembel on instructions, proposed a substitute agreement to the MOU, increasing the purchase price for the shares of the business (albeit payable by the issue of shares in Network). Mr Tembel accepted in cross-examination that that offer was made in order to buy further time from the defendants so that Network could access funding from sources other than the ANZ because, as Mr Tembel added, the capital raising or finance raising aspects had not been progressing as anticipated. As at that date Mr Tembel had been instructed to say that all due diligence would be complete by close of business on 11 November 2005.
Previously, on 2 November 2005, Mr Tembel had made due diligence requests which were responded to by 5 November 2005. At about the same time Mr Darrer prepared draft acquisition agreements which were sent to Mr Tembel on the evening of 5 November and received by Mr Tembel on 6 November. On 6 November 2005 Mr Tembel wrote to Mr Darrer having reviewed the draft sale of shares agreement stating his belief that it was “premature to provide suggested drafting changes and comments of detail” because there needed to be resolved some questions of principle. He then set out a list of issues of principle which he said required to be resolved including a requirement for warranties to extend for more than six months. That appears to have been the same day that, amongst other things, Mr Darrer had a conversation with Mr Speck during which there may have been an expression of a loss of confidence in the ability of Network to complete the transaction pursuant to the terms of the MOU. It appears also to have been the date when the defendants gave active consideration to recommencing negotiations with APN. The defendants, nonetheless, continued to pursue the proposed sale with Network, and, indeed, extended the effective date on two occasions as I have mentioned previously.
Mr Tembel’s proposal on behalf of Network on 8 November 2005 was followed up by a letter two days later. On 10 November 2005 he wrote to Mr Darrer referring to previous discussions about “various unforeseen circumstances [which] have impacted on the timing of the Transactions”. Mr Tembel went on to say that this would require further discussion and possibly negotiation on a number of matters including the timing of payments to the vendors. A reading of this letter could easily suggest that the deal as embodied in the MOU was then effectively “off the table” from Network’s point of view. Nonetheless, Mr Darrer responded to Mr Tembel reaffirming the terms of the MOU, requiring confirmation of Network’s ability to pay, confirming that the defendants had made it clear that they were dealing with other prospective parties and confirming an intention on the part of the defendants to meet their obligations under the MOU. Mr Tembel’s response was in a lengthy letter dated 11 November 2005. The third page of that letter complained about the lack of response on a number of matters which had been raised on 6 November by Mr Tembel on the draft sale of share agreements. Amidst other correspondence in which various parties began to adopt disputing positions, work nonetheless continued on the due diligence and in meeting obligations. On 14 November 2005 Mr Darrer responded to the comments made by Mr Tembel on the share sale agreement by, amongst other matters, offering warranties as had been sought by Mr Tembel in his email of 6 November.
Whatever the position may have been with the negotiations between the defendants and APN, the evidence establishes that the defendants, especially through Mr Darrer, were at all times meeting their obligations under the MOU. I need not dwell on the occasional erroneous allegation made by Mr Tembel which he ultimately accepted in cross-examination to have been simply wrong. The fact is, that any failure on the part of Network to comply with the terms of the MOU was due to its own inability to secure finance and not due to any conduct on the part of the defendants to secure a better deal with another party. There was certainly no possible contemplation of such before 8 November, as it appears that discussions between the defendants and APN may not seriously have been resumed before 12 or 13 November 2005. On 14 November 2005 Christina Walters contacted Mr Darrer to undertake their due diligence assignment on 16 November. The evidence of Mr Tembel was that as at 24 November 2005, there were still fundamental differences to be resolved between the defendants and Network. On 29 November 2005 Network served on Mr Darrer on behalf of Network a termination notice purportedly under the MOU. As at that date there was no concluded agreement between the defendants and APN or any other party. The defendants gave their notice of termination on 7 December 2007. There is no evidence that the defendants would not, or could not, have dealt with Network pursuant to the MOU if called upon.
Accordingly, I pronounce the following orders and declarations:
A. The plaintiff’s claim is dismissed.
B. The plaintiff’s claim to the MOU deposit is forfeited by its conduct.
C.The MOU was validly terminated by the defendants by notice given 7 December 2007 and they are entitled to retain the MOU deposit and any interest thereon.
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