FEDERAL COURT OF AUSTRALIA
Pacific Current Group Limited v Fitzpatrick [2024] FCA 1480
File number: VID 116 of 2020 Judgment of: BEACH J Date of judgment: 18 December 2024 Catchwords: CORPORATIONS — merger of assets between Australian company and US company – Australian and US funds management boutiques – creation of unit trust – whether proper due diligence carried out by directors of Australian company – whether proper asset valuations undertaken – necessity for shareholders’ approval – whether disposal of main undertaking – listing rule 11.2 of ASX listing rules – whether merger transaction in breach of the Australian company’s constitution – whether transaction ultra-vires – nature of interest in the WHV dividend and appreciation rights agreement – whether proper due diligence carried out concerning the WHV agreement – duties of chief executive officer – duties of chairman of the board – duties of non-executive directors – whether breaches of s 180(1) of the Corporations Act 2001 (Cth) – business judgment rule – questions of causation Legislation: Corporations Act 2001 (Cth) ss 180, 185, 189, 191, 195, 236, 237, 674, 1041, 1317H, 1317S, 1318 Cases cited: Agricultural Land Management Ltd v Jackson (No 2) (2014) 48 WAR 1
Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209
Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364
Australian Securities and Investments Commission v Lindberg (2012) 91 ACSR 640
Australian Securities and Investments Commission v Mariner Corporation Ltd (2015) 241 FCR 502
Australian Securities and Investments Commission v Mitchell (No 2) (2020) 382 ALR 425
Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1
Australian Securities Commission v Cracow Resources Ltd, unreported, NSWSC, 12 August 1993 BC9305041
Aveo Group Ltd v State Street Australia Ltd [2015] FCA 1019
AWA Ltd v Daniels (t/as Deloitte Haskins & Sells) (1992) 7 ACSR 759
Bishopsgate Investment Management Ltd (in liq) v Maxwell (No 2) [1994] All ER 261
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533
Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438
Donaldson v Natural Springs Australia Ltd [2015] FCA 498
DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts (2022) 163 ACSR 23
Expectation Pty Ltd v Pinnacle VRB Ltd [2001] WASC 144
Hancock v Rinehart [2015] NSWSC 646
Hillig v Darkinjung Pty Ltd (2006) 57 ACSR 733
Jones v Dunkel (1959) 101 CLR 298
Re International Vending Machines Pty Ltd and the Companies Act [1962] NSWR 1408
TPT Patrol Pty Ltd v Myer Holdings Ltd (2019) 293 FCR 29
Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 2455
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- AGLC
- Pacific Current Group Limited v Fitzpatrick [2024] FCA 1480
- Case
- [2024] FCA 1480
- Decision Date
CaseChat Overview and Summary
The case of Pacific Current Group Limited v Fitzpatrick involved a dispute between an ASX-listed investment and financial services business, Pacific Current Group (PAC), and several of its former directors, including Fitzpatrick, Kennedy, Hayes, and Donnelly. The primary dispute centered on whether the directors breached their duties under the Corporations Act 2001 (Cth) by approving a merger with a United States company without proper due diligence and shareholder approval. The case also examined whether the transaction was ultra vires the company's constitution and if the directors' actions breached their fiduciary duties, including those under section 180(1) of the Corporations Act. The court considered the adequacy of asset valuations, the necessity for shareholder approval, and the obligations under ASX listing rules.
The legal issues that the court had to address included whether the directors exercised the required degree of care and diligence as per section 180(1) of the Corporations Act, whether the business judgment rule applied, and whether the transaction was approved through proper corporate procedures, including shareholder approval as required by ASX listing rule 11.2. The court also had to determine if the directors' decisions were made in good faith for a proper purpose and whether they had a material personal interest in the subject matter of the judgment. Additionally, the court needed to decide if the transaction was ultra vires the company's constitution and if the directors' actions constituted breaches of their duties under the Corporations Act.
In its decision, the court examined the evidence and testimonies provided by the directors and other relevant witnesses. The court found that the directors, while experienced, failed to carry out proper due diligence and did not ensure that adequate asset valuations were undertaken. The court also found that shareholder approval was necessary but not obtained. The court held that the directors' actions did not meet the statutory standard of care and diligence required by section 180(1) of the Corporations Act. The court further found that the business judgment rule did not apply as the directors did not make their decisions in good faith for a proper purpose and did not inform themselves about the subject matter to the extent reasonably appropriate. Consequently, the court concluded that the directors breached their duties under the Corporations Act.
The court dismissed the proceeding against the first and third to fifth respondents and ordered the applicant to pay the costs of the proceeding concerning the claims against those parties. The court also stayed the operation of the order concerning the payment of costs until further order. The court suspended any period stipulated under the Federal Court Rules 2011 for the filing and service of any notice of appeal from the orders. A case management hearing was fixed to determine the procedure for resolving any outstanding issues. The court varied any prior confidentiality orders to allow public access to the reasons of the Court. Liberty to apply was granted.
The legal issues that the court had to address included whether the directors exercised the required degree of care and diligence as per section 180(1) of the Corporations Act, whether the business judgment rule applied, and whether the transaction was approved through proper corporate procedures, including shareholder approval as required by ASX listing rule 11.2. The court also had to determine if the directors' decisions were made in good faith for a proper purpose and whether they had a material personal interest in the subject matter of the judgment. Additionally, the court needed to decide if the transaction was ultra vires the company's constitution and if the directors' actions constituted breaches of their duties under the Corporations Act.
In its decision, the court examined the evidence and testimonies provided by the directors and other relevant witnesses. The court found that the directors, while experienced, failed to carry out proper due diligence and did not ensure that adequate asset valuations were undertaken. The court also found that shareholder approval was necessary but not obtained. The court held that the directors' actions did not meet the statutory standard of care and diligence required by section 180(1) of the Corporations Act. The court further found that the business judgment rule did not apply as the directors did not make their decisions in good faith for a proper purpose and did not inform themselves about the subject matter to the extent reasonably appropriate. Consequently, the court concluded that the directors breached their duties under the Corporations Act.
The court dismissed the proceeding against the first and third to fifth respondents and ordered the applicant to pay the costs of the proceeding concerning the claims against those parties. The court also stayed the operation of the order concerning the payment of costs until further order. The court suspended any period stipulated under the Federal Court Rules 2011 for the filing and service of any notice of appeal from the orders. A case management hearing was fixed to determine the procedure for resolving any outstanding issues. The court varied any prior confidentiality orders to allow public access to the reasons of the Court. Liberty to apply was granted.
Orders
Orders of the court
1. The applicant’s proceeding against the first and third to fifth respondents be dismissed.
2. The applicant pay the first and third to fifth respondents’ costs of and incidental to this proceeding concerning the applicant’s claims against those parties.
3. There be a stay on the operation of order 2 until further order.
4. Any period stipulated under the Federal Court Rules 2011 (Cth) for the filing and service of any notice of appeal from orders 1 and 2 be suspended until further order.
5. A case management hearing be fixed at 9.30 am on 7 February 2025 to determine the procedure under which any outstanding issues concerning, inter-alia, any of these orders, the case against the second respondent, any cross-claim between the respondents or any other costs question are to be resolved.
6. To the extent necessary, any prior confidentiality orders made in this proceeding or proceeding VID 608 of 2019 are varied so as to allow public access to and public dissemination of the reasons of the Court published today.
7. Liberty to apply.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
Now in terms of my detailed reasons, it has been convenient to divide my discussion into the following topics:(a)Some relevant background – ([43] to [148]).(b)Relevant witnesses and evidentiary questions – ([149] to [222]).(c)General principles: directors’ duties – ([223] to [302]).(d)The sequence of events – ([303] to [754]).(e)The alleged breaches of directors’ duties – ([755] to [1253]).(f)The question of shareholder approval — listing rule 11.2 – ([1254] to [1422]).(g)General principles concerning listing rule 11 – ([1423] to [1509]).(h)The ultra vires question – ([1510] to [1628]).(i)Relevant facts concerning WHV – ([1629] to [1858]).(j)The various issues concerning WHV – ([1859] to [2193]).(k)The terms of the implementation deed – ([2194] to [2257]).(l)Voting in favour of the circular resolution – ([2258] to [2265]).(m)Causation – ([2266] to [2304]).(n)Some aspects of potential loss and damage — Pinnacle and WIG – ([2305] to [2446]).(o)Sections 1317S and 1318 potential application – ([2447] to [2453]).(p)Conclusion – ([2454] to [2455]).Some relevant background Prior to the merger, PAC was an ASX-listed investment and financial services business based in Australia. PAC, which was until 18 October 2015 known as Treasury Group Limited, was at all material times engaged in the business of investing in fund managers. Its business model involved investing capital in and providing support services to fund managers or boutiques. In these reasons and for convenience I will simply refer to PAC. As at 12 November 2013, PAC’s business insofar as it involved investing in fund managers comprised holding interests in the following boutique fund managers being Investors Mutual Ltd (IML), Orion Asset Management Ltd, RARE Infrastructure Ltd (RARE), Celeste Funds Management Ltd, Aubrey Capital Management Ltd, Evergreen Capital Partners Ltd, Octis Asset Management Pte Ltd, Treasury Asia Asset Management Ltd, Global Value Investors Limited and AR Capital Management Pty Ltd. As at 21 February 2014, approximately 60 per cent of PAC’s forecast financial year 2014 earnings were generated from its 40 per cent ownership of RARE, and approximately 30 per cent of PAC’s forecast financial year 2014 earnings were generated from its ownership of IML. If the owners of the remaining 60 per cent of RARE put it up for sale, PAC had a right of first refusal to purchase the 60 per cent it did not own. If it did not exercise its right to purchase the remaining 60 per cent, it could be obliged to sell its 40 per cent interest to the purchasers of the 60 per cent interest. At around this time, there was an increasing possibility of RARE being divested within the next 12 months. If RARE was divested, PAC’s earnings before interest, taxes, depreciation and amortisation (EBITDA) would fall by approximately 85 per cent. PAC’s net profits after tax (NPAT) might fall by a lesser amount depending upon whether or not the RARE divestment proceeds were returned to shareholders. If the divestment proceeds were retained, interest income would have become the largest component of NPAT until there were significant new investments completed.
Evidence
Evidence Before The Court
Let me say something about the respondent directors. Evidence of the directors As at 2014 Mr Kennedy had been the longest serving of the directors having been appointed a director on 4 June 2003. At the time of trial he still remained a director. He had extensive experience in commercial law and had been a director of other public and private companies. Mr Kennedy was careful in his evidence during cross-examination. He answered questions directly, although he was a little feisty at times in response to some of my gentle queries. Nevertheless he was an impressive and reliable witness. Mr Fitzpatrick was a director of PAC from 5 October 2004 until 1 March 2019 and its chairman for most of that period. Through his companies in 2014 he owned about 11.45% of PAC’s shares. Mr Fitzpatrick had had extensive experience in the funds management sector. He had also had considerable experience as a company director. Mr Fitzpatrick made numerous concessions in cross-examination, particularly where he accepted his inability to recall discussions and events from 2013 and 2014. Mr Fitzpatrick’s evidence was thoughtful and reliable. Mr Hayes was a director from 22 February 2007 to 26 November 2012. He had been the founder of Ausbil Dexia Ltd, a boutique, and part of Barclays Bank’s Australian investment operations. Mr Hayes had an extensive knowledge and understanding of boutiques and investment operations generally. Mr Hayes was the first to acknowledge that there were limitations on his ability to give detailed evidence due to his failing memory. Mr Hayes was 80 at the time of giving evidence. Despite these difficulties, Mr Hayes’ high level evidence on factors that caused him to vote in favour of the merger was generally reliable. Ms Donnelly joined the board on 28 March 2012. Her background was in accounting and tax and then funds management. She held management positions at Australia New Zealand Banking Group Limited and Queensland Investment Corporation. Since finishing as CEO at QIC, she had established, and then sold, her own company which educated investment executives in the superannuation and funds management industry world-wide. She has held numerous directorships on the boards of public and private fund managers and has held positions on the investment committees of government and private investment bodies and industry superannuation funds. Ms Donnelly, although she was prepared to make concessions, was firm in what she recalled. She gave short and sharp reliable answers. I accept Ms Donnelly’s evidence unequivocally. Mr McGill was PAC’s chief executive officer. He had been employed as CEO by PAC in July 2011. He was appointed as a director of PAC in August 2013. He ceased to be a director on 28 August 2015. Mr McGill had an impressive employment history with decades of experience in investment banking before coming to PAC. His experience included being a strategy consultant at LEK Partnership, holding senior roles in Macquarie Bank’s corporate finance and direct investments teams and then being the founding partner at Crescent Capital, which was an independent specific purpose private equity firm, and where he worked from 2000 to 2010.
Decision
Reasons for decision
Section 180 of the Act provides:Care and diligence—directors and other officers(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:(a)were a director or officer of a corporation in the corporation’s circumstances; and(b)occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.Business judgment rule(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:(a) make the judgment in good faith for a proper purpose; and(b) do not have a material personal interest in the subject matter of the judgment; and(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and(d) rationally believe that the judgment is in the best interests of the corporation.The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.(3) In this section:business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation. Section 180(1) is normative and cast in mandatory terms. The section imposes an obligation to meet a statutory standard of care and diligence applicable to the exercise of all of the powers and the discharge of all of the duties of a director or officer, whatever the source. If the required degree of care and diligence is not met, then the section will have been contravened. Section 180(1) creates an objective test, as I said in Australian Securities and Investments Commission v Mitchell (No 2) (2020) 382 ALR 425 at [1397]. The “reasonable person” is an ordinary person who possesses the knowledge and experience of the relevant director. The core duty of the director is to take reasonable steps to place themselves in a position to guide and monitor the management of the company. The directors must become familiar with the fundamentals of the business in which the corporation is engaged and are under a continuing obligation to keep informed about the activities of the corporation. Directorial management requires a general monitoring of corporate affairs and policies. The directors should maintain familiarity with the financial position of the corporation. The duty mandates, at its core, that a director’s involvement in the company’s management requires ordinary competence or reasonable ability. Equivalently, the duty of diligence requires directors to take reasonable steps to place themselves in a position to guide and monitor the company’s management. The purpose of s 180(1) is not to punish the making of mistakes or errors of judgment. Directors and officers are expected to take calculated commercial risks. However, they must exercise care and diligence in the assessment of risk and reward.
Ratio Decidendi
Legal Principle Established
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