Stratis v Reckon Limited
[2003] FCA 355
•24 APRIL 2003
FEDERAL COURT OF AUSTRALIA
Stratis v Reckon Limited [2003] FCA 355
KATHIE STRATIS v RECKON LIMITED & ORS
N 322 of 2000
WHITLAM J
24 APRIL 2003
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N 322 of 2000
BETWEEN:
KATHIE STRATIS
APPLICANTAND:
RECKON LIMITED
FIRST RESPONDENTPHIL HAYMAN
SECOND RESPONDENTGREG WILKINSON
THIRD RESPONDENTSTEVE RICKWOOD
FOURTH RESPONDENTJUDGE:
WHITLAM J
DATE OF ORDER:
24 APRIL 2003
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1. The proceeding is dismissed with costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N 322 of 2000
BETWEEN:
KATHIE STRATIS
APPLICANTAND:
RECKON LIMITED
FIRST RESPONDENTPHIL HAYMAN
SECOND RESPONDENTGREG WILKINSON
THIRD RESPONDENTSTEVE RICKWOOD
FOURTH RESPONDENT
JUDGE:
WHITLAM J
DATE:
24 APRIL 2003
PLACE:
SYDNEY
REASONS FOR JUDGMENT
Introduction
The applicant, Kathie Stratis, used to be employed by the first respondent, Reckon Limited (“Reckon”). In this proceeding she seeks an order setting aside part of a deed whereunder she was granted a number of options over shares in Reckon. The document in question was executed on 11 June 1999 in the course of preparations for an initial public offering of shares by Reckon. It was signed on behalf of Reckon by the second respondent, Phil Hayman, and the fourth respondent, Steve Rickwood. Mr Hayman, Mr Rickwood and the third respondent, Greg Wilkinson, were directors of Reckon at that time. Ms Stratis also claims to have suffered loss and damage as a result of allegedly misleading and deceptive representations made by these individual respondents and by two of Reckon’s professional advisers prior to her execution of this document.
The Employer and the Service Agreement
Reckon was founded by Mr Wilkinson and Mr Hayman in 1987. Mr Rickwood joined them the next year. Each of them held a third of the shares.
Ms Stratis commenced employment with Reckon on 24 April 1995 as National Sales Manager. She was a university graduate and twenty-nine years old. At the time Reckon’s business consisted of publishing, distributing, marketing and providing support for financial management software products.
In June 1997 Reckon set up a wholly-owned subsidiary in order to develop a financial services Internet site. This was referred to within Reckon as the “online” business.
On 24 June 1997 Reckon and Ms Stratis executed a service agreement whereby Reckon agreed to pay her “remuneration and/or benefits” described as follows:
“● Base Salary of $53000,00 p.a.
● Car Allowance of $12720,00 p.a.
●Commission @ 0.5% on Sales for those sales areas where Sales Targets are achieved. (As clarification, no commission on sales will be paid in areas where Target is not achieved.)
● Further 6% to Superannuation Fund
● Profit Share●In the event that Reckon Software Pty Ltd is sold, 2.5% of the revenue realised as a result of the sale of Reckon Software Pty Ltd shall be paid.”
(Reckon Software Pty Ltd was Reckon’s name at the time.) On 1 May 1998 Ms Stratis was appointed General Manager – Sales and Marketing and her annual salary was increased to $100,000.00.
New Capital and Public Share Offer
In September 1998 a venture capital company called Techold Pty Ltd (“Techold”) provided substantial equity capital to Reckon as a result of which the founding directors’ combined shareholding was reduced to 70% of its issued capital with the other 30% being held by Techold.
In March 1999 Reckon engaged Wentworth Associates Pty Ltd (“Wentworth Associates”) to advise on the possibility of its raising further equity capital. A principal of that firm, Geoff Levy, recommended an initial public offering of shares, and Wentworth Associates were engaged as project managers for a strategy codenamed Project Speed. At Mr Levy’s suggestion Reckon retained Freehill Hollingdale & Page (“FHP”) to act as their solicitors. The partner responsible for FHP’s team was Rick Narev.
A due diligence committee was formed to implement the proposed issue. Its members were Mr Wilkinson, Mr Hayman, Mr Levy, Mr Narev and a representative from the investigating accountants, Deloitte Touche Tohmatsu (“Deloittes”), and from each of the joint lead managers, Merrill Lynch International (Australia) Limited and Warburg Dillon Read Australia Limited. The committee held its first meeting on 7 April 1999, at which Eytan Uliel, Mr Levy’s alternate, indicated that Wentworth Associates were “preparing a paper regarding the proposed float structure”.
The first draft of Wentworth Associates’ float plan was dated 9 April 1999. It contained a number of assumptions, one of which was:
“It is desirable that $40 million be raised in the float to be retained by Reckon as “working capital”, so as to fund future growth of the company - $10 million initially being targeted for the software business and $30m initially being targeted for the online business. It may be prudent to raise a further $10 million for future needs while the markets are receptive to these capital raisings;”
Another key assumption was that $12 million be raised to permit the existing shareholders to cash in part of their holdings in Reckon so that each of Mr Wilkinson, Mr Hayman and Mr Rickwood would receive $1,780,000. The plan also proposed that after such a payout the remaining shares held by these individuals should be subject to an “escrow” arrangement.
Quite early on in the due diligence process the terms of the final dot point in Ms Stratis’s service agreement reproduced at [5] above came to the attention of Mr Levy and Mr Narev. Neither is certain precisely how or when the matter first arose. (It was probably not long after 12 April 1999 because on that date it appears from the documents in Exhibit B that Mr Levy was sent a copy of a due diligence report, which had been prepared in May 1998 for Techold and which commented on that item in Ms Stratis’s salary package.) In any event, Mr Narev advised Mr Wilkinson and Mr Hayman that, whilst he had not formed any concluded view as to the meaning and effect of this provision in the service agreement, it would avoid uncertainty for the future if Reckon came to a commercial arrangement with Ms Stratis prior to the float for her to give up this entitlement. To this end Mr Wilkinson and Mr Hayman decided to offer Ms Stratis $250,000 on the basis that this represented 2.5% of the amount of $10 million being raised for the software business. Mr Rickwood agreed with this course of action.
Ms Stratis did not attend meetings of the due diligence committee. However, she knew that the float project was under way, she regularly saw the teams of advisers around Reckon’s offices, and she provided from time to time information requested by the directors and the advisers. On 17 May 1999 those directors called upon Ms Stratis in her office. The discussion that then took place is the linchpin of Ms Stratis’s case. It is common ground that Mr Wilkinson, who was Reckon’s managing director, did most of the talking, but otherwise there is a dispute as to the substance of the exchange.
The Meeting on 17 May 1999
Ms Stratis deposed to her recollection of the discussion in an affidavit made on 15 October 2001 as follows:
“31. … We had a conversation to the following effect:
I said:
‘Oh, this is quite official.’
Mr Wilkinson said:
‘As you know, we’re in the process of offering the company for public sale. We have all been working extremely hard with the underwriters to get a fair and reasonable value for the company. Over the last month or so I’ve had many arguments with the underwriters over what they consider a fair and reasonable price. They don’t seem to understand the real value of what we’re offering. I can’t tell you how many tense and explosive arguments I’ve had with them – full force 10’s, but I finally think I’ve made them understand our full potential.’
He paused and continued:
‘We now all agree that the real value and future of the company comes from its On-line potential. That’s where we see the future growth to be. Dot coms really are the way of the future. The underwriters are valuing the Reckon On-line and the Reckon Software divisions as two separate components even though they are simply going to List under the one company name.’
Mr Wilkinson said:
‘It goes without saying that you have been a key person to the growth of the company.’
I said:
‘Yes I have.’
32.I found Mr Wilkinson’s reference to the significance of the On-line department somewhat confusing but I did not say anything about. Mr Wilkinson leaned forward in his chair and then said words to the effect of:
‘As I said, I’ve had many arguments with the underwriters about the value of the business, and On-line is the way of the future. We have therefore attributed approximately 90% of the value to this side.’
He then said words to the effect:
‘We all know that the day will come when customers download software from the Internet. There will be no more box moving. Our distribution headaches will come to an end.’
33.Mr Wilkinson continued to look directly at me and said words to the effect of:
‘The software business has been valued at $10 million and as you have an existing agreement with the company you’re entitled to 2.5% of $10 million or $250,000. We still need to work out the paperwork, however you will receive these by way of options issued to you at either 1 cent, ½ cent or 20 cents. It’s quite a complicated process, but rest assured this is just a routine procedure for the Listing.’
I said words to the effect of:
‘So you mean I need to pay for the shares?’
Mr Wilkinson said words to the effect of:
‘They’re not actually shares, they’re options to receive shares and no you will not have to pay for your options. For complicated legal reasons we need to give the options a value however, you will be compensated for that amount.’
Mr Hayman then said words to the effect of:
‘Realistically, I doubt you will have to pay for them, however if you do, then we’ll give you an additional amount of options to compensate for the payment.’
I felt overwhelmed by this. I said words to the effect of:
‘So what’s the difference between receiving options and shares?’
Mr Wilkinson said words to the effect of:
‘Options give you the right to shares. It means that you will receive documents stating that you have $250,000 worth of options that can be realised as shares when you request it. It’s a legal procedure required for the paper trial of the Listing.’
I said words to the effect of:
‘Thank you for the opportunity. If $250,000 is what my Service Agreement entitles me to then this is great.’
Mr Wilkinson then said words to the effect of:
‘How many times have we told you that if you stick with us we’re going to make you rich?’
I said words to the effect:
‘So what has the whole company been valued for?’
Mr Wilkinson leaned forward again and said:
‘Just over $100 million. As I said earlier, approximately 90% of the value is being attributed on On-line and this really doesn’t involve you.’
Mr Hayman said to me words to the effect of:
‘The options will be issued to you under escrow for a 5 year period.’
I said words to the effect of:
‘What’s that?’
Mr Hayman said words to the effect of:
‘Escrow means that you can’t sell the share for a limited period of time. In your instance this is 5 years.’
Mr Rickwood quickly jumped in and added words to the effect of:
‘Don’t look so worried. We’ll have a private agreement with you which states that the moment you want to exercise your right and sell your shares we will release them to you.’
I said words to the effect of:
‘You will release me from escrow even if I choose to sell them on day one?’
Mr Rickwood and Mr Hayman then said words to the effect of:
‘Yes.’
Mr Hayman then said:
‘All you need to do is come to any one of us with a release form and we will sign it, no questions asked.’
I said words to the effect of:
‘Were [sic] would I get a release form from?’
Mr Hayman then said:
‘You can simply type one out. It’s just a letter requesting you be released from escrow and any one of us three Directors can sign it for you.’
I then said words to the effect of:
‘Ok, that’s simple enough. I just need to type out a letter asking to sell my shares, get any one of you to sign it and I can sell them at any time.’
Mr Hayman then said words to the effect of:
‘That’s absolutely right.’
I then said words to the effect:
‘I will call my accountant Kamal, regarding tax. I need to find out my tax position.’
Mr Hayman said words to the effect of:
‘You should look at the most tax effective way to receive them. Get Kamal to look at your options and we will see whether we can accommodate it or not.’
When she gave evidence at the trial, Ms Stratis added that at the end of the conversation either Mr Wilkinson or Mr Hayman said that FHP would advise Reckon and “draw up the papers.”
Mr Wilkinson made an affidavit, in which he referred to parts of Ms Stratis’s affidavit reproduced above, and said:
32.… I do not recall the precise words I used but I accept that the effect of part of the conversation is as set out in paragraph 31 of her affidavit. Having informed Ms Stratis about our intention to float Reckon, our conversation continued and words to the following effect were said:
I said:‘There were questions as to whether we should float only the dot com part of the company or the whole company. The preference is to roll the two entities … together. It is recognised that the key value driver is the on-line business … but the banks would prefer to put the software business in there to prove a safety net to investors should the dot com bluesky not come off. We need to [sic] on what you will you will [sic] get from the float. After the float we will have left about $40 million in cash. $30 million of that is intended for the [dot]com business and $10 million is intended for the software for the development of the international software business. Whilst that is not strictly the sale of the software business, we can say that is what it was and we can give you 2.5% of that $10 million.
She said: ‘Wow. Will I be getting a cheque for $250,000?’
Hayman: ‘No. You’ll be getting either shares or options.’ …”
Mr Wilkinson recalled also that Ms Stratis said she would get advice from her accountant and that Mr Hayman said she should also get legal advice. He did not recall any discussion about escrow arrangements.
In his affidavit Mr Hayman, after denying that the conversation was as described by Ms Stratis, said:
“27.… To the best of my recollection, words to the following effect were spoken:
Wilkinson:‘As you know, we are floating Reckon, not selling it. We have to come to an arrangement about what you will receive on the float, to avoid any argument. As you know, from the outset we have been aiming to raise $40 million, $30 million for our on-line business and $10 million for our overseas software business. How does two and a half percent of the $10 million, or $250,000 sound to you?
Stratis:Guys, you don’t have to do this. Do I get cash or what?
Hayman:You’re getting shares or options. I’m not sure which at this stage. It’s something we’re going to have to work out. We’re also going to have to work out the most tax effective way from Reckon’s point of view and from your point of view to receive this. You should be getting some tax advice.
Stratis:I’ll do that.”
Mr Hayman also did not recollect any further discussion of options or mention of escrow arrangements.
Mr Rickwood is no longer employed by Reckon. He also denied the conversation deposed to by Ms Stratis although, whilst broadly confirming what the other two directors said, he could not recall any mention of the amount to be raised by the float or of options.
All these witnesses were cross-examined. Ms Stratis adhered doggedly to her account of the conversation. In particular, she denied that Mr Wilkinson said that the sum of $250,000 represented 2.5% of the amount of $10 million to be raised for the software business. Mr Wilkinson agreed in cross-examination that $10 million was an “arbitrary figure”, but each of the directors was adamant that neither of them said any specific figure had been attributed to “the value” of Reckon’s software business. In Mr Wilkinson’s case he confessed at one stage during his cross-examination to being “bamboozled” by questions on this topic, but I think that ultimately his denial on this point was quite clear.
Development of the Options Proposal
Mr Wilkinson told Mr Levy that Ms Stratis was to be issued with “$250,000 worth” of shares in Reckon in satisfaction of any “entitlement” under the provision of the service agreement they had earlier discussed. Mr Wilkinson also asked Mr Levy to advise Reckon as to the most tax effective structure Reckon could contemplate in order to assist Ms Stratis. Mr Levy suggested that Reckon grant Ms Stratis options over shares.
Ms Stratis gave evidence that, following the meeting on 17 May 1999 with Reckon’s directors, she had a number of conversations with Mr Levy concerning the grant of options to her. In his evidence Mr Levy said that he did not specifically recall such conversations, but that he could recall having a discussion with either Ms Stratis or her accountant about the taxation treatment of rights to acquire shares under an employee share scheme. Ms Stratis also said that Mr Levy told her that “$10 million value” had been placed on Reckon’s software business. Mr Levy flatly denied that he ever would have made such a statement.
The investigating accountants, Deloittes, were responsible for reviewing financial information concerning Reckon to be included in the prospectus. This involved the preparation of a pro forma consolidated balance sheet as at 31 December 1998 based on the assumption that all the transactions contemplated in the prospectus had taken place at that date. Accordingly, on 21 May 1999, Chris Biermann of Deloittes emailed Mr Wilkinson and Mr Hayman asking whether a deal had been negotiated yet with Ms Stratis about “her profit share”. Mr Wilkinson replied:
“A deal has been done:
The way it was put, we are raising $40 million. $10 million for the software business and $30 million for Online. She is entitled to 2.5% of the money raised for the software business, ie $250,000.00
This will be paid in the form of “free” options and included with the senior executive staff option package she will be entitled to. Whilst we are not allowed to provide free options, there is apparently a minimum price, whatever the case, her net income for her 2.5% share will be worth no more than $250,000.00 on the day of the float. (Eytan will know how to deal with this).”
Wentworth Associates issued a revised float plan dated 24 May 1999. In the item dealing with a proposed “employee share ownership/option/incentive scheme”, they added a new comment:
“an amount will be specifically allocated under this scheme (although perhaps at a different strike price) to an existing employee who has certain entitlements, and those entitlements will then cease;”
On 28 May 1999 Mr Hayman faxed Mr Biermann a copy of Ms Stratis’s service agreement. Deloittes later prepared a draft report containing a pro forma balance sheet which referred in a note to 200,000 options granted to an executive officer at an exercise price of “1 cent” with an “earliest” exercise date of June 1999.
A meeting of the due diligence committee was held on 2 June 1999. The minutes state:
“Geoff Levy explained that Kathie Stratis’ [sic] would be granted $250,000 dollars of options (the number could only be determined once the Retail Price is known) at a strike price of 1c each. A condition of the issue of the options will be that Kathie Stratis is not entitled to sell those shares for a period of 5 years without the consent of the Managing Director or the CFO.”
Those minutes also contain the following item on financial due diligence:
“Chris Biermann noted that to finalise the [investigating accountants’ report] he required details of the option arrangements. Geoff Levy informed him that there would be 500,000 options issued to non associates at retail price, special employee options issued to Kathie Stratis (approximately 200,000 at an exercise price of 1c, and options over approximately 2.35 million shares at the retail price under the employee share plan. Rick Narev explained to Chris Biermann that while the plan was to pass director’s resolution and issued [sic] the options into the float, the resolution could be passed before the float and made conditional on the float, if it was easier for accounting purposes.”
The Options Deed
Ms Stratis also gave evidence that on or after 1 June 1999 she had a conversation with Mr Narev in which he told her that Reckon’s software business had been valued at $10 million. Mr Narev had no recollection of speaking to Ms Stratis, but said that he would not have said such a thing because at the time he did not know what valuation had been placed on Reckon’s software business.
The documents in evidence show that Mr Narev was involved in documenting the arrangement with Ms Stratis. On 8 June 1999 Mr Narev sent Mr Hayman a deed “dealing with the Kathie Stratis options”, advising that the deed “will need to be signed before the prospectus can be lodged”. At midday on 9 June 1999 Mr Narev sent Reckon a revised draft of a deed granting options over its shares to Ms Stratis “in her capacity as trustee of the Stratis Family Trust”. Ms Stratis sent a copy of this draft to her accountant, Karmel Gill-Thomas.
On 9 June 1999 Mr Narev also sent Reckon forms of certificate required for “management sign-off” by nominated employees, including Ms Stratis, on the proposed issue. Mr Narev pointed out in his email that each of those individuals would need to read the latest draft of the prospectus in order to sign his or her certificate. At 5.00 pm on 10 June 1999 Mr Hayman forwarded to Ms Stratis by email a marked-up copy of the draft prospectus in the form sent to the printers for typesetting.
On the morning of 11 June 1999 the deed between Reckon and Ms Stratis, which is the subject of this proceeding, was executed. It contained the following recitals:
“A.… Reckon and Stratis (in her personal capacity) are the parties to a service agreement dated 24 June 1997 (the Service Agreement).
B.The Service Agreement provides that, in the event that Reckon is ‘sold’, Stratis will be entitled to ‘2.5% of the revenue realised’ (Sale Benefit).
C.Reckon intends to offer shares to the public, and to be admitted to the Official List of the Australian Stock Exchange Limited (Listing).
D.The parties have agreed that they will treat the Listing as a ‘sale’ for the purposes of the Service Agreement and that Reckon will satisfy the Sale Benefit by granting options to Stratis (in her capacity as trustee of the Stratis Family Trust) on the terms and conditions contained in this deed.”
Clause 1 of the deed, headed “Grant of Options”, provided:
“1.1 Grant
On or before the date of Listing, Reckon must grant to Stratis (in her capacity as trustee of the Stratis Family Trust) the number of options determined using the following formula, on the terms and conditions set out in clause 1.2 (Options):
N = 250,000
R
where:
N is the number of Options; andR is the ‘Retail Price’ as defined in the prospectus to be issued by Reckon dated on or about 9 June 1999.
1.2 Terms of the options
The Options will have the same terms and conditions as the options granted prior to Listing under the Senior Executives and Directors Option Plan adopted by Reckon on or about 9 June 1999, subject to the following:
(a) the exercise price of the Options will be $0.01 per share;
(b)there will not be any vesting conditions, performance hurdles or any other restrictions on exercising the Options, and the Options will be exercisable at any time within 5 years after the date of granting;
(c)the Options will not lapse if Stratis ceases to be employed by Reckon for any reason;
(d)Stratis must not sell, transfer or otherwise dispose of any of the shares issued to her as a result of the exercise of any of the Options until the date 5 years after the date of exercise of the relevant Options, without the prior written consent of the managing director or chief financial officer of Reckon.
1.3 No Listing
If Listing has not occurred on or before 15 November 1999, then:
(a)if the Options have already been granted, they will be deemed to have automatically been cancelled;
(b)this deed will automatically terminate; and
(c) the Sale Benefit will continue in full force and effect.
1.4 Satisfaction
The parties acknowledge that if Reckon grants the Options and Listing occurs, Reckon will have fully and finally satisfied all of its obligations in respect of the Sale Benefit.”
Clause 2.4 provided that the deed superseded “all previous agreements in respect of its subject matter” and embodied the entire agreement between the parties. Ms Stratis also signed her “management sign-off certificate”, which stated (inter alia) that she had read the first draft of the prospectus “to be dated on or about 10 June 1999”.
The deed is dated 10 June 1999 in Mr Hayman’s handwriting. Mr Hayman thinks that may be when he and Mr Rickwood signed the document. He does not dispute that the document was signed in Ms Stratis’s office on the morning of 11 June 1999. In any event, Ms Stratis deposed to a conversation at that time as follows:
“50. … Mr Hayman said words to the effect of:
‘This whole process is full of documents. It’s just routine paperwork you need to sign to receive your entitlement. It makes it all official for the Listing.’
He then said in a jocular tone words to the effect of:
‘You don’t have to sign it. You simply won’t get your entitlements. It makes no difference to me.”
I then said words to the effect of:
‘Yeah right.Give me the pen.’”
Mr Hayman accepts that they had a “jocular” conversation along those lines. Ms Stratis agrees that she read the document carefully before she signed.
Registration of the Prospectus
Later on 11 June 1999 the following events took place: Reckon reorganized its issued capital so that it comprised 64,782,500 ordinary shares; additional directors of Reckon were appointed; Mr Rickwood resigned as a director of Reckon and was appointed instead as an alternate director; and Reckon delivered to the Australian Securities Commission (“the ASC”) a prospectus for the issue of 56,336,875 ordinary shares. The features of the offer were as follows. The retail application price was $1.05 per share. An institutional offer was to be conducted by way of a bookbuild with an indicative bookbuild range of $0.80-$1.05 per share. The price payable by retail investors was to be the lower of the “Retail Cap” of $1.05 and the “Final Price” determined under the institutional bookbuild. Upon completion of the offer 16,336,875 of the shares held by the existing shareholders were to be cancelled by payment of an amount per share equivalent to the Final Price. Reckon was to apply for admission to the official list of the Australian Stock Exchange Limited (“ASX”) and for official quotation of 104,782,500 shares on the ASX.
Reckon’s prospectus was formally lodged with the ASC on 15 June 1999. The prospectus stated in section 10.1 that Reckon intended to grant options over a number of unissued shares, that of these “238,095 options will be granted pursuant to an existing employee incentive arrangement at an exercise price of one cent”, and that the “balance of the options have an exercise price equal to the Retail Cap”. The report from Deloittes included in the prospectus made no reference to those 238,095 options.
A Hiccough in the ASX Listing
On 30 June 1999 the senior listings officer of the ASX wrote to Mr Narev pointing out that this proposal did not appear to comply with the listing rule requiring a minimum exercise price for options of 20 cents. Mr Narev replied to the ASX on 1 July 1999 as follows:
“The 238,095 options referred to as being granted under an ‘existing employee incentive arrangement’ relate to Kathie Stratis, a senior executive. Ms Stratis was employed by the company in June 1997. As part of her employment contract, she was entitled to ‘2.5% of the proceeds of sale of the business’ at the time it was ‘sold’.
As part of the float process, it was agreed that the above obligation would be settled by granting 238,095 options to Ms Stratis (which is considerably less than 2.5% of the likely market capitalisation of Reckon after the float). Because Ms Stratis has effectively already provided the consideration for the underlying shares (ie agreeing to be employed under the terms of the 1997 agreement), it would not be within the spirit of the arrangement to now require her to pay 20 cents upon the exercise of the options.
The Company is presently in discussions with Ms Stratis as to whether she would be prepared to exercise the options prior to listing. If she is not prepared to do so (which no doubt would be driven by her own personal tax reasons), then we will need to work with you to find some other solution to the issue which you have raised. The options are a contract between Ms Stratis and Reckon, and Reckon is therefore not legally able to change the terms of the options without the consent of Ms Stratis.”
On 5 July 1999 Mr Narev wrote to the ASX:
“We are still awaiting a decision by Kathie Stratis and her advisers as to whether or not she is prepared to exercise her options and I will let you know as soon as a decision has been made.”
Mr John Young, a consulting tax lawyer from Melbourne, wrote to Ms Gill-Thomas, Ms Stratis’s accountant, on 7 July 1999. He commenced:
“I refer to your fax message of 5 July 1999 and to our telephone conversations concerning this matter.
As you may know, I have spoken with Kathie and with Rick Narev of Freehills in Sydney and, at Kathie’s suggestion, provide the following summary of advice in relation to the various issues which we have been discussing.”
Mr Young then set out his advice on Div 13A of Pt III of the Income Tax Assessment Act 1936 (Cth).
On 7 July 1999 Ms Stratis applied for 30,000 shares in Reckon pursuant to the offer in the prospectus. And, on 9 July 1999 Mr Narev wrote to the ASX:
“Further to our recent discussions, we confirm that Kathie Stratis has advised us that she will exercise her 238,095 options in Reckon prior to the commencement of trading of ordinary shares of Reckon on the ASX, in order to facilitate admission of Reckon to the Official List.
It would therefore be acceptable to Reckon for the ASX to impose as a condition of admission to the Official List that Reckon provides the ASX with satisfactory evidence that the options have been exercised.”
The Grant and Exercise of the Options
Late in the afternoon on 15 July 1999 Mr Narev sent an email to Reckon with the following message:
“Here is the time critical documentation for today. I attach an Option Certificate with attached Terms and Conditions for Kathie Stratis’s options, and a separate completed Notice of Exercise.
Please arrange for the Option Certificate to be signed by 2 directors and then given to Kathie. Kathie should then sign the Notice of Exercise and, if possible, provide you with a cheque for the exercise price of $2,380.95 (although the payment is not critical). I have dated all of the documents tomorrow as I will need you to complete the signing tomorrow, preferably before midday. It is fine for Kathie to sign the Notice of Exercise by fax if she is not in Sydney.
The Notice of Exercise contains an extra confirmation in the final paragraph. This is for Kathie’s benefit based on my discussion with her tax adviser.”
The option certificate was signed by Mr Wilkinson and Mr Hayman. It certified that Ms Stratis was the holder of 238,095 options over ordinary shares in Reckon granted on 16 July 1999. Ms Stratis signed the notice of exercise dated 16 July 1999 in respect of all 238,095 shares. The final paragraph of that notice stated:
“I confirm in my personal capacity and in my capacity as trustee of the Stratis Family Trust that the obligation of the Company to grant options under the deed dated 10 June 1999 was satisfied by granting those options to me in my personal capacity.”
The Share Allotments
An extraordinary general meeting of Reckon was held on 16 July 1999 at which it was resolved that, subject to the allotment of sufficient shares to satisfy the minimum subscription requirement of the prospectus, the issued capital would be reduced by cancelling 16,336,875 ordinary shares and by returning the sum of $1.15 in respect of each share cancelled. Mr Wilkinson, Mr Hayman and Mr Rickwood each held 1,500,000 of the shares to be cancelled.
On 19 July 1999 the directors of Reckon ratified the grant on 16 July 1999 of the options to Ms Stratis and resolved to issue and allot 238,095 fully paid ordinary shares to her at an issue price of $0.01 each. (Ms Stratis was also granted 50,000 options under the Senior Executive and Directors’ Option Plan.)
On 19 July 1999 the directors of Reckon also resolved to issue and allot the shares subscribed for pursuant to the prospectus. This involved the allotment of 22,000,000 shares to institutions at an issue price of $1.15 per share and of 34,336,875 shares to other subscribers at an issue price of $1.05 per share. Ms Stratis was allotted the total of 30,000 shares for which she had applied. That allotment is shown in her issuer sponsored holding statement dated 19 July 1999. Reckon’s shares commenced trading on the ASX on 19 July 1999.
The Share Sales
Ms Stratis immediately gave her brokers a large selling order. (There is in evidence an undated document signed by Mr Hayman as “Financial Director”, giving Ms Stratis “permission to sell her shares”.) A contract note dated 20 July 1999 shows that Ms Stratis sold 168,095 shares in Reckon at prices varying between $2.48 and $2.33 per share. The net proceeds due to her after brokerage and stamp duty amounted to $429,819.14.
The documentary evidence reveals that on 26 July 1999 Ms Stratis bought on market 10,000 shares in Reckon at a price of $1.74 per share. These shares appear to have been used in part settlement of the sale of 168,095 shares. Ms Stratis’s issuer sponsored holding statement dated 31 July 1999 shows an opening balance of 30,000 shares, the allotment of 238,095 shares on 26 July 1999, the transfer of only 158,095 shares on 27 July 1999 and a closing balance of 110,000 shares.
However, the documentary evidence also reveals that the shares allotted to Ms Stratis on exercise of her options were not quoted on the ASX. On 5 August 1999 FHP sent Reckon the ASX application forms required for quotation of these 238,095 shares, and on 18 August 1999 Reckon submitted to the ASX those forms signed by Mr Hayman.
Ms Stratis resigned from Reckon on 14 December 1999 and ceased employment there on 28 January 2000. However, the documentary evidence shows that she continued to trade her Reckon shares. On 11 February 2000 Ms Stratis sold 7,000 shares at a price of $1.90 per share. Her issuer sponsored holding statement dated 29 February 2000 shows this transaction and a closing balance of 103,000 shares. On 16 March 2000 Ms Stratis sold 3,000 shares at a price of $1.53 per share.
Findings
In the further amended statement of claim it is alleged that three representations were made to Ms Stratis at her meeting with the directors on 17 May 1999. These are: (1) that she was entitled under her service agreement as a result of the public issue of shares by Reckon to 2.5 per cent of the value of its software business; (2) that that software business was valued at $10 million; and (3) that such entitlement was worth $250,000. I am satisfied, and I find, that no such representations were made by Mr Wilkinson, Mr Hayman or Mr Rickwood at that meeting. No one ever advised either of these directors that Ms Stratis had such an entitlement, nor had anybody told any of them that “the value” of the software business was $10 million. (Cross-examination of these witnesses proceeded on the implicit assumption that prior to the meeting of 17 May 1999 they had received advice or information to such effect, but there was no such evidence.) Much evidence was given about what was allegedly said by various individuals around the time the service agreement was executed on 24 June 1997. Ms Stratis relied for her recollection of those conversations on notes that she said she made contemporaneously. However, at the end of the trial and in the course of submissions, it was recognized by her counsel that whatever was said in 1997 was not likely to assist in determining what was said on 17 May 1999. I accept that Ms Stratis considered that she was entitled under her service agreement to 2.5 per cent of any consideration received for the sale of Reckon’s software business. However, I find that there was no explicit reference to any “entitlement” by either Ms Stratis or any of the directors in the meeting on 17 May 1999. Reckon was not proposing to sell its software business. On the other hand, from the outset the float plan envisaged raising $10 million for the software business. (The expenditure plans of Reckon loomed large because of the ASX “cash-box” rules.) This was the “arbitrary” figure upon which the offer to Ms Stratis was based. The quantification of the value of what she was to receive by reference to 2.5 per cent must have made it clear to her that that percentage figure was derived from the service agreement. Nonetheless, I do not accept that Ms Stratis reacted to the proposal put by Mr Wilkinson with any words of qualification such as “if this is what my service agreement entitles me to”. I am sure that she was, in fact, pleased and that this was the impression conveyed to all present.
Moreover, I find that, contrary to Ms Stratis’s version, there was no discussion of the details of how the shares might be made available. It is apparent that Ms Stratis has conflated into her recollection pieces of information that could never have been discussed at the time. Two examples make this clear. First, it would have made no sense at this stage for Mr Wilkinson to have mentioned an exercise price of 20 cents per share. Such a price could not have been discussed at the earliest until after the ASX wrote to FHP on 30 June 1999. Secondly, the topic of “escrow” would also not have been raised. The disposal restrictions required for the deferral of the inclusion in assessable income of the discount given to Ms Stratis in respect of any rights acquired by her were not something that the directors understood. The restriction eventually embodied in condition (d) of clause 1.2 of the deed exchanged on 11 June 1999 resulted from Mr Levy’s advice. The “escrow” agreements executed by the founding directors in respect of their continued shareholdings in Reckon were dictated by different considerations, namely, the joint lead managers’ marketing requirements for the public issue. Ms Stratis is, at best, confused in her recollection. Where there is a conflict, I reject her evidence and accept that of the directors. Mr Wilkinson was not dissembling when he emailed Mr Biermann on 21 May 1999. The alleged representations are not made out.
The further amended statement of claim also alleges that Mr Levy and Mr Narev represented to Ms Stratis that Reckon’s software business was valued at $10 million. This claim was barely pressed at the conclusion of trial. Nonetheless, I should state quite clearly that I accept the denial of each of these advisers that he made such a representation. Mr Levy and Mr Narev gave evidence very carefully. It is apparent from the chain of events I have described in some detail above that at various stages they must have spoken either to Ms Stratis or her advisers, Ms Gill-Thomas or Mr Young, about the taxation implications of the option proposal. There are in evidence notes in Ms Stratis’s own handwriting referring to “Division 13A” and “qualifying shares” together with the names of Mr Young and Mr Narev. Mr Narev obviously drafted documents from time to time to accommodate Ms Stratis’s changing requirements. For example, the deed was amended so as to grant the options to a family trust, but the notice exercising the options was drafted so as to be that of an individual employee. There simply never was a reason why either Mr Levy or Mr Narev would at any time, let alone prior to 11 June 1999, make the alleged representations to Ms Stratis.
Finally, the pleading alleges that on 11 June 1999 Mr Hayman, in saying what is reproduced in [27] above, represented to Ms Stratis that the deed she signed was just “routine paperwork” which she needed to sign in order to receive her entitlement under her service agreement. As I have mentioned, Mr Hayman does not dispute the substance of this allegation. But it hardly advances Ms Stratis’s case. The grant of her options did need to be finalized before the prospectus could be registered. Nothing that Mr Hayman said was in the slightest way likely to mislead or to deceive Ms Stratis. In particular, she agreed that she read the document carefully and understood the plain meaning and purport of clauses 1.4 and 2.4 of the deed. (It is only clause 1.4 that by her amended application Ms Stratis seeks to have set aside.) The printer’s proof of the prospectus sent to her on 10 June 1999 did not include in section 10.1 the number of options. The number of 238,055 included in that section of the prospectus lodged with the ASC on 15 June 1999 was obviously calculated not at the Retail Price for which the deed provided, but at the Retail Cap. In the event, of course, the amount of the divisor turned out to be the same.
Ms Stratis has completely failed to make out the matters on which she grounds her case. None of the respondents engaged in the misleading or deceptive conduct alleged. It may have been a bit of a stretch for a prospectus dated 15 June 1999 to suggest that a deed made four days beforehand was an “existing employee incentive arrangement”. Ms Stratis can, however, hardly complain of that. She exercised her options at the exercise price proscribed by the ASX rules for listed companies so that Reckon’s shares could be quoted. In turn, Ms Stratis was sent an issuer sponsored holding statement which permitted her to sell on market 158,095 unquoted shares on the first day of Reckon’s listing. Her profit on the price of $1,580.95 she paid for those shares was immense.
Order
The proceeding will be dismissed with costs.
I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Whitlam
Associate:
Dated: 24 April 2003
Counsel for the applicant:
T G R Parker
Solicitors for the applicant:
Kemp Strang
Counsel for the first respondent:
Fabian Gleeson
Solicitors for the first respondent:
Freehills
Counsel for the second, third and fourth respondents:
F C Corsaro SC
Solicitors for the second, third and fourth respondents:
Minter Ellison
Dates of hearing:
1, 2, 3, 4 and 15 July 2002
Date of judgment:
24 April 2003
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