Selak v National Tiles Co Pty Ltd
[2023] VSC 446
•31 July 2023
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST - CONNOCK J
S ECI 2020 04730
BETWEEN:
| JOHN SELAK | Plaintiff |
| v | |
| NATIONAL TILES CO PTY LTD (ACN 007 381 599) & ORS (according to the attached Schedule) | Defendants |
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JUDGE: | Hetyey AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 13 September 2022, further material received 11 November 2022 |
DATE OF JUDGMENT: | 31 July 2023 |
CASE MAY BE CITED AS: | Selak v National Tiles Co Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2023] VSC 446 |
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PRACTICE AND PROCEDURE — Legal professional privilege — Application by defendants for orders that documents produced by subpoenaed non-parties are the subject of legal privilege and not available for inspection — Where plaintiff contends crime or fraud exception to legal privilege under common law applies — Where alleged falsification of board minutes in contravention of s 1307(1) of the Corporations Act 2001 (Cth) — Whether prima facie case of contravention — Whether documents prepared or communications made in furtherance of commission of alleged offence.
CORPORATIONS — Corporations Act 2001 (Cth) — Alleged offence under s 1307(1) — Discussion of physical and mental elements of offence — Whether conduct that results in the falsification of books affecting or relating to affairs of the company — Contentious wording of resolution of board of directors — Whether draft board minutes are a book affecting or relating to affairs of the company — Whether signed minutes were falsified — Whether later board minutes approving and ratifying earlier minutes were falsified —s 251A — Requirement for signing and retention of minutes of meetings — s 251A(6) — Relevance of presumption that minute signed and recorded is evidence of the proceeding, resolution or declaration to which it relates, unless contrary proved.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr G Kozminsky Ms C Mintz | Gilbert + Tobin |
| For the Defendants | Mr P Solomon KC Ms A Folie | Herbert Smith Freehills |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
Procedural history.............................................................................................................................. 1
Background......................................................................................................................................... 5
Dramatis personae........................................................................................................................... 5
Share option plan and offer letter..................................................................................................... 6
Changes to the Board....................................................................................................................... 8
National Tiles’ share valuation........................................................................................................ 9
April 2020 Board meeting............................................................................................................. 11
Implementation of changes to the Board and ESOP close out....................................................... 12
April Minutes................................................................................................................................ 13
Resignations of John Selak and Sue Morphet................................................................................ 15
Wording of shareholders’ agreement resolution............................................................................ 16
May 2020 Board meeting............................................................................................................... 19
Events following May Board meeting........................................................................................... 20
The ‘Proposal’ to Mr Larsen.......................................................................................................... 20
Intervention of lawyers.................................................................................................................. 22
Falsification allegations by Mr Selak and Ms Morphet................................................................ 23
August 2020 Board meeting.......................................................................................................... 25
Other evidence led by parties........................................................................................................ 26
Legal professional privilege and the crime or fraud exception.............................................. 28
Statute or common law?................................................................................................................ 28
Position at common law................................................................................................................. 30
Sections 251A and 1307(1) of the Corporations Act................................................................... 39
Operation of s 251A....................................................................................................................... 39
Operation of s 1307(1)................................................................................................................... 41
Physical element of s 1307(1) and meaning of falsification........................................................... 43
Mental element of s 1307(1).......................................................................................................... 46
Parties’ submissions........................................................................................................................ 48
Plaintiff’s written submissions...................................................................................................... 48
Defendants’ written submissions.................................................................................................. 51
Plaintiff’s written submissions in reply........................................................................................ 55
Parties’ oral submissions at the hearing........................................................................................ 57
Plaintiff’s oral submissions............................................................................................................ 57
Defendants’ oral submissions........................................................................................................ 62
Plaintiff’s oral submissions in reply.............................................................................................. 65
Issues for determination................................................................................................................. 66
Whether prima facie case of contravention of s 1307(1) of the Corporations Act?.............. 68
Whether alleged contravention of s 1307(1) in clear and definite terms?..................................... 68
Are the Draft April Minutes and the Revised April Minutes ‘books affecting or relating to the affairs of the [C]ompany’?......................................................................................................................... 69
Did Frank Walker falsely assert the Draft April Minutes were inaccurate and, relatedly, were the Revised April Minutes false?............................................................................................................. 70
Are the April Minutes false?......................................................................................................... 76
Are the May and/or August Minutes false?.................................................................................. 84
Did Frank Walker and/or Greg Larsen otherwise engage in conduct resulting in the falsification of any of the minutes referred to above?.............................................................................................. 86
Did Frank Walker and/or Greg Larsen know that any documents referred to above were false, or intend they be made false, or were they reckless that the documents were made false?.......................... 86
Whether the plaintiff is entitled to argue the crime or fraud exception applies on some alternative basis?............................................................................................................................................ 86
Conclusion on whether prima facie case or reasonable grounds for believing crime or fraud has been committed.......................................................................................................................... 87
Whether opposed documents are communications in furtherance of alleged crime or fraud? 88
Scope of HSF’s and PwC entities’ retainer.................................................................................... 88
Opposed documents produced by PwC entities............................................................................. 89
Opposed documents produced by HSF.......................................................................................... 90
Opposed documents produced by Greg Larsen.............................................................................. 92
Inspection of opposed documents................................................................................................... 93
Conclusion......................................................................................................................................... 96
HIS HONOUR:
Introduction
National Tiles Co Pty Ltd (‘National Tiles’ or ‘Company’), Frank Walker Group Pty Ltd (‘FWG’), and Mr Frank Walker (collectively, ‘defendants’) claim legal professional privilege over documents produced by non-parties to the proceeding under subpoenas issued by Mr John Selak (‘plaintiff’). However, the plaintiff contends that legal professional privilege is unavailable because the relevant documents are communications in furtherance of a crime or fraud, namely the falsification of minutes of the board of National Tiles (‘Board’) in contravention of s 1307(1) of the Corporations Act 2001 (Cth) (‘CorporationsAct’). In those circumstances, can the defendants maintain their claims for legal professional privilege over the subpoenaed documents? For the reasons that follow, the answer is they can. The evidence does not suggest, on a prima facie basis, that the Board minutes have been falsified. The likely inference available on the evidence is that they are the subject of a genuine dispute.
Procedural history
The proceeding concerns an Employee Share Option Plan (‘ESOP’) adopted by National Tiles and an offer made by the Company to Mr Selak, a former director of the Company, inviting him to participate in the ESOP by acquiring options in the Company. Mr Selak alleges, among other things, that upon acceptance of the offer and payment of the price for the options, an agreement came into existence between himself and National Tiles pursuant to the written terms of the offer and the ESOP (‘Agreement’). The ESOP contemplated the preparation of a shareholders’ agreement, should a person wish to exercise their options and acquire shares in the Company. Mr Selak contends he was provided with a shareholders’ agreement approved by National Tiles, containing terms so unreasonable that no reasonable minority shareholder would agree to be bound by them. He also says the terms of the proffered shareholders’ agreement were inconsistent with the Agreement, depriving him of all, or a substantial part of, the benefit or reward under the Agreement. Mr Selak alleges National Tiles breached the Agreement and that its holding company, FWG, and Mr Walker[1] procured the said breach. He seeks exemplary and aggravated damages for breach of contract and the tort of procuring breach of contract.
[1]A reference in this judgment to ‘Mr Walker’ is a reference to Mr Frank Walker as opposed to his son, Mr Nick Walker.
The plaintiff’s originating process was filed on 22 December 2020. At a directions hearing on 12 March 2021, Connock J made various pre-trial timetabling orders, including for the discovery of documents and the filing and service of witness outlines and expert reports. The proceeding is currently set down for trial on an estimated duration of eight days over October and November 2023.
Over February, March, and May 2022, Mr Selak issued subpoenas to the following addressees, all of whom are non-parties to the proceeding:
(a) a subpoena dated 3 March 2022 addressed to Greg Larsen (‘Larsen subpoena’), a non-executive director and chairperson of the Board;
(b) subpoenas dated 3 March 2022 and 23 May 2022 addressed to Herbert Smith Freehills (‘HSF’) (‘HSF subpoenas’), solicitors for the defendants in the proceeding. On 24 December 2015, HSF was engaged by FWG to provide legal advice regarding the terms of the ESOP; and from around 27 April 2020, HSF provided legal advice to both National Tiles and FWG concerning the ESOP and associated shareholders’ agreement.[2] Separately, on 17 June 2020, HSF was engaged by National Tiles and FWG in relation to anticipated proceedings by Mr Selak;
(c) a subpoena dated 3 March 2022 addressed to PricewaterhouseCoopers (‘PwC’). In mid‑April 2020, PwC was engaged by National Tiles to provide legal advice and services (including taxation advice) regarding the closing out of the ESOP. Additionally, in August 2020, PwC advised National Tiles on an email sent in late July 2020 by Ms Sue Morphet, the former chairperson of the Board, concerning the minutes of a Board meeting held on 23 April 2020; and
(d) a subpoena dated 24 March 2022 addressed to PricewaterhouseCoopers Securities Ltd (‘PwCS’), which was engaged by National Tiles to undertake an independent valuation of the shares of the Company in connection with the ESOP.
[2]The defendants’ evidence suggests that both National Tiles and FWG were the relevant clients for this engagement, although the HSF file only identifies National Tiles as the client. Further, Board minutes for a meeting of National Tiles held on 20 May 2020 record that HSF was acting for FWG in connection with the preparation of the shareholders’ agreement. Given the parties’ approach to the issues in the present application, I am not satisfied that anything turns on these slight inconsistencies.
The Larsen subpoena called for documents concerning any proposed agreement or understanding for financial reward or other incentive between Mr Larsen and the Company and/or Frank Walker, and which evidenced any resulting payments. The HSF subpoenas sought precedent shareholders’ agreements used by HSF, documents prepared by Mr Andrew Clyne of HSF concerning the Board meeting on 21 May 2020, and instructions, advice, and comments concerning that Board meeting. The subpoenas directed to PwC and PwCS (collectively, ‘PwC entities’) required production of, among other things, documents regarding the valuation of National Tiles on about 29 January 2020 and pursuant to a report prepared by PwC and dated 22 April 2020, a record of what was said at a meeting between the directors of National Tiles and PwC representatives on about 1 April 2020 regarding the valuation of National Tiles, and file notes prepared by persons at the PwC entities regarding the Board meeting on 23 April 2020.
By summons dated 7 July 2022,[3] the defendants sought orders that certain documents produced by the addressees of the relevant subpoenas are the subject of legal professional privilege and should therefore not be uplifted or inspected (‘privileged documents’). Mr Selak opposes the summons insofar as it concerns a subset of the privileged documents (‘opposed documents’), to which he contends legal professional privilege cannot attach because they constitute communications between a lawyer and a client in furtherance of a crime or fraud (‘crime or fraud exception’). In particular, he alleges there has been a falsification of minutes of a Board meeting held on 23 April 2020 (‘April Minutes’), in contravention of s 1307(1) of the Corporations Act. The alleged falsification concerns the wording of a resolution about the shareholders’ agreement required under the ESOP (‘shareholders’ agreement resolution’). Save for the opposed documents and a small number of privileged documents that were apparently disclosed by the defendants to the plaintiff during the course of the proceeding, the plaintiff concedes there is no other basis to challenge the defendants’ privilege claims over the balance of the privileged documents. The parties also agree there is no need for the Court to separately determine whether the claim for legal professional privilege is otherwise made out in relation to the entirety of the privileged documents.
[3]The summons filed 7 July 2022 ostensibly replaces an earlier summons served on 9 May 2022: see affidavit of Peter Holloway affirmed 9 May 2022, [2].
On 17 June 2022, Connock J made orders, among other things, listing the hearing and determination of the privilege claims made by the defendants before me. The only issue for determination is whether legal professional privilege is unavailable in respect of the opposed documents because of the crime or fraud exception.
In support of his application, the plaintiff relies on the affidavits and exhibits of Janet Whiting sworn 22 July 2022 (‘first Whiting affidavit’), 19 August 2022 (‘second Whiting affidavit’), and 12 September 2022 (‘third Whiting affidavit’), together with written submissions dated 25 July 2022 and 19 August 2022, respectively.
The defendants rely on the affidavits and exhibits of Peter Holloway affirmed 9 May 2022 (‘first Holloway affidavit’), 6 July 2022 (‘second Holloway affidavit’), 5 August 2022 (‘third Holloway affidavit’), and 12 September 2022 (‘fourth Holloway affidavit’), together with written submissions dated 5 August 2022.
The parties also made reference to the plaintiff’s further amended statement of claim dated 22 October 2021 and the defendants’ amended defence to the further amended statement of claim dated 5 November 2021.
The opposed documents are found in the three schedules prepared by the defendants’ lawyers:
(a) documents 41–53 and 57–59 in the schedule at pages 105–109 to Exhibit ‘PJH‑1’ of the first Holloway affidavit (which were produced by the PwC entities) (‘PwC privilege schedule’);
(b) documents 1–9 (including 1a) in the updated schedule at page 62 of Exhibit ‘PJH‑2’ of the second Holloway affidavit (which were produced by Mr Larsen) (‘Larsen privilege schedule’); and
(c) documents 4, 16–47 and 59 in the schedule at pages 55–58 of Exhibit ‘PJH‑2’ of the second Holloway affidavit (which were produced by HSF) (‘HSF privilege schedule’).
(each a ‘privilege schedule’ and, collectively, ‘privilege schedules’).
The application was heard on 13 September 2022 and the Court reserved its decision. At the conclusion of the hearing, the parties were requested to jointly prepare a neutrally‑worded chronology. They did so on 11 November 2022, and a copy of the submitted chronology has been placed on the Court file.
Background
Given the serious nature of the allegations made in the application, it is necessary to set out, in some detail, the background to the proceeding.
Dramatis personae
The dramatis personae that appear in the relevant background are as follows:
Name Role / Relationship Relevant dates John Selak (plaintiff) Former Director of National Tiles 7 May 2015 to 8 May 2020 Gregory Larsen Non-Executive Director and Chairperson of the Board of National Tiles 7 May 2015 to 5 May 2020; a date between 5 May 2020 and 21 May 2020 to 24 June 2021 (Chairperson) Frank Walker
(third defendant)Director of National Tiles 30 April 1990 to present Sue Morphet Former Director and
Chairperson of Board of National Tiles7 May 2015 to 8 May 2020 Nick Walker Chief Executive Officer of National Tiles;
Director of National Tiles; and Frank Walker’s son4 June 2010 to 28 February 2022 Georgina (Georgie) Bell (née Walker) Director of National Tiles and Frank Walker’s daughter 24 February 2020 to present Rhonda Walker Director of National Tiles and Frank Walker’s wife 24 February 2020 to present Chris Herrick Chief Financial Officer and Secretary of National Tiles 29 August 2020 to present (as Secretary) Peter Davis Director of National Tiles 1 July 2020 to 10 March 2022 Rebecca Weir Assistant Company Secretary at Boardroom Australia Nick Brown Legal Partner of PwC Hamish Emms Director of PwC Nigel Smythe Partner at PwC Ashley Poke Lawyer at PwC Andrew Clyne Partner at HSF 2003 to present Nick Wormald Consultant at HSF (former Partner) 1 May 2018 to present (as Consultant) Stefanie Wilkinson Partner at HSF December 2015 to February 2021 Rhiannon Zarro Solicitor at HSF Robert Prosser Solicitor at HSF
Both FWG and its wholly owned subsidiary, National Tiles, are under the effective control of Frank Walker, who holds equal shares (50 per cent) in FWG with his wife, Rhonda Walker. FWG holds its shares in National Tiles as trustee for the Frank Walker Family Trust.
Share option plan and offer letter
The ESOP was adopted by the Board on 7 April 2016 and enabled eligible persons, including employees and non-executive directors of National Tiles, to acquire shares in the Company on terms set out in the ESOP. There is evidence indicating Mr Selak himself was involved in the drafting of the ESOP in September 2015, in his then capacity as Partner in the Transaction Advisory Services team at Ernst & Young.
By cl 2.4.1 of the ESOP, eligible persons who applied for, or were granted options, are deemed to have agreed to:
(a) be bound by certain rules of the ESOP (‘ESOP Rules’) and the terms and conditions set out in a letter of offer;
(b) become a shareholder following the allocation of shares upon the exercise of options and to enter into a ‘Shareholders’ Agreement’ if required by the Company; and
(c) be bound by any relevant Company policy.
The ESOP defines a ‘Shareholders’ Agreement’ to mean a shareholders’ agreement in terms approved by the ‘Majority Shareholder’, which would include certain conditions, such as trading restrictions.
By a letter of offer dated 20 April 2016 (‘offer letter’), Mr Selak was invited to participate in the ESOP by purchasing four million options, with a price hurdle of 50 cents per option. The purchase price payable on grant of the options was set at 0.3444 cents per option, equal to the market value of an option at the date of the offer letter. Upon valid exercise of the options by payment of the relevant exercise price (12.3 cents per option), one ordinary share would be allocated for each option exercised.
An attachment to the offer letter, titled ‘Section A Key Terms and Conditions – FY16 Offer’, sets out various provisions, including the grant of options, vesting and exercise of the options, and the allocation of shares following the exercise of the options. Relevantly, one of the vesting conditions identified is the satisfaction of a ‘share value hurdle’. If no ‘Liquidity Event’[4] occurred before 20 April 2020, that date would be the ‘Vesting Date’, and the value of the shares for the purpose of the share value hurdle would be determined by a valuation as at 31 December 2019, to be undertaken by an independent third-party valuer nominated by the majority shareholder. The percentage of options that vested on the Vesting Date was determined on a sliding scale, based on the value of an ordinary share of National Tiles as at the Vesting Date, as follows:
[4]A ‘Liquidity Event’ was defined as the listing of National Tiles’ shares, the sale of all, or substantially all, of the company’s assets or shares to a third party, or such other event determined by the Board to constitute a Liquidity Event.
| Value of an Ordinary Share at Vesting Date | Options that Vest (%) |
| $0.50 or higher (‘Full Vesting Target’) | 100% |
| 98% – 99.9% of Full Vesting Target | 80% |
| 96% – 97.99% of Full Vesting Target | 60% |
| 94% – 95.99% of Full Vesting Target | 40% |
| 92% – 93.99% of Full Vesting Target | 20% |
| 90% – 91.99% of Full Vesting Target | 10% |
| Lower than 90% of Full Vesting Target | 0% |
The document also provided that ‘[u]pon the allocation of shares, [the participant] agree[s] to become a member of the Company and will be required to agree to the terms of the Shareholders’ Agreement’. Defined terms in the document appear to correspond with definitions found in the ESOP itself.
Shortly after receiving the offer letter, Mr Selak accepted the offer and acquired four million options in National Tiles.
Mr Selak alleges (and the defendants admit) that upon acceptance of the offer letter and payment of the relevant price for the options, the Agreement came into existence between himself and National Tiles, in accordance with the written terms of the offer letter and the ESOP.
Changes to the Board
It is the plaintiff’s evidence that, on 31 October 2019, Mr Walker informed the non‑executive directors of National Tiles that, following the meeting of the Board to be held in April 2020, Mr Larsen, and Ms Morphet would retire as directors and Mr Selak would continue as director and be appointed as chairperson of the Board, replacing Ms Morphet (‘October 2019 succession plan’).
On 21 February 2020, Mr Walker sent an email to HSF, copied to the other members of the Board, his wife Rhonda Walker, son Nick Walker, and daughter Georgie Bell. In that email, Mr Walker noted that following a stroke he had apparently suffered in the prior month, he had resolved to immediately appoint Ms Walker and Ms Bell as directors of the Company. Ms Walker and Ms Bell were subsequently appointed to the Board on 24 February 2020. The composition of the Board then became: Frank Walker, Georgie Bell, Greg Larsen, John Selak, Nick Walker, Rhonda Walker and Sue Morphet. At the time of this change in Board membership, Mr Selak raised concerns in an email exchange with Mr Walker regarding the latter’s decision to appoint his wife and daughter as directors of the Company, which he believed could compromise the third-party independence of the valuation process and associated ESOP closure, and potentially expose Mr Walker to allegations that he had ‘stacked’ the Board.
National Tiles’ share valuation
With no ‘Liquidity Event’ having yet occurred, in accordance with the offer letter, it was then necessary for National Tiles to appoint an independent third party to conduct a valuation of National Tiles’ shares. To that end, a proposal from PwCS was sought. However, between January and April 2020, a disagreement arose between Mr Walker and Mr Selak in relation to the valuation methodology to be applied by PwCS. Notably, Mr Selak was of the view that an amended valuation proposal, in which PwCS proposed to use the ‘single point estimate’ method of valuation, did not meet the appropriate standards. By email dated 1 February 2020 from Mr Selak to Mr Walker, Mr Selak sought Board access to PwCS’s initial and amended proposal ‘so that the appropriate level of transparency [be] maintained’.
In an email dated 3 February 2020 and sent to Mr Selak, Mr Walker disagreed that PwCS had erred by using a single point estimate and noted he had invited Nick Wormald of HSF, the author of the ESOP documentation, to the next Board meeting to address any legal questions concerning the valuation and any other relevant processes.
PwCS was ultimately engaged by National Tiles on 14 February 2020 to perform a valuation of the Company’s ordinary shares as at 31 December 2019. The engagement was signed off by Mr Chris Herrick as Chief Financial Officer.
The Board met on 26 February 2020 (‘February Board meeting’) to discuss, among other things, the ESOP, and PwCS’ valuation. A timeline was agreed whereby PwCS would present a draft redacted valuation report to the Board, with the final report to be presented by PwCS at the April 2020 Board meeting. The minutes of the February Board meeting record that Frank Walker confirmed his wife and daughter would remove themselves from any future voting requirement regarding the ESOP.
Following the February Board meeting, PwCS provided a draft report to the Board on 26 March 2020 (‘PwCS draft report’), in which they set out their assessment of the fair market value of an ordinary share of National Tiles as at 31 December 2019.
On 29 March 2020, following distribution of the PwCS draft report, Mr Walker emailed the Board, stating that he rejected the PwCS draft report and identifying various alleged inaccuracies and erroneous assumptions contained within it. He relevantly said:
I propose this valuation matter be set aside until a more appropriate time in the future, hopefully within the next month or so.
In reserving my rights in every role I play in this matter, if my concerns are not satisfactorily addressed, I confirm I plan to take action against PwC[S] in the Federal Court for providing me false and misleading information and to seek to have the valuation deemed null and void.
After consulting with Mr Larsen and Mr Selak, Ms Morphet replied to Mr Walker’s concerns by email dated 30 March 2020 in the following terms:
[I]t is not appropriate for the company to change or delay the agreed option valuation timeline as stipulated in the Share Option Plan. Nor should the specific time line of the PWC[S] valuation process be changed. This timeline was agreed by the board in February.
…
I also don’t think its [sic] helpful for you to be threatening to take legal action against PWC[S] …
These threats are extremely vexatious and undermine our common desire for courteous and professional discussion.
Mr Walker responded the same day, emphasising that ‘[t]he valuation [would] not be proceeding based on the current Redacted report’. He stated that he had ‘been given false and misleading information by PwC[S]’ and ‘[would] be taking action … unless the matter [was] resolved to [his] absolute satisfaction’.
In further email exchanges later that day, Ms Morphet said she was of the view that the Board ‘should continue with the agreed process’, but Mr Walker considered this approach ‘unacceptable’ and purported to suspend the valuation process ‘effective immediately’. He also said that if the Board voted to challenge his decision, he would immediately seek directions from the Federal Court of Australia as to the appropriateness or otherwise of the valuation continuing in its then form.
April 2020 Board meeting
Ahead of the Board meeting on 23 April 2020 (‘April Board meeting’), Nick Walker circulated a proposed agenda on 21 April 2020 to Ms Morphet and Mr Herrick, which noted various matters for discussion, including the ‘PwC[S] Business Valuation Engagement’, ‘ESOP Legal & Tax Considerations (Board discussion)’, and ‘Non‑Executive Director tenure’. Ms Morphet forwarded this agenda to other Board members on the day before the April Board meeting (22 April 2020).
Immediately prior to the April Board meeting, PwCS finalised their valuation report dated 22 April 2020, a copy of which was circulated to the Board by Mr Herrick on the same day. The report assessed the fair market value of each share in National Tiles to be 47.6 cents. This resulted in 3.2 million of Mr Selak’s options vesting, upon the execution of a shareholders’ agreement, exercisable at a price of $393,600 (12.3 cents per option).
On the morning of the April Board meeting, at 7:51am, Nick Brown, a Legal Partner at PwC, circulated by email to Ms Morphet and Mr Herrick, ‘sample resolutions’ for the Board’s consideration, including ‘resolutions relating to the interim vesting outcomes, the NED [(Non-Executive Director)] related resolution … and a resolution about the preparation of a shareholders agreement’. The email records that Ms Morphet suggested the sample resolutions be shared with Mr Herrick before the meeting. The document attached to the email was entitled, ‘Summary of Resolutions that May Be Considered by the Board of Directors on 23 April 2020’. The document sets out the following sample resolution:
IT WAS RESOLVED THAT the Company engage [x] to prepare the shareholders’ agreement (ensuring that specific provisions required by the definition of “Shareholders’ Agreement” in the ESOP Rules are incorporated) and that the market standard minority protections (for example, pre‑emption rights on new shares issues) are included in the documentation.
(‘Sample Resolution’).
Mr Herrick subsequently forwarded Mr Brown’s email to another employee at National Tiles and requested that she upload the attached ‘sample resolutions’ onto Diligent, which I understand to be a file-sharing platform. He also forwarded the email and attached the ‘sample resolutions’ to Ms Rebecca Weir, an Assistant Company Secretary of BoardRoom Australia.
The April Board meeting, which was chaired by Ms Morphet, opened at 8:06am and concluded at 12:12pm. All directors of the Company were in attendance. Others in attendance by invitation were: Mr Herrick; Ms Weir; Mr Brown; Mr Hamish Emms, Director of PwC; and Mr Nigel Smythe, a Partner of PwC. The Board was satisfied that Mr Larsen, Mr Selak, and Ms Morphet had met 80% of their share value hurdle and were, respectively, entitled to exercise 3.2 million options. A resolution was therefore passed in relation to preparation of a shareholders’ agreement to give effect to the allocation of shares upon the exercise of their options under the ESOP. However, the wording of that resolution is a matter of significant controversy between the parties in the present application.
Implementation of changes to the Board and ESOP close out
On the plaintiff’s evidence, Frank Walker telephoned Mr Selak shortly after the April Board meeting concluded and requested that he resign from the Board.
The next day, on 24 April 2020, Frank Walker sent an email titled ‘Board Announcement’ to Mr Herrick and members of the National Tiles executive team, and copied to the Board. In that email, he announced the conclusion of Ms Morphet’s, Mr Larsen’s, and Mr Selak’s respective statutory positions as non-executive directors of the Company. He also confirmed Mr Larsen’s agreement to remain with the Company as interim chairperson, pending recruitment of a replacement.
Following the announcement of the Board changes, on 28 April 2020, Ms Morphet and Mr Selak circulated a letter to the directors of National Tiles, setting out a proposal for the closing out of the ESOP (‘ESOP close out proposal’). The letter identified that Ms Morphet and Mr Selak each had 3.2 million vested options, with an intrinsic value of 35.3 cents per option, equating to approximately $1.13 million each, or roughly $2.26 million in total. To apparently assist the Company with its cashflow, they proposed that their options be cancelled and they be paid $2.26 million in 12 equal monthly instalments of $188,267 ($93,133 each per month) commencing July 2020. This was said to equate to a net cash outlay for National Tiles, after tax, of $132,000 per month for 12 months, with ‘no need for a shareholder’s agreement as there will not be any minority shareholders’.
On the same day, Ms Morphet emailed Ms Weir and Mr Herrick about the distribution of draft minutes of the April Board meeting, in order that she could sign those minutes by 30 April 2020 and complete her tenure as chair of the Company.
April Minutes
On 29 April 2020, at 11:50am, Ms Weir circulated a draft of the April Minutes (‘Draft April Minutes’) to Ms Morphet, Mr Herrick, and Nick Walker to review. In her covering email, Ms Weir stated:
With regards to the ESOP resolutions these are an adjusted version of the draft resolutions Nick Brown provided (adjusted to reflect the ESOP outcome).
The Draft April Minutes contained resolutions in the following terms:
IT WAS RESOLVED THAT:
·the Major Shareholder (or his representative) prepare the shareholders’ agreement (ensuring that the specific provisions required by the definition of “Shareholders’ Agreement” in the ESOP Rules are incorporated) and that market standard minority protections (for example, pre-emption rights on new shares issues) are included in the documentation; and
·[Nick Brown], as the Company’s legal counsel would review the agreement on behalf of the Company (as a party to the Shareholder Agreement) to ensure the rights of the future minority shareholders were protected and that any implications on the effective management of the Company were fully considered.
(together, ‘Minority Protection Resolutions’).
As can be seen, the Draft April Minutes contained a form of resolution that contemplated a shareholders’ agreement in similar language to the Sample Resolution suggested by Mr Brown of PwC on 23 April 2020. Both the Sample Resolution and the Draft April Minutes made specific reference to the shareholders’ agreement containing ‘market standard minority protections’.
Later that day, Mr Herrick sent a reply email to Ms Weir and Ms Morphet, stating that he and Nick Walker had reviewed the Draft April Minutes and had made a number of marked-up ‘recommended changes’. The suggested changes were to various items in the minutes, including a minor change to the note accompanying the resolution regarding review of the shareholders’ agreement, so that it read:
NB, as the Company’s legal counsel would review the agreement on behalf of the Company (as a party to the Shareholder Agreement) to provide a view that
ensurethe rights of the future minority shareholders were protected and that any implications on the effective management of the Company were fully considered and consistent with market standard.
Having not heard from Ms Morphet in relation to the Draft April Minutes, Ms Weir sent a follow up email on 1 May 2020 at 9:40am, asking if she had any comments. On that same morning, at 10:28am, Mr Herrick emailed Ms Weir, stating that he had spoken to Ms Morphet and ‘there were a couple of further minor amendments’ captured in a further marked-up version of the Draft April Minutes. Shortly thereafter, at 10:43am, Mr Herrick again emailed Ms Weir, asking her to hold off on circulating the draft minutes as Ms Morphet had additional proposed changes.
Later that day, at 12:19pm, Ms Weir sent the Draft April Minutes to the wider Board, including Ms Bell, Mr Larsen, Mr Walker, and Mr Selak. She noted that the minutes had already been reviewed by Ms Morphet, Nick Walker, and Mr Herrick. Mr Selak indicated his approval of the Draft April Minutes by email on 1 May 2020 at 1:04pm. Mr Larsen did the same at 3:20pm that day.
At 4:04pm on 1 May 2020, Mr Walker replied to Ms Weir’s email and copied in the other Board members, including Mr Selak and Ms Morphet. He said:
The minutes do not reflect my understanding of the shareholder agreement resolution as recorded.
Please await my written account of what was resolved which I will provide prior to their adoption.
(‘1 May Walker email’).
Shortly after sending that email, at 4:09pm, Mr Walker separately emailed Ms Morphet and Mr Selak, noting his discussions with other directors individually about their ESOP close out proposal. He informed them that a final response to the ESOP close out proposal would follow the next Board meeting scheduled for May, but that ‘its acceptance [was] most unlikely’ and it would be:
[P]rudent for [them] to continue [their] deliberations on whether [they] wish[ed] to exercise [their] options on the basis [they would] need to personally fund the 12.3c per option exercise price …
At 5:18pm, Ms Morphet replied to the 1 May Walker email, copying in the other Board members, and stating that Mr Walker’s ‘recollections must be sent to all members of the [April Board] meeting’ and that ‘any unresolved disagreement’ ought to be mediated by the Company’s lawyer in the event that his disagreements related to the resolutions made at the April Board meeting (‘1 May Morphet email’). The next day, she responded to Mr Walker’s separate 1 May 2020 email about the ESOP close out proposal, requesting that she be informed of the reasoning for the rejection.
Resignations of John Selak and Sue Morphet
On 4 May 2020, on the instructions of Frank Walker, Mr Clyne of HSF separately emailed Mr Selak and Ms Morphet, attaching a written form of notice of resignation as director of National Tiles. They were requested to sign and return the form within the week.
On 5 May 2020, in response to Mr Clyne’s email, Mr Selak made various amendments to the attached resignation form and noted he had not sought legal advice, but reserved the right to do so. His amendments recorded that: he had been asked to resign by Mr Walker; his resignation was not voluntary; and he had an entitlement under the ESOP amounting to approximately $1.13 million, although there was still doubt as to how this entitlement would be ‘monetised’. Mr Selak also stated:
My resignation is also subject to me agreeing [to] the final form of the minutes of the board meeting held on 23 April 2020. I note that the final draft of these minutes was prepared by our acting company secretary Rebecca Weir from Boardroom Pty Ltd. They were then reviewed by our CFO Chris Herrick and then by the Chair Sue Morphet, before they were sent to the rest of the board for approval. Nick Walker, Greg Larsen and myself all approved them. Frank is yet to approve them indicating that he will want some changes. I don’t know what changes he will want, however, if they in any way change the essence of what everyone else has agreed to, I will be seeking legal advice.
In her email of 5 May 2020, Ms Morphet stated she was unable to resign as director and chairperson until the minutes of the April Board meeting had been signed off. She noted that the Draft April Minutes had been approved by all April Board meeting participants, but were awaiting Frank Walker’s review.
Mr Larsen proceeded to sign a ‘Notice of Resignation as Director and Secretary’ on 5 May 2020, the effect of which was that he ceased acting as a director of National Tiles from the close of the April Board meeting. Mr Larsen confirmed he had ‘received all money, consideration or benefits’ to which he was entitled as director and secretary of the Company, save for any entitlements under the ESOP.
Wording of shareholders’ agreement resolution
On 7 May 2020 at 10:48am, Mr Walker emailed Mr Larsen, copying in Nick Walker, Georgie Bell, and Rhonda Walker about the Draft April Minutes (‘7 May Walker email’). He said:
Please find enclosed a copy of the draft minutes sent last week and my proposed alteration below to [the] Shareholder’s Agreement, which I will be putting to the May board meeting. On Nick Wormald and Andrew Clyne’s advice, I have discussed this yesterday with Nick, Georgie and Rhonda and all have confirmed that my recollection reflects what was resolved which was:
It was resolved that the majority shareholder be invited to prepare and provide to the company for adoption a shareholder agreement (as defined in the ESOP rules) in terms approved by the majority shareholder for the purpose of giving effect to the requirements of the ESOP rules.
Mr Walker requested that the above form of resolution replace the existing resolution in the Draft April Minutes.
Later that morning, Mr Larsen emailed Ms Weir directly at 11:40am, providing the ‘alternative view’ of the relevant resolution, in the form proposed by Mr Walker. He requested that Ms Weir consider the change and, if appropriate, send him a copy of the changed draft before it was recirculated. At 11:48am, Ms Weir indicated she was comfortable with the proposed change as ‘it [was] in line with [her] recollection (albeit a shorter version)’. She said that if the rest of the Board was comfortable, she did not ‘see any potential issues arising’. She attached a revised version of the Draft April Minutes containing the form of resolution contended for by Mr Walker, which was in the following terms:
IT WAS RESOLVED THAT the Majority Shareholder be invited to prepare and provide to the Company for adoption a shareholders agreement (as defined in the ESOP rules) on terms approved by the Majority Shareholder for the purpose of giving effect to the requirements of the ESOP rules.
(‘Revised April Minutes’).
Ms Weir requested that Mr Larsen review the Revised April Minutes prior to their recirculation for Board approval. He responded by saying there was no need to recirculate the Revised April Minutes and that, as new chair of the Board, he would include the document in the papers for the next Board meeting scheduled for 21 May 2020 (‘May Board meeting’) for the purpose of its ‘ratification’.
Later in the day, on 7 May 2020 at 1:40pm, Ms Weir forwarded a copy of the Revised April Minutes by email to Mr Herrick for the purpose of approval at the next Board meeting. Mr Herrick replied, saying he had spoken with Mr Larsen that afternoon, and was ‘comfortable’ with the Revised April Minutes being tabled at the May Board meeting.
On 8 May 2020, Mr Walker emailed Ms Morphet and Mr Selak to provide detailed answers to the queries they had previously raised, including the status of the minutes of the April Board meeting (‘8 May Walker email’). He provided detailed reasons as to why the ESOP close out proposal would ‘most certainly be rejected’ at the May Board meeting, citing prevailing economic conditions, such as the predicted doubling of Australia’s unemployment rate and the shrinking of the construction industry, which led him to conclude that National Tiles no longer held the value it did in December 2019. Mr Walker stated that Ms Morphet and Mr Selak were ‘sophisticated investors’ and knew the Company intimately. He considered that the Company would benefit if Ms Morphet and Mr Selak decided to exercise their collective full entitlements ‘with a much welcome cash injection of up to circa $800k’. Mr Walker indicated that the drafting of a shareholders’ agreement was ‘progressing well and [was] due to be signed off by the [B]oard’ at the May Board meeting. Mr Walker noted there had been a shareholder resolution removing each of Ms Morphet and Mr Selak as directors of the Company and that the notification of changes to the Board composition would be made to the Australian Securities and Investments Commission (‘ASIC’) within 28 days. A record of the shareholder resolution was signed by Mr Walker, as sole member of National Tiles, on the same day as the 8 May Walker email.
Finally, Mr Walker explained in the 8 May Walker email that the Board minutes for the April meeting would be tabled at the May Board meeting for consideration and final adoption. Additionally, given that five of the seven directors present at the April Board meeting would be in attendance at the May Board meeting, Mr Walker had ‘absolute confidence that the minutes that [would] be adopted [would] reflect what the [B]oard believes was resolved at the April [Board] meeting’.
Mr Walker concluded his email by stating that the Frank Walker Family Trust has resolved to remove each of Mr Selak and Ms Morphet as directors of National Tiles, and that the Company would arrange for ASIC to be notified accordingly.
May 2020 Board meeting
The May Board meeting was held on 21 May 2020. The directors present were: Mr Larsen, Nick Walker, Ms Bell, Frank Walker, and Rhonda Walker. Mr Herrick, Mr Clyne, and Ms Weir were in attendance by invitation. At this point, HSF had been retained by FWG to prepare the shareholders’ agreement contemplated by the ESOP Rules and the April Minutes. Minutes of the May Board meeting (‘May Minutes’) relevantly record that:
(a) the Board resolved to approve the shareholders’ agreement, subject to minor amendments, and the final draft would be circulated to the ESOP participants;
(b) Mr Larsen had resigned from the Board effective 23 April 2020, but he wished to withdraw his resignation. The Board resolved to accept his withdrawal of resignation and authorised Mr Herrick to update ASIC;
(c) Mr Larsen was appointed as chairperson of the Board effective from the day of the May Board meeting; and
(d) the Board confirmed the Revised April Minutes to be a true and correct record of the April Board meeting and authorised Mr Larsen to sign the minutes as chairperson (which he had already done on the day prior).
This final version of the April Minutes contained the shareholders’ agreement resolution in the form proposed by Frank Walker in the Revised April Minutes. The document did not contain the Minority Protection Resolutions in the form set out in the Draft April Minutes. In particular, it did not include the reference to ‘market standard minority protections’, nor did it include the resolution concerning review of the shareholders’ agreement, in respect of which Chris Herrick and Nick Walker had proposed changes. For the sake of clarity, the April Minutes ultimately approved by the Board and signed off by Mr Larsen as chairperson expressed the relevant resolution as follows:
IT WAS RESOLVED THAT the Majority Shareholder be invited to prepare and provide to the Company for adoption a shareholders agreement (as defined in the ESOP rules) on terms approved by the Majority Shareholder for the purpose of giving effect to the requirements of the ESOP rules.
Events following May Board meeting
On 22 May 2020, Mr Herrick emailed Ms Morphet and Mr Selak, attaching the April Minutes, in the form confirmed by the Board at the May Board meeting. He foreshadowed that a shareholders’ agreement would be provided to them the next business day. Mr Herrick then provided a version of the April Minutes to Ms Morphet with ‘tracked changes from the version that was circulated for approval on 1 May’.
On 25 May 2020 at 9:45am, Ms Morphet forwarded the April Minutes and Mr Herrick’s accompanying emails to Mr Brown of PwC, and stated:
Nick [t]hese changes remove everything we agreed in the meeting[.] When are you free for me to discuss this with you[.]
Later in the afternoon of 25 May 2020, Ms Morphet emailed Mr Walker, Mr Nick Walker, Mr Larsen, and Mr Herrick, to ask whether the ESOP close out proposal of 28 April 2020 had been accepted by the Board. She also sought guidance on the current market value of National Tiles’ shares and any mid-term business forecasts to assist her and Mr Selak to ‘make some important decisions over the next few weeks’. On 26 May 2020, Mr Walker responded, confirming that the ESOP close out proposal had been formally rejected by the Board for the reasons conveyed to her on 8 May 2020. Mr Walker stated, among other things, that the Board did not intend to form a view on the current value of a National Tiles share, but would rely on an expert valuer to do so if and when the need arose. He also said that the Board did ‘not believe it prudent to speculate on the value of [Ms Morphet’s] options if exercised and put to the market under the terms of the adopted shareholder agreement’.
The ‘Proposal’ to Mr Larsen
The next day, on 26 May 2020, at 7:19am, Mr Larsen sent an email to Mr Walker entitled, ‘Record of Conversation’. Given the significance that has been attached to this correspondence by the plaintiff, it is appropriate to set out its contents in some detail:
Dear Frank
I thought I would note my understanding of the conversations we have had since the 15 April concerning my ongoing arrangements with the Walker family and National Tiles. I am very appreciative of your continued confidence in me and your offer, in perpetuity, to Colleen and myself. Given my ongoing role, to be discussed below, I would like to have a common understanding as to what it means so that I have a basis for decisions I should make in relation to the ESOP and in relation to my other business activities.
The story started with our conversation that the easiest way to resolve the ESOP and valuation questions might be to just acknowledge the work of the 3 NEDS [(non-executive directors)] by some sort of ex gratia payment and forget the ESOP and valuation outcomes.
You advised that you had put this idea to Nick(Wormald) and he did not like it.
You then made to me a unexpected offer which I recall as being along the following lines;
“Rhonda and I have discussed this and we will always believe that Greg Larsen has been the major reason, in any number of ways, why we have had such business success over the last 10 years. Yes, it would have been successful, but the way that you have worked me and developed Nick to successfully succeed me, means much of the success is due to you. This has resulted in the outcomes we now have.
Therefore irrespective, of the valuation and ESOP outcomes, we want to give you an annual retainer at the level of your current director[‘]s fees for the rest of your life, and, if you predecease Colleen, for the rest of her life. The only condition is that you will keep your current options( presumed at that point to be 4 million) and if/when we sell the company you will receive your share and , as there will no longer be a Company to pay the amount , the retainer will cease”
…
My quandary at the time was whether I had a conflict with my fellow directors in relation to the valuation and the ESOP. Obviously if the valuation was out of the money there was no issue.
…
My decision to myself, was that my first responsibility( ethically and legally) was as a director of National Tiles and that I must act to get those matters resolved in the Company’s best interests. I needed to proceed to arrive at a fair and equitable and legally indisputable outcome for my fellow directors and the other ESOP beneficiaries. This was especially so as they had no knowledge at that time of your separate undertaking to me. This is the approach that I took and would continue to do so until 30 April , when I assumed this “chapter” to be closed.
The valuation from PWC resulted in an outcome where the ESOP options vested at 80% which for me and the other 2 NEDS equalled 3.2 million options. The Exercise Period , as per the agreement, is a period commencing on the day following the Vesting Date and ending on 30 September 2030 or such other shorter period notified to you by the Board. Given that the NEDS were all leaving in April 2020, the date for the exercise of options was extended to 23 June 2020 - which is the timescale both John Selak and Sue Morphett [sic] are working to. Your conversation with me led me to believe that the 23/6/2020 time limitation does not apply to me as I would have a continuing role as with the company as an Advisory Director which I have relied upon and I do not intend to exercise any options at this time
As of 1 May, I have deemed for myself to have commenced a new chapter on my journey with the Walker family. We had a conversation last week and agreed that it would be sensible and practical for the Company for me to withdraw my resignation as director of National Tiles and to continue in that role for the foreseeable future and carry out the duties as Chairman of Directors. I agreed to do that.
Frank, I would appreciate your confirmation that the above record is in accordance with your understanding and therefore something that I can rely upon. If so, I will not be exercising my options in the immediate future and certainly not by 23 June 2020
…
(emphases added)
(‘26 May Larsen email’)
Intervention of lawyers
On 9 June 2020, Gilbert + Tobin sent a letter by email to Frank Walker on behalf of Ms Morphet and Mr Selak (‘9 June Gilbert + Tobin letter’). The letter asserted, among other things, that:
(a) Mr Walker had resiled from prior representations to Ms Morphet and Mr Selak that they would be compensated for their sustained contributions to National Tiles’ business over the years, including by way of cash payments under the ESOP;
(b) Mr Walker had been unjustly enriched as a result;
(c) the terms of a proffered shareholders’ agreement were ‘manifestly oppressive’, unreasonable, and ‘a marked departure from what may be typically expected in a shareholder[s’] agreement’. The shareholders’ agreement was also said to contain terms contrary to the resolutions passed at the April Board meeting, which required that it contain ‘market standard minority protections’;
(d) Mr Walker had interfered with the valuation process, appointed family members to the Board, and removed Mr Selak and Ms Morphet from the Board; and
(e) Mr Walker had amended the Draft April Minutes previously approved by all persons in attendance (other than him) to delete references to ‘market standard minority protections’.
The letter concluded by demanding payment to Mr Selak and Ms Morphet of $1,129,600 each within seven days, failing which Mr Selak and Ms Morphet would initiate proceedings for damages for misrepresentation and unjust enrichment, ‘at which time [the] dispute [would] become public’.
Falsification allegations by Mr Selak and Ms Morphet
On 24 July 2020, Ms Morphet sent an email to Mr Larsen (‘24 July Morphet email’). The email is not in evidence because it is headed ‘Without Prejudice’. Nevertheless, it is common ground that the email contained a direct allegation by Ms Morphet that the April Minutes had been falsified and fabricated.
On 10 August 2020, Mr Larsen replied to the 24 July Morphet email. His responding email, which was not marked ‘Without Prejudice’, relevantly stated that:
(a) each of the remaining directors (including himself) who attended the April Board meeting disagreed with Ms Morphet’s recollection of the April Board meeting ‘insofar as the discussion and resolution concerning the preparation of a new shareholders’ agreement [was] concerned’. He said it was ‘unsurprising there are differing recollections about that part of the meeting given how spirited the discussion became at times and the personal interests of some of the participants in the subject matter of the debate’;
(b) ‘there [was] no basis for [Ms Morphet’s] comments about documents being falsified and fabricated’;
(c) Ms Morphet’s ‘unsubstantiated “concern” that documents [were] being deleted or edited in breach of the criminal law is entirely unwarranted’;
(d) allegations of ‘falsification, fabrication, document destruction and criminal conduct’ had been made against himself and other directors, including Mr Walker, Nick Walker, Rhonda Walker, and Ms Bell. He characterised such allegations as unwarranted, unsubstantiated, and defamatory and stated that each of the directors expressly reserved their rights in respect of the allegations; and
(e) he emphasised the ESOP Rules, which bind the Company and the option holders and require that any option holder must (on exercise of their options) enter into a shareholders’ agreement on terms approved by the Majority Shareholder, irrespective of any resolution passed at the April Board meeting.
On 13 August 2020, Mr Selak emailed Mr Larsen and relevantly stated:
[T]he wishes of the majority shareholder (Frank) should not be confused with what’s in the best interests of the company. As Directors, our duty is to act in the best interests of the Company.
The ESOP rules provide the Board with significant discretion throughout the close‑out process. Why would it not be in the Company’s best interests for the Shareholders’ Agreement to contain standard market minority shareholder protection provisions for the Company’s ESOP participants? This is especially so for the three executives with vested options, particularly in light of what we have seen from Frank over the previous 3 months. I refer you to Sue’s email to Frank on 4 April 2020, wherein she said;
“The whole Board (not just the 3 independent NEDs), has a higher duty of care to the executive ESOP participants because they aren’t sitting around the boardroom table when these critical decisions are being made. They trust that the whole Board will do the right thing by them and by the company. Allowing anyone to change the rules now would be a breach of that trust.”
In respect of the [April] [M]inutes:
* On 1 May 2020, you replied to Rebecca’s email approving the minutes which rightly contained the minority shareholder protection provisions
* You then cut a deal with Frank
* At the Board meeting held in May 2020, as Chairman, you signed a subsequent version of the minutes of the 28 April 2020 meeting as being “true and correct” even though they fundamentally varied from the draft minutes you approved on 1 May 2020.
You would have to admit that the aesthetics of this aren’t good.
…
That’s the problem when you lose your objectivity and allow Frank’s lawyers to rewrite history.
Greg, once you and Frank have been served and the Statement of Claim is lodged with the Court, this matter will effectively be in the public domain. Naturally, both you and Frank will have the opportunity to defend your conduct both before the Court and in the court of public opinion. I hope for your sake, that the deal you cut with Frank, was worth it.
(‘13 August Selak email’)
Mr Selak’s email was marked ‘Without Prejudice’, but he now accepts that it is not so.
On 18 August 2020, Mr Larsen replied to the 13 August Selak email and stated that he had already addressed the points raised in his earlier correspondence to Ms Morphet dated 10 August 2020, and would not otherwise provide a ‘detailed response to the inappropriate and defamatory accusations’ set out in the 13 August Selak email. He observed that Mr Selak’s use of the ‘Without Prejudice’ descriptor was misplaced and put Mr Selak ‘on notice that each of the directors of National Tiles … expressly reserve [their] rights in respect of the allegations set out in [Mr Selak’s] email …’
August 2020 Board meeting
The Board (now constituted by Frank Walker, Rhonda Walker, Nick Walker, Georgie Bell, Greg Larsen, and a new director, Mr Peter Davis) met again on 19 August 2020 (‘August Board meeting‘). At this meeting, the topic of the April Minutes was again discussed, as was the escalating dispute with Mr Selak and Ms Morphet. The minutes for the August Board meeting (‘August Minutes’) record that because of an unspecified conflict of interest on the part of Mr Larsen, Nick Walker took over the role as chairperson for this aspect of the meeting. The August Minutes note that Ms Morphet and Mr Selak had disputed the form of the April Minutes as they related to the wording of the shareholders’ agreement resolution. The August Minutes further state:
It was noted that the form of the … April [M]inutes was different to a draft of the minutes of that meeting that had been circulated by Ms Rebecca Weir of Boardroom … and that had been informally confirmed by several directors prior to the [May Board meeting].
The August Minutes recorded correspondence passing between Gilbert + Tobin (on behalf of Mr Selak and Ms Morphet) and HSF (on behalf of Mr Walker), along with the 24 July Morphet email, Mr Larsen’s responsive email of 10 August 2020, the 13 August Selak email, and Mr Larsen’s response of 18 August 2020, had been uploaded onto the Diligent board platform. This correspondence was tabled and noted. The Board resolved that the April Minutes be ratified.
Other evidence led by parties
In their affidavit material, the parties introduced further contextual evidence, in addition to setting out the above chronology of events.
In the first Whiting affidavit, Ms Whiting referred to contemporaneous file notes taken at the April Board meeting by Mr Herrick (‘April Board meeting file notes’), which, among other things, record: ‘minority protections in the s/holders agreement’. She also referred to the 26 May Larsen email, which was said to record prior discussions between Mr Larsen and Mr Walker, as well as a proposal that had apparently been put by Mr Walker to Mr Larsen at an earlier time (described by the plaintiff in his pleadings and affidavit material as ‘the Proposal’).
In the second Whiting affidavit, Ms Whiting deposed that she was instructed by Mr Selak, and believed, that the Minority Protection Resolutions referred to in the Draft April Minutes were passed at the April Board meeting. She said she had corresponding instructions from Ms Morphet. Regarding the Proposal, Ms Whiting observed that the defendants do not admit (but do not deny) the Proposal in their pleadings. On 12 November 2021, Gilbert + Tobin wrote to HSF, seeking an explanation for the non‑admission and have since complained about the adequacy of the response received.
In the third Whiting affidavit, Ms Whiting exhibited a handwritten note dated 5 May 2020, which had been produced by Mr Larsen pursuant to his subpoena (‘Larsen handwritten note’). The plaintiff made various submissions about the interpretation and significance of the Larsen handwritten note.
In the third Holloway affidavit, Mr Holloway exhibited a copy of the constitution of National Tiles (‘National Tiles Constitution’), which was signed by Mr Walker and dated 30 August 2001. At that time, the Company was known as Statewide Ceramics Pty Ltd. The National Tiles Constitution provides, among other things, that ‘[a] resolution of the Directors must be passed by a majority of votes cast by Directors entitled to vote on the resolution’ (cl 13.2.1) and that ‘the chairman of the meeting has a casting vote if necessary in addition to any vote the chairman has in the chairman’s capacity as a Director’ (cl 13.2.2). Mr Holloway also exhibited the Memorandum of Association of the Company when it was known by the earlier name of Jamela Pty Ltd (‘National Tiles Memorandum of Association’). That document states, among other things, that minutes of Board meetings ‘shall be signed by the chairman of the meeting at which the proceedings were held or by the chairman of any succeeding meeting’ (cl 62(c)).
In addition, Mr Holloway provided further information concerning the circumstances of the April Board meeting. Mr Holloway said he had been informed by Mr Herrick, and believed, that the usual practice of National Tiles was to conduct Board meetings in person. However, because the April Board meeting occurred during COVID-19 restrictions, it was held remotely and was apparently unrecorded. Mr Herrick instructed Mr Holloway that he attended the April Board meeting in full and that the Sample Resolution prepared by Mr Brown of PwC was discussed. Mr Herrick relayed to Mr Holloway that, at the April Board meeting, Mr Selak and Ms Morphet expressed their views that the shareholders’ agreement should be drafted to include minority protections, but the Board did not agree or resolve for that to occur, nor was the Sample Resolution passed. Mr Herrick informed Mr Holloway that the expression, ‘minority protections in the s/holders agreement’, which is referred to in the April Board meeting file notes, records the fact that discussions took place at the meeting about whether the shareholders’ agreement should include minority protections. However, he informed Mr Holloway that the words did not record any agreement about that issue.
It is important to note that, aside from the solicitors’ affidavits prepared by Ms Whiting and Mr Holloway for the purpose of this application, the parties have not adduced any direct evidence from any participant or observer at the April Board meeting about what transpired at that meeting. The same can be said for the May and August Board meetings.
Legal professional privilege and the crime or fraud exception
Statute or common law?
The parties’ written submissions initially proceeded on the basis that the defendants’ privilege claims (and the plaintiff’s opposition to those claims) should be determined pursuant to the statutory framework found in the Evidence Act 2008 (Vic) (‘Evidence Act’). However, at the hearing of the matter, the parties agreed that the correct approach was to consider the plaintiff’s challenge to the opposed documents in accordance with common law principles. It is appropriate to briefly explain why that approach is correct.
Section 125(1)(a) of the Evidence Act provides:
125 Loss of client legal privilege—misconduct
(1) This Division does not prevent the adducing of evidence of—
(a)a communication made or the contents of a document prepared by a client or lawyer (or both), or a party who is not represented in the proceeding by a lawyer, in furtherance of the commission of a fraud or an offence or the commission of an act that renders a person liable to a civil penalty; …
Section 125 is housed within Part 3.10 of the Evidence Act, which deals with privileges. That provision should be read together with s 131A of the Evidence Act, which is also found in Part 3.10. Section 131A relevantly states:
131A Application of Part to preliminary proceedings of courts
(1) If—
(a)a person is required by a disclosure requirement to give information, or to produce a document, which would result in the disclosure of a communication, a document or its contents or other information of a kind referred to in Division 1, 1C or 3; and
(b)the person objects to giving that information or providing that document—
the court must determine the objection by applying the provisions of this Part (other than sections 123 and 128) with any necessary modifications as if the objection to giving information or producing the document were an objection to the giving or adducing of evidence.
(2)In this section, disclosure requirement means a process or order of a court that requires the disclosure of information or a document and includes the following—
(a)a summons or subpoena to produce documents or give evidence; …
At the hearing, Ms Mintz of counsel for the plaintiff submitted that, for s 125 of the Evidence Act to apply, the ‘person’ referred to in s 131A, being the subject of a ‘disclosure requirement’, must be the same person who objects to disclosure of the information. On that basis, the statutory framework relating to privileges set out in Part 3.10 of the Evidence Act has no application here because it is not the PwC entities, Mr Larsen, or HSF, as addressees of the subpoenas, who are objecting to the disclosure of the documents in question. Rather, it is the defendants who have voiced objections and claimed privilege over the opposed documents.
This construction of the legislative provisions finds support in the decision of Connock J in Alphington Developments Pty Ltd v Amcor Ltd (No 2) (‘Alphington’).[5] Alphington was an appeal and cross-appeal from a decision of an Associate Justice relating to claims of legal professional privilege made by Amcor Developments Pty Ltd in respect of documents produced to the Court by a third party. Before the Associate Justice, each party maintained that the questions of privilege were to be determined under ss 117, 118, and 119 of the Evidence Act and not the common law. On appeal, it was argued that the Court was led into error by applying those provisions of the Evidence Act, rather than common law principles.
[5][2018] VSC 293.
Justice Connock held that:[6]
[6]Ibid [25]–[26] (emphases in original).
[W]here a person is required to produce documents in answer to a subpoena, s 131A of the [Evidence] Act is only engaged where:
(a)‘a person’ is required to produce documents pursuant to the subpoena; and
(b) ‘the person’ objects to providing the document/s.
Consequently if … ‘a person’ producing the documents … is not ‘the person’ objecting to the documents being provided … then s 131A(1) is not engaged and ss 118 and 119 of the [Evidence] Act do not apply.
As unsatisfactory as that may appear,[7] the language of the statute is clear and the position is the subject of settled authority.[8]
[8]Citing, by way of example, New South Wales v Public Transport Ticketing Corporation [2011] NSWCA 60, [32] (Allsop P); Singtel Optus Pty Ltd v Weston (2011) 81 NSWLR 526, 532 [28] (White J); Cargill Australia Ltd v Viterra Malt Pty Ltd (No 8) [2018] VSC 193, [42] (Macaulay J).
Having regard to the analysis of Connock J in Alphington, I am persuaded that the provisions of the Evidence Act are not relevant for the purposes of this application. As it is the defendants who are claiming privilege over the opposed documents, rather than the addressees of the subpoenas themselves, by reason of s 131A of the Evidence Act, s 125 has no work to do. Instead, the principles of the common law apply.
Position at common law
At common law, the legal advice limb of professional privilege protects from disclosure a communication made or a document prepared for the dominant purpose of a lawyer providing, or a client obtaining, legal advice or services.[9] In Esso Australia Resources v Federal Commissioner of Taxation, Gleeson CJ, Gaudron and Gummow JJ explained the rationale of the privilege in this way:
Legal professional privilege (or client legal privilege) protects the confidentiality of certain communications made in connection with giving or obtaining legal advice or the provision of legal services, including representation in proceedings in a court. In the ordinary course of events, citizens engage in many confidential communications, including communications with professional advisers, which are not protected from compulsory disclosure. The rationale of the privilege has been explained in a number of cases, including Baker v Campbell [(1983) 153 CLR 52], and Grant v Downs [(1976) 135 CLR 674] itself. The privilege exists to serve the public interest in the administration of justice by encouraging full and frank disclosure by clients to their lawyers …[10]
[9]See Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 201 CLR 49, 73 [61] (Gleeson CJ, Gaudron and Gummow JJ) (‘Esso Australia’), affd Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 213 CLR 543, 552 [9] (Gleeson CJ, Gaudron, Gummow and Hayne JJ). See also Australian Crime Commission v Stewart (2012) 87 ATR 31, 36 [7] (Stone J); AWB Ltd v Cole (No 5) (2006) 155 FCR 30, 44 [41] (Young J) (‘AWB’); Attorney‑General (NT) v Kearney (1985) 158 CLR 500, 511 (Gibbs CJ) (‘Kearney’).
[10]Esso Australia, 64 [35].
To enliven the protection of legal privilege, the onus is on the party claiming privilege to establish that the relevant communications were undertaken for the dominant purpose of giving or obtaining legal advice.[11]
[11]See, eg, Federal Commissioner of Taxation v Pratt Holdings Pty Ltd (2005) 60 ATR 466, 477–81 [30] (Kenny J); Mitsubishi Electric Pty Ltd v Victorian Workcover Authority (2002) 4 VR 332, 337 [11] (Batt JA).
However, communications made in furtherance of a crime or fraud are not protected by legal professional privilege, ostensibly because the privilege never attaches to them in the first place.[12] Whilst the concept is sometimes referred to as an ‘exception’ to legal professional privilege or an instance of the loss of such privilege, it has also been said that it is the illegal object of such communications that prevents them from being privileged at the first instance.[13]
[12]Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501, 556 (McHugh J) (‘Propend’), citing R v Cox and Railton (1884) 14 QBD 153; Varawa v Howard Smith & Co Ltd (1910) 10 CLR 382; Kearney, 515 (Gibbs CJ); Sut v Nominal Defendant (1968) 2 NSWR 78; LT & KT v Conlon Lensworth Interstate (Vic) Pty Ltd [1970] VR 293.
[13]Propend, 556 (McHugh J), citing Carter v Northmore Hale Davy & Leake (1995) 183 CLR 121, 163.
The principles concerning the crime or fraud exception to legal privilege at common law were comprehensively set out by Young J in AWB Ltd v Cole (No 5) (‘AWB’).[14] In that case, AWB Ltd, whose conduct was the subject of a Royal Commission, sought a declaration from the Federal Court that some 900 documents were, or recorded, confidential communications that were the subject of legal professional privilege and were therefore protected from inspection.[15] An issue that arose for determination was whether legal privilege attached to AWB Ltd’s documents, for which legal advice had been obtained, in the event that such advice had been procured ‘in furtherance of a fraud, wrongful conduct or sham transaction’.[16] After inspecting the relevant documents, Young J concluded that the documents in question were not protected by legal privilege as they were, ‘prima facie, brought into existence in furtherance of an improper and dishonest purpose’; namely, the inflation of certain contracts to extract payment out of a United Nations escrow account to satisfy a compensation claim by the Grain Board of Iraq.[17] The evidence established that the transaction was ‘deliberately and dishonestly structured’ by AWB Ltd to misrepresent the true nature of certain transport fees and to ‘work a trickery on’ the United Nations.[18] His Honour considered that it would be contrary to public policy for the privilege to enure in communications of that kind.[19] In arriving at that conclusion, Young J explained the rationale of the crime or fraud exception to legal privilege as follows:[20]
Communications between a lawyer and client which facilitate a crime or fraud are not protected by legal professional privilege. This principle is often referred to as the ‘fraud exception’ to legal professional privilege, but this does not capture its full reach: Attorney-General (NT) v Kearney (1985) 158 CLR 500 at 515; [Commissioner of Australian Federal Police v] Propend [Finance Pty Ltd (1997) 188 CLR 501] at 546; Clements, Dunne & Bell Pty Ltd v Commissioner of Australian Federal Police (2001) 48 ATR 650; 188 ALR 515 at [30].
The principle encompasses a wide species of fraud, criminal activity or actions taken for illegal or improper purposes: see North J‘s review of the authorities in Clements[, Dunne & Bell Pty Ltd v Commissioner of Australian Federal Police (2001) 188 ALR 515] at [35]–[44]. The scope of conduct caught by the principle has been articulated in a variety of ways, often without particular precision: [Commissioner of Australian Federal Police v] Propend [Finance Pty Ltd (1997) 188 CLR 501] at 545. Classic formulations have been spoken of communications in furtherance of a ‘crime or fraud’: R v Cox (1884) 14 QBD 153 at 165; a ‘criminal or unlawful proceeding’: Bullivant v Attorney-General (Vic) [1901] AC 196 at 201; ‘any unlawful or wicked act’: Annesley v Anglesea (1743) 17 State Tr 1139 at 1229; and ‘all forms of fraud and dishonesty such as fraudulent breach of trust, fraudulent conspiracy, trickery, and sham contrivances’: Crescent Farm (Sidcup) Sports Ltd v Sterling Offıces Ltd [1972] Ch 553 at 565. In [Attorney-General (NT) v] Kearney [(1985) 158 CLR 500], the High Court applied the principle to deny legal professional privilege to legal advice obtained by the Northern Territory Government which was prima facie a ‘deliberate abuse of statutory power’ to defeat a land claim under the Aboriginal Land Rights (Northern Territory) Act 1976 (Cth). In his reasons for judgment, Gibbs CJ (with whom Mason and Brennan JJ agreed) stated at 515 that ‘legal professional privilege will be denied to a communication which is made for the purpose of frustrating the processes of the law itself, even though no crime or fraud is contemplated’.
…
Where a client is engaged in fraudulent conduct, communications with his or her lawyer in furtherance of the fraud are not privileged, regardless of whether the lawyer is a party to the fraud or not: Clements[, Dunne & Bell Pty Ltd v Commissioner of Australian Federal Police (2001) 188 ALR 515] at [213]. The principle applies to communications passing between a client and lawyer where the lawyer is innocent of the fraud or improper purpose: R v Bell; Ex parte Lees (1980) 146 CLR 141 at 145. Further, the fraud need not be that of the client or the lawyer; it may be that of a third party: Capar v Commissioner of Police (1994) 34 NSWLR 715; R v Central Criminal Court; Ex parte Francis [1989] AC 346, cited with approval in Clements[, Dunne & Bell Pty Ltd v Commissioner of Australian Federal Police (2001) 188 ALR 515] at [217]–[218].
It is important to bear in mind that the fraud exception is based on public policy grounds. The principle is sufficiently flexible to capture a range of situations where the protection of confidential communications between lawyer and client would be contrary to the public interest: see [Attorney-General (NT) v] Kearney [(1985) 158 CLR 500] at 514–515; R v Cox at 614. This aspect of the principle is reflected in the statement that ‘[t]he privilege takes flight if the relationship between lawyer and client is abused’: Clarke v United States of America 289 US 1 at 15 (1933); see also [Attorney-General (NT) v] Kearney [(1985) 158 CLR 500] at 514 and 524.
[14](2006) 155 FCR 30, which was cited by McKerracher J in Lane v Admedus Regen Pty Ltd [2016] FCA 864, [81] and Daubney J in Deppro Pty Ltd v Hannah (2009) 1 Qd R 1, 6 [18], 8 [21].
Whilst the April Board meeting file notes are clearly a contemporaneous document, so too is the 1 May Walker email, in which Mr Walker directly contested the accuracy of the Draft April Minutes. Again, I note that the Court does not have the benefit of direct evidence from those who attended the April Board meeting. Regardless, the contemporaneous documents will, no doubt, be put to key witnesses at trial to confirm their recollection of events. Whether the hearsay evidence of Mr Herrick’s recollection of events at the April Board meeting is at odds with his involvement in reviewing and marking up the Draft April Minutes is a matter for another day. Any apparent inconsistency does not, on its own, or in combination with other evidence, support a prima facie conclusion of falsity.
For similar reasons, I am unconvinced that the Larsen handwritten note dated 5 May 2020 constitutes compelling circumstantial evidence to support the inference the April Minutes have been prima facie falsified. It is unclear precisely what the note records, although I accept that it may record a discussion with Nick Wormald of HSF in connection with the ESOP. The phrase, ‘expose to inequity’ (assuming that is what it says), is difficult to contextualise. I am unsure how it relates to the allegations of falsification. Whilst the plaintiff interprets certain words to read as: ‘NW – don’t want to be forming a new – “sophisticated minority”’, I am not satisfied that the words should be read in that way. An alternative and more likely interpretation of those words is: ‘NW – don’t want to be forming a view – “sophisticated investors”’. Other examples of the rendering of the letters ‘n’ and ‘s’ in the file note support that reading. Further, the expression ‘sophisticated investors’ was in fact a phrase used by Mr Walker a few days later in the 8 May Walker email, whereby he explained to Ms Morphet and Mr Selak why their ESOP close out proposal would ‘most certainly be rejected’ at the May Board meeting and described them as ‘sophisticated investors’ who knew the Company intimately. Further, it is not apparent to me how the Larsen handwritten note provides insight into what was ‘really going on’ at National Tiles, as suggested by the plaintiff.
I am not persuaded that the Proposal should be accorded the weight given to it by the plaintiff as circumstantial evidence of the alleged falsification. Whilst the plaintiff suggests that Mr Larsen’s initial approval of the Draft April Minutes (on 1 May 2020) occurred prior to Mr Walker making him the Proposal, this is ultimately a matter of speculation. As the plaintiff quite properly concedes, the 26 May Larsen email (which refers to the Proposal) does not reveal the precise timing of various conversations and events referred to in the document. In the first paragraph of the 26 May Larsen email, Mr Larsen refers to his understanding of conversations with Mr Walker ‘since 15 April concerning his ongoing arrangements with the Walker family and National Tiles’. This assumes at least some of the conversations pre-dated the April Board meeting (held on 23 April 2020) and the dispute concerning the April Minutes. When referring to Mr Walker’s ‘unexpected offer’ to pay Mr Larsen ‘an annual retainer at the level of his current director fees for the rest of [his] life’, he notes that this was accompanied by the explicit condition that he keep his current options and, in the event the Company was ever to be sold, he would receive his share. Mr Larsen then refers to his primary responsibility to act legally and ethically as a director of National Tiles, given the separate undertaking from Mr Walker had not been disclosed to his fellow directors. He described this as the approach he took until 30 April, when he ‘assumed this “chapter” to be closed’. I assume, but cannot be sure, that this is a reference to Mr Larsen’s pre-planned resignation as a director in accordance with the October 2019 succession plan. Mr Larsen then refers to a ‘new chapter on his journey with the Walker family’ commencing 1 May and a conversation he had with Mr Walker in the week prior to the 26 May Larsen email, concerning the withdrawal of his resignation as a director of the Company and his future duties as chairperson. Whilst the defendants do not admit the existence of the Proposal, even taking the 26 May Larsen email at face value, there is no clear nexus between the Proposal and Mr Larsen’s withdrawal of his resignation as director, on the one hand, and the changing of his position in relation to the Draft April Minutes, on the other hand. The email makes no mention of either the April Board meeting, the Draft April Minutes, the relevant shareholders’ agreement resolution, or the topic of minority shareholder protections.
Rather than conclude on a prima facie basis that the Proposal was made to ‘buy off’ Mr Larsen and influence his position in relation to the relevant resolution recorded in the April Minutes, on the evidence currently before the Court, there is another potential explanation for the Proposal that seems more plausible. That explanation can be found in the terms of the 26 May Larsen email itself. After recording that he had received an offer to be paid an annual retainer commensurate with his director’s fees on an ongoing basis, and subject to his understanding that a deadline of 23 June 2020 for the exercise of his options did not apply, Mr Larsen twice stated that he did not intend to exercise his options under the ESOP. Far from the Proposal being ‘inexplicable on any rational commercial basis’ (as contended by the plaintiff), it may be that the statement by Mr Larsen — that he did not intend to exercise his options — represented his consideration for the ongoing payment of an annual retainer. It is unclear on the evidence whether Mr Larsen ultimately did in fact refrain from exercising his options in exchange for ongoing annual retainer fees and whether the annual retainer was commensurate with the value of that concession. The full context and consequences of the Proposal (assuming it was in fact made and accepted) will, no doubt, be illuminated at trial.
Ultimately, although there is some inferential evidence relied upon by the plaintiff to support the case of falsification of the April Minutes, there are conflicting inferences of greater weight that suggest an absence of reasonable grounds to believe there has been a falsification of a book under s 1307(1) of the Corporations Act. Further, there is insufficient prima facie evidence that the April Minutes are false and not what they purport to be.
Other contextual matters support these conclusions. For instance, it is noteworthy that there was no complaint about the change to the Draft April Minutes until at least 25 May 2020, when Ms Morphet forwarded the April Minutes to Mr Brown of PwC and complained about the removal of everything allegedly agreed to at the April Board meeting. Further, a direct challenge to the April Minutes was not made until the 9 June Gilbert + Tobin letter, suggesting Mr Walker had wrongly amended the Draft April Minutes, and when Ms Morphet sent the 24 July Morphet email to Mr Larsen, directly alleging that the April Minutes had been falsified and fabricated. According to the chronology, the allegation of falsification only came about after Mr Walker confirmed, on 26 May 2020, that the ESOP close out proposal put forward by Ms Morphet and Mr Selak on 28 April 2020 (by which they had sought to be paid $2.26 million in exchange for the cancellation of their options) had been formally rejected by the Board for the reasons already provided to Ms Morphet and Mr Selak in the 8 May Walker email.
Moreover, the April Minutes contemplate a process for the preparation of a shareholders’ agreement in terms that appear aligned with the definition of a ‘Shareholders’ Agreement’ set out in the ESOP and the terms of the offer letter accepted by Mr Selak and Ms Morphet on 20 April 2016 concerning the ESOP. It is reasonable to infer that the Board preferred to adopt a resolution consistent with the ESOP, rather than a resolution potentially inconsistent with the ESOP and which granted rights to option holders that arguably exceeded those rights conferred by the offer letter.
Whilst the parties made submissions apparently directed to the presence or absence of a motive for the falsification of the April Minutes, I note that motive is not, strictly, an element of the offence under s 1307(1), although it may be relevant to establishing its contravention. In that context, I accept that Mr Walker and his family members effectively controlled the Board. Further, at all times, it was within the power of the Board to amend, alter, or extinguish the resolutions previously passed by the Board and recorded in its minutes of meetings. Given that is the case, the question may be asked whether there was any strategic advantage to Mr Walker engaging in conduct that resulted in the alleged falsification? Even if, as the plaintiff suggests, Mr Walker’s true position was that he did not want any minority shareholders in National Tiles, it is not entirely clear how the alleged falsification was said to serve that purported agenda.
The above findings and observations mean I am not satisfied, on a prima facie basis, that Mr Walker and Mr Larsen knew or intended that the April Minutes falsely recorded, or were reckless about the April Minutes falsely recording, a resolution that was not passed by the Board. As regards the test of recklessness in particular, there is no evidence that Mr Walker or Mr Larsen were actually aware of a substantial risk that the alleged falsification would occur and, having regard to the circumstances known to them, they were not justified in taking that risk.
Are the May and/or August Minutes false?
There is insufficient evidence to support a prima facie case of the falsification of the May Minutes insofar as they approved the April Minutes. That is because, for the reasons already discussed, the April Minutes are not, themselves, prima facie false. As already explained, the Board, as constituted at the time of the May Board meeting, resolved to approve the Revised April Minutes and authorised Mr Larsen to sign those minutes in accordance with cl 62(c) of the National Tiles Memorandum of Association and s 251A(2) of the Corporations Act. Pursuant to s 251A(6), the May Minutes are presumed to be evidence of the resolution they contain, unless the contrary has been proved. I am not satisfied that the contrary has been proved to the requisite standard. Relatedly, the May Minutes cannot be in furtherance of the initial alleged offence of falsification of the April Minutes under s 1307(1) of the Corporations Act if there are no reasonable grounds for believing there has been such an offence in the first place. I have found there are no such reasonable grounds.
Similarly, I do not accept that the ratification of the April Minutes by the August Minutes was prima facie in furtherance of the initial offence and itself constitutes an offence under s 1307(1). The Board might have equally reconsidered the shareholders’ agreement resolution contained in the April Minutes and voted on it anew with the same result. It is difficult to see how such reconsideration of the issue would have amounted to falsification. Further, in the August Minutes, the Board expressly noted that the April Minutes differed from the Draft April Minutes circulated by Ms Weir and informally confirmed by several directors. Importantly, the August Minutes also recorded that Ms Morphet and Mr Selak disputed the accuracy of the April Minutes. This annotation is more consistent with the existence of a genuine dispute between Board members about what was determined at an earlier board meeting, rather than conduct that results in the falsification of the minutes of the earlier meeting.
Whilst the plaintiff says it is unclear whether Rhonda Walker and Georgie Bell excused themselves from voting at the relevant Board meetings in relation to the ESOP (including the May and August Board meetings) in circumstances where they were obliged to do so, this is not a matter that would render false the minutes derived from such meetings. It may, however, give rise to a separate question of whether the relevant resolutions were validly made. But, that is beyond the scope of this interlocutory application.
To the extent the plaintiff suggests that the changes to the Board’s composition prior to the May and August Board is relevant to the question of falsification, I am not satisfied that issue is particularly relevant because Mr Walker always had the ability, through FWG, to pass a shareholder resolution changing the composition of the Board. The appointments of Ms Walker and Ms Bell occurred several months prior, on 21 February 2020, and purportedly on account of Mr Walker’s health, rather than because of a dispute over the conduct of meetings of the Board which had not yet been held.
Further, it is important to note that the August Board meeting was also attended by Peter Davis, the newest member of the Board. As a Board member, he was partly responsible for the ratification of the April Minutes. However, the plaintiff has not sought to impugn his conduct. There is no evidence to suggest, and the parties did not submit that, Mr Davis had any personal interest in the outcome of the August Board meeting or the treatment of the April Minutes.
I am not convinced that the mental element of the offence under s 1307(1), by the alleged falsification of the May Minutes and/or August Minutes, is made out on a prima facie basis because there is no evidence that Mr Walker and Mr Larsen were reckless about, or knew or intended that:
(a) the May Minutes were false to the extent they approved the allegedly falsified April Minutes; and
(b) the August Minutes were false insofar as they ratified the April Minutes.
In particular, I am not satisfied there is evidence that Mr Walker or Mr Larsen were aware of a substantial risk that the alleged falsification would occur and, having regard to the circumstances known to them, they were not justified in taking that risk.
Did Frank Walker and/or Greg Larsen otherwise engage in conduct resulting in the falsification of any of the minutes referred to above?
In the reasons above, I have canvassed the relevant conduct relied upon by the plaintiff and said to result in the falsification of the Draft April Minutes, the Revised April Minutes, and the April, May, and August Minutes. I am not satisfied there is a prima facie case that Mr Walker and/or Mr Larsen have otherwise engaged in any other conduct that resulted in the falsification of any of these minutes.
Did Frank Walker and/or Greg Larsen know that any documents referred to above were false, or intend they be made false, or were they reckless that the documents were made false?
I have already addressed this question in the above analysis. In summary, there are no reasonable grounds to believe Mr Walker or Mr Larsen possessed any of these mental states.
Whether the plaintiff is entitled to argue the crime or fraud exception applies on some alternative basis?
Having regard to the manner in which the interlocutory application was prepared and argued, I do not accept, as a matter of procedural fairness and given the serious consequences of overriding legal professional privilege, that it is appropriate for the plaintiff to be entitled to argue that the fraud or crime exception arises on a basis other than s 1307(1) of the Corporations Act. An alleged contravention of s 1307(1) is the case the defendants have sought to meet in protecting their claims for legal professional privilege over the opposed documents. Reference was made by the plaintiff to s 1308(1) of the Corporations Act for the first time at the conclusion of the hearing. The plaintiff did not address, by reference to the evidence, the specific elements of the fault‑based offence under s 1308(1), which relates to the making of false or misleading documents. Nor did he address how the opposed documents were prepared in furtherance of that offence. The allegation of contravention of s 1308(1) was not made in clear and definite terms. The same can be said for the allegation that there is evidence of a broader species of fraud so as to invoke the crime or fraud exception. That allegation is simply too nebulous. It has not been put on a basis that the defendants can fairly address or that the Court can properly consider.
Conclusion on whether prima facie case or reasonable grounds for believing crime or fraud has been committed
Having carefully weighed the quality and strength of the evidence relied upon by the plaintiff in contending for the crime or fraud exception, I am of the opinion that there is an absence of a prima facie case or reasonable grounds for believing that a crime or fraud has been committed that would disentitle the defendants from invoking legal professional privilege over the opposed documents. It may be that, on the basis of more complete and compelling evidence, the plaintiff is ultimately proven to be correct in his recollection of events at the April Board meeting. In the event that he is so vindicated, he would be in a strong position to displace the presumption of accuracy of the April Board Minutes conferred by s 251A(6) of the Corporations Act. However, in the context of the present application, the evidence, which is entirely circumstantial and hearsay in nature, does not go so far as to establish a prima facie case that Mr Walker falsified the Draft April Minutes or the revised April Minutes, or that Mr Walker and/or Mr Larsen falsified the April Minutes or the later Board minutes, which approved and then ratified the April Minutes.
Whether opposed documents are communications in furtherance of alleged crime or fraud?
Because I have found there is no prima facie case for the commission of a crime or fraud, it is strictly unnecessary for me to consider whether the opposed documents were also prima facie communications in furtherance of, or as a step preparatory to, the alleged crime or fraud (namely the alleged contravention of s 1307(1) of the Corporations Act). This second part of the inquiry is redundant. Nevertheless, given the point was argued at the hearing and in the event I am wrong in my conclusion about the crime or fraud, I will briefly address the second stage of the inquiry.
Scope of HSF’s and PwC entities’ retainer
As previously explained, the evidence discloses that HSF was engaged:
(a) on 24 December 2015 by FWG to provide legal advice on the terms of the ESOP;
(b) on or around 27 April 2020 to provide legal advice to both National Tiles and FWG in relation to the ESOP and the associated shareholders’ agreement. This is notwithstanding that the HSF file only identifies National Tiles as the client and the May Minutes record that HSF was acting for FWG in connection with the shareholders’ agreement; and
(c) on 17 June 2022 by National Tiles and FWG in relation to anticipated proceedings by Mr Selak.
Further, PwC was engaged:
(a) in mid-April 2020 by National Tiles to provide legal advice and services (including taxation advice) regarding the closing out of the ESOP; and
(b) in August 2020 by National Tiles to provide advice in relation to an email sent in late July 2020 by Ms Morphet, concerning the April Minutes (which I take to be a reference to the 24 July Morphet email).
PwCS was separately engaged by National Tiles to undertake an independent valuation of the shares of the Company for the purpose of the ESOP.
Having regard to the descriptions of the opposed documents in the privilege schedules, the evidence filed in the application, and the parties’ respective submissions, I consider that the evidence, as it presently stands, is insufficient to support a prima facie finding that the relevant communications were in furtherance of the alleged falsification of the April, May, or August Minutes (or the prior iterations of the April Minutes)[110]. Whilst some of the opposed documents are broadly relevant to the allegations of falsification made by the plaintiff and Ms Morphet because they are responsive to those allegations, mere relevance does not render them communications in furtherance of the alleged falsification.[111] As I explain further below, there is no basis in the evidence to suppose they are communications which are connected to the alleged falsification ‘in the sense of helping it, advancing it or assisting it’.[112] Nor are there reasonable grounds for believing that National Tiles, Mr Walker, or Mr Larsen sought legal advice from HSF and the PwC entities to conceal the alleged offending.
[110]Namely, the Draft April Minutes and the Revised April Minutes.
[111]Butler v Board of Trade, 686–7; Carbotech, [24]; Kaye v Woods, [38]. See also Uniform Evidence Law, [EA.125.90].
[112]See Kaye v Woods, [38]; Amcor, [59].
Opposed documents produced by PwC entities
As regards the opposed documents produced by the PwC entities, they essentially comprise communications passing between lawyers at PwC and Greg Larsen and/or Frank Walker concerning issues raised by Ms Morphet regarding the ESOP. With the exception of a number of attachments to emails,[113] they all post-date the April Board meeting, the May Board meeting, the 9 June Gilbert + Tobin letter, and the 24 July Morphet email. Those attachments include memoranda of advice, copies of the ESOP, and copies of the various iterations of the April Minutes that were provided to PwC to assist them in giving their legal advice. In light of the evidence given by the defendants concerning the scope of the PwC entities’ retainer, the descriptions of the opposed documents produced by the PwC entities, and the date of the relevant documents, there is no indication that the communications contain advice in relation to the formulation of the shareholders’ agreement resolution contained in the April Minutes or otherwise relate to the preparation of the April Minutes or the May Minutes. Nor do the descriptions refer to the holding of the August Board meeting or the preparation of the August Minutes. Given the serious nature of the allegations raised by Ms Morphet, Mr Selak, and by Gilbert + Tobin on their behalf, it was entirely appropriate for National Tiles to obtain legal advice concerning the nature and implications of the allegations. The resulting advice appears directed to the Company’s response to the allegations of falsification and the manner in which the allegations should be addressed at Board level. It was therefore likely to be advice on the legal consequences of alleged past fraud, the legal remedies that may be invoked by Ms Morphet and Ms Selak as alleged victims of the fraud, and any legal defences that may be available in respect of any claim by Ms Morphet and Mr Selak. Such advice would not be in furtherance of the commission of the alleged fraud.[114]
[113]The attachments are documents 42, 43, 45, 47–53 of the PwC entities’ privilege schedule.
[114]P & V Industries, [27]; Amcor, [63].
Opposed documents produced by HSF
Similar observations can be made about the opposed documents produced by HSF. The relevant documents span the period 1 May 2020 to 18 May 2020, with one document dated 29 June 2020 (document 59 of the HSF privilege schedule). At that time, HSF was formally retained to provide legal advice to both National Tiles and FWG in relation to the ESOP. The communications to and from HSF across the relevant date range followed the April Board meeting and coincided with the 1 May Walker email and the 1 May Morphet email. The documents also followed the various communications with Mr Selak and Ms Morphet about their resignations as directors of National Tiles. The later communication of 29 June 2020 (document 59) was also subsequent to the April Board meeting, the May Board meeting, and the 9 June Gilbert + Tobin letter. The HSF privilege schedule records at least one communication concerning legal advice about the Draft April Minutes (document 16) and various communications regarding the claims made by Mr Selak and Ms Morphet, and the provision of comments upon draft correspondence from Mr Walker to Mr Selak and Ms Morphet.
According to the annotations for document 16 in the HSF privilege schedule, advice was given by Nick Wormald and Andrew Clyne of HSF about the April Minutes. It seems that advice was then referenced by Mr Walker in the 7 May Walker email, in which he stated he had taken HSF’s advice and discussed his recollections of the April Board meeting with Nick Walker, Georgie Bell, and Rhonda Walker, all of whom confirmed his own recollections. Advice appears to have been legitimately sought and provided in relation to the controversy between members of the Board concerning the content of the April Minutes.
Having regard to the relevant dates, I assume the draft correspondence referred to in the HSF privilege schedule to be the 8 May Walker email, in which Mr Walker provided detailed reasons as to why Ms Morphet’s and Mr Selak’s ESOP close out proposal would likely be rejected at the May Board meeting. That correspondence also made reference to the process of approval of the April Minutes at the May Board meeting, which was said to reflect the conventional procedure for approval of Board Minutes. The 8 May Walker email was a substantive piece of correspondence and understandably required the input of lawyers in settling its content. To the extent that advice was given by HSF in relation to the Draft April Minutes and the 8 May Walker email to enable National Tiles to order its affairs so as not to do something prohibited by statute, such advice is not in furtherance of the alleged crime or fraud.[115] Further, there is no basis to conclude (as suggested by the plaintiff) that advice given in respect of the earlier drafts of the 8 May Walker email was used to justify the alleged falsification of the April Minutes and conceal the alleged wrongdoing.
[115]Kearney, 513–14 (Gibbs CJ), referred to in Cross on Evidence, [25290].
Again, having regard to the evidence given by the defendants concerning the scope of HSF’s engagement, the descriptions of the opposed documents produced by HSF, and the date of the relevant documents, there is no prima facie indication that the opposed HSF documents contain advice in relation to the actual formulation of the shareholders’ agreement resolution contained in the April Minutes or otherwise relate to the preparation of the April, May, or August Minutes.
Opposed documents produced by Greg Larsen
I turn then to the opposed documents in Mr Larsen’s privilege schedule. Aside from one undated document (document 1a), the opposed documents produced by Mr Larsen fall within the period from 20 July 2020 to 18 August 2020 and therefore post‑date the April Board meeting, May Board meeting and 9 June Gilbert + Tobin letter. The communications contain legal advice given by the PwC entities in the lead up to the August Board meeting. The legal advice concerns the claims made by Mr Selak and Ms Morphet, which, according to the chronology, must relate to the claims of falsification of the April Minutes. As already explained, the fact that advice was given in relation to such serious claims is unremarkable. The fact that such advice was given in anticipation of the August Board meeting is also unsurprising because the Board’s earlier approval of the April Minutes at the May Board meeting had been challenged and the issue required further consideration by the Board. According to the August Minutes, the Board’s ratification of the April Minutes occurred after consideration of the claims articulated by Mr Selak and Ms Morphet in correspondence tabled before the Board, and after specifically acknowledging that the former directors disputed the accuracy of the April Minutes. There are no reasonable grounds for believing that Mr Larsen and the defendants sought advice on how to contravene the law by falsifying the April Minutes, the May Minutes, or the August Minutes (by virtue of their ratification of the April Minutes). They were entitled to seek and obtain legal advice concerning an appropriate response to the allegations of falsification and to a fundamental disagreement between Board members about the accuracy of the April Minutes and how the disagreement ought to be recorded. To the extent advice was sought and obtained about the ratification of the April Minutes, I consider that such advice was directed to enabling the Company to arrange its affairs so as not to do something prohibited by statute (in circumstances where the April and May Minutes had already been challenged), rather than to further the alleged falsification.
Some of the communications in Mr Larsen’s privilege schedule also refer to, or enclose, earlier communications from PwC legal practitioners prior to, and at, the April Board meeting. These communications pre-date the controversy over the April Minutes. Having regard to the descriptions of the opposed documents produced by Mr Larsen, there is no prima facie indication that those communications contain advice from PwC in relation to the formulation of the shareholders’ agreement resolution contained in the April Minutes or otherwise concern the preparation of the April or May Minutes.
Inspection of opposed documents
In applications such as the present, the Court has the power to inspect the documents the subject of dispute.[116] In Amcor, Kyrou J (as his Honour then was) exercised his discretion to inspect the relevant documents because of inconsistencies in relation to how privilege was claimed, the cryptic nature of descriptions used by the party claiming privilege, and because his Honour considered it would be unsafe to determine the important question of whether the documents were prepared in furtherance of the commission of a fraud or an act that renders a person liable to civil penalty without first inspecting them.[117] Here, I have reached the conclusion that the opposed documents are not communications in furtherance of a crime or fraud based on the evidence before the Court, the submissions made by the parties, and the detailed descriptions of the opposed documents in the privilege schedules. There is therefore strictly no need for me to inspect the opposed documents in the present application.
[116]Amcor, [71]. The discretion of the Court to inspect discoverable documents over which a claim for privilege is made is also contemplated by r 29.13 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic).
[117]Amcor, [73].
However, in the event I have erred in the exercise of my discretion about whether to inspect the documents, and to satisfy myself that the conclusion I have reached is supported by the documents themselves, I determined to undertake a brief inspection. Following my inspection, I am fortified in my conclusion that the opposed documents were not communications made in the furtherance of the alleged falsification of the relevant Board minutes. By way of illustration, I note the following features of particular opposed documents, whilst being necessarily oblique as to their contents:
(a) document 41 of PwC’s privilege schedule is a chain of emails between Nick Brown and Ashley Poke (legal practitioners at PwC) dated 4 August 2020, discussing the 24 July Morphet email (which made direct allegations of falsification) and subsequent communications between Mr Larsen and Ms Morphet. There is nothing to suggest that the advice given in relation to Ms Morphet’s allegations was in furtherance of the alleged offending;
(b) document 42 of PwC’s privilege schedule is a memorandum of advice from PwC dated 22 April 2020. It contains detailed legal and tax advice relating to the ESOP ‘close out’ process. It does not appear to traverse any issues associated with the form of shareholders’ agreement resolution discussed at the April Board meeting;
(c) documents 44 of PwC’s privilege schedule is an email from Mr Larsen to Mr Brown of PwC and includes previous emails passing between Mr Larsen and Ms Weir concerning the Revised April Minutes, which incorporated Mr Walker’s proposed requested amendments, as communicated in the 7 May Walker email. The attachment (document 45) appears to be the same version of the Revised April Minutes sent by Ms Weir to Mr Larsen on the morning of 7 May 2020. Similarly, document 46 is a further email from Mr Larsen to Mr Brown of the same date for the purpose of National Tiles receiving legal advice attaching earlier versions of the April Minutes, namely: document 47, which is the final version of the April Minutes (as approved by the Board); document 48, which appears to be the version of Draft April Minutes incorporating the amendments initially proposed by Chris Herrick and Nick Walker on 29 April 2020; documents 49, 50 and 51, which appear to be the Draft April Minutes initially circulated by Ms Weir; and document 52, which appears to be the Revised April Minutes, albeit with detail of when Nick Brown left the meeting (a detail that found its way into the final version of the April Minutes). The fact that these versions of the April Minutes were provided to PwC does not suggest that PwC gave advice in furtherance of the alleged falsification of those minutes;
(d) document 4 of the HSF privilege schedule is one of the iterations of the Draft April Minutes. The document was provided by Mr Walker to Nick Wormald of HSF for the purpose of providing legal advice in relation to the minutes. This appears to be the Draft April Minutes incorporating the amendments initially proposed by Chris Herrick and Nick Walker on 29 April 2020. There is no indication on the face of the document that HSF provided any input into the drafting of the April Minutes or that the document includes any amendment to reflect what Frank Walker allegedly falsely asserted was his recollection of events at the meeting;
(e) document 16 of the HSF privilege schedule is an email chain dated 5 May 2020 between Nick Wormald, Stephanie Wilkinson, Andrew Klein, and Robert Prosser, created for the purpose of providing legal advice about the April Minutes. It is an internal discussion between lawyers at HSF. In broad terms, it deals with the legal and procedural issues arising in circumstances where the Company’s Board members were unable to agree on what transpired at the April Board meeting. The communication makes reference to Frank Walker’s recollections of the positions adopted at the April Board meeting concerning the shareholders’ agreement resolution. It does not appear to be a communication that advanced or concealed the alleged falsification;
(f) document 47 of the HSF privilege schedule is a copy of a document titled, ‘National Tiles Co Pty Ltd – Action list – Matters arising from board meeting’, which is dated 18 May 2020. The document and additional highlighting were apparently created and saved to HSF’s internal file for the purpose of HSF providing legal advice. The document makes no reference to the allegations of falsification of the April Minutes. It deals with vesting outcomes for the ESOP and notes that HSF was engaged to draft the shareholders’ agreement for the purpose of discussion at the May Board meeting;
(g) document 1 of the Larsen privilege schedule is a set of handwritten notes taken by Greg Larsen on 20 July 2020, in his capacity as chair of the Board, and which recorded a conversation with Nick Brown regarding legal advice by PwC given to National Tiles before and at the April Board meeting. Whilst being necessarily circumspect in relation to the contents of the notes, the notes appear to relate to the mechanical process of preparing a shareholders’ agreement and purport to record Mr Brown’s account of the discussion about the shareholders’ resolution at the April Board meeting.[118] I have no reason to believe that the communication was in furtherance of the alleged offending. I hold the same view in relation to document 1a, which is a handwritten note prepared by Mr Larsen of his discussion with Mr Brown and which concerns the same subject matter; and
(h) document 4 of the Larsen privilege schedule is an email from Mr Larsen to Mr Walker, Nick Walker, Rhonda Walker, Georgie Bell, Chris Herrick, and Ashley Poke of PwC, and copied to Nick Brown of PwC, referring to information to be discussed at a meeting prior to the August Board meeting. Whilst it notes the disputed nature of the April Minutes, on the face of the email, there is no reason to believe that the communication was in furtherance of the alleged offending.
[118]I note, as an aside, that Mr Brown’s apparent recollection of the April Board meeting does not appear to be consistent with the April Minutes being false.
Conclusion
For the above reasons, it follows that the defendants’ claims of privilege over the opposed documents have not been displaced by the plaintiff’s allegation that the relevant communications were made in furtherance of a crime or fraud, namely the falsification of Board minutes under s 1307(1) of the Corporations Act.
The parties are requested to confer as to an appropriate form of order to give effect to these reasons, including as to costs. If the parties are unable to reach agreement about those matters, the matter will be listed for a short further hearing and the parties will be required to set out their respective positions in concise written submissions.
SCHEDULE OF PARTIES
| S ECI 2020 04730 | |
| BETWEEN: | |
| JOHN SELAK | Plaintiff |
| - v - | |
| NATIONAL TILES CO PTY LTD (ACN 007 381 599) | First Defendant |
| FRANK WALKER GROUP PTY LTD (ACN 100 126 403) | Second Defendant |
| FRANCIS IAN WALKER | Third Defendant |
Citing discussion in Stephen Odgers, Uniform Evidence Law (Thomson Reuters, 12th ed, 2016)
1145–6 (‘Uniform Evidence Law’).
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