Reil Corporation Ltd v Bankers Trust Australia Ltd

Re: REIL CORPORATION LIMITED; KARLA PTY LIMITED and ROXAM LIMITED
And: BANKERS TRUST AUSTRALIA LIMITED and ANTHONY EDWARD AVELING
No. G1422 of 1988
FED No. 99
Deceit - Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
M.L. Foster J.(1)

CATCHWORDS

Deceit - whether statement of fact or opinion - whether opinion founded on genuine belief.

Trade Practices - whether statement of fact or opinion - existence of reasonable grounds for holding opinion.

Companies (Acquisition of Shares) Code - s.12(g)

Companies Code - s.36

Trade Practices Act 1974 - s.52

Evidence Act 1905 (Cth) - s.7B

John McGrath Motors (Canberra) Pty Ltd v Applebee
(1964) 110 CLR 656

HEARING

SYDNEY

#DATE 23:3:1990

Counsel for the Applicants: Mr T. E. F. Hughes QC

with Mr N. C. Hutley.

Instructed by: Minter Ellison.

Counsel for the Respondents: Mr P. Hely QC

Mr D. Heydon QC

with Mr J. C. Kelly.

Instructed by: Freehill, Hollingdale and Page.

ORDER

1. The applicants' application be dismissed.

2. The applicants pay the respondents' costs.

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

JUDGE1

The applicants in these proceedings sue the first and second respondents to recover damages claimed to arise from an alleged misrepresentation made by the second respondent on behalf of the first respondent on 14 October 1987. The first respondent is a prominent merchant bank operating in Australia and the second respondent was at the relevant time and is a director of the first respondent. The first applicant is and was a public company actively engaged in the financial world in the area of acquisitions and takeovers. The second and third applicants were nominee associated companies set up to play a role in the takeover processes that form an essential part of the subject matter of these proceedings. I shall refer to the applicants collectively as "Reil". I shall refer to the first respondent as "BT" and to the second respondent as Mr Aveling.

The main actors in these proceedings on behalf of Reil were Messrs. Cave, Willson, and Mansfield. Each of them was a relatively young man with an academic background in commerce and accounting and with considerable acquired skills in the fields of finance and company management. The applicant company was set up by Mr Cave in 1986 for the predominant purpose of undertaking company takeover activities. Mr Willson, who was a director of Macquarie Bank on the corporate services side, and with whom Mr Cave had worked previously at that bank, was brought in to the organisation. Similarly Mr Mansfield, who at the time was managing director of the McDonald's organisation, was also brought in to the management of Reil. It appears that under the management of these three men successful takeovers were accomplished of a company referred to in the evidence as Hygienic Lily and also of the Sunbeam Victa organisation. The evidence clearly establishes that it was the object of Reil to acquire at a reasonable price companies which had an established name and market share but which in the opinion of the three men were distinctly underperforming and were capable of achieving far greater profits if properly managed. It is not contested that the three men were amply equipped by experience and expertise to undertake the achievment of these objectives.
In 1987 Reil, after conducting research from what has been described as all publicly available information, decided that the company known as Wormald International Limited ("Wormald") was a suitable object for takeover. The three men considered that it conformed to their requirements for a takeover target and was capable, in their hands as managers, of very greatly increasing its profitability.
In 1986 and 1987 Wormald had engaged in and been the subject of previous takeover activity. These activities have not been the subject of particularly detailed treatment in the evidence and there is no need to refer to them in any depth. It appears that in 1986 it was the subject of a hostile takeover bid by a company referred to in the evidence as "Suyutu", a subsidiary of another company, Sunshine Australia Ltd ("Sunshine"), which was effectively controlled by a certain Mr Lee Ming Tee, a well known figure in the financial markets and company takeover areas, who has been frequently referred to in the evidence but who has not been called as a witness. The takeover bid was unsuccessful but resulted in Suyutu, at the end of the day, holding a large parcel of Wormald shares. It appears that thereafter, in 1986, Mr Lee joined the board of Wormald and became its chairman. In 1987 Wormald, itself, made a successful takeover bid for Sunshine. That company had a number of disparate operations mainly consisting of investments in other companies, the details of which do not matter. I am satisfied, however, that by far its largest asset was the parcel of Wormald shares that it had acquired through its wholly owned subsidiary Suyutu as a result of the previous failed takeover bid. These shares have been referred to in the proceedings as the "Sunshine shares". I shall refer to them as such in these reasons. Prior to the Wormald takeover, the Sunshine shares comprised 36% of the ordinary capital of Wormald.
In order to raise the necessary finance to effect the takeover of Sunshine, Wormald announced that it would make a one for two renounceable rights issue. The issue was underwritten by three corporate entities one of which was the stockbroking organisation Dominguez Barry Samuel and Montagu Limited ("DBSM").
The result of the rights issue was to dilute the 36% Sunshine shareholding to 24%. The rights attached to the Sunshine shares would, if exercised, produce a shareholding amounting to 14% of Wormald's share capital. Suyutu, as a result of the Wormald takeover of Sunshine, became a subsidiary of Wormald and, by virtue of s.36 of the Companies Code, unable to take up its rights to the new issue of shares in its parent company. In these circumstances DBSM took options over these rights. In these proceedings, these rights have been referred to as "the Sunshine rights". I shall adopt this nomenclature in these reasons.
The situation in relation to the Sunshine shares and Sunshine rights was as described above at the time that Reil, through Messrs. Cave, Willson, and Mansfield, became interested in obtaining control of Wormald. Indeed, there is some indication in the evidence that Reil had become so interested and made some tentative approaches prior to the completion of the Wormald-Sunshine takeover which was finalised on 15 September 1987. Matters, however, started to come to a head so far as Reil was concerned towards the end of September. It then became known to them that DBSM were willing to dispose of the Sunshine rights. Their option to acquire them was to expire on 19 October and the rights themselves were required to be exercised before the expiry date of 21 October. Reil evinced interest in the acquisition of these rights. It also evinced interest in the acquisition of the Sunshine shares. Those shares together with the shares to be issued upon the exercise of the rights would provide a controlling interest in Wormald.
I find it unnecessary to refer in any detail to the negotiations which occurred up to the commencement of the critical period around 9 October 1987. There were discussions between the Reil representatives and Mr Lee Ming Tee as to various proposals under which Reil was to obtain effective control of Wormald and undertake the efficient management of the organisation. It appears, fairly clearly, that, at least in the earlier stages of these negotiations, Reil was prepared to proceed on a basis that did not require its becoming the owner of the Sunshine shares and rights. It would seem that at those stages it would have been satisfied with an effective management agreement and some measure of control through shareholding, the ultimate reward to Reil shareholders to be provided by options to take up a very substantial shareholding in Wormald at a later point of time.
However, by 9 October, Reil was able to put a precise offer to the Wormald board through Lee Ming Tee in a letter of that date. This letter is exhibit D. It contains Reil's proposal at that point of time. It was the subject of presentation to the board of Wormald by Messrs. Cave, Willson and Mansfield on that day. No finality was reached but it was understood that the board would give consideration to it promptly. It covered the entry into of appropriate management agreements, which would result in Messrs. Cave and Mansfield applying themselves "100% to the task of running Wormald upon the agreed date". It noted an agreement to take up the Sunshine rights controlled by DBSM at a price of $3.50 per share and an intention to purchase further rights on the market giving, in all, rights to under 20% of the diluted capital of Wormald.
It was acknowledged in the evidence that this agreement had not in fact taken effect at that point of time. It was asserted, although not expressed in the letter, that the agreement to take up the rights was known to be contingent upon the whole of the proposals being put into effect. The remaining proposals were that Reil sought to take up the 24% capital in Wormald constituted by the Sunshine shares, in circumstances where Sunshine, as a subsidiary, was obliged to dispose of the shares within 12 months. It was further noted that the sale of this parcel to Reil would require, because of the provisions of s.12(g) of the Companies (Acquisition of Shares) Code, approval by a shareholders' meeting of Wormald. The sale was to be recommended by the board. Additionally the board was to recommend at the same meeting the issue of 50 million share options to Reil to be exercisable at $5.50 at any time over the next five years. Finally, Messrs. Cave, Willson and Mansfield were to receive seats on the Wormald board from the date of commencement of the management agreements.
I am satisfied that on the same day at a conversation at the offices of DBSM between Mr Chant of that organisation and Messrs. Cave, Mansfield and Willson, it was made clear by the latter gentlemen that they were not prepared to sign an agreement for the purchase of the Sunshine rights until agreement had been reached in respect of all elements of the overall transaction.
It does not appear from exhibit D, but it is apparent from the evidence, that the price offered for the shares in the Sunshine parcel was $4.25 per share to be paid on or before the date on which Suyutu was required to dispose of those shares. This was the price to be considered by the board after the meeting of 9 October. The price for the acquisition of the Sunshine rights had been agreed firmly at $3.50. The next board meeting, at which the Reil proposal was to be considered was to take place on 14 October. On that day Reil forwarded to the board via Lee Ming Tee a further letter (exhibit U) containing the proposals in final form. Specific reference was made therein to the price of $4.25 per share for the Sunshine parcel to be purchased on or before 15 September 1988. It was also noted that "all dividends on those shares would accrue to Sunshine until settlement". The exercise price of the proposed 50 million options to be issued to Reil was put again at $5.50. Other matters relating to the vesting and exercise of the options were also set out.
The proposals were serious and detailed. Quite clearly, the Wormald board so regarded them. If agreement were reached as to the sale of the Sunshine shares, it would be necessary that the sale be approved by a meeting of shareholders. For the purpose of such a shareholders' meeting it would be necessary to obtain an independent report from an expert as to whether the proposed price for the shares was a fair and reasonable one. The board also wished to be advised as to the proper price to be sought for the Sunshine shares and the options. After 9 October it sought the assistance of BT as to the latter question. It further retained its auditors, the chartered accountants Arthur Young and Co., to provide a report as to the fair and reasonable price for the Sunshine shares. Reil was aware, before 14 October, of both these appointments.
Mr Aveling was the BT executive assigned to advise and assist Wormald in the negotiations with Reil. He had an assistant, Mr Cook. Both men were highly qualified in the field of share valuation. Both gave evidence in the case. The Arthur Young and Co. representatives engaged to report on the fairness and reasonableness of any price agreed upon for the acquisition of the Sunshine shares, pursuant to the s.12(g) meeting, were Messrs Bartlett and Ferris. Mr Bartlett had done the most recent audit of the accounts of Wormald. So far as the evidence discloses Mr Bartlett was clearly the main actor on behalf of Arthur Young. Neither of these men were called as witnesses.
Mr Aveling received his instructions late in the afternoon of 9 October at the offices of Wormald's solicitors. He was told in detail of the proposal and was given various documents, including Reil's letters and Wormald's last annual report. He also received copies of previous reports given by DBSM and the firm of Nelson Wheeler which had been prepared in relation to Wormald's acquisition of Sunshine.
Mr Aveling then entered upon his task. I accept his account of what occurred thereafter. Over the weekend he gave consideration to the documents with which he had been supplied and also other material available from the BT library. He gave consideration to what would be required in the fairly short time available for the board meeting on 14 October. On the Monday morning he had a lengthy conversation with Mr Willson in which he clarified various aspects of the Reil proposal. He also received other reports, the detail of which I need not refer to. They related to expert advice received by the board of Sunshine during the previous takeover situation.
On 13 October 1987, in the late afternoon, Mr Aveling went to the offices of Arthur Young and Co. to discuss the Reil proposal. He was accompanied by Mr Cook. He conferred with Mr Bartlett and other members of the Arthur Young organisation. The discussion is set out in some detail in the evidence of Mr Aveling, which I accept. It seems fairly clear that he was more advanced in his thinking than was Mr Bartlett and was able to put to Mr Bartlett a number of arguments which he had evolved in considering the matter up to that time. Consideration was given to the already existing expert reports bearing upon the value of the shares. The valuations in those reports had been done on a cum-rights basis. It was necessary, in view of the changed situation, that those calculations be brought back to an ex-rights basis. There was discussion as to the level of premium which had been included in the valuations to reflect the fact that the parcel being valued was a controller's strategic holding. Mr Aveling commented to Mr Bartlett that the amount of premium allowed had been, in his opinion, very small.
The men then considered the last annual report of Wormald and certain auditor's qualifications, with Mr Aveling expressing the view that the qualifications had little relevance as they had little bearing on Wormald's maintainable earnings. Consideration was then given to Wormald's budget for the year ending 30 June 1988. Mr Bartlett informed Mr Aveling that he had been advised by Wormald that the projected profit after tax for that fiscal year was $30 million.
After some further conversation, the detail of which I need not refer to, Mr Aveling inquired as to what sort of view Mr Bartlett was coming to. He was told that Mr Bartlett had not finalised any view but that his present thinking was that, based on the budgeted profit of $30 million, he would want to see a cash price for the shares in the Suyutu parcel of $4.00 per share, equivalent to a price of $4.50 per share in 12 months time. These matters were noted in Mr Aveling's day book (exhibit 12). The difference between the two figures reflected the fact, accepted by both men as being entirely appropriate, that a discounting factor must necessarily be applied to a price payable in the future to arrive at the present value of that price.
It is clear that Mr Aveling accepted that Mr Bartlett's view as to the cash now price of $4.00 was based upon his evaluation of material in his possession as auditor touching upon the value of the Wormald shares. These were matters described as "fundamentals", including historical earnings and asset values.
Mr Aveling then made various suggestions as to adjustments that should be made to Mr Bartlett's figure in view of the basis of acquisition proposed by Reil. It was agreed that a discounting factor of 15% would not be inappropriate and that as against the discount it would be necessary to take into account the fact that Sunshine would be retaining the dividends on the Sunshine shares until they were acquired by Reil in the future. These considerations were applied to Reil's offer of $4.25. After adjustment for those factors was done, the Reil offer converted to a cash now figure of $3.88 per share.
There was also discussion, based upon relevant documents, of the price that Wormald must be taken to have paid for the Sunshine parcel in its recent acquisition of Sunshine. It was necessary that allowance be made in this calculation for the value of Sunshine assets other than its holding of Wormald shares. It became clear to the two men that Wormald had paid approximately $5.17 per share. It was accepted that this was a relevant matter in so far as the transaction was a very recent one, the parcel concerned was a strategic one, and the acquisition had been made by the Wormald board. It would have been clear to all concerned, in my view, that serious opposition could be anticipated by the board to a proposal that the same parcel of shares be sold at a price substantially lower than the price at which they had recently been acquired by Wormald. I am satisfied, also, that at the conclusion of this meeting Mr Aveling raised the topic of the 50 million options which were to be acquired by Reil, under its proposal, and which were to be issued free. He indicated that the value of those options was something that he would consider when he got back to the office.
That evening Mr Aveling prepared a document described as an aide-memoire for presentation to the Wormald board the next day. The next day he added to it a reference to the Reil letter of 14 October which had just arrived and also a calculated value of the options. The evidence establishes that this calculation had been performed on the basis of a recognised method, the Black and Scholes method. Before attending the board meeting and speaking to this document, Mr Aveling had two further conversations with Mr Bartlett. The first was a telephone conversation on the morning of 14 October. There was some discussion of the value of the non-Wormald assets in Sunshine. Mr Aveling then queried Mr Bartlett as to his progress on the valuation. I am satisfied that Mr Bartlett replied "based on fundamentals I am probably happy with the Reil price of $4.25. On the premium I would like to see more, but if the earnings are soft it is hard to justify that". Mr Aveling remarked that, in his view, the figure of $3.88 discussed the previous evening should be increased to $3.91 to reflect a slightly lower discount rate in view of the fact that the period of deferred payment was eleven months rather than twelve. He went on to say that "more importantly" he had now valued the options at 46 cents per option which, spread over the number of shares Reil was to purchase amounted to "a free benefit of 56 cents" for each share. He indicated that this meant that Reil was, in effect, paying only $3.35 for each share. I am satisfied that Mr Bartlett agreed that this was a matter that needed to be looked at and discussed later that day.

A further meeting took place between Mr Aveling, Mr Cook, Mr Bartlett and Mr Ferris over lunch, prior to their attendance at the Wormald board meeting. Mr Aveling raised the matter of the options indicating that they obviously had a very significant value. He made notes of the relevant calculations and also produced a diagram indicating the Black and Scholes method of calculation (exhibit AJ). I am satisfied that this discussion in relation to the options continued for some 20 minutes and that at its conclusion Mr Bartlett said that he could see that the options had a very definite value, that the figures produced by Mr Aveling were reasonable and that allowance would have to be made for them.
I am further satisfied that Mr Aveling clearly made the point to Mr Bartlett, in circumstances where he was entitled to assume that Mr Bartlett was basically assenting to it, that the cash now equivalent of the Reil offer was approximately $3.30 as against a current market price for the Wormald shares of $3.40 to $3.50. Mr Aveling then introduced the subject of control premiums to be paid when the acquisition was of a strategic parcel of shares. He put forward the argument that studies suggested that an average premium of 40% was appropriate and that in the case of partial offers such as this the premium should be even higher. He made the point that not only was the effective price being offered less than the current market price, there was no addition of a premium. I am satisfied that Mr Bartlett indicated that this was a matter of concern.
It is clear that a number of matters were discussed at this lunchtime meeting. They are referred to in the evidence and I do not propose to set them out here. I accept Mr Aveling's evidence as to what occurred. Apart from the generally favourable view that I formed of him as a witness, many of the matters referred to by him in his evidence was supported by contemporaneous notes.
The four men thereafter attended the Wormald board meeting which commenced at about 3 o'clock in the afternoon. Although the evidence is not clear, I consider on the probabilities that Mr Bartlett and Mr Ferris were present at the board meeting whilst Mr Aveling addressed the board on the BT aide-memoire. Mr Aveling raised the matter of the customary payment of control premiums in situations like the present where the acquisition of the Sunshine parcel would result in Reil obtaining effective control. He mentioned premiums of the order of 40 to 50%. He mentioned that the imputed price per share paid by Wormald in the Sunshine takeover appeared to be approximately $5.13. This provoked some discussion amongst the board members and produced opinions as to the previous price, ranging from about $4.30 to $5.13.
I am satisfied that enquiry was made of Mr Bartlett as to his views of the Reil offer price of $4.25 and that he expressed a preliminary view that it was too low. There was then discussion about the profit figures which he had used in his calculations, to which he responded that he had been using a figure of 30 to 32 million. This again provoked discussion and assertions on the part of two board members that the figures did not take into account anticipated profit from Wormald's involvement in the Australian Submarine Corporation contract and also in respect of some English investments referred to as "the Holmes operation". It is clear from Mr Aveling's evidence that these matters were put by the relevant members of the board in a "very spirited fashion".
It was put that, when these matters were taken into account, the appropriate profit figure was more like $40 million for the current year. The directors who made this contribution to the discussion were, in the opinion of Mr Aveling, the directors closely involved in those aspects of Wormald's operations and were consequently able to speak with some authority on these topics. It is clear that he formed the view that considerable weight should be given to these contentions and that Mr Bartlett appeared to be forming the same view. It was suggested that Mr Bartlett should leave the meeting and speak to Wormald's financial controller on these subjects. This was suggestion was acceded to. Mr Bartlett and Mr Ferris then left the meeting, whilst Mr Aveling continued to address it. After some further explanations he expressed the view that Wormald should ask for a price of $5.00 on the shares. The board accepted this recommendation. There was discussion about the appropriate "strike" price for the options in which Mr Aveling did not participate. The board reached agreement that an asking price of $6.00 per option was appropriate.
Mr Lee Ming Tee then indicated that he would leave the meeting and speak to the Reil representatives who, unknown to Mr Aveling, were waiting outside the boardroom. Mr Bartlett had not returned but, I am satisfied that Mr Aveling, as a result of his own discussions with Mr Bartlett over the period and from what he had heard and observed in the boardroom, had formed a view as to the direction in which the Arthur Young representatives were heading in relation to their own recommendations and report. I am quite satisfied that he genuinely held the view, expressly stated in his evidence, that Mr Bartlett and Mr Ferris "would be looking at a figure of the order of $5.50". The broad reasoning which produced this conclusion on Mr Aveling's part was stated in his evidence and also demonstrated in a written calculation (exhibit 15).
Stated shortly, he accepted the cash now figure, based on "fundamentals", of $4.00 previously stated by Mr Bartlett and not departed from. To this he added the 58 cents per share to reflect the value of the options, a figure which he had good reason, in my view, to suppose would be adopted by Mr Bartlett. He then assumed that Mr Bartlett would accept a factor of 14% to increase the price to make allowance for deferred payment and set off against that a deduction of 18 cents to accommodate the retained dividends. These figures had been the subject of previous discussion between himself and Mr Bartlett in circumstances where he was quite reasonably entitled to assume that they would ultimately be accepted. These calculations produced a figure of $5.02 per share without regard to any increase in the projected profits to 40 million as against 30 to 32 million. Nor did they appear to give any very significant consideration to an appropriate level of control premium.
I am quite satisfied on Mr Aveling's evidence that, with the addition of these factors, he was well entitled to conclude that the Arthur Young representatives' thinking could be of the order of $5.50. Although Mr Aveling was cross-examined on certain aspects of his approach to this conclusion, in particular as to the effect of the Australian Submarine contract it was not put to him that he did not have a genuine belief that Mr Bartlett's thinking was along these lines. I am satisfied that he genuinely believed that it was. There has been no evidence from Mr Bartlett or Mr Ferris as to what was in their minds at the time as to a proper figure to be recommended as a fair and reasonable price. It may be noted, however, that on 23 October they reported that the price arrived at, namely $5.00, was in fact fair and reasonable.
I am therefore satisfied that Mr Aveling had these views as to Arthur Young's likely position in mind when Mr Lee Ming Tee returned to the boardroom and requested that he come outside and speak to the Reil representatives. He did so. He was accompanied by Mr Cook. A conversation then took place between himself and Messrs. Cave, Willson and Mansfield. It is in this conversation that the representations sued upon were allegedly made by Mr Aveling. It is appropriate, then, at this point to consider the representations relied upon in the pleadings.
The representation originally pleaded was "that Arthur Young had informed the board of Wormald that ordinary shares in Wormald were worth between $5.00 and $5.50 in the opinion of Arthur Young". This alleged representation was maintained in an amended statement of claim of 28 June 1989 and in a further amended statement of claim filed in court on 5 March 1990. No evidence was given in support of any such representation. In fact Messrs. Cave and Mansfield specifically denied in their evidence that any such representation had been made.
At the conclusion of the evidence a further amendment was sought and ultimately allowed which included the following representations:-

"(ii) alternatively, that on 14 October 1987 Arthur Young had expressed to the Board the opinion that the value of each share in the Sunshine Parcel was more like $5.50 than $5.00; or

(iii) alternatively, that on 14 October 1987 Arthur Young were of the opinion that the value of

each share in the Sunshine Parcel was more like $5.50 than $5.00; or

(iv) alternatively, that on 14 October 1987 Arthur Young were of the opinion that the value of

each share in the Sunshine Parcel was more than $5.00; or

(v) alternatively, that on 14 October 1987 Arthur Young had expressed to the Board the opinion that the value of each share in the Sunshine Parcel was more than $5.00."

These amendments were clearly sought in order to accommodate evidence given as to the contents of this crucial conversation, including evidence given on behalf of the respondents. It is to be noted that they are all representations alleged to have been made by Mr Aveling as representations of actual fact and not as representations of Mr Aveling's opinion as to the existence of those facts. In this regard it was very properly conceded by senior counsel for the applicants that the applicants' case could not succeed if the court were to hold that Mr Aveling had only expressed his opinion as to what was the relevant opinion of "Arthur Young" rather than stating to the Reil representatives as a fact that "Arthur Young" held, or expressed, the relevant opinion.
In this regard, it should be noted that a further application to amend the statement of claim was expressly abandoned. This amendment would have asserted a breach of s.52 of the Trade Practices Act 1974 by asserting that Mr Aveling expressed as his opinion that Arthur Young held the relevant opinions and that Aveling's expression of opinion was deceptive or misleading in that he did not hold the opinion expressed or that, if he did, no reasonable basis existed for it. It is my view, in any event, as appears from the above findings, that Mr Aveling, at the time when he commenced to speak to the Reil representatives on 14 October, was of the opinion that the Arthur Young representatives would arrive at an evaluation in excess of $5.00 and probably approaching $5.50.
The alleged representations so pleaded formed the basis of a cause of action in deceit in that it was further alleged that Mr Aveling was at all material times aware that they were false. Alternatively, they formed a basis of a cause of action for breach of s.52 of the Trade Practices Act in that they purported to state as a fact that Arthur Young had reached a concluded view as to value in the range stated when Aveling was merely of the opinion that they would reach that view.
So far as the count in fraud is concerned, it is clear that the court should not adopt an objective approach to the meaning of the words said to constitute the relevant representation. The enquiry must be as to what the representor meant by the words he used and not as to the meaning attributed to them by the representee. If the meaning intended by the representor was false to his knowledge or made in circumstance where he was recklessly indifferent to its truth or falsity then, but not otherwise, fraud may be made out (John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) 110 CLR 656). Hence, it was properly conceded by senior counsel for the applicants that if the circumstances of this case were that there was ambiguity as to whether Mr Aveling was making a statement of fact or merely expressing his own opinion and if he genuinely believed that he was expressing only an opinion, then fraud could not be made out.
However the first inquiry in this case must be as to whether Mr Aveling made the representations of fact relied upon. If not, the causes of action cannot be sustained. I should add that, subject to conditions embodied in orders made by consent, the case has proceeded only on the issues of whether or not the representations of fact relied upon were made, and if so, were relied upon by the applicants to their detriment. The question of the quantification of any damage was, by consent, left in abeyance.
The evidence as to the representations has been given by five witnesses, Messrs. Cave, Willson and Mansfield on behalf of the applicants and Messrs. Aveling and Cook on behalf of the respondents. It is clear that, to varying degrees, these men were engaged in what quickly became a negotiating situation in relation to the proper price to be paid for the Sunshine shares. It is also quite clear that the discussion was a spirited one. The Reil representatives had arrived at their offer price of $4.25 by a process of reasoning based upon what was available to them as to the financial situation of Wormald. It appears that they had made no allowance for any value to be attributed to the options and advanced the argument during the negotiations that the value of the options was not something that should be taken into account. Mr Aveling insisted that this was a proper matter to consider in relation to the share price. Although Mr Willson, in a way which I found somewhat puzzling having regard to the clarity of other aspects of his evidence, asserted that he had no recollection of any discussion in which Mr Aveling put forward the grounds for justification of a price as high as $5.00, The other Reil representative were in basic agreement with Mr Aveling and Mr Cook that this type of discussion certainly took place and preceded any reference to Arthur Young's position.
I am quite satisfied that there was a fairly lengthy discussion from the outset in which Mr Aveling put forward the bases of his valuation of the shares and in which those bases were contested by the Reil representatives. I am satisfied that the question of a discount for deferred payment and a setting off in relation to retained dividends was discussed. I am satisfied that the increase in share value by 58 cents per share having regard to the granting of free options was discussed and that mention of the Black and Scholes method of valuation was made by Mr Aveling. I am equally satisfied that the question of whether the options should be considered in relation to the share price was raised by the Reil representatives. Additionally, it is clear to me that the projected profits for the then fiscal year were the subject of debate, with Willson voicing the view that Wormald did not have a good history of reaching its budgets. I do not propose to refer to the whole of the evidence on these aspects of the conversation. I am quite satisfied that no reference was made to the views of Arthur Young until debate on Mr Aveling's arguments in favour of Wormald's asking price was exhausted. I am completely satisfied that the reference to Arthur Young's deliberations was in no way in the forefront of the discussion.
It has been asserted by Messrs. Aveling and Cook that what was said about Arthur Young's position did not form part of any negotiations between the parties and was in the nature of what is sometimes described as a "throw away line". In response to this characterisation, it is put on behalf of the applicants that it was in the nature of a parting shot designed to have significant impact upon the decision. I think the correct designation of the references to Arthur Young lies somewhere in between these positions. I do not think that the atmosphere of negotiation was entirely dissipated when it was introduced. I am satisfied that it was not put forward as a main argument by the respondents' representatives but it must have been realised that it would have some impact.
The applicants assert that they were told, in effect, that Arthur Young had reached a view that the shares were worth over $5.00 and in the region of $5.50. They assert that they were informed expressly or impliedly that the Wormald board had been made aware of this view and that consequently, in effect, the board's hands were tied. If the board were to agree to a significantly lower figure than that arrived at by Arthur Young, then there would be no real prospect of that figure receiving the approval of shareholders at the s.12(g) meeting. I am satisfied, therefore, that Arthur Young's views would have been perceived of as being a relevant consideration by the Reil representatives. Conversely it would have been apparent, in my view, to Messrs. Aveling and Cook that Arthur Young's views could be so perceived by the other men. The degree of relevance is of course another matter.
It is the respondents' case on this aspect that the discussion with Mr Aveling would be perceived as the significant aspect of the conversation together with the obvious fact that the board would be guided by him. It was also put that the most reasonable inference from all of the facts was that Reil was quite prepared to pay the $5.00 asked and would not have abandoned the negotiations because of the rise in price. Indeed, it is conceded by Mr Cave, that shortly after the acceptance of the price, he described it publicly as a gaining of the "first prize". It was further put that it was only after the share market crash of 20 October with the consequent severe drop in market price of Wormald shares that Reil seized upon the references to Arthur Young's position as providing a basis for extricating itself from severe financial difficulty.
Be that as it may, the decision of the case depends clearly, in the first instance, upon the view I arrive at as to what was said by Mr Aveling in relation to Arthur Young. This depends upon my evaluation of the evidence given by each of the five men as to the representations. It is evidence based upon recollection of words spoken and not recorded. It is subject to all the well known unconscious forces of reconstruction in favour of a case sought to be presented. Although recollection is necessarily expressed as a statement of words allegedly used, it cannot hope in the nature of things, to be a totally accurate reflection of those words. In the ultimate, a decision in this type of case is heavily dependent upon the impression made by individual witnesses. I have been much assisted in this case by observation of the witnesses in the giving of their evidence in chief and in cross-examination. It is reasonable that I should state at this point that I formed a very favourable view of Mr Aveling as a witness. At the conclusion of the evidence and addresses I was of the view that I preferred his evidence to that of the other witnesses in the case and that I could place the greatest reliance upon his version of the critical conversation.
I have re-read the transcript of evidence and the exhibits relevant to this question and have considered again the arguments of counsel which have been provided in written form. I do not intend in these reasons to set out or deal with all those arguments. I have taken them into account along with the impressions that I gained myself in listening to the evidence and observing the witnesses. At the conclusion of these further considerations I have not changed my view as to the reliability of Mr Aveling's testimony. Indeed I find that view fortified.

The versions given by the Reil witnesses of the representations allegedly made by Mr Aveling are, to say the least, divergent. Some divergence is, of course, to be expected. Too great a congruence of evidence in a case of this kind leads inevitably to a suspicion of concoction of an agreed version. However, the degree of divergence in this case must cause concern as to the reliability of the recollection of the individual witnesses. This concern is compounded in this case by the fact that Mr Cave's version of the relevant statements was put to Mr Mansfield and specifically denied by him. Mr Mansfield's version suffered a similar fate when put to Mr Cave. Mr Willson's version was at odds with both and was acknowledged as being apparently unreliable by senior counsel for Reil in his address.
The version given by Mr Cave, in evidence, was as follows: "if you think I am being tough, Arthur Young have valued the shares in excess of $5.00. I still think it is a good deal for you guys anyway". As already indicated Mr Cave expressly denied that Aveling had made any statement as originally pleaded in the statement of claim. He consequently does not assert that Mr Aveling made any representation to the effect that the board had been told of Arthur Young's opinion as to the proper share price.
Mr Willson gave evidence that Mr Aveling made representations as to Arthur Young's position on two separate occasions. He said that, at the outset of the conversation, in answer to a question from Mr Cave as to why the price had to be higher, Mr Aveling said "Arthur Young has come to the conclusion that for it to be fair and reasonable the shares have to be at a price of $5.00 and the options at possibly $6.00". This statement was put in a context that Mr Willson could recall none of the arguments put by Mr Aveling in support of his own contention that the price had to be $5.00. Mr Willson recalled there was some conversation about Wormald's budget and as to whether Mr Aveling had checked Wormald's past performance in respect of its budgets and that thereafter, as a final comment, Mr Aveling said words to the effect "(c)ome on you guys you are getting a good deal. If you think I'm being tough, Arthur Young is more like $5.50."
In cross-examination Mr Willson agreed that this latter representation was significantly different, being "if you think I am being tough I would say that Arthur Young is more like $5.50". This, in fact, accords with Mr Aveling's evidence to be considered later. Indeed Mr Willson agreed that he treated Mr Aveling's statement as an expression of Mr Aveling's opinion as to the Arthur Young position.
Mr Willson was a difficult witness to assess. I came to the conclusion that the first part of his version was at best a product of unconscious reconstruction. I think that he has transposed in his recollection a reference made by Lee Ming Tee as to what BT had advised the board into a reference to advice given by Arthur Young to the board. Although I was invited, in effect, by counsel for the applicants, to disregard his evidence entirely I do not hold the view that he was being irresponsible in what he put before me. I come to the conclusion that, subject to the error in recollection to which I have just referred, he did have some basic recollection of salient features. I consider that his ultimate corroboration of Mr Aveling must be accorded real significance in the case.
Mr Mansfield's version of the representation was "look, you guys, you are getting a sweet deal anyway. The options are worth a fortune. I am at $5.00 and the auditors are valuing it at even higher, in the vicinity of $5.50." He went on to say that "Cave and Willson said: 'Is that what the board has been advised?' and that Aveling replied, 'yes'".
The latter part of this evidence of Mansfield's was at variance with answers to interrogatories and at variance with the evidence of Messrs. Cave and Willson. I was not impressed by Mr Mansfield's evidence. I felt that he was confused in his recollection.
I turn to the versions given by Messrs. Aveling and Cook as to Mr Aveling's statement in relation to Arthur Young's position. Mr Aveling says that he said of the conclusion at the putting of his own arguments and in the context of suggesting that the Reil representatives give some private thought to the matter, the following words: "Gosh, if you guys think we are tough, I'd say Arthur Young are on more like $5.50". Mr Cook gave the following version of Aveling's statement: "Gosh, you guys think we are tough, Arthur Young are in there on more like $5.50."
Mr Cook was a careful and impressive witness. The difference between his version and that of Mr Aveling was apparent not only in their oral testimony; it had been made apparent in the respondents' answers to interrogatories. Not surprisingly, perhaps, the applicant's counsel sought to place considerable reliance upon Mr Cook's evidence as supportive of the applicant's case that Mr Aveling had made a statement of fact and not merely a statement of his own opinion. Mr Cook was, however, resistant to this interpretation of the words as he recalled them. He made his view quite plain in answers to cross-examination, that he was of the opinion that, in the general context in which the words were uttered, Mr Aveling was clearly expressing his own opinion as to Arthur Young's position.
It is, of course, both obvious and well known that in a conversational situation much is to be gained as to the meaning of an expression from the context in which it is uttered, the general atmosphere surrounding the conversation, and the tone and inflection of the speaker's voice. This is the more so when fairly colloquial expressions are used. In ordinary circumstances, in my view, a hearer can determine whether a speaker is expressing merely his own opinion as to the existence of facts as opposed to a categorical statement as to their existence. I am quite satisfied that Mr Cook was conveying a truthful and accurate impression of the effect of his recollection of Mr Aveling's words, namely that Aveling was merely expressing an opinion. I am fortified in this view, by Mr Willson's evidence,to which I have made reference.
In the upshot, the view that I have formed as to the reliability of Mr Aveling's testimony and his general credibility as a witness is not shaken in any respect by a slight difference between his testimony and Mr Cook's. Indeed I regard Mr Cook's evidence as fundamentally corroborative of Mr Aveling's. I accept Mr Aveling's version as being the most reliable of all. This being so I accept that Mr Aveling was doing no more than giving an opinion as to Arthur Young's position which he genuinely held. Moreover, that opinion was expressed in terms which, in themselves, could not but indicate that Arthur Young's views were at that stage, in Mr Aveling's opinion , only tentative.
It is necessary to refer briefly to three other matters of evidence bearing on the question of whether Mr Aveling's version should be accepted.
The first of these is a file note made by Mr Bartlett on 10 November 1987. It was admitted into evidence under s.7B of the Evidence Act 1905 (Cth) as a business record of Arthur Young and Co. Mr Bartlett was not called by the applicants although it was made clear that he was available. Mr Aveling gave evidence of conversations with Mr Bartlett on the afternoon of 14 October after he had had his conversation with the Reil representatives. These conversations are not consistent with the thrust of Mr Bartlett's diary note. The diary note was made after the stock market crash and after conversations with Mr Mansfield who had then assumed the position of Chief Executive of Wormald. Mr Aveling's evidence also establishes that Mr Bartlett was expressing some degree of concern as to whether his firm would retain the Wormald audit after the change of control. I have given full consideration to this file note but, in the absence of being able to evaluate Mr Bartlett as a witness, I am not prepared to accord it any significance as against the sworn testimony of Mr Aveling.
The second piece of evidence is given by Mr Shannon, who was and is the company secretary of Wormald. He testified to overhearing what I consider was properly characterised as a "snippet" of conversation between Mr Aveling and Mr Bartlett after the board meeting. Mr Shannon gave a recollection to the effect that Mr Aveling had said to Mr Bartlett that he, Aveling, had said that Arthur Young would not say that a price of less than $5.00 would be acceptable in the independent expert's report, to which Mr Bartlett had replied that that was not correct because the independent expert's report had not been concluded. No note was made of the conversation and it is clear from Mr Shannon's evidence that he did not attribute any great significance to it at the time. I think it is likely that he overheard and misconstrued some part of the conversation to which Mr Aveling deposes as having taken place with Mr Bartlett at Wormald's offices that afternoon. I have, again, considered this evidence but am unable to attribute to it any real significance in comparison with the view I have formed of the general reliability of Mr Aveling's version.
I have also considered the evidence as to the meeting between Messrs. Willson and Aveling on 19 November 1987. I am satisfied that it was in the nature of a confrontation which rapidly deteriorated into what was described in the evidence as "a blazing row". Human beings, even of professional background, are not noted for accuracy of assertion or response in such circumstances. I gain no significant assistance from this evidence. I am quite unable to accept that Mr Aveling said anything that could reasonably assist in a finding that he made the representations of fact relied upon. Nor do the written documents brought into existence by each of the men after the meeting lead me to any different conclusion. I remain satisfied as to the reliance I place upon Mr Aveling's testimony as to the conversation of 14 October.
I am therefore of the view that the applicants' case must fail. I am not satisfied that Mr Aveling made the representations of fact relied upon.
It is, therefore, unnecessary for me to consider the other issues posed for determination. I merely note that the applicants would have faced, in any event, serious difficulties on the questions of reliance and causation, particularly in respect of that part of the claim which depended upon their decision to exercise the Sunshine rights after the stock exchange crash. In the circumstances in my view, it must have been fairly apparent that prior expressions of opinion as to the value of Wormald shares would necessarily be subject to review in light of the existing market situation.
Accordingly I dismiss the applicants' application. I order that it pay the respondents' costs.

[1990] FCA 99

23 MARCH 1990