Selak v National Tiles Co Pty Ltd (No 4)

[2024] VSC 438

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL COURT

COMMERCIAL LIST

S ECI 2020 04730

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:	Connock J
WHERE HELD:	Melbourne
DATES OF HEARING:	31 October 2023; 1, 2, 3, 8, 9 November 2023; 11, 12 December 2023; further materials on 15, 18 December 2023; 24 May 2024; 11 July 2024 (Reopening question hearing); 17 July 2024 (Plaintiff’s application for interim stay of delivery of primary reasons for judgment that were scheduled to be delivered on 17 July 2024); and 23 and 24 July 2024 (Plaintiff’s application for stay of the delivery of primary reasons for judgment pending determination of plaintiff’s uplift and inspection application in respect of documents said to be subject to legal professional privilege)
DATE OF JUDGMENT:	29 July 2024
CASE MAY BE CITED AS:	Selak v National Tiles Co Pty Ltd & Ors (No 4)
MEDIUM NEUTRAL CITATION:	[2024] VSC 438

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CONTRACT — Construction of employee share option plan — General principles of construction — Implied terms — Meaning of value — Meaning of fair value — Implied obligation to cooperate to allow contracting parties to have the benefit of the agreement — Implied obligation not to hinder or prevent the fulfillment of the purpose of the express promises in the agreement — Alleged breach of implied terms — Breach of contract — Causation — Alleged breach of express term — Loss and damage — Whether loss suffered — Nominal damages — Mackay v Dick (1881) 6 App Cas 251 — Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201 — Construction of exclusion clauses — Construction of limitation clauses.

TORTS — Inducing breach of contract — General principles — Elements of the tort — Whether contract breached — Intention to induce breach of contract — Relevant knowledge — Whether parent company can induce breach of contract of subsidiary — Whether a director can be liable for inducing a breach of contract of the company of which they are a director — The principle in Said v Butt [1920] 3 KB 497 — Whether defendants had requisite knowledge of contract or intent to induce the alleged breach of contract — Whether nominal damages for breach of contract is loss or damage for the tort of inducing breach of contract.

DAMAGES — Damages for breach of contract — Damages in tort — Nominal damages — Alleged loss of opportunity — Principles in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 — Whether an opportunity of some value existed and was lost — Operation and application of ‘Sellars’ discount — Aggravated damages — Exemplary damages.

EVIDENCE — Inferences in civil cases — Evidence Act 2008 (Vic) s 140 — Briginshaw v Briginshaw (1938) 60 CLR 636 — Jones v Dunkel (1959) 101 CLR 298.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	K Foley SC G Kozminsky	Gilbert + Tobin
For the Defendants	P Solomon KC A Folie	Herbert Smith Freehills

TABLE OF CONTENTS:

INTRODUCTION AND SUMMARY........................................................................................... 1

Part A – Background Facts............................................................................................................. 10

..... Part A.1 – National Tiles: History and people........................................................................ 11

..... Part A.2 – ESOP genesis and early history, including Bunnings acquisition proposal... 13

..... Part A.3 – PwCS valuation and subsequent events............................................................... 22

..... Part A.4 – 23 April 2020 Board Meeting and subsequent events......................................... 45

Part A.5 – Aftermath of 23 April 2020 Board Meeting including dispute regarding minutes of 23 April 2020 Board Meeting and Selak Cash Out Proposal............................................ 55

Part A.6 – 21 May 2020 Board Meeting including signed April 2020 Board Meeting minutes and Walker Shareholders’ Agreement Resolution............................................................... 78

Part A.7 – Provision of the PSA to Mr Selak and Ms Morphet............................................ 80

Part A.8 – MOU between Frank Walker and Mr Larsen and other matters...................... 84

Part A.9 – Correspondence between the parties’ solicitors and other matters.................. 88

Part A.10 – Ratification of 23 April 2020 Board Meeting minutes at 31 August 2020 Board Meeting and other matters............................................................................................................... 98

Part B – Option Agreement, the ESOP Terms, and the PSA................................................. 103

Part B.1 – Option Agreement.................................................................................................. 103

Part B.2 – Proffered Shareholders’ Agreement (PSA)......................................................... 114

Part B.3 – The Option Agreement – Cooperation Terms and some matters of construction     125

Part B.3.1 – Cooperation Terms to be implied............................................................. 125

Part B.3.1.1 – Principles regarding the implication of Cooperation Terms. 125

Part B.3.1.2 – The Cooperation Terms were implied terms of the Option Agreement.............................................................................................................. 131

Part B.3.2 – Some matters of construction of the Option Agreement...................... 131

Part B.3.2.1 – Principles and observations regarding the construction of commercial contracts.............................................................................................. 132

Part B.3.2.2 – Construction of Clause 2.2.1(k).................................................. 137

.......... Plaintiff’s submissions.............................................................................. 138

.......... Defendants’ submissions......................................................................... 140

.......... Consideration – Proper construction of Clause 2.2.1(k)...................... 141

Part B.3.2.3 – Meaning of Shareholders’ Agreement...................................... 146

Part B.3.2.4 – Proper construction and meaning of the expression ‘value’ in sub-paragraph (b) of the Permitted Transfer Regime.......................... 153

.......... Plaintiff’s submissions.............................................................................. 154

.......... Defendants’ submissions......................................................................... 157

Consideration – Meaning of ‘value’ in sub-paragraph (b) of the Buyback Provision in the Permitted Transfer Regime terms...................... 160

Part B.4 – Meaning of ‘Valuer’ in the definitions section of the PSA................................ 174

Part C – Witnesses......................................................................................................................... 176

Part C.1 – Ms Morphet............................................................................................................. 178

Part C.2 – Mr Selak................................................................................................................... 180

Part C.3 – Mr Smooker............................................................................................................. 181

Part C.4 – Mr Linehan.............................................................................................................. 183

Part C.5 – Mr Samuel............................................................................................................... 188

Part C.6 – People not called as witnesses.............................................................................. 188

Part C.6.1 – The rule in Jones v Dunkel........................................................................ 189

Part D – Some Factual Findings.................................................................................................. 193

Part D.1 – The drawing of inferences in civil cases............................................................. 194

Part D.2 – Shortly before 20 April 2020, did Frank Walker realise that he did not have to pay out ESOP participants with a cash payment?.................................................................... 197

Part D.3 – Based on the unredacted parts of the redacted valuation report dated 26 March 2020 provided by PwCS, did Frank Walker assume that 4 million options would vest for each of the NEDs?......................................................................................................................... 198

Part D.4 – Can it be inferred that Frank Walker did not want the options to vest?....... 200

Part D.5 – Did Frank Walker seek to prevent the options from vesting?......................... 203

Part D.6 – Was the Walker Shareholders’ Agreement Resolution passed at the April 2020 Board Meeting?............................................................................................................................ 206

Part D.7 – Was the Morphet Shareholders’ Agreement Resolution passed at the April 2020 Board Meeting?............................................................................................................................ 216

Part D.8 – Did Frank Walker and Mr Larsen support and approve the form of the Approved April Minutes at the May 2020 board meeting?.................................................................... 222

Part D.9 – Were the April 2020 Board Meeting minutes false and misleading insofar as the minutes (a) included the Walker Shareholders’ Agreement Resolution and (b) did not include the Morphet Shareholders’ Agreement Resolution?......................................................... 222

Part D.10 – Did Frank Walker not want to pay out any of the vested options with a cash payment?............................................................................................................................................ 232

Part D.11 – Did Frank Walker not want anyone to exercise their vested options?......... 232

Part D.12 – Did Frank Walker instruct FWG’s solicitors, HSF, to prepare the PSA, which was to be subject to Frank Walker’s approval, and did HSF act on the instructions of Frank Walker?............................................................................................................................................ 233

Part D.13 – Was it established or can it be inferred that Mr Larsen obtained advice from Frank Walker’s solicitor, Mr Wormald of HSF, regarding potential ‘inequity’ arising from the ESOP and/or the Shareholders’ Agreement?......................................................................... 234

Part D.14 – Did Frank Walker support or approve the May 2020 PSA Resolution at the May 2020 board meeting?................................................................................................................. 234

Part D.15 – But for Frank Walker adopting the position that the PSA should be approved, the other directors would not have been in favour of approving the PSA.............................. 235

Part D.16 – No other options were exercised by any of the option holders so as to become a shareholder of National Tiles......................................................................................... 236

Part D.17 – Did the 19 June HSF Letter contain a genuine offer on the part of Frank Walker to engage in discussions with Mr Selak and Ms Morphet to explore whether any changes to the PSA could be agreed (PSA Discussion Offer)?............................................................ 236

Part E – Contract Claim – Breach of Clause 2.2.1(k) Claim.................................................... 243

Part E.1 – Plaintiff’s submissions............................................................................................ 243

Part E.2 – Defendants’ submissions....................................................................................... 245

Part E.3 – Consideration – Clause 2.2.1(k) breach............................................................... 245

Part F – Contract Claim – Cooperation Terms Claim.............................................................. 247

Part F.1 – Plaintiff’s submissions............................................................................................ 247

Part F.2 – Defendants’ submissions....................................................................................... 253

Part F.3 – Consideration – Breach of Cooperation Terms................................................... 261

Part F.3.1 – Did National Tiles require Mr Selak to execute and commit to the PSA in the PSA Form only?..................................................................................................... 261

Part F.3.2 – If Mr Selak had been required to execute and commit to the PSA in the PSA Form only, would that have breached the Cooperation Terms?................... 264

Part F.4 – Cooperation Terms loss and damage................................................................... 276

Part F.4.1 – Cooperation Terms loss – Plaintiff’s submissions................................ 276

Part F.4.2 – Cooperation Terms loss – Defendants’ submissions............................ 278

Part F.4.3 – Principles and observations – Damages for breach of contract.......... 282

Part F.4.4 – Consideration – Cooperation Terms loss............................................... 286

Part F.4.4.1 – Causation and Cooperation Terms loss................................. 286

Part F.4.4.2 – Cooperation Terms quantum of alleged loss........................ 293

Part F.4.5 – Cooperation Terms breach – Other matters.......................................... 301

Part F.5 – Conclusion – Cooperation Terms breach............................................................ 302

Part G – FWG Inducing Breach of Contract Claim................................................................. 303

Part G.1 – Introduction............................................................................................................ 303

Part G.2 – Inducing breach of contract – Principles and observations............................. 303

Part G.3 – Plaintiff’s submissions on the elements of the tort other than loss................. 309

Part G.4 – Defendants’ submissions on the elements of the tort other than loss............ 314

Part G.5 – Consideration – FWG and Frank Walker tort claim elements other than loss 316

Part G.5.1 – Clause 2.2.1(k) – Inducing breach of contract claim............................ 323

Part G.5.2 – Cooperation Terms – Tort Claim elements other than loss................ 326

Part G.6 – Loss and damage and the Cooperation Terms Tort Claims............................ 329

Part G.6.1 – Plaintiff’s submissions – Tort Claims loss............................................. 329

Part G.6.2 – Defendants’ submissions – Tort Claims loss........................................ 331

Part G.6.3 – Consideration – Cooperation Terms Tort Claims loss........................ 334

Part H – Other Matters.................................................................................................................. 335

Part I – Conclusion and Proposed Orders................................................................................. 336

ANNEXURE ‘A’ – ESOP Terms.................................................................................................. 337

SCHEDULE OF PARTIES............................................................................................................ 352

HIS HONOUR:

INTRODUCTION AND SUMMARY

1. The plaintiff (plaintiff or Mr Selak) is a former director of the first defendant (National Tiles), which is a wholly owned subsidiary of the second defendant (FWG or Majority Shareholder). In its capacity as trustee, FWG holds the shares in National Tiles on trust for the Frank Walker Family Trust (Walker Family Trust). The third defendant (Frank Walker) is and was at all relevant times a director of National Tiles, the sole director of FWG, and the owner of one of the two issued shares in FWG. Frank Walker’s wife, Rhonda Walker, owns the other share in FWG.

1. National Tiles introduced a share option plan in April 2016 for the benefit of ‘Eligible Persons’[1] (ESOP), which relevantly included Mr Selak and the former chair of the board of National Tiles (NT Board), Ms Sue Morphet. Pursuant to an agreement made between Mr Selak and National Tiles in April 2016 (Option Agreement), the plaintiff was granted 4 million options (Selak Options) to acquire shares in National Tiles on the terms of the Option Agreement, which included the terms of the ESOP (ESOP Terms). The acquisition cost of the Selak Options was funded through a bonus paid to Mr Selak by National Tiles for that purpose. FWG and Frank Walker were not parties to the Option Agreement.

   [1]As defined in the Option Agreement.

1. The Option Agreement and ESOP Terms state that an option holder who exercised options to acquire shares in National Tiles may be required by National Tiles to execute a shareholders’ agreement in terms approved by the Majority Shareholder, being FWG. At the time the Option Agreement was entered into in 2016, no shareholders’ agreement had been drafted or approved by the Majority Shareholder, as was known to all relevant parties. This was also the position at the time that 3,200,000 of the Selak Options vested in April 2020 (Selak Vested Options).

1. By 20 April 2020 (Original Vesting Date), no sale or other ‘Liquidity Event’[2] had occurred. Consequently, and pursuant to the terms of the ESOP, the value of an ordinary share in National Tiles as at 31 December 2019 was to be determined by an independent third party valuer nominated by FWG, in order to determine whether the share value vesting hurdles in the ESOP had been satisfied. Following a valuation process, and noting that the other vesting conditions were satisfied, it was determined that the value-related hurdles for the ESOP had been partially satisfied for Mr Selak and some other Eligible Persons. Relevantly, and subject to the terms of the Option Agreement, this gave rise to an opportunity for Mr Selak to exercise the 3,200,000 Selak Vested Options so as to acquire the same number of shares in National Tiles (Selak NT Shares) at a price of 12.3 cents per option exercised, being a total cost of $393,600 (Exercise Price).

   [2]As defined in the Option Agreement.

1. If Mr Selak wished to exercise the Selak Vested Options he was required to do so by 23 June 2020, failing which any unexercised Selak Vested Options would lapse (Options Lapse Date).

1. In May 2020, a shareholders’ agreement was prepared by Herbert Smith Freehills (HSF) for FWG on the instructions of Frank Walker. That agreement was approved by the National Tiles board at a meeting held on 21 May 2020. It was noted in the minutes of that meeting that a draft shareholders’ agreement should be provided to Ms Morphet and Mr Selak for their review as soon as practicable. The shareholders’ agreement was forwarded to Mr Selak under cover of an email dated 25 May 2020.[3]

   [3]The terms of which are addressed later in these reasons.

1. Mr Selak said he considered the terms of the proffered shareholders’ agreement (PSA) to be draconian, unreasonable and unacceptable, with one primary concern said to have been a claimed absence of adequate ‘minority protection provisions’ in connection with the restrictions on any future share transfers if Mr Selak exercised the Selak Vested Options, and became a National Tiles shareholder.

1. By his third further amended statement of claim (Third FASOC), Mr Selak made breach of contract claims against National Tiles (Contract Claims), and an inducing breach of contract claim against each of Frank Walker and FWG (Tort Claims). The claims were refined, and in some respects narrowed, during the course of the trial and during closing submissions.[4]

   [4]A revised list of issues was filed by the parties on 20 December 2023, although the parties did not conduct the trial or structure their closing submissions strictly by reference to the issues listed in that way. However, this is of no consequence because, to the extent the issues referred to remained live in the proceeding they are each addressed in these reasons in any event.

1. Briefly, and in substance, by the Contract Claims ultimately pursued the plaintiff alleged, among other things, that: 

1)          There were implied terms of the Option Agreement that:

(a)   National Tiles would not hinder or prevent the fulfillment of the purpose of the express promises made in the agreement; and

(b)  National Tiles would cooperate and do all such things as were necessary to enable Mr Selak to have the benefit of the Option Agreement;

(Cooperation Terms).

2)          It was a term of the Option Agreement[5] that, at the time the National Tiles board invited an Eligible Person to apply for a grant of, or granted an Eligible Person options, the board would provide each Eligible Person with an offer letter (Offer Letter) which contained the ‘minimum information’ regarding the Options referred to in clause 2.2.1, including, relevantly:

[5]See clause 2.2.1(k) of the ESOP Terms.

(k)any other relevant terms and conditions to be attached to the Options or Shares allocated on exercise of Options.

(Clause 2.2.1(k)).

3)          National Tiles breached the Cooperation Terms by requiring Mr Selak to execute the PSA in the form provided to him on 25 May 2020 (PSA Form), as a condition of being allocated shares upon the exercise of any of the Selak Vested Options. This was said to be so because the terms of the PSA hindered or prevented the fulfilment of the purpose of the express promises under the Option Agreement by reason of:

(a)        the terms of the PSA being such as to deprive the Selak Vested Options of any economic value — which the plaintiff defined as the ‘No Reward Breach’;

(b)  the terms of the PSA, when taken as a whole, being unreasonable in all the circumstances, and so unreasonable that no reasonable minority shareholder would agree to be bound by the PSA, including because the PSA rendered the exercise of the Selak Vested Options uncommercial; and

(c)   the terms of clause 13.6 and clause 13.7 of the PSA being inconsistent with the Permitted Transfer Regime (Permitted Transfer Regime) under the Option Agreement.

4)          By reason of the breach of the Cooperation Terms Mr Selak suffered loss and damage, being a lost opportunity to have what would have been his National Tiles shares compulsorily acquired from him by National Tiles pursuant to the ‘Permitted Transfer Regime’ under the ESOP Terms, or alternatively, being a lost opportunity to acquire and hold 3,200,000 National Tiles shares. The primary amount claimed under this part of the claim was $1,060,164, being the claimed value of the Selak NT Shares ($1,453,764) less the Exercise Price of $393,600.

5)          Upon the proper construction of Clause 2.2.1(k) of the Option Agreement, it operated so as to prohibit National Tiles from making the allotment of shares to Mr Selak conditional upon him signing a Shareholders’ Agreement containing ‘relevant terms and conditions’ attaching to the options or shares which had not been disclosed in the Offer Letter.

6)          National Tiles breached Clause 2.2.1(k) because the PSA that Mr Selak was required to sign as a condition of exercise of the Selak Vested Options contained clause 13.7, which was a relevant term and condition attaching to the options or shares that was not disclosed in the Option Agreement.

7)          Nominal damages only should be awarded in respect of the breach of Clause 2.2.1(k) of the Option Agreement.

1. By the Tort Claims Mr Selak alleged that each of Frank Walker and FWG procured or induced the alleged breaches of contract (Alleged Contract Breaches) referred to above, and that he had suffered loss and damage as a result. Damages were said to be at large, with the plaintiff also claiming aggravated and exemplary damages in respect of the Tort Claims. In making the Contract Claims and the Tort Claims the plaintiff relied upon various aspects of the chronology and sequence of events over an extended period, until about September 2020. These were said to support a number of factual findings and inferences that should be made and drawn by the Court in connection with establishing aspects of the claims, including as to allegations of the knowledge and intent of Frank Walker and FWG, and in relation to the damages claims.[6]

   [6]Which in part explains the lengthy ‘Background Facts’ section that follows in Part A below, various aspects of which are further addressed where appropriate later in these reasons.

1. The defendants characterised the plaintiff’s claim as ‘ambitious’ and denied that they were liable to the plaintiff as alleged, or at all, and many issues were raised between the parties, some of which fell away by the conclusion of trial. Among other things, the defendants contended that:

1)        The plaintiff misconstrued parts of the Option Agreement and, in particular, the meaning of ‘value’ in the definition of ‘Permitted Transfer Regime’, and the meaning and operation of Clause 2.2.1(k).

2)        The Alleged Contract Breaches have not been established.

3)        The plaintiff has not established that he suffered any loss or damage as a result of any of the Alleged Contract Breaches.

4)        The quantum of the amount claimed for the Alleged Contract Breaches was materially overstated.

5)        The Tort Claims could not succeed for a number of reasons.

6)        In any event, there was no basis for awarding any damages on the Tort Claims, whether at large, aggravated, exemplary, or otherwise.

1. For the reasons that follow, I have concluded that the plaintiff has failed to make out:

1)          his breach of contract claims against National Tiles;

2)          his inducing breach of contract claim against Frank Walker; and

3)          his inducing breach of contract claim against FWG.

1. In so concluding, and by way of a brief non-exhaustive summary,[7] my findings that follow include the following:

   [7]Which brief summary is not to be considered in isolation but in the context of the detail of the reasons and the terms in which the findings and conclusions are referred to in the body of the reasons.

1)          The Cooperation Terms were implied terms of the Option Agreement.[8]

[8]See Part B.3.1 below.

2)          Upon the proper construction of the Option Agreement:

(a)        Clause 2.2.1(k) did not operate to prevent National Tiles including relevant terms and conditions via the Shareholders’ Agreement that were not otherwise disclosed in the Offer Letter.[9]

[9]See Part B.3.2.2 below.

(b)       The term ‘Shareholders’ Agreement’ in the definition section of the Option Agreement means a Shareholders’ Agreement, in terms not inconsistent with the Plan or Offer Letter, approved by the Majority Shareholder at the time that it is entered into, which will include the provisions referred to in the said definition section, and any other not inconsistent terms approved by the Majority Shareholder at that time.[10]

[10]See Part B.3.2.3 below.

(c)        The term ‘value’, where it appears for the second time in sub-paragraph (b) of the Buyback Provision of the Option Agreement, means ‘fair value’.[11]

[11]See Part B.3.2.4 below.

(d)       Fair value in the Buyback Provision:[12]

[12]See Part B.3.2.4 below.

i.      means what is just and equitable in the circumstances; and

ii.      does not necessarily exclude minority or marketability discounts.

3)          The term ‘Valuer’ in the PSA does not mean ‘independent valuer’ and the criterion of valuer independence is not otherwise imported into the PSA.[13]

[13]See Part B.4 below.

4)          The factual findings referred to in Part D below, including findings that:

(a)        The Walker Shareholders’ Agreement Resolution was not passed at the April 2020 Board Meeting.[14]

[14]See Part D.6 below.

(b)       The Morphet Shareholders’ Agreement Resolution was not passed at the April 2020 Board Meeting.[15]

[15]See Part D.7 below.

(c)        The Approved April Minutes are false and misleading insofar as they record that the Walker Shareholders’ Agreement Resolution was passed at the April 2020 Board Meeting.[16]

[16]See Part D.9 below.

(d)       The Approved May Minutes are false and misleading insofar as they confirm that the Approved April Minutes are a true and correct record of the April 2020 Board Meeting.[17]

[17]See Part D.9 below.

(e)        The Approved August Minutes are false and misleading insofar as they confirm or ratify that the Approved April Minutes are a true and correct record of the April 2020 Board Meeting.[18]

[18]See Part D. 9 below.

(f)        The Approved April Minutes are not false and misleading by reason of their failure to record that the Morphet Shareholders’ Agreement Resolution was passed at the April 2020 Board Meeting.[19]

[19]See Part D.9 below.

(g)       The Approved May and August Minutes are not false and misleading insofar as they failed to record, confirm or ratify that the Morphet Shareholders’ Resolution was passed at the April 2020 Board Meeting.[20]

[20]See Part D.9 below.

(h)       The PSA Discussion Offer in the 19 June HSF Letter was an offer to engage in discussions with the plaintiff and Ms Morphet to explore whether any changes to the terms of the PSA could be agreed, which was not taken up by the plaintiff or Ms Morphet.[21]

[21]See Part D.17 below.

5)          Having regard to the proper construction of Clause 2.2.1(k), National Tiles did not breach Clause 2.2.1(k) of the Option Agreement by including clause 13.7 in the PSA.[22]

[22]See Part E.3 below.

6)          If National Tiles had breached Clause 2.2.1(k) by including clause 13.7 in the PSA, the plaintiff would have been entitled to an award of nominal damages only, which I would have fixed in the sum of $100.[23]

[23]See Part E.3 below.

7)          It was not established that Mr Selak was required to execute and commit to the PSA in the PSA Form only, as a condition of exercising his vested options.[24]

[24]See Part F.3.1 below.

8)          If it had been established that Mr Selak was required to execute and commit to the PSA in the PSA Form only, as condition of exercising his vested options, I would have concluded that this amounted to a breach of the Cooperation Terms for the reasons discussed in Part F.3.[25]

[25]See Part F.3.2 below.

9)          If I had concluded that the Cooperation Terms were breached in the manner referred to in Part F.3, for the reasons referred to in Part F.4.4, I would have concluded that the plaintiff had not established that the said breach of the Cooperation Terms caused the plaintiff the claimed loss of opportunity. Consequently, the plaintiff would  have been entitled to an award of nominal damages only, which I would have fixed in the sum of $100.[26]

[26]See Part F.4.4.1 below.

10)       If I had concluded that the plaintiff had suffered the claimed loss of opportunity by reason of the Cooperation Terms breach referred to, for the reasons referred to in Part F.4.4.2, I would have assessed that loss at $333,282.[27] This amount is based upon:

[27]See Part F.4.4.2 below.

(a)        a loss of an opportunity of the plaintiff to have shares compulsorily acquired by National Tiles at fair value pursuant to the Buyback Provision, where fair value does not in the circumstances have minority or marketability discounts applied;

(b)        an undiscounted Sellars value of $1,453,764;

(c)        applying a Sellars discount of 50% ($726,882); and

(d)       a further deduction of $393,600 to reflect the Exercise Price that would have been paid by Mr Selak to exercise his options but was not paid.

11)       If I had concluded that the plaintiff’s alleged loss for the alleged breach of the Cooperation Terms should have been calculated by reference to the market value of the shares alone (without any Sellars discount), I would have assessed the loss at $187,906.[28] This amount is based on a base value of $1,453,764, less (a) a 20% minority discount ($290,752.80); less (b) a 50% marketability discount ($581,505.60); and less (c) the Exercise Price ($393,600).

[28]See Part F.4.4.2 below.

12)       If I had concluded that the plaintiff had established that National Tiles had breached Clause 2.2.1(k) and the Cooperation Terms, for the reasons referred to in Part G I would have concluded that the plaintiff had not established that Frank Walker or FWG committed the tort of inducing breach of contract in respect of either of those breaches of the Option Agreement by National Tiles. It was not established that Frank Walker or FWG had the requisite knowledge or intent, or that they induced the breaches. It was also not established that the plaintiff had  suffered loss and damage by reason of such alleged conduct in any event.[29]

13)       Upon the proper construction of the Option Agreement, the limitation clause comprising clause 10.1.3 of the ESOP Terms would not have engaged if the plaintiff’s claims had been made out. The clause does not operate in respect of loss caused by a breach of the Option Agreement, or loss caused by third parties to the Option Agreement wrongly inducing the parties to the Option Agreement to breach it.[30]

14)       It is not necessary to address the issues of directors’ liability for the tort of inducing breach of contract, aggravated damages, or exemplary damages.[31]

[29]See Parts G.5 and G.6 below.

[30]See Part F.4.5 below.

[31]See Part G.6 below.

1. The plaintiff’s claims against the defendants will be dismissed and I will hear from the parties on the question of costs and the precise form of orders.

Part A – Background Facts

1. Given the plaintiff’s reliance on numerous events over many years it is necessary to set out in some (but not complete) detail the rather lengthy chronology and sequence of events traversed in the documentary and oral evidence at trial by the plaintiff. This is primarily because the plaintiff seeks to draw on various alleged historical matters in support of aspects of his claims, particularly in connection with the Tort Claims; and in support of various inferences the plaintiff contends can be drawn, including as to Frank Walker’s and FWG’s intention and knowledge; and regarding the plaintiff’s damages claims, including his claims for aggravated and exemplary damages.

1. Whilst lengthy, much of the chronology and sequence of events was not relevantly controversial or in contest, although some factual matters were in issue and contested. The latter are addressed later in these reasons, where relevant. Two material examples are: what resolutions, if any, were passed at the 23 April 2020 board meeting (April 2020 Board Meeting) regarding the preparation of a Shareholders’ Agreement to be provided to the plaintiff;[32] and whether Mr Selak would have exercised any of the Selak Vested Options, even if a proposed Shareholders’ Agreement in a form that he found acceptable had been proffered to him. These and some other of the contended factual matters are addressed in Part D below.

   [32]And other ESOP participants with vested options.

Part A.1 – National Tiles: History and people

1. As will be seen, a number of individuals with differing roles are referred to in this part of the reasons. It is therefore convenient and useful to include a table of many of these people and their respective roles, which I do below:[33]

   [33]Which I have adopted in part from Hetyey AsJ’s decision in Selak v National Tiles Co Pty Ltd & Ors [2023] VSC 446, [14].

Name	Role / Relationship
John Selak (plaintiff)	Former Director of National Tiles
Gregory Larsen	Non-Executive Director and Chairperson of the Board of National Tiles
Frank Walker (third defendant)	Director of National Tiles
Sue Morphet	Former Director and Chairperson of Board of National Tiles
Nick Walker	Chief Executive Officer of National Tiles; Director of National Tiles; and Frank Walker’s son
Georgina (Georgie) Bell (née Walker)	Director of National Tiles and Frank Walker’s daughter
Rhonda Walker	Director of National Tiles and Frank Walker’s wife
Chris Herrick	Chief Financial Officer and Secretary of National Tiles
Peter Davis	Director of National Tiles
Rebecca Weir	Assistant Company Secretary at Boardroom Australia
Nick Brown	Legal Partner of PWC legal
Hamish Emms	Director of PwC
Nigel Smythe	Partner at PwC
Ashley Poke	Lawyer at PWC legal
Andrew Clyne	Partner at HSF
Nick Wormald	Consultant at HSF (former Partner)
Stefanie Wilkinson	Partner at HSF
Rhiannon Zarro	Solicitor at HSF
Robert Prosser	Solicitor at HSF
Daryl O’Callaghan	Lawyer at PWC legal

1. On 16 March 1990, National Tiles (then named Jamela Pty Ltd) was incorporated. A copy of its constitution (NT Constitution) was in evidence.

1. Frank Walker was appointed a director of National Tiles on 30 April 1990 and remains a director. Frank Walker’s son, Nick Walker, was appointed a director of National Tiles on 4 June 2010 and ceased to be a director on 28 February 2022. John Selak was appointed as a director on 7 May 2015 and ceased to be a director on 8 May 2020. Sue Morphet was appointed as a director on 7 May 2015 and ceased to be a director on 8 May 2020. Greg Larsen was appointed a director on 7 May 2015 and remained a director at all relevant times.

1. Frank Walker’s daughter, Georgina Bell, was appointed a director on 24 February 2020, as was his wife, Rhonda Walker. Robert Costa was appointed a director on 26 April 2022, as was Campbell Stott. Chris Herrick was a company secretary of National Tiles, having been appointed on 28 August 2020, with Russell Vaughan also being a company secretary, having been appointed on 15 September 2017.

1. The company search for National Tiles recorded that the total number of National Tiles shares on issue was 215 million and that they were all held by FWG, but not beneficially. This is because FWG holds the shares as trustee of the Walker Family Trust. At all relevant times, the sole director and secretary of FWG was Frank Walker, having been appointed on 5 April 2002. The share capital of FWG comprises two shares, each with a nominal value of $1. One share is held by Frank Walker beneficially, and the other share is held by Rhonda Walker beneficially.

1. The current NT Constitution was adopted and recorded in a notice of resolution dated 30 August 2001. National Tiles’ original memorandum and articles of association were dated 16 March 1990 (Original NT Constitution).

1. From about 2012 to 2015, John Selak was a member of the National Tiles advisory board. At that time, Mr Selak was also a partner at Ernst & Young.

1. On 12 June 2014, Frank Walker proposed a plan called ‘220 by 2020’. It was Frank Walker’s idea; the plan was for National Tiles to achieve an increased market share by 2020, resulting in an overall business value of $220 million.

1. On 2 September 2014, Frank Walker’s executive assistant emailed a proposed IPO strategy document to the Non-Executive Directors (NEDs). The document was in preparation for an IPO strategy day scheduled for 15 September 2014. Among other things, the document stated that the goal was to develop and refine National Tiles’ business to take to market in approximately five years to achieve a price in excess of $200 million. Reference was made to Mr Selak believing a trade sale was most likely, and Frank Walker’s view that an IPO should be aimed for. No sale mechanism was settled upon at that time, and Mr Selak said in his evidence that it was going to be dependent on market conditions. To this end, in his paper, Frank Walker proposed a commencement of trading on the ASX for Tuesday 7 April 2020. The document also referred to various proposed incentives for goal achievement, comprised of proposed sales bonuses applicable at different targets, and including rewards for NEDs of $1 million for an outcome of $100 million to $150 million; $2 million for an outcome of $150 million to $200 million; and $4 million for an outcome in excess of $200 million.

Part A.2 – ESOP genesis and early history, including Bunnings acquisition proposal

1. During 2015, National Tiles took some steps towards putting the share option plan in place that would enable Eligible Persons, including directors, to purchase options to acquire shares in National Tiles that could be exercised on agreed terms. At that stage, the terms of the proposed plan referred to the proposal to issue options to acquire fully paid ordinary shares in National Tiles, with reference to the happening of a Liquidity Event by no later than 20 April 2020 – being the Original Vesting Date. Mr Selak said it was Frank Walker’s idea and met the latter’s objective of everyone being able to share in the growth.

1. Ernst & Young were engaged to assist National Tiles in preparing the plan. At the time, Mr Selak was an experienced partner at Ernst & Young, although he had limited experience with share option plans. He said the work was done by experts in Ernst & Young’s remuneration people team. On 15 April 2015, Ernst & Young prepared the proposed design for an employee equity plan. A key objective of the plan was stated as: ‘Reward for achievement of minimum share price upon liquidity event’.

1. On 7 May 2015, Mr Selak became a non-executive director of National Tiles, and Ms Morphet became a director of National Tiles and chairperson of the NT Board. Greg Larsen also joined the NT Board as a non-executive director at this time.

1. At a meeting of the NT Board on 23 July 2015, one of the matters discussed was the ESOP. The meeting minutes recorded that the ESOP was ‘in hand with E & Y retained’, and noted that National Tiles would have the document in four weeks, with the executives to be notified that day (23 July 2015) of its progress.

1. On 21 September 2015, Mr Selak emailed draft invitation and acceptance letters, and draft rules for the ESOP to Frank Walker.

1. Between 22 October 2015 and 23 March 2016, Mr Selak sent and received various emails about the ESOP and its terms, which included, for example, draft ESOP documentation, modelling, and scenarios based on various valuation outcomes. Mr Selak read and was familiar with the terms of the proposed ESOP and its development through to its final form.

1. By letter dated 17 November 2015 addressed to Frank Walker, Ms Morphet expressed her desire to resign as chairperson of the NT Board. The letter outlined three reasons why the resignation point had been reached, namely: the nature and tone of Frank Walker’s interaction with Ms Morphet and other board members; a continuing conflict around the role of the board and the CEO, and their authority, versus Frank Walker’s authority; and Frank Walker’s recent resistance to honouring the ESOP agreement reached the previous year. One of Ms Morphet’s concerns was delay and the time it was taking to progress and implement the ESOP in a context where she considered the delay to be unfair. She said this was because the move to the ESOP was, in part, in place of any pay rises for executives and had reduced the bonus pool, so that earnable bonuses were more limited. Mr Selak said the bonus pool, which did not apply to the NEDs, was to be reduced from $400,000–500,000 to $150,000. Mr Selak said that the delay was due to procrastinating on Frank Walker’s part; that he had no sense of urgency; and that everything seemed to take forever.

1. During her evidence, Ms Morphet referred to Frank Walker’s management style as being ‘particularly needy’, and that ‘for all his strengths, as of course he does have, his massive weakness of assuming he is the only one in the room and his point of view is the only point of view, made it very, very difficult for Nick [Walker] to get the most from the board and the most from his own time’. Ms Morphet also said that the NT Board meetings and the NT Board time was seriously devoted to managing Frank Walker’s position, ‘versus in a normal board you would have more interactive conversation between directors and with the CEO’. She said that Frank Walker ‘cast a very large shadow as a proprietor and founder’, but also noted more than once that it was ‘Frank’s money’.[34]

   [34]For example, transcript 275:19 and 289:9.

1. Following a meeting with Frank Walker, during which he asked Ms Morphet to reconsider her position, she decided to withdraw her resignation.

1. On 11 December 2015, Mr Selak sent an email to National Tiles attaching what were described as the final versions of the various ESOP documents. This email recorded, as was the fact, that he was a partner in the transaction advisory services division of Ernst & Young.

1. The minutes of the Walker ‘family board meeting’ dated 4 April 2016, which took place at Ernst & Young, recorded that the meeting had addressed numerous matters in relation to the ESOP. With respect to the ESOP price hurdle, the minutes recorded that it could be met through either an IPO or trade sale if the share price was 50 cents; or if the company was valued to be worth over $107.5 million, but noting that the value was to disregard the diluting impact of any options being exercised so as to increase the number of shares. The minutes also referred to a recent change to the documents and the number of shares to be created, recording that Mr Selak had devised a more efficient way to implement the share options. This was said to involve the Walker Family Trust retaining the existing 215 million shares on issue, with up to 35 million new shares being created for the ESOP.

1. As Ms Morphet said, in the context of introducing the ESOP, it was decided that the bonus pool for executives would be capped. The fees for NEDs also remained fixed, which Ms Morphet said was $100,000 per year for each of Mr Selak, Mr Larsen, and herself.

1. On 7 April 2016, National Tiles adopted the ESOP to enable Eligible Persons (defined as employees and non-executive directors) to acquire shares in National Tiles. The ESOP provided that Eligible Persons could be invited to apply for a grant of options to acquire shares in National Tiles, with the terms of the invitation to be set out in the ESOP and a letter of offer. Further details of the Option Agreement, including the ESOP Terms, are dealt with in Part B (and elsewhere) below.

1. On 20 April 2016, the final version of the ESOP was sent to Mr Selak, together with a letter of offer to participate in the ESOP in what was described as the National Tiles Co Pty Ltd Share Option Plan Invitation & Nomination Pack (Invitation Pack). In evidence, Mr Selak said that it was an incentive plan for the key executives and NEDs. He said the purpose was to align the interests of the company, its shareholders, the board and key employees — and to share in their efforts to grow the business.

1. In April 2016, Mr Selak accepted the offer for, and subsequently purchased, the 4 million Selak Options.[35] The purchase was funded by National Tiles paying Mr Selak a bonus of $27,012, which was applied to pay the price of the options. It was common ground that, at this point, the Option Agreement between Mr Selak and National Tiles came into existence. Mr Selak said that, ‘in essence’, he considered the final version of the ESOP to be consistent with the idea originally proposed to the board and the executives.

   [35]The ESOP application signed by Mr Selak was dated 17 June 2016, but nothing turned on this aspect.

1. Mr Selak accepted that in 2016, and thereafter, he was a sophisticated man of commerce, as was established in any event. It was also accepted, as was established, that at all relevant times he had knowledge of the ESOP Terms, including being aware:

·that shares to be issued were dependent upon accepting a shareholders’ agreement in terms to be approved by the Majority Shareholder;

·that the Shareholders’ Agreement had not been prepared and was to be provided down the track;

·that he did not consider asking for the Shareholders’ Agreement to be drafted earlier;

·that the Shareholders’ Agreement was potentially an important part of the ESOP;

·of the definition of ‘Shareholders’ Agreement’, and that it was slanted in favour of the Majority Shareholder; and

·of the terms of the Permitted Transfer Regime and restrictions on transfer in the ESOP.

1. On 7 June 2017, Frank Walker sought details of all the participants and their entitlements. The following information was provided to him, with respect to ‘ESOP Agreements as per the signed contracts’:

Name	Options	Price Hurdle	Purchase Price payable upon Grant of Options	Exercise Price per Option	Vesting (Same for everyone)
Brian Smith	500,000 500,000	$0.75/0.50 $1.00/0.75	0.3444	12.3	Year to 30 June 20.17 - $2.0m Year to 30 June 2018 - $2.2m Year to 30 June 2019 - $2.4m Year to 30 June 2020 - $2.6m
Camron Whittaker	2,000,000 2,000,000	$0.50 $0.75	0.3444	12.3
Diarmuid McAlary	1,500,000 1,500,000	$0.75/ - $1.00/-	0.3444	12.3
Gregory Larsen	4,000,000	$0.50	0.3444	12.3
John Selak	4,000,000	$0.50	0.3444	12.3
Kerry-Anne Konstantinou	1,000,000	$0.50	0.3444	12.3
Lynna Barrett	1,000,000 1,000,000 1,000,000	$1.00/0.50 $1.25/0.75 $1.50/1.00	0.3250	25.0
Mark Cash	4,000,000 4,000,000	$0.50/- $0.75/-	0.3444	12.3
Oliver Grozdanoski	250,000 250,000	$0.75/0.50 $1.00/0.75	0.3444	12.3
Russell Vaughan	2,500,000	$0.50	0.3444	12.3
Simon Duggan	250,000 250,000	$0.75/- $1.00/-	0.3444	12.3
Sue Morphet	4,000,000	$0.50	0.3444	12.3

1. In May 2018, National Tiles appointed Flagstaff Partners to assist it in seeking to find buyers to purchase the company, with the project being named ‘Project Dolphin’. National Tiles had gone to the market about a year or so earlier than planned because Frank Walker could see a decline in the amount of new houses being built, which Mr Selak described as the canary in the coal mine, because National Tiles’ performance tended to lag the market by five to eight months as its pipeline of work consisted of houses already acquired.

1. By letter dated 12 March 2019, Bunnings Group Limited (Bunnings) submitted a conditional offer to acquire 100% of the shares in National Tiles on a cash and debt-free basis. The offer was said to reflect the conclusions of Bunnings’ due diligence completed to date, including (then) recent discussions with management and advisers on current performance and short-term outlook. The document recorded Bunnings’ offer as a purchase price of up to $125 million, via a fully funded cash offer with a certain payment of $110 million on completion, and an additional contingent payment of $15 million to be paid if the business achieved a specified EBIT.

1. On 2 April 2019, during a meeting with Michael Schneider (Bunnings) and Justin Williams (Bunnings), Frank Walker made a counter-offer of $125 million plus a contingent payment of up to $20 million. This is referred to in Frank Walker’s email to Michael Schneider and Justin Williams dated 3 April 2019, which contains the following terms:

Hello Michael & Justin

On behalf of our family, I would like to thank you both for your time yesterday and your ongoing interest in acquiring our business.

I thought it worthwhile to confirm the structure upon which we are willing to transact.

· Certain payment of $125 million (representing 8.9x conservative FY19 EBIT); PLUS

· Contingent payment equal to 6.9x the incremental EBIT in FY20 over and above $14 million EBIT, capped at $20 million

· Total consideration payable will therefore not exceed $145 million

I trust that you will appreciate that the above offer represents a significant shift in our earlier expectations and that we have taken into consideration points that we believe are important to you in your decision making processes. As such, we sincerely believe this offer represents a fair deal to both parties.

Kind regards

Frank

1. Around this time, figures were prepared that recorded an estimated value for each ESOP participant, depending upon the indicative sale price. The summary was in the following terms:

EQUITY INCENTIVE SUMMARY BY PARTICIPANT

EBIT ($m)	$	15.2m	$	17.0m	$	22.0m	$	27.5m
Indicative sale price $m (x9.1)	$	138.4m	$	155.0m	$	200.6m	$	250.3m
Cents per share	$	0.52	$	0.60	$	0.79	$	1.01
Estimated Value per Participant:*
FWFT	$	88,700,000	$	101,200,000	$	131,460,000	$	166,110,000
Nick Walker	$	16,010,000	$	18,280,000	$	24,280,000	$	30,880,000
Sue Morphet	$	1,590,000	$	1,890,000	$	2,680,000	$	3,550,000
Greg Larsen	$	1,590,000	$	1,890,000	$	2,680,000	$	3,550,000
John Selak	$	1,590,000	$	1,890,000	$	2,680,000	$	3,550,000
Russell Vaughan	$	990,000	$	1,180,000	$	1,670,000	$	2,220,000
Camron Whittaker	$	790,000	$	940,000	$	2,680,000	$	3,550,000
Kerry-anne Konstantinou	$	400,000	$	470,000	$	670,000	$	890,000
Lynna Barrett	$	270,000	$	350,000	$	1,090,000	$	2,290,000
Chris Herrick	$	220,000	$	300,000	$	1,000,000	$	2,180,000
Brian Smith	$	200,000	$	240,000	$	670,000	$	890,000
Nicole Schafter	$	110,000	$	150,000	$	500,000	$	1,090,000
Oliver Grozdanoski	$	100,000	$	120,000	$	330,000	$	440,000
James Grose	$	60,000	$	70,000	$	250,000	$	540,000
Darren Taylor	$	50,000	$	60,000	$	80,000	$	100,000
Michael Vrettas	$	50,000	$	50,000	$	50,000	$	50,000
* Above numbers rounded and indicative only

1. In April 2019, Bunnings made its best and final offer of ‘$140m (albeit $25m was a payment contingent on future performance)’, as referred to in Flagstaff’s process review document on Project Dolphin, dated 3 May 2019. The fixed or certain part of the offer had been increased from $110 million to $115 million, with the additional $5 million contingent on the business hitting an FY19 EBIT of $14 million. In addition, the sliding scale earn out amount was to be capped at $25 million for an FY20 EBIT between $14 million and $18 million.

1. National Tiles did not accept Bunnings’ offer, which Mr Selak said was considered opportunistic. It was ultimately decided to take National Tiles off the market. Mr Selak stated in an email dated 14 November 2019 to Flagstaff’s Geoff Cohen, ‘the prevailing view was that the price offered did not reflect the underlying potential for, or value of, the business’. Mr Selak said there had been no interest from private equity, which had been a surprise, and that the only serious buyer was Bunnings. He also said that, at the time the final offer was received from Bunnings, they knew that they would not meet the EBIT targets in Bunnings’ final offer. He said it was decided to terminate negotiations and focus on the business.

1. On 2 May 2019, Frank Walker sent an email to the directors and others in which he said that, if the company achieved ‘seemingly very realistic numbers’ then, based on the Wesfarmers (Bunnings) multiple, over the next three years, the business value could be circa $250 million; ‘i.e. $1 per share without relying on potential purchasers paying any synergies or blue sky’.

1. In an email exchange between Frank Walker, Mr Larsen, Ms Morphet, Mr Selak and Nick Walker on 22 and 23 July 2019, Frank Walker set out the basis of an agenda for a proposed informal meeting to occur thereafter. He suggested the following topics: what we have achieved; what we have learned; what we can do better; the way forward; and board makeup.

1. In a further part of the email exchange, Frank Walker referred to what he wanted for the business, and what he wanted from the business. In so doing, Frank Walker stated that he was immensely proud of all that he had achieved over the past decade, but noted that:

Yet so much credit for this incredible journey is because of the great people, like the three of you [Ms Morphet, Mr Selak and Mr Larsen], I have had around me. And I like to believe we haven’t even started!

When addressing key milestones, Frank Walker stated that the business value had grown from circa $10 million to circa $100 million; and that the family’s wealth, excluding the business, had grown from circa $5 million to $100 million, including commercial and residential property investments with negative gearing shortfalls partly funded by company dividends and commercial leases. Frank Walker acknowledged the NEDs, describing them as invaluable to the success of the business.

1. By this time, it was apparent that a sale was not going to occur, and that the ESOP would need to be closed out. There had been earlier discussions as to whether it should be extended, and Mr Selak said that Frank Walker did not want to extend it.

1. In late October 2019, and subsequent to a meeting between Mr Selak, Ms Morphet and Mr Larsen at the Lyceum Club, Ms Morphet, Mr Selak and Mr Larsen met with Frank Walker. Ms Morphet told him that the ESOP needed to be closed out and proposed to Frank Walker that, rather than going through the valuation process, in ‘good faith’ he could agree to a number valuing the shares and close out the ESOP with a cash payment. The price suggested to Frank Walker was 50 cents per share, which was a price that Mr Larsen had suggested at the Lyceum Club meeting with Mr Selak and Ms Morphet.

1. In her evidence, Ms Morphet said that she was quite surprised at the 50 cent price suggested by Mr Larsen, because they had just closed out negotiations with Bunnings and the ‘market was sort of dipping a little bit’.[36] Mr Selak thought it was fair, and said that the $125 million counter-offer Frank Walker had put to Bunnings valued the company at 45–50 cents a share.

   [36]Transcript 284.

1. Frank Walker did not agree, and proposed that National Tiles do a valuation. He said it was going to be nowhere near as high as 50 cents a share and, so much so, that he would be happy to have the value put at the higher end of the valuation received. Mr Selak said Frank Walker had said the value was no more than 35 cents and so no options would vest; and that he had said getting the valuation would be a waste of time and money, and the NEDs could even use the top end of the range. Mr Selak thought differently and considered that some or all of the options would vest.

1. At this stage, Frank Walker, Ms Morphet, and Mr Selak were under the erroneous impression that any vested options would have to be cashed out by a payment from National Tiles to holders of vested options if there was no Liquidity Event by 20 April 2020. They remained under this mistaken belief until shortly before the April 2020 Board Meeting.

1. At the late October 2019 meeting, Frank Walker informed Mr Selak, Ms Morphet and Mr Larsen that he wanted to refresh the board and that, following the meeting of the National Tiles board in April 2020, Mr Larsen and Ms Morphet should retire as directors, and Mr Selak should continue as a director and be appointed as chair of the NT Board. In her evidence, Ms Morphet said that she was disappointed to be asked to finish up as a director and was personally disappointed by Frank Walker’s request.

1. Mr Selak told Frank Walker afterwards that he was willing to stay on and chair the NT Board, but also suggested that Frank Walker keep Ms Morphet on the NT Board, in part due to the good relationship with Nick Walker and her mentoring of him. Frank Walker was not persuaded.

Part A.3 – PwCS valuation and subsequent events

1. On 15 January 2020, PricewaterhouseCoopers Securities (PwCS) provided National Tiles with a draft valuation proposal for a proposed 31 December 2019 valuation of National Tiles in connection with closing out the ESOP, as provided for in the Option Agreement and ESOP Terms. Frank Walker, on behalf of FWG as Majority Shareholder, had nominated PwCS as the valuer.

1. PwCS proposed using a Discounted Cash Flow (DCF) methodology (with a market comparable approach to be used as a cross-check), with the valuation to be expressed as falling within a likely range. PwCS’s proposal for services was, in part, in the following terms:

Proposal for services

We have structured our proposal based on our understanding of your needs:

• To assess the Fair Market Value (defined below) of National Tiles to assist the Company consider the pricing of ordinary shares as required under the Company’s ESOP.

• This proposal specifically relates to a 100% Enterprise Valuation of National Tiles. We will perform a Fair Market Valuation under the following commonly used definition:

• “the price that would be negotiated at the valuation date in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm’s length”

• The concept of Fair Market Value does not take into account the particular circumstances of any specific purchaser or seller. It therefore excludes any special strategic value that may be placed on the business by one particular purchaser. Accordingly, the actual market price achieved in a transaction may be higher or lower than our Fair Market Value range depending upon the circumstances of the transaction, the relative negotiating position of each party and the level of synergies the purchaser may be able to realise. As such, the Fair Market Value generally represents the starting point for setting an offer price. The next step in the process is to assess the Strategic Value, being the value of a business or asset to a specified purchaser.

• We understand that you will make the necessary net debt adjustments in order to calculate a value of a single, ordinary share. Accordingly, our valuation will be presented as an Enterprise Valuation only. Should you require any assistance in the calculation of an equity value or a single share, we can amend our proposal to suit your needs.

1. On 28 January 2020, Frank Walker and Mr Selak had a telephone call about PwCS’s valuation proposal. Frank Walker referred to this telephone call in his file note of 5 February 2020.[37] The file note revealed the existence of tensions between Frank Walker and Mr Selak in late January and early February 2020 about the approach to the valuation, as did the email exchanges that followed, aspects of which are referred to below. The file note was prepared either shortly before or shortly after a meeting or discussion between Mr Selak, Frank Walker and HSF’s Nick Wormald about the proposed valuation. In his email to Mr Selak of 4 February 2020, Frank Walker said that he thought the meeting would be beneficial prior to the board meeting later in February ‘so that ideally you and I can be on the same page when PWC address the board next week‘.

   [37]A number of Frank Walker’s file notes were tendered in evidence without objection. In addition, a transcription of the collected file notes was prepared by the parties and became Exhibit MFI 3. MFI 3 noted with question marks where words could not be deciphered by the plaintiff and defendants. Red text recorded where the defendants considered the wording was unclear. I have read, reviewed and considered (a number of times) the Frank Walker file notes in evidence (FW File Notes), and the content of MFI 3. Where I refer in these reasons to the express terms of any of the FW File Notes, I have satisfied myself regarding the handwritten words used.

1. The statements in the 5 February 2020 file note included those of Frank Walker to the following effect:

1)          That Mr Selak told him that he had to accept a range for the value, that he could not dictate which documents the valuers were given, and that he must accept the DCF method.

2)          That Mr Selak was conflicted; that the ESOP was actually a share option plan largely for the NEDs, and that the share entitlement for the three NEDs amounted to about 66% of the entitlement.

3)          The NT Board had no role in the appointment of the valuer given the terms of the ESOP, but that Mr Selak as a participant could appeal the valuation if the majority agreed, and that was where his rights started and finished.

4)          Concern about Mr Selak’s lack of judgment in relation to the valuation, which he considered should not have been necessary in the first place given his view of the value of National Tiles. He stated that it would prove a waste of precious company cash to have the valuation carried out.

5)          The ESOP document clearly stated his sole right to approve the Valuer, and that the NT Board had no say in the process at all.

6)          The valuation should never have been required; that a fully unconflicted board would never have sanctioned it; and that based on shareholding ratios, he was 8.5% conflicted, but that the NEDs were 100% conflicted.

1. On 29 January 2020, Frank Walker and Chris Herrick met with PwCS to discuss the valuation proposal. Frank Walker said he had three primary concerns — that the valuation be fair; that it be a single point valuation; and that a DCF methodology not be adopted. He told PwCS that National Tiles had ‘over ambitious budgeting’.

1. On 29 January 2020, PwCS provided an amended valuation proposal which proposed providing a single point valuation and not a range. DCF remained the primary proposed valuation methodology.

1. In February 2020, National Tiles appointed PwCS as the independent third party valuer to conduct the valuation to close out the ESOP.

1. Ms Morphet said the valuation process was not straightforward for a number of reasons, but mostly because Frank Walker was anxious that the NEDs would ‘unduly influence the valuation because we had a lot to gain’.[38]

   [38]Transcript 290.

1. From about 28 January until early February 2020, a dispute or difference arose between Mr Selak[39] and Frank Walker concerning the method to be applied by PwCS in the valuation process. This occurred in part following Mr Selak’s receipt of PwCS’s amended proposal. In the email exchange, Mr Selak stated, among other things:

   [39]Who had considerable valuation experience. See Part C.2 below.

1)          The issue was one of the most significant matters that National Tiles had dealt with, as Frank Walker was said to have said in the past.

2)          The fact that the Majority Shareholder appointed the valuer did not absolve the NT Board, of which Frank Walker was also a member, of its duty to ensure that proper processes had been followed, and that the valuation met the appropriate standard.

3)          Doing a valuation, particularly one of this nature and importance, was not a mathematical exercise; it necessarily involved the valuer exercising significant subjective judgement, which was said to be why the valuation was expressed as a range, with no value in the range being any more or any less appropriate than any other value within the range.

4)          The PwCS initial valuation proposal met the appropriate standards, but the amended valuation proposal did not.

5)          The full board of National Tiles should have access to both the initial proposal and the amended proposal, so that the appropriate level of transparency could be maintained.

1. The issue was further referred to in a subsequent email exchange in which Mr Selak said he was pleased that Frank Walker had agreed to use DCF as the primary valuation methodology. Mr Selak also stated that he was looking at it as a director, and that it was important for National Tiles to show they had acted in good faith and the work was done to a high standard. By doing this, Mr Selak considered that it would significantly reduce the risk of a second valuation being commissioned. In specified circumstances, option holders were entitled to request one under the ESOP Terms. In evidence, Mr Selak said that Frank Walker was trying to control the valuation process. However, Mr Selak had confidence that PwCS were very professional, would follow proper processes and be thorough, and that their outcome would be professional and defendable.

1. On about 5 February 2020, Frank Walker, Nick Wormald and Mr Selak met and discussed the appointment of PwCS and the valuation process. As noted earlier, this was referred to in the 5 February 2020 FW File Note, which appears to have been prepared shortly before or shortly after that discussion.

1. Ms Morphet considered that National Tiles should have a corporate lawyer advising it in connection with close out of the ESOP. At a board meeting on 11 February 2020 (at which Mr Smythe and Hamish Emms of PwCS were present by invitation), it was resolved that National Tiles would take legal advice on various issues, including the valuation range/specific point valuation issue, and how that should be handled in terms of vesting. The relevant part of the meeting minutes were in the following terms:

ESOP Close Out – Business Valuation Update

As discussed at the previous Board meeting, it had been requested that the Major Shareholder (Frank Walker) nominate a third-party independent valuer to conduct a valuation of the business to use as the base valuation of the ESOP vesting conditions. The Major Shareholder had now nominated PwC who had provided a proposal which had been circulated to the Board for consideration.

It was noted that before PwC would provide their valuation report, the following issues would need to be resolved:

• The current ESOP terms did not specify the action to be taken should a range be provided by the independent valuer rather than a specific point.

• All Non-Executive Directors were ESOP participants and therefore had disclosed their relevant interests in the decision.

• PwC would need to interview members of the Board and Management Team in order to ascertain a fair valuation however the Non-Executive Directors were conflicted.

PwC Business Valuation Engagement

NS and HE (PwC) joined the meeting at 11.15 am.

The Chair welcomed PwC to the meeting and invited them to provide an overview of the valuation process.

The Board queried whether usual practice for the valuation was to provide a range or a specific point and PwC confirmed that a specific point was only provided in certain circumstances i.e. the ESOP rules call for a specific point. It was noted that the Board would make a decision regarding this point and advise PwC of their decision in due course.

The Chair thanked PwC for their time, and they left the meeting at 12.10pm. The meeting was adjourned from 12.10 pm to 12.15pm.

After consideration, the Board RESOLVED that legal advice should be taken regarding the following points:

• Whether the valuation should be requested as a range or specific point and if a range is recommended, how that should be handled in terms of vesting;

• Whether the Non-Executive Directors should be allowed to liaise with PwC during the interview period given the relevant conflicts of interest;

• How the relevant conflicts of interests be handled if a decision is required in relation to the ESOP vesting; and

• The Dispute Resolution process should the first valuation be disputed by a majority of Option Holders.

It was agreed that MGMT/NEDs would provide a recommendation regarding the engagement of a legal firm to provide the above advice which would be circulated for a decision by the Board via Circular Resolution.

1. A file note of Frank Walker dated 12 February 2020 stated as follows:[40]

   [40]As earlier mentioned, the question marks indicate handwritten words of Frank Walker that could not be deciphered — as is the case with the other file notes reproduced in these reasons.

12.2.20

ESOP.

1. S.M, G.L + J.S as a voting block currently control the N.T. Board

2. With a potential circa $7M conflict of interest issue at least this is not ??? to I’m the 100% owner of N.T being FWFT

3. The directors of the FWFT being F + R would need this issue rectified

4. They have decided to askThe most ??? + effective solution is for SM + GL to resign as directors now being 2 months earlier than what was planned.

5. This will leave the board controlled by 2 family directors FW + NW and one independent Chairman JS

_______________________

6. When the resignation of of SM + GL are received the board of NT will instruct PWC to value the business expressed in terms of a range in line with the wishes of the retiring directors and the ??? ??? ??? ??? J.S.

7. PWC will be instructed to nominate a single point value being any number within the range that they deem to best reflect the most accurate point within the range to reflect FMV of a single share net of debt.

8. This PWC figure will be deemed the ??? figure for the purposes of the ESOP valuation

9. If a majority of the ESOP participants reject this single point value they have the option to call on a second value to be ??? on the same specifications as the first

10. The average of both the first + second values will be deemed the FMV of a single share net of debt for the purposes of the ESOP calculations.

11. The above solution protects the conflicted directors from participating in a board decision where they have a ??? ??? ??? whilst also providing them with their preferred method of valuation

___________________________________________________

70% ??? – No ???

30K.

1. On about 13 February 2020, Frank Walker made a further file note, which contained numerous statements regarding the ESOP. Frank Walker’s notes included statements to the following effect:

1)           Mr Larsen and Ms Morphet would vote with Mr Selak because of his expectations/expertise.[41]

[41]It is not clear on the handwritten file note whether the word is ‘expectations’ or ‘expertise’, but the parties agreed that it was ‘expectations’.

2)           He did not trust Mr Selak because:

(a)        He said that if the valuation proved him wrong he would abide by them but will not accept the valuation;

(b)       He wants to move the cards after they fall;

(c)        He says he has a history that the Valuer’s (PwCS) do not have.

3)          That he trusted the three NEDs, but will not rely on trust when he does not have to.

4)          Mr Selak and Frank Walker think that Mr Larsen and Ms Morphet believe that without them we would not have succeeded. The note also contained a statement that Frank Walker believed ‘we succeeded because I had made good decisions’, although this comment was struck through in the file note.

5)          That Frank Walker would only proceed on the basis of upfront certainty, and in the absence of upfront certainty he would take control of the board and accept potential repercussions for managing or removing the board and how he behaves in relation to the process.

6)          Ms Morphet wanted to put forward an independent lawyer.

7)          Ms Morphet wanted to have all three NEDs talk to PWC. Frank Walker recorded his view that ‘it’s not on’.

8)          Mr Smythe had had one case in 25 years where the mid-point had not been his recommendation and that this demonstrates that Mr Selak had a desire to try and control the outcome by not agreeing to a mid-point.

9)          That the executives could be asked whether they want a range or a single point, and if they wanted a range, whether they would accept the mid-point.

10)       Mr Selak was saying he did not want to risk being brought before the courts for not acting in the best interests of the executives.

11)       ‘J.S is my opponent in what I trust will be a fair contest. I want the lowest — He wants the highest.’

12)       The note also contained a list of ‘Documents to table’.

1. On 14 February 2020, Chris Herrick, on behalf of National Tiles, signed the PwCS engagement letter. Among other things, the engagement letter noted that:

1)          The valuation was to provide an assessment of fair market value as defined of an ordinary share in National Tiles at 31 December 2019.

2)          The purpose of the valuation was to assist the company to comply with the ESOP and it was understood that this required a valuation to be performed at 31 December 2019 based on the enterprise value of the company less its net debt.

3)          That the following commonly used definition of ‘Fair Market Value’ would be used:

“the price that would be negotiated at the Valuation Date in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing, but not anxious seller acting at arms length.”

The concept of Fair Market Value does not take into account the particular circumstances of any specific purchaser or seller. It therefore excludes any special strategic value that may be placed on the business by one particular purchaser. Accordingly, the actual market price achieved in a transaction may be higher or lower than our Fair Market Value depending upon the circumstances of the transaction, the relative negotiating position of each party and the level of synergies the purchaser may be able to realise.

By its very nature, valuation work cannot be regarded as an exact science and the conclusions arrived at in many cases will, of necessity, be subjective and dependent on the exercise of individual judgement. To comply with the requirements of this engagement we will provide you with a single point estimate of the Fair Market Value of an ordinary share in the Company.

4)          There can be different approaches to valuation, and PwCS would most likely utilise the DCF method as their primary approach with the market comparable method being used as a cross-check.

1. From 21 to 23 February 2020, Frank Walker and Mr Selak exchanged emails regarding Frank Walker having been unwell and having had a health episode; and his decision to appoint his wife, Rhonda Walker, and his daughter, Georgie Bell, to the NT Board. Mr Selak raised concerns about these appointments in respect of the valuation process, noting that ‘new director appointments might have the appearance of compromising the third party independence of the valuation process and associated ESOP closure’.

1. In his email to Frank Walker of 23 February 2020, Mr Selak stated his view that having a majority of independent (non-family) directors on the National Tiles board was best practice from a governance viewpoint. He also stated that the appointment of family members could potentially expose Frank Walker to the risk of unwarranted allegations that he had stacked the National Tiles board, as well as associated impropriety regarding the process. He suggested to Frank Walker: why take the risk? Frank Walker sent these emails to HSF to obtain an opinion on whether he had acted appropriately. During his evidence, Mr Selak said he thought Frank Walker was stacking the board so that he could manipulate the outcome of the closing out of the ESOP.

1. Ms Morphet had also raised concerns with Frank Walker about the appointments and gave evidence that, as a result of the NEDs’ concerns, it was agreed that the new directors would not have any voting rights on ESOP discussions.

1. On 24 February 2020, Rhonda Walker and Georgie Bell were appointed to the National Tiles board. The National Tiles board then comprised Frank Walker, Nick Walker, Rhonda Walker, Georgie Bell, Mr Larsen, Mr Selak and Ms Morphet. It was agreed with Frank Walker that Rhonda Walker and Georgie Bell would not be involved in discussions or business regarding close out of the ESOP.

1. On 24 February 2020, Frank Walker sent the other directors what he described as his ‘proposal for consideration’ on the proposed valuation process.

1. On 26 February 2020, the National Tiles February 2020 board meeting was held. At the meeting, agreement was reached on the process to close out the ESOP. The minutes of that meeting read in part as follows:

Attendees

Sue Morphet	Greg Larsen
Frank Walker	Rhonda Walker
Nick Walker	Georgie Bell
John Selak	Chris Herrick

Outcomes and Agreed Actions

1. PwC Valuation Deliverable:

   a.PwC to be informed by Chris that they may elect to present their valuation in accordance with generally accepted market standards. If PwC elect to disclose a valuation range, PwC will be required to make a recommendation of a number within the disclosed range.

Part G.6.3 – Consideration – Cooperation Terms Tort Claims loss

1. Putting to one side the claims for aggravated and exemplary damages, the plaintiff put his loss of opportunity tort case regarding the Cooperation Terms on the same basis as he did for the Contract Claim; that is, claiming the same lost opportunity. This was addressed at some length in Part F.4 above, to which I refer. Having regard to the analysis in that part of the reasons above, and noting that for the Tort Claims the plaintiff relies upon the same counterfactual of signing the minimum permissible Shareholders’ Agreement, the damages claim for the Tort Claims also fails at causation. However, had the plaintiff made out the Tort Claims and not then failed at causation, I would have concluded that he had suffered loss of $333,282, in respect of the claimed lost opportunity for the reasons referred to in Part F.4.4 above.

1. Because the Tort Claims were not made out in various respects, it is not necessary to consider the question of aggravated or exemplary damages, and I do not propose to do so.

Part H – Other Matters

1. Shortly before these reasons were to be delivered, the plaintiff made an application by summons filed 28 May 2024 to uplift and inspect various documents over which the defendants claimed legal professional privilege (Documents Application), but which the plaintiff alleged was overridden by the engagement and operation of the so called crime/fraud exception. The Documents Application and its background is of some complexity, and included a related application made by the defendants during the interlocutory stages of the proceeding, and a recent contention by the defendants that the Documents Application could not be heard and determined unless the plaintiff first obtained leave to reopen his case (Reopening Issue).

1. I heard argument and determined the Reopening Issue on 11 July 2024.[373] I concluded that the plaintiff did not require leave to reopen his case in order to pursue the Documents Application and the other relief sought in the plaintiff’s summons. Directions were made to facilitate the hearing of the Documents Application and the other matters raised in the summons, and that hearing is scheduled to take place before a different judge of this Court on 6 August 2024. On 11 July 2024 I also informed the parties that I proposed to deliver these reasons on 17 July 2024, and directed that the plaintiff inform the Court and the defendants by 4pm on 15 July 2024 whether the plaintiff proposed to apply for a stay of the delivery of these reasons.  

   [373]Selak v National Tiles Co Pty Ltd & Ors (No 2) [2024] VSC 409.

1. On 15 July 2024 the defendants and the Court were informed that the plaintiff proposed to apply for a stay of the delivery of these reasons. At a hearing on 17 July 2024 an interim stay was granted unopposed to allow time for material to be filed and served and the stay application to be heard and determined. The stay application was heard by me on 23 and 24 July 2024 and I concluded that the stay application should be dismissed, and that these reasons should be handed down. I also informed the parties that I would allow them to have an opportunity to consider these reasons before giving judgment and making final orders.[374]

   [374]See Selak v National Tiles Co Pty Ltd & Ors (No 3) [2024] VSC 431.

Part I – Conclusion and Proposed Orders

1. For the above reasons I have concluded that the plaintiff has failed to make out:

1)          his breach of contract claims against National Tiles;

2)          his inducing breach of contract claim against Frank Walker; and

3)          his inducing breach of contract claim against FWG.

1. In so concluding, and by way of a brief non-exhaustive summary, my findings included those referred to in paragraphs 13 and 688 above.

1. The plaintiff’s claims against the defendants will be dismissed and I will hear from the parties on the question of costs and the precise form of orders.

ANNEXURE ‘A’ – ESOP Terms

National Tiles Co Pty Ltd

Share Option Plan

Adopted by the Board on 7th April 2016

Table of contents

Table of contents ...................................................................................................................  I

1.          Purpose....................................................................................................................   I

2.          Operation of the Plan................................................................................................   I

3.          Unvested Options.....................................................................................................   2

4.          Vesting of Options..................................................................................................... 3

5.          Ceasing employment.................................................................................................. 4

6.          Variations of capital................................................................................................... 5

7.          Liquidity Event ........................................................................................................... 5

8.          Clawback and lapse for fraud or breach ...................................................................... 5

9.          Amendments to the Plan and terms............................................................................ 6

10.        General terms and conditions ..................................................................................... 7

11.        Interpretation and Definitions.................................................................................... 9

1. Purpose

1.1The Plan is designed to allow the Board to make grants of Options to Eligible Persons which provide the opportunity to acquire Shares to assist with:

(a)attracting, motivating and retaining Eligible Persons;

(b)delivering rewards to Eligible Persons for individual and Company performance;

(c)allowing Eligible Persons to become Shareholders in the Company; and

(d)aligning the interests of Eligible Persons with those of Shareholders.

1. Operation of the Plan

2.1Grant of Options

2.1.1The Board may, from time to time, in its absolute discretion, operate the Plan and:

(a)invite an Eligible Person to apply for a grant of; or

(b)grant to an Eligible Person;

Options in accordance with the terms of the Plan and upon such additional terms and conditions as the Board determines, with the approval of the Majority Shareholder.

2.2Information to be provided

2.2.1At the time of the invitation under rule 2.1.1(a) or grant under rule 2.1.1(b), the Board will provide each Eligible Person with an Offer Letter which contains the following minimum information regarding the Options (to the extent it is relevant):

(a)the number or value of Options being granted, or the method or formula for determining the number or value of Options;

(b)the date of grant;

(c)the method and form of applying for, or rejecting of, a grant of Options as applicable;

(d)any amount payable in respect of a grant of Options;

(e)details of any applicable Conditions, including performance and/or service conditions and the applicable Period;

(f)the time or times at which the Conditions will be tested in respect of the Period (at which time, the Options may Vest and become exercisable);

(g)the period or period(s) over which Options may be exercised, the Exercise Price, any applicable Exercise Restrictions and the manner of exercise of those Options;

(h)details of any Trading Restriction on Shares, allocated upon exercise of the Options, whether on a mandatory or voluntary basis;

(i)the time and circumstances when Options lapse;

(j)the treatment of Options and Shares upon a Liquidity Event; and

(k)any other relevant terms and conditions to be attached to the Options or Shares allocated on exercise of Options.

2.3Differing terms

2.3.1The Board may decide to invite Eligible Persons to participate in a grant of Options, or make a grant of Options, on different terms for different Eligible Persons. In making this decision, the Board may have regard to:

1Share Option Plan

(a)the Eligible Person’s length of service with the Company;

(b)the Eligible Person’s position and remuneration; and

(c)any other matter the Board considers relevant.

2.4Terms of the grant of Options

2.4.1An Eligible Person who applies for a grant, or is granted Options, is deemed to have agreed to:

(a)be bound by the Rules and the terms and conditions set out in the Offer Letter;

(b)become a Shareholder, following the allocation of Shares upon the exercise of Options and enter into a Shareholders Agreement if required by the Company; and

(c)be bound by any relevant Company policy,

including any modifications applicable from time to time.

2.4.2Unless the Board determines otherwise, a grant of Options will not be made in part. In participating in the grant, the Eligible Person agrees to be granted the whole number of Options described in the Offer Letter.

2.4.3The Board reserves the right to reject an application for a grant of Options or to not make a grant of Options to an Eligible Person who has received an invitation. If the Board determines to exercise its discretion, the grant shall be deemed never to have been made.

2.5Title to Options

2.5.1Unless the Board determines otherwise:

(a)a grant of Options are personal to the Participant and cannot be transferred to other persons or entities unless allowed by rule 3.3.1; and

(b)Options may only be registered in the name of the Participant.

2.5.2Where the Board determines to grant Options to a Nominee, rule 2.4 applies to both the Eligible Person and Nominee and the Board may require both the Eligible Person and Nominee to agree to any terms and conditions and execute any forms that the Board determines prior to Options being granted.

1. Unvested Options

3.1.Shareholder entitlements

3.1.1A Participant shall not be entitled to receive dividends or have any other rights of a Shareholder in respect of the Options until the underlying Shares (if any) are allocated to the Participant under the Plan following exercise of Options.

3.2Lapse of unvested Options

3.2.1Subject to the Board’s overriding discretion, a Participant’s unvested Options will lapse upon the earliest to occur of:

(a)the date specified by the Board for the purposes of rule 2.2.1(i);

(b)an event described in the Offer Letter or any of rule 3.3 (Restrictions on Dealing), rule 3.4 (Prohibition against hedging), rule 5 (Ceasing employment), rule 6 (Variations of capital), rule 7(liquidity Event), or rule 8 (Clawback and lapse for fraud and breach);

(c)failure to satisfy the Conditions by the end of the Period;

(d)such other date as specified in the Offer Letter.

2Share Option Plan

3.2.2The Board may specify in the Offer Letter additional circumstances in which a Participant’s Options may lapse prior to Vesting.

3.3Restrictions on Dealing

3.3.1An Option is only transferable:

(a)in accordance with rule 4.2; or

(b)with the consent of the Board.

3.3.2Where the Participant purports to transfer an Options other than in accordance with rule 3.3.1, the Options immediately lapses.

3.4Prohibition against hedging

3.4.1A Participant must not enter into any scheme, arrangement or agreement (including options and derivative products) under which the Participant may alter the economic benefit to be derived from any Options that remain subject to these Rules, irrespective of future changes in the market price of Shares.

3.4.2Where the Participant enters, or purports to enter, into any scheme, arrangement or agreement described in rule 3.4.1, the Options immediately lapses.

1. Vesting of Options

4.1Testing

4.1.1Options will only Vest once the Board, in its discretion, determines any relevant Conditions have been satisfied.

4.1.2Subject to rule 4.1.1, at the end of the Period, the Board will:

(a)test the applicable Conditions (including any service conditions, if relevant) and determine the extent to which the Conditions have been satisfied and Options vest and become exercisable, subject to any Exercise Restrictions;

(b)determine the time when the Options Vest and become exercisable, subject to any Exercise Restrictions; and

(c)within a reasonable timeframe, notify Participants of the extent to which any applicable Conditions have been satisfied and Options Vest and become exercisable, subject to any Exercise Restrictions.

4.1.3Re-testing of Conditions in respect of a period shall not be permitted unless:

(a)provided for in the Offer Letter; or

(b)where the Board, in its complete discretion, determines otherwise.

4.2Exercise of Options

4.2.1Where any Exercise Restriction applicable to a Vested Option has lifted, or no longer applies, such Options may be exercised by the Participant, unless the Board makes a determination under rule 4.2.2.

4.2.2The Board may, in its discretion, determine that some or all of the Vested Options may not be exercised by the Participant under rule 4.3.2 and instead:

(a)cancel the relevant number of Vested Options, in which case the Company will provide consideration to the relevant Participant for the cancellation of the Vested Options by either cash payment or an allocation of Shares; or

(b)procure a third party (whether another person or entity or a Share Trust) to acquire the

3Share Option Plan

relevant number of Vested Options for cash.

In each case, the value of the consideration paid for the Vested Options cancelled will be equivalent to the value of the Vested Options, as determined by the Board in its sole discretion and acting reasonably, determined on the basis that the value of the Company is reduced by any Dividend Shortfall not paid before the relevant Liquidity Event.

Any cash payment made in accordance with rule 4.2.2 will be:

(a)made in Australian dollars; and

(b)paid subject to rule 10.8,

unless the Board determines otherwise.

4.3Settlement of Options upon exercise

4.3.1Upon the valid exercise of Options pursuant to rule 4.3.2, the Company must issue or procure the transfer of Shares in accordance with rule 4.4 to, or for the benefit of, the Participant.

4.3.2An Option is validly exercised if no Exercise Restrictions apply and the Participant:

(a)follows any process set out in the Offer Letter; and

(b)pays the Exercise Price (if any) to the Company.

4.3.3If a Participant purports to exercise Options in contravention of any applicable Exercise Restriction, the Options will be deemed to have been exercised on the first date the Exercise Restriction ceases to apply, subject to payment of the relevant Exercise Price.

4.4Share settlement

4.4.1Each exercised Option entitles the Participant to receive one Share in the Company.

4.4.2All Shares issued under the Plan will rank equally in all respects with other Shares of the same class for the time being on issue by the Company, except as regards to any rights attaching to such other Shares by reference to a record date prior to the date of their allocation or transfer.

4.4.3Shares allocated under the Plan will be subject to any applicable Trading Restrictions, the Shareholders’ Agreement and any relevant Company policy.

1. Ceasing employment

5.1Unvested Options

5.1.1Where a Participant ceases to be an Eligible Person before Options held by that Participant vest, all unvested Options held by that Participant lapse, unless the Board determines otherwise.

5.2Vested Options

5.2.1Where a Participant ceases to be an Eligible Person before Vested Options held by that Participant are exercised, all unexercised Options held by that Participant lapse, unless the terms of an Offer Letter provide otherwise or the Board determines otherwise.

5.3When employment ceases

5.3.1Subject to applicable laws, at the discretion of the Board, a Participant who is granted an approved leave of absence and who exercises their right to return to work under any applicable award, enterprise agreement, other agreement, statute or regulation before the Options Vest, will not be treated for those purposes as ceasing employment.

5.4Overseas transfers

5.4.1If a Participant remains an Eligible Person but is transferred to work in another country, or changes tax residence status, and as a result would:

4Share Option Plan

(a)become subject to restrictions on his or her ability to hold or deal in Options or Shares or receive any proceeds of sale from the sale of Shares due to the securities laws or exchange control laws of the country to which he or she is transferred; or

(b)suffer a tax disadvantage (or cause the Company to suffer a tax disadvantage),

the Board, in its discretion, may determine that Options Vest on such date, to such extent and on such terms as they determine, before or after the Eligible Person’s transfer takes effect.

1. Variations of capital

6.1Capital reorganisations, bonus issues and rights issues

6.1.1If, prior to Vesting, there is a Variation of Capital Event then the number of Options or the Exercise Price to which each Participant is entitled may be adjusted (including by lapsing Options) in the manner determined by the Board, with the approval of the Majority Shareholder.

6.1.2It is intended that the Board would exercise its discretion under this rule to ensure that Participants do not enjoy a windfall gain or unfair loss as a result of any Variation of Capital Event.

6.1.3If new Options are granted as part of such an adjustment, such Options will, unless the Board determines otherwise, be subject to the same terms and conditions as the original Options, including without limitation, any Condition.

1. Liquidity Event

7.1Board discretion upon a Liquidity Event

7.1.1The Board may specify in the Invitation (in accordance with rule 2.2.1 U)) a particular treatment that will apply to Options and Shares upon a Liquidity Event.

7.1.2If no particular treatment has been specified in the Offer Letter under rule 7.1.1, rule 7.2 will apply.

7.2Treatment upon a Liquidity Event

7.2.1Upon a Liquidity Event, or upon the Board determining that a Liquidity Event is likely to occur, the Board may determine, in its absolute discretion, that some or all of the Participant’s unvested Options:

(a)Vest at the completion of the relevant Liquidity Event (or at such other time as the Board determines);

(b)may be forfeited;

(c)remain subject to the applicable Conditions and/or Period(s); or

(d)become subject to substitute or varied Conditions and/or Period(s).

7.3Notification of Vesting of Options

7.3.1If a Liquidity Event occurs, or the Board exercises its discretion pursuant to rule 7.2, the Board must immediately notify all affected Participants.

7.3.2Where a Participant holds a Vested Option at the date of the Liquidity Event (including those that Vest pursuant to rule 7.2.1), those Options must, unless the Board determines otherwise, be exercised in accordance with rule 4.3 within such period after the Liquidity Event as specified by the Board, unless the Board makes a determination under rule 4.2.2. Any Options not exercised within this period will lapse.

1. Clawback and lapse for fraud or breach

8.1Board discretion to lapse Options generally

8.1.1Where, in the opinion of the Board, a Participant has committed an act which:

(a)constitutes fraud, or dishonest or gross misconduct in relation to the affairs of the Company;

5Share Option Plan

(b)brings the Company into disrepute;

(c)is in breach of his or her obligations to the Company, including compliance with applicable Company policy;

(d)fails to perform any other act reasonably and lawfully requested of the Participant; or

(e)has the effect of delivering strong Company performance in a manner which is unsustainable or involves unacceptably high risk, and results or is likely to result in a detrimental impact on Company performance following the end of the Period,

the Board may make a determination under rule 8.3.

8.2Clawback

8.2.1Where, in the opinion of the Board:

(a)an Option, which would not have otherwise Vested, Vests or may Vest as a result directly or indirectly of:

(1)the fraud, dishonesty or breach of obligations (including, without limitation, a material misstatement of financial information) of any person; or

(2)any other action or omission (whether intentional or inadvertent) of any person,

the Board may make a determination under rule 8.3 ; or

(b)an Option, which may otherwise have Vested, has not Vested as a result directly or indirectly of any circumstance referred to in this rule 8.2.1, the Board may reconsider the level of satisfaction of the applicable Conditions and reinstate and Vest any Option that may have lapsed to the extent that the Board determines appropriate in the circumstances or make a new grant of Options that reflect the terms of the original Option.

8.3Board’s powers in relation to Options

8.3.1In the circumstances set out in rule 8.1 or 8.2 above, the Board may, in its absolute discretion, and subject to applicable laws, determine any treatment in relation to an Option, including, without limitation, to:

(a)reset the Conditions and/or alter the Period applying to the Options;

(b)deem all or any Options which have not vested to have lapsed or been forfeited (as relevant);

(c)deem all or any Options, including any Shares allocated following vesting (or exercise, as applicable) of an Option may not be subject to any further restrictions under this Plan, to have lapsed or been forfeited (as relevant); and/or

(d)where Shares that have been allocated to a Participant under the Plan have been subsequently sold, require that the Participant repay the net proceeds of such a sale.

1. Amendments to the Plan and terms

9.1Amendments

9.1.1Subject to rule 9.1.2 and 9.1.4, the Company may at any time and from time to time at the request of the Majority Shareholder, supplement or revoke, including by way of schedule, all or any of these Rules or all or any of the rights or obligations of the Participants or any of them.

9.1.2Despite this rule 9.1 except as to setting or varying vesting conditions or price hurdles or vesting dates, no amendment to these Rules may materially reduce the rights of any Participant attaching to Options granted under the Plan prior to the date of the amendment, unless the amendment is made primarily for the purpose of complying with present or future Laws applicable to the Plan or the

6Share Option Plan

Company, to correct any manifest error or mistake, or with the consent of Participants who hold a majority of the Options affected by the amendment.

9.1.3The Board must provide written notification to Participants affected by any amendment made pursuant to rule 9.1.1 as soon as reasonably practical after any such amendment has been made.

9.1.4Any amendment made pursuant to this rule 9.1 may be given such retrospective effect, if so determined by the Board.

9.2Non-residents of Australia

9.2.1Notwithstanding anything in these Rules, the Board may at any time, and from time to time, amend, supplement or revoke, including by way of schedule, any of these Rules, to apply to an Eligible Person or Participant, employed in, resident in, or who are citizens of, countries other than Australia.

9.2.2Any different rules made under rule 9.2.1 shall be restricted in their application to those Eligible Persons and Participants employed in, resident in, or who are citizens of the foreign country or countries specified by the Board, and may be amended, supplemented or revoked in accordance with rule 9.1.1.

9.2.3For the purposes of clarification, any different rules that are adopted under rule 9.2.1 may have an adverse impact upon Eligible Persons or Participants. However, any different rules that may apply must comply, to the extent legal and practicable, with the basic principles of the Plan.

1. General terms and conditions

10.1Options and obligations of Participants

10.1.1Unless the subject of an express provision in an employment contract, the rights and obligations of any Participant under the terms of their office, employment or contract with the Company are not affected by their participation in the Plan.

10.1.2Except where expressly contemplated, these Rules will not form part of and are not incorporated into any contract between any Participant (whether or not they are an Eligible Person) and the Company. The grant of Options on a particular basis in any year does not create any right or expectation of the grant of Options on the same basis, or at all, in any future year.

10.1.3No Participant has any right to compensation for any loss in relation to the Plan.

10.1.4The Participant appoints the company secretary of the Company (or any other officer of the Company authorised by the Board for this purpose) as his or her agent to do anything necessary to:

(a)allocate Shares to the Participant in accordance with these Rules; and

(b)execute transfers of or documents necessary to cancel or forfeit Shares or Options in accordance with these Rules or their conditions of issue.

10.2Power of the Board

10.2.1The Board administers the Plan and subject to clause 9 has absolute and unfettered discretion in exercising any power or discretion concerning the Plan and may:

(a)delegate to any person for the period and on the terms it decides the exercise of any of its powers or discretions under the Plan;

(b)decide on appropriate procedures for administering the Plan consistent with these Rules;

(c)establish and implement a Share Trust, and delegate authority to a Trustee, for the purposes of delivering and holding Shares on behalf of Participants;

(d)resolve conclusively all questions of fact or interpretation concerning the Plan and these Rules and any dispute of any kind that arises under the Plan;

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(e)determine to suspend or cease operation of the Plan at any time and take any actions required to effect the winding up of the Plan;

(f)act or refrain from acting at its discretion under these Rules or concerning the Plan or the Options or Shares held under the Plan; and

(g)waive any breach of a provision of the Plan.

10.2.2Except as otherwise expressly provided in the Plan, the Board has absolute and unfettered discretion to act or refrain from acting under or in connection with the Plan and in the exercise of any power or discretion under the Plan.

10.3Waiver of terms and conditions

Notwithstanding any other provisions of the Plan, the Board may at any time waive in whole or in part any terms or conditions (including any Condition) in relation to any Options granted to a Participant under the Plan and the Rules.

10.4Dispute or disagreement

In the event of any dispute, disagreement or uncertainty as to the interpretation of the Plan, or as to any question or right arising from or related to the Plan or to any Options or Shares granted under it, the decision of the Board is final and binding.

10.5Personal information

Subject to compliance with the Privacy Policy, the Privacy Act and all applicable Law, each Participant consents to the Company, or its agents (and each of their Related Parties) collecting, holding and using personal information that the Participant provides in the application to participate in the Plan or otherwise provides to the Company, or its agents (and each of their related parties) as part of their employment, in order to carry out the administration and operation of the Plan in accordance with these Rules, including providing relevant information to:

(a)the Plan manager or another entity that manages or administers the Plan on behalf of the Company (as the case may be);

(b)any broker or external service provider, including a tax or financial adviser;

(c)the trustee of any Share Trust;

(d)any government department or body; and

(e)any other person or body as required or authorised by law.

10.6Notices

A notice or other communication under or concerning the Offer Letter or the Rules is validly given to a Participant if:

(a)delivered personally to the Participant;

(b)sent by prepaid post to the Participant’s last known residential address;

(c)sent to the Participant by facsimile, email or other electronic means at the Participant’s place of work; or

(d)posted on an electronic notice board maintained by or on behalf of any member of the Company and accessible by the Participant,

and will in the case of (a), (c) and (d) above, be treated as being received immediately following the time it was sent, posted, or delivered, and where it is sent by regular post it will be treated as received 48 hours after it was posted.

10.7Laws governing Plan

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The Plan and any Options granted and Shares allocated under it are governed by the laws of Victoria and the Commonwealth of Australia. Any agreement made under the Plan is entered into in the State of Victoria and each participant submits to the exclusive jurisdiction of courts of that state to herein determine matters arising under the Plan.

10.8Tax

10.8.1Unless otherwise required by Law, no member of the Company is responsible for any Taxes which may become payable by a Participant as a consequence of or in connection with the grant of any Options, the allocation or transfer of any Shares or any dealing with any Options or any Shares.

10.8.2The Company, or the Trustee will have the right to withhold or collect from a Participant such Taxes as any member of the Company, or the Trustee is obliged, or reasonably believes it is obliged, to account for to any taxation authority. In exercising this right, the Company, or the Trustee may:

(a)require the Participant to provide sufficient funds (by way of salary deduction or otherwise); or

(b)sell Shares to be issued or transferred to the Participant, including the sale of sufficient Shares to cover any costs of such sale.

1. Interpretation and Definitions

11.1Interpretation

In the Plan, the following rules apply unless a contrary intention appears:

(a)capitalised terms have the meanings provided in rule 11.2;

(b)headings are for convenience only and do not affect the interpretation of the Plan unless the context requires otherwise;

(c)any reference in the Plan to any statute or statutory instrument includes a reference to that statute or statutory instrument as amended;

(d)any words denoting the singular include the plural and words denoting the plural include the singular;

(e)any words denoting the masculine apply equally to the feminine equivalent; and

(f)where any word or phrase is given a definite meaning in this Plan, any part of speech or other grammatical form of that word or phrase has a corresponding meaning.

11.2Definitions

ASXAustralian Securities Exchange

BoardThe board of directors of the Company, or any committee, person or body to which the board duly delegates its powers and authorities to under this Plan

CompanyNational Tiles Co Pty ltd (ABN 57 007 381 599)

ConditionOne or more performance or service related conditions which must be satisfied before an Option Vests

Constitution The constitution of the Company operating as a contract between the Company and

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its members and officers

Corporations Act Means the Corporations Act 2001 (Cth)

Dividend Shortfall  Has the meaning given to that term in any relevant Offer Letter.

Eligible Person  Any employee or non-executive director or the Company, or any other person so designated by the Board.

Exercise Price  The amount payable on exercise of an Option as determined by the Board and specified for the purposes of rule 2.2.1 (which may be nil)

Exercise Restriction  Restrictions on the ability of a Participant to exercise a Vested Option as specified for the purposes of rule 2.2.1 and 5.2.1.

Liquidity Event  Means:

(a)Listing of the Shares on the ASX or another registered securities exchange;

(b)The sale of all, or substantially all, of the Company’s assets or shares to a third party; or

(c)such other event determined by the Board to be a Liquidity Event.

MajorityMeans any shareholder or group of

Shareholder  shareholders who at the relevant time between them own more than 50% of the Shares on issue.

NomineeMeans:

(a)an immediate family member of the Eligible Person;

(b)a company whose members comprise no persons other than the Eligible Person or immediate family members of the Eligible Person;

(c)a trustee of a discretionary trust where the Eligible Person is the trustee and/or appointor of the trust, or

(d)a corporate trustee of a self-managed superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993) where the Eligible Person is a director

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of the trustee,

nominated by the Eligible Person to receive the grant of Options and which has been approved by the Board.

Offer Letter  A letter or document, in any form, provided by the Board to an Eligible Person setting out the terms and conditions of the grant, including the information set out in rule 2.2.1

OptionAn entitlement to receive a Share subject to satisfaction of applicable conditions and compliance with the applicable exercise procedure (including Exercise Restrictions and payment of any applicable Exercise Price), granted to a Participant under the Plan on the terms and conditions determined by the Board.

Option Value  The market value (at the time a Participant elects to exercise Vested Options under rule 4.2.1) of the Shares that would have been allocated or transferred to the Participant upon exercise of the Options (or otherwise under rule 4.2.2) less any applicable Exercise Price.

Participant  An Eligible Person or a Nominee approved by the Board who has been granted Options under the Plan

PeriodThe period or periods over which the Conditions are measured or tested as specified by the Board for the purpose of the Option, including the period or periods over which re-testing occurs pursuant to rule 4.1.3

PlanNational Tiles Co Pty Ltd Share Option Plan

Privacy Act The Privacy Act 1988 (Cth), as amended

Privacy Policy  The privacy policy that applies to the Company from time to time

RulesThe rules of the Plan, as amended from time to time

ShareA fully paid ordinary share in the capital of National Tiles Co Pty Ltd

Share TrustAn employee share trust established by the Company to hold Shares on behalf of Eligible Persons

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Shareholder  A registered holder of a Share

Shareholders’  A shareholders’ agreement in terms

Agreementapproved by the Majority Shareholder at the time it is entered into which will include provisions with the following effect and any other terms approved by Majority Shareholder at that time:

(a)Shares resulting from the exercise of an Option are not transferable other than pursuant to any Trading Restriction described in the terms of the Option offer or as follows:

(1)a Majority Shareholder can require (“Drag Right”) the holders of Shares resulting from the exercise of an Option to sell to a third party those shares at the same price and time as the Majority Shareholder sells Shares to a person or persons acquiring more than 50.1% of the issued Shares (“Drag Sale”); and

(2)the holders of Shares resulting from the exercise of an Option can sell (“Tag Right”) if a Drag Sale occurs but the Drag Right is not exercised, elect to sell the same proportion of their Shares to the same person at the same price and time as the Majority Shareholders are selling in the Drag Sale.

(b)Each Shareholder will agree to execute and do all documents and things necessary to enable a buy back of Shares by the Company approved by the Board and Majority Shareholder in respect of Shares resulting from the exercise of Options.

Takeover Bid As defined in section 9 of the Corporations Act

TaxesAny tax, levy contribution or duty (including any associated penalty or interest amount), social security liability or other liability imposed by any Law, governmental, semi-governmental, judicial or other authority

Trading Restriction  Restriction on transfer imposed on Shares allocated under the Plan

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TrusteeThe trustee from time to time of the Share Trust

ValuerA tier 1 independent valuer nominated by the Majority Shareholder.

Variation of Capital  Any event affecting the number or type of

EventShares on issue in the capital of the Company, including a subdivision, consolidation, reduction, redemption or return of capital, or rights issue, bonus issue or other further issue of securities

VestA participant becoming entitled to exercise their Options, subject to any Exercise Restrictions and upon valid exercise, have the Shares underlying his or her Options allocated to him or her subject to the Rules of the Plan (and Vested or Vesting shall be construed accordingly)

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SCHEDULE OF PARTIES

S ECI 2020 04730

JOHN SELAK	Plaintiff
- and -
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