Sheehy v Nuix Pty Ltd

Case [2023] FCA 56


FEDERAL COURT OF AUSTRALIA

Sheehy v Nuix Pty Ltd [2023] FCA 56

File number(s): NSD 1168 of 2020
Judgment of: HALLEY J
Date of judgment: 7 February 2023
Catchwords: CORPORATIONS – where applicant was granted options exercisable upon sale of respondent business – where respondent undertook share split pursuant to s 254H of Corporations Act 2001 (Cth) (Corporations Act) – where respondent conducted initial public offering (IPO) – where applicant sought to exercise options after IPO – whether consent judgment entered in prior proceedings in Supreme Court of New South Wales precludes applicant from advancing causes of action – whether applicant precluded by res judicata/cause of action estoppel, issue estoppel, Anshun estoppel or abuse or process –whether term implied into renegotiation of applicant’s remuneration package (2008 Option Agreement) that there was to be a proportionate adjustment to conversion ratio between options and shares in event of share split (Implied Term) – whether implication from express terms or to give business efficacy to agreement – whether changes in respondent shareholding constituted sale of business – whether respondent breached 2008 Option Agreement – whether respondent not accepting applicant’s notice to exercise options was oppressive contrary to s 232 of Corporations Act – whether respondent’s conduct was unconscionable contrary to s 21 of the Australian Consumer Law – where applicant precluded by doctrine of Anshun estoppel from pursuing causes of action – where not necessary to prove detrimental reliance as an additional element to establish Anshun estoppel – where respondent conduct was not unconscionable or oppressive – where Implied Term necessary to give business efficacy to 2008 Option Agreement – where respondent did not breach 2008 Option Agreement as sale of respondent business has not occurred – originating process dismissed
Legislation:

Corporations Act 2001 (Cth) ss 170, 175, 195, 232, 233, 254H, 708A

Competition and Consumer Act 2010 (Cth) sch 2, The Australian Consumer Law ss 2, 21

Trade Practices Act 1974 (Cth) ss 52, 53

Cases cited:

Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (No 2) (2001) 119 FCR 1; [2001] FCA 1861

Accord Pacific Holdings Pty Ltd v Gleeson as Liquidator of Accord Pacific Land Pty Ltd (in liq) [2011] NSWSC 1021

Adamson v New South Wales Rugby League Limited (1991) 27 FCR 535; [1991] FCA 9

Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57

Arthurson v Victoria [2001] VSC 244

Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588; [2000] HCA 25

Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36

Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90

Beck v Weinstock [2012] NSWCA 289

Blair v Curran (1939) 62 CLR 464; [1939] HCA 23

Bofinger v Kingsway Group Pty Ltd (2009) 239 CLR 269; [2009] HCA 44

Boreland v Docker [2007] NSWCA 94

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AGLC
Sheehy v Nuix Pty Ltd [2023] FCA 56
Case
[2023] FCA 56
Decision Date

CaseChat Overview and Summary

The case of Sheehy v Nuix Pty Ltd involved a dispute between Mr Sheehy, a former CEO of Nuix, and Nuix regarding the exercise of share options granted to Mr Sheehy. The matter was heard by the Federal Court of Australia, where Mr Sheehy sought to exercise his share options after Nuix conducted an initial public offering (IPO). The primary issues before the court included whether Mr Sheehy was precluded from advancing his claims by various estoppel doctrines and whether Nuix breached the 2008 Option Agreement or acted oppressively or unconscionably.

The court found that Mr Sheehy was precluded by the doctrine of Anshun estoppel from pursuing his claims. The Anshun estoppel applied because Mr Sheehy had previously sought and obtained a declaration in the 2018 Proceedings that his share options were exercisable, and he had not appealed that decision. The court also determined that while an implied term regarding the adjustment of the conversion ratio between options and shares in the event of a share split was necessary to give business efficacy to the 2008 Option Agreement, there had been no breach of that agreement as there had been no sale of Nuix's business. Additionally, the court found that Nuix's conduct in not accepting Mr Sheehy's notice to exercise his options was neither oppressive nor unconscionable.

The court dismissed the amended originating process brought by Mr Sheehy against Nuix. The parties were directed to provide agreed or competing orders for costs within 14 days of the orders, with the opportunity for an oral hearing if necessary.

This case highlights the complexities of share option agreements and the estoppel doctrines that can preclude parties from advancing certain claims in subsequent litigation, particularly where the issues have already been determined in prior proceedings.

Orders

Orders of the court

1. The amended originating process is to be dismissed.

2.

Within 14 days of these orders, the parties provide, by email, to the Associate of

Halley J agreed or competing orders for costs.

3. In the event of competing orders, the parties also provide short written submissions and any affidavit evidence in support of their respective positions.

4. The making of costs orders be dealt with on the papers unless either party seeks an oral hearing, in which event that is to be communicated in the email referred to in Order 2.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

TABLE OF CONTENTS

INTRODUCTION

[1]

EVIDENCE

[15]

Mr Sheehy

[15]

Nuix’s witnesses

[20]

Mr Standen

[21]

Mr Phillips

[28]

Mr Smith

[33]

Ms Rochay

[41]

Mr Egan

[45]

Expert witnesses

[48]

FACTUAL BACKGROUND

[54]

Establishment of Nuix

[54]

2006 Employment Contract

[56]

2008 Option Agreement

[65]

Failure to sell Nuix by 2010 and 2011 share acquisition by Macquarie

[73]

2016 payment to Mr Sheehy and his resignation

[77]

Share Split and resignation of Mr Sheehy

[80]

2018 Proceedings

[88]

Commencement of these proceedings

[93]

Initial Public Offering

[94]

Purported exercise of the Remaining 2008 Options

[101]

NUIX PRECLUSIONARY DEFENCES

[102]

Introduction

[102]

Res judicata/cause of action estoppel

[104]

Principles

[104]

Submissions of Mr Sheehy

[111]

Submissions of Nuix

[114]

Consideration

[123]

Issue estoppel

[130]

Principles

[130]

Submissions of Mr Sheehy

[136]

Submissions of Nuix

[138]

Consideration

[142]

Anshun estoppel and abuse of process

[145]

Principles

[145]

Anshun estoppel

[145]

Abuse of process

[150]

Submissions of Mr Sheehy

[153]

Requirements for Anshun estoppel

[153]

Relevance and reasonableness

[157]

Submissions of Nuix

[165]

Requirements for Anshun estoppel

[165]

Relevance and reasonableness

[168]

Consideration

[176]

Requirements for Anshun estoppel

[176]

Anshun estoppel and abuse of process

[189]

BREACH OF THE 2008 OPTION AGREEMENT

[213]

Introduction

[213]

Implication from express terms

[216]

Principles

[216]

Submissions of Mr Sheehy

[222]

Submissions of Nuix

[229]

Consideration

[233]

Implication necessary to give business efficacy

[239]

Principles

[239]

Submissions of Mr Sheehy

[245]

Business efficacy

[248]

Other BP Refinery factors

[253]

Reliance on post-contractual conduct

[255]

Submissions of Nuix

[257]

Business efficacy

[259]

Other BP Refinery criteria

[261]

Reliance on subsequent conduct

[266]

Consideration

[269]

Forsayth and Leadenhall

[272]

Business efficacy

[281]

Other BP Refinery factors

[290]

Relevance of post-contractual conduct

[299]

OPPRESSION

[310]

Introduction

[310]

Principles

[311]

Submissions of Mr Sheehy

[316]

Submissions of Nuix

[322]

Consideration

[330]

UNCONSCIONABILITY

[341]

Introduction

[341]

Principles

[342]

Trade or commerce

[344]

Acquisition of services

[348]

Unconscionable conduct

[349]

Submissions of Mr Sheehy

[352]

Submissions of Nuix

[356]

Consideration

[359]

EXERCISE OF OPTIONS

[364]

Introduction

[364]

Sale of the business of Nuix

[367]

Submissions of Mr Sheehy

[367]

Submissions of Nuix

[369]

Consideration

[371]

Alternative oppression claim

[385]

The submissions of Mr Sheehy

[385]

The submissions of Nuix

[387]

Consideration

[388]

QUANTUM

[392]

Introduction

[392]

Principles

[402]

Submissions of Mr Sheehy

[405]

Exercise of the 2008 Options

[405]

Issue of the Shares

[408]

Sale of the Shares

[414]

Blockage discounts

[415]

Submissions of Nuix

[416]

Exercise of the Remaining 2008 Options

[416]

Issue of the Shares

[417]

Sale of the Shares

[420]

Blockage discounts

[427]

Consideration

[430]

Exercise of the Remaining 2008 Options

[430]

Issue of the Shares

[438]

Sale of the Shares

[448]

Retention of the Shares

[448]

Blockage discounts

[451]

Most probable Scenario

[454]

DISPOSITION

[457]

Background

Background to the litigation

I consider in more detail the evidence given by the experts later in these reasons in addressing what damages Mr Sheehy might have expected to have been awarded had he otherwise been successful in establishing the causes of action that he seeks to advance in these proceedings.FACTUAL BACKGROUNDEstablishment of Nuix Nuix was founded by Mr Jim McInerney. He died in 2004 and his wife, Agnes McInerney, inherited ownership of Nuix. In late 2005, a group of six investors invested approximately $510,000 in Nuix (Angel Investors) to fund its recapitalisation and restructuring.2006 Employment Contract On 12 June 2006, Mr Sheehy commenced employment with Nuix as its CEO. The Chairman of Nuix at that time was Mr Tony Castagna who remained the Chairman until 2021, apart from a period between 2013 and 2015 when the Chairman was Mr David Standen. Mr Sheehy was employed pursuant to a written agreement in the form of a letter from Mr Castagna dated 12 April 2006 and signed by Mr Sheehy on 19 June 2006 (Employment Contract). The total compensation package offered in the Employment Contract comprised a guaranteed cash component, an “at-risk” bonus and an equity participation. The “at-risk” bonus comprised a sales bonus and a separate profitability bonus. The Employment Contract provided, under the heading “Equity participation”, that Mr Sheehy would be:…offered the opportunity to purchase 30,000 shares, or 3% of the issued capital in the company via an options scheme. The terms and conditions for these stock options will be provided to you in a separate document, but the essential terms will be:• Vesting over 36 months, commencing June 2006• 12-month “cliff” for vesting, such that should you leave prior to June 2007, no stock options would vest• 12 month “accelerated” vesting in the event of a change of control of the company• 90-day period after your departure from the company in which you may exercise these options … Under the heading “Equity participation”, the Employment Contract also provided that Mr Sheehy may be granted an additional 25,000 fully-paid shares at the discretion of the Nuix Board. The Employment Contract stated the compensation package “provides a strong incentive for [Mr Sheehy] to unlock the value inherent in the opportunity” available to Nuix. Mr Sheehy subsequently received an “Offer to Take up Options Under the Employee Option Plan (EOP)” dated 23 July 2007 (2007 Offer). Mr Sheehy was invited to apply for the 2006 Options under the Employee Option Plan Rules of Nuix dated 17 July 2007 (EOP Rules) on the terms and conditions set out in the 2007 Offer. The options were stated to be otherwise subject to the EOP Rules. The options were exercisable for five years after the date on which they vested. The EOP Rules provided:(a)for the accelerated vesting of options in the event of a “Change of Control event”, which “denotes an event where 51% of the company’s Shareholding changes ownership” (cl. 11); and(b)that in the event of a “reorganisation of the capital of the Company the terms of the Options shall be reorganised in accordance with the relevant re-organisation plan as at the date of reorganisation” (cl. 10.1).

Evidence

Evidence Before The Court

I am otherwise persuaded that the implied term that Mr Sheehy seeks should be implied into the 2008 Option Agreement but there has been no breach of that agreement because there has been no sale of the business of Nuix. I am not persuaded that the conduct of Nuix in not accepting the Option Exercise Notice was oppressive contrary to s 232 of the Corporations Act or unconscionable conduct contrary to s 21 of the ACL. If, contrary to these findings, Nuix had breached the 2008 Option Agreement or acted oppressively or unconscionably, I have determined that the value of the Nuix shares that Mr Sheehy would have been issued if the Option Exercise Notice had been accepted by Nuix for the purposes of determining the damages or compensation to which Mr Sheehy would have been entitled is best reflected in the valuation undertaken by Mr Michael Potter, the expert forensic accountant relied upon by Nuix, for the fourth scenario he was asked to consider.EVIDENCEMr Sheehy Mr Sheehy gave evidence of the circumstances in which he entered into the 2008 Option Agreement and the background to the incentives provided to him. This evidence included the growth of the business of Nuix, the transactions between Nuix and Macquarie in 2011 and 2016, the sale to Macquarie in December 2016 of 30,000 options that had been issued to him with a grant date of 13 June 2006 and an exercise price of $0.85 (2006 Options) and some 20% of the 2008 Options. Mr Sheehy gave further evidence regarding the circumstances of his resignation as the CEO of Nuix, his knowledge and participation in the Share Split and the commencement and settlement of the 2018 Proceedings. Mr Sheehy was cross-examined. He found the task of directly answering questions challenging. He was prone to becoming argumentative and non-responsive as illustrated in the following exchange:Do you see that?---Yes, I see that.And those were the instructions that you had given to Deutsch Miller at the time about your understanding of the effect of the share split on your options and those of all other Nuix share and option holders; correct?---Yes, and no. I hate to be confusing, but Deutsch Miller - - -Let me just break it down for you, Mr – – –HIS HONOUR: Had you finished your answer?---I was trying to explain why I said yes and no.I think a yes and no answer probably does require an immediate explanation for it to be of any sense?---Deutsch Miller are a great law firm, but they didn’t understand the intricacies of options and shares, so hence the reason why – one of the reasons why I changed law firms by this case.Well, that’s not really an answer to the question that was asked of you?---Oh, okay, sorry. And the question then is – I apologise.MR DARKE: This paragraph, Mr Sheehy, reflects the instructions that you gave to Deutsch Miller about what you understood to be the effect of the share split on your options; correct?---Yes. When pressed further by Mr Darke SC, who appeared for Nuix, as to how he gave instructions to his solicitors, Deutsch Miller, to state to Nuix that the number of the Remaining 2008 Options should be multiplied by 50 and the exercise price divided by 50, contrary to the position he was now advancing in these proceedings, he gave the following argumentative evidence: That statement of how the share split would apply to your options, accorded with your instructions to Deutsch Miller, didn’t it?---That’s how they wrote it up, yes.Yes. And - - -HIS HONOUR: That’s not an answer to the question?---Sorry.We are not interested in what they wrote up. We know what was written up; it’s in the letter. That wasn’t the question that was asked by Mr Darke. Answer Mr Darke’s question?---Yes, Mr Darke. MR DARKE: The words that appear in brackets:Our client’s options will be multiplied by 50 and the exercise price will be divided by 50. Accorded with your instructions to Deutsch Miller; correct?---Yes. Yes and no again. I mean, there was multiple ways it was described over the - - -I’m not asking you, Mr Sheehy, about how it was described?---Okay. I’m asking you about the instructions you gave to Deutsch Miller. And the instructions you gave to Deutsch Miller were that the number of your options will be multiplied by 50, and the exercise price would be divided by 50 as a result of the share split; correct?---Yes. And that was your state of mind at the time; correct?---I was of two states of mind because both – in my mind, both got to the same place. Whether you had 50 times the number of options then you had a one to one change, or you had a one to 50 share split and they both got to the same place. Mr Sheehy - - -?---So, you could say yes.If you had been in two states of mind at the time, as you just said, you would have instructed Deutsch Miller to describe the effect of the share split on your options in 35 those two alternative ways, wouldn’t you?---Sorry to be contrarian but no, I wouldn’t. Because they both ended up in the same place as having 22.X million shares. They – I wouldn’t have.Mr Sheehy, you gave Deutsch Miller explicit instructions about how you understood the share split to affect your options; correct?---I gave them instructions.Explicit instructions; correct?---I asked them to work out what happened. I wouldn’t have said – I didn’t sit down and give them a lecture on how share and option splits work. But, you know, I thought it was pretty obvious.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

These proceedings give rise to the following principal issues:(a)given the terms of the Consent Judgment, is Mr Sheehy precluded by reason of res judicata/cause of action estoppel, issue estoppel, Anshun estoppel or abuse of process from advancing the causes of action that he is seeking to pursue in these proceedings;(b)should a term be implied into the 2008 Option Agreement to the effect that, in the event of a share split, there is to be a proportionate adjustment to the conversion ratio between options and shares, either as an implication from the express terms of the agreement or because it is necessary to give business efficacy to the agreement;(c)are the changes in the shareholding of Nuix, effected by the IPO, sufficient to constitute a sale of the business of Nuix for the purpose of enlivening the preconditions in the 2008 Option Agreement for the exercise of the Remaining 2008 Options;(d)did Nuix breach the 2008 Option Agreement by not accepting the Option Exercise Notice;(e)was the conduct of Nuix in not accepting the Option Exercise Notice oppressive, contrary to s 232 of the Corporations Act 2001 (Cth) (Corporations Act);(f)was the conduct of Nuix in not accepting the Option Exercise Notice unconscionable contrary to s 21 of the Australian Consumer Law (ACL); and(g)if Mr Sheehy has established that Nuix has breached the 2008 Option Agreement or, has otherwise contravened s 232 of the Corporations Act, or has contravened s 21 of the ACL, what damages or compensation should be awarded to Mr Sheehy. There are two fundamental and insurmountable hurdles to the claims that Mr Sheehy seeks to pursue in these proceedings. First, Mr Sheehy, after the Share Split had occurred, sought and obtained pursuant to the Consent Judgment, a declaration in the 2018 Proceedings that the 453,273 Remaining 2008 Options that he held were exercisable in accordance with the terms of the 2008 Option Agreement and the Options Register be corrected to reflect that declaration. Second, pursuant to the terms of the 2008 Option Agreement, the Remaining 2008 Options were only able to be exercised on a sale of the business of Nuix. For the reasons that follow, I have concluded that Mr Sheehy is precluded by the doctrine of Anshun estoppel from pursuing the causes of action that he seeks to advance in these proceedings. I am otherwise persuaded that the implied term that Mr Sheehy seeks should be implied into the 2008 Option Agreement but there has been no breach of that agreement because there has been no sale of the business of Nuix. I am not persuaded that the conduct of Nuix in not accepting the Option Exercise Notice was oppressive contrary to s 232 of the Corporations Act or unconscionable conduct contrary to s 21 of the ACL. If, contrary to these findings, Nuix had breached the 2008 Option Agreement or acted oppressively or unconscionably, I have determined that the value of the Nuix shares that Mr Sheehy would have been issued if the Option Exercise Notice had been accepted by Nuix for the purposes of determining the damages or compensation to which Mr Sheehy would have been entitled is best reflected in the valuation undertaken by Mr Michael Potter, the expert forensic accountant relied upon by Nuix, for the fourth scenario he was asked to consider.EVIDENCEMr Sheehy