Zomojo Pty Ltd v Hurd (No 2)
[2012] FCA 1458
FEDERAL COURT OF AUSTRALIA
Zomojo Pty Ltd v Hurd (No 2) [2012] FCA 1458
Citation: Zomojo Pty Ltd v Hurd (No 2) [2012] FCA 1458 Parties: ZOMOJO PTY LTD v MATTHEW HURD, ZEPTONICS PTY LTD, CROSSWISE PTY LTD, MD HAMMER PTY LTD, ZEPTO MARKETS PTY LTD, ZEPTO FABRICS PTY LTD, ZEPTOIP PTY LTD and TRADEMACH PTY LTD; MATTHEW HURD, JOLENE (TAS) PTY LTD and HURD FAMILY SUPERANNUATION FUND; ZOMOJO PTY LTD File number: VID 1478 of 2011 Judge: GORDON J Date of judgment: 19 December 2012 Corrigendum: 18 June 2013 Catchwords: CORPORATIONS – directors – fiduciary and statutory director’s duties – first respondent a director of the applicant – first respondent established business in competition with applicant – first respondent failed to disclose opportunities, attempted to take the benefit of opportunities – first respondent used information obtained in his position as director to develop products in competition with the applicant – first respondent undertook fundraising activities in respect of a competitor venture – breach of duty of good faith under s 181 of the Corporations Act 2001 (Cth) – use of information to improperly gain an advantage in breach of s 183 of the Corporations Act 2001 (Cth) – breach of fiduciary obligations of fidelity and good faith – duration of duties owed by company director – whether second to eighth respondents liable for knowingly assisting first respondent’s breaches of fiduciary duty – Corporations Act 2001 (Cth) ss 181, 183
CONTRACT – employment –confidential information – restraint upon the use of confidential information broader than equitable restraint and for unlimited duration – may extend to employee’s know how or knowledge obtained during the course of employment – may extend to combinations of information not individually confidential – restraint of trade – restraint upon trading activities in respect of certain markets for a certain duration – restraint upon offering employment to existing employees of the applicant – first respondent used recruitment agency to offer employment to other former employees – enforceability of restraint provisions – factors relevant to validity – application of Restraints of Trade Act 1976 (NSW) to provisions not expressed in severable terms – whether second and fifth respondent liable for inducing breach of contract – Restraints of Trade Act 1976 (NSW), s 4
CONTRACT – employment – disclosure and assignment of inventions created during period of employment – extension to evolutions of inventions – first respondent conceived of, developed, designed and marketed a series of devices based upon knowledge of applicant’s techniques – evidence of when inventions first conceived of – first respondent failed to disclose and assign inventions
PRACTICE AND PROCEDURE – relief – relief must be tailored to the particular findings of breach – applicant sought to restrain the first respondent for a further period of 12 months from misusing confidential information – injunction neither necessary nor justified
Legislation: Acts Interpretation Act 1901 (Cth)
Corporations Act 2001 (Cth)
Electronic Transactions Act 1999 (Cth)
Restraints of Trade Act 1976 (NSW)Cases cited: AB Consolidated Ltd v Europe Strength Food Co Pty Ltd [1978] 2 NZLR 515
Attorney General (Cth) v Adelaide Steamship Co Ltd (1913) 18 CLR 30
Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (1995) 58 FCR 26
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288
Andrews v Australia and New Zealand Banking Group Ltd (2012) 86 ALJR 1002
Aquaculture Corporation v New Zealand Green Mussel Co Ltd (1985) 5 IPR 353
Aqua-Max Pty Ltd v MT Associates Pty Ltd (2001) 3 VR 473
Australian Broadcasting Commission v Australian Performing Right Association Limited (1973) 129 CLR 99
Australian Hotels Association (NSW) v TAB Ltd [2006] NSWSC 293
Barnes v Addy (1874) LR 9 Ch App 244
Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 39 WAR 1
Belmont Finance Corporation v Williams Furniture Ltd(No 2) [1980] 1 All ER 393
Bents Brewery Co Ltd v Hogan [1945] 2 All ER 570
Boral Bricks NSW Pty Ltd v Frost (1987) Aust Torts Reports 80-097
BP Refinery (Westernport) Pty Limited v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266
Brightman v Lamson Paragon Ltd (1914) 18 CLR 331
Briginshaw v Briginshaw (1938) 60 CLR 336
British Celanese Ltd v Courtaulds Ltd (1935) 52 RPC 171
Buckley v Tutty (1971) 125 CLR 353
Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Commercial Plastics Ltd v Vincent [1965] 1 QB 623
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Cook v Deeks [1916] 1 AC 554
Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 297
Council of the City of Sydney v West (1965) 114 CLR 481
Cream v Bushcolt Pty Ltd (2004) ATPR 42-004
Dart Industries Inc v David Bryar & Associates Pty Ltd (1997) 38 IPR 389
Del Casale v Artedomus (Aust) Pty Ltd (2007) 73 IPR 326
Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167
Drake Personnel Ltd v Beddison [1979] VR 13
Driveforce Pty Ltd v Gunns Ltd (No 3) [2010] TASSC 38
Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79
Endoline Pty Ltd v Drapac [2012] VSC 156
Endresz v Whitehouse [1998] 3 VR 461
Exchange Telegraph Company Limited v Gregory & Co [1896] 1 QB 147
Exchange Telegraph Company Limited v Central News Limited [1897] 2 Ch 48
Farah Constructions Pty Ltd v Say-Dee Pty Limited (2007) 230 CLR 89
Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) [1999] 1 VR 584
Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473
Fitzgerald v Masters (1956) 95 CLR 420
Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd (2009) 81 IPR 1
Goldsoll v Goldman [1914] 2 Ch 603
Greig v Insole [1978] 3 All ER 449
Harrison v Project & Design Co (Redcar) Ltd [1978] FSR 81
Hodgson v Amcor Ltd [2012] VSC 94
Independent Oil Industries Ltd v Shell Co of Australia Ltd (1937) 37 SR (NSW) 394
Industrial Furnaces Ltd v Reaves [1970] RPC 605
Interfirm Comparison (Australia) Pty Ltd v Law Society of New South Wales [1975] 2 NSWLR 104
International Scientific Communications Inc v Pattison [1979] FSR 429
Johnson v The Edgware & Co, Railway Co (1866) 35 Beav 480
J Spurling Ltd v Bradshaw [1956] 2 All ER 121
JT Stratford & Son Ltd v Lindley [1965] AC 269
L’Estrange v F Graucob Limited [1934] 2 KB 394
Links Golf Tasmania Pty Ltd v Sattler (2012) 292 ALR 382
Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580
Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1
Lordsvale Finance Plc v Bank of Zambia [1996] QB 752
Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181
Maitland Main Collieries Pty Ltd v Xstrata Mt Owen Pty Ltd [2006] NSWSC 1235
M Dalley & Co Pty Ltd; Re (1968) 1 ACLR 489
Mense & Ampere Electrical Manufacturing Co Pty Ltd v Milenkovic [1973] VR 784
Milwell Holdings Ltd v Johnson (1988) 12 IPR 378
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq) (1999) 96 FCR 217
Nenna v Australia Securities and Investments Commission (2011) 198 FCR 32
North v Marina [2003] NSWSC 64
O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359
Oil Basins Limited v Bass Strait Oil Company [2012] FCA 1122
Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Parker v South Eastern Railway Company (1877) 2 CPD 416
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165
Printers & Finishers Ltd v Holloway (No 2) [1964] 3 All ER 731
Reed Business Information Pty Ltd v Seymour [2010] NSWSC 790
Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656
RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd (2011) 280 ALR 125
Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286
Rouen v Ryan [2001] NSWCA 230
Russell v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (2007) 69 NSWLR 198
Saltman Engineering Co Ltd v Campbell Engineering Co Ltd [1963] 3 All ER 413
Sargent v ASL Developments Ltd (1974) 131 CLR 634
Seager v Copydex Ltd [1967] 1 WLR 923
Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84
Short v The City Bank of Sydney (1912) 15 CLR 148
Specialist Diagnostic Services Pty Ltd (formerly Symbion Pathology Pty Ltd) v Healthscope Pty Ltd [2012] VSCA 175
Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2) (2012) 287 ALR 360
Spotless Group Ltd v Blanco Catering Pty Ltd (2011) 93 IPR 235
State Lotteries Office v Burgin [1993] NSWCA 254
St Edmundsbury & Ipswich Diocesan Board of Finance v Clark (No 2) [1975] 1 WLR 468
TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130
Terrapin Ltd v Builders Supply Co (Hayes) Ltd [1967] RPC 375
The Balmain New Ferry Company Ltd v Robertson (1906) 4 CLR 379
Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
Tropeano v Riboni [2005] VSC 229
United Australia Ltd v Barclays Bank Ltd [1941] AC 1
Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15
Watson v Phipps (1985) 63 ALR 321
Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459
Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25
Williams v Hursey (1959) 103 CLR 30
Wood and Amcolite Ld v Gowshall Ld (1937) 54 RPC 37
Woolworths Ltd v Olson [2004] NSWCA 372
Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317
Yore Contractors Pty Ltd v Holcon Pty Ltd (1990) 2 ACSR 663Ford H, Austin R and Ramsay I, Principles of Corporations Law (Butterworths, subscription service) at [16.220] (Service 77)
Date of hearing: 22-26 October and 2 November 2012 Date of last submissions: 5 November 2012 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 519 Counsel for the Applicant: Dr M J Collins SC with Dr M R Sharpe Solicitor for the Applicant: Corrs Chambers Westgarth Counsel for the Respondents: Mr C D Wood with Mr D Parish Solicitor for the Respondents: Clayton Utz FEDERAL COURT OF AUSTRALIA
Hurd v Zomojo Pty Ltd (No 2) [2012] FCA 1458
CORRIGENDUM
1.In paragraph 259 of the Reasons for Judgment, the sixth sentence reads “Indeed, Hurd himself, at one point, conceded that OptiCast was renamed ZeptoCast and that ZeptoCast was subsequently renamed OptiCast”. The sixth sentence should read “Indeed, Hurd himself, at one point, conceded that OptiCast was renamed ZeptoCast and that ZeptoCast was subsequently renamed ZeptoLink”.
I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Gordon. Associate:
Dated: 18 June 2013
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 1478 of 2011
BETWEEN: ZOMOJO PTY LTD (ACN 114 604 269)
ApplicantAND: MATTHEW HURD
First RespondentZEPTONICS PTY LTD (ACN 141 647 716)
Second RespondentCROSSWISE PTY LTD (ACN 140 717 317)
Third RespondentMD HAMMER PTY LTD (ACN 149 869 189)
Fourth RespondentZEPTO MARKETS PTY LTD (ACN 150 529 301)
Fifth RespondentZEPTO FABRICS PTY LTD (ACN 156 138 000)
Sixth RespondentZEPTOIP PTY LTD (ACN 156 133 087)
Seventh RespondentTRADEMACH PTY LTD (ACN 115 683 864)
Eighth RespondentAND BETWEEN MATTHEW HURD
First Cross-ClaimantJOLENE (TAS) PTY LTD (ACN 082 267 516)
Second Cross-ClaimantHURD FAMILY SUPERANNUATION FUND
Third Cross-ClaimantAND: ZOMOJO PTY LTD (ACN 114 604 269)
Cross-Respondent
JUDGE:
GORDON J
DATE OF ORDER:
19 DECEMBER 2012
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.By 4:00pm on 21 January 2013, the parties are directed to confer and to bring in orders to give effect to these reasons for judgment and orders for the future management of the proceeding. If the parties are unable to reach agreement, each party should file and serve a minute of proposed orders and a two page submission addressing the area(s) of dispute.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).
INDEX
DESCRIPTION
PARA(S)
1
Introduction
[1]-[7]
2
Facts
2.1 2005 – The establishment of Zomojo
[8]-[37]
2.2 2006 to 2010 – The development of Zomojo’s products
[38]-[64]
2.2.1 Zomojo’s Trading and Zomojo’s Gateways
[38]-[45]
2.2.2 Zomojo’s ATS
[46]-[59]
2.2.3 Ion
[60]-[61]
2.2.4 Zomojo’s NICs
[62]-[64]
2.3 January 2010
[65]-[66]
2.4 May 2010
[67]
2.5 September 2010
[68]-[78]
2.6 October 2010
[79]-[101]
2.7 November 2010
[102]-[109]
2.8 December 2010
[110]-[125]
2.9 January 2011
[126]-[142]
2.10 February 2011 onwards – staff recruitment
[143]-[154]
2.11 March 2011 onwards – Zeptonics’ activities after Hurd left Zomojo
[155]-[172]
2.12 Hurd’s Conduct and Hurd as a witness
[173]
3
Legal Framework
3.1 The Service Agreement
[174]
3.2 Confidentiality and Confidential Information
[175]-[203]
3.2.1 Clause 9 of the Service Agreement
[175]-[199]
3.2.2 Springboard doctrine
[200]-[203]
3.3 Fiduciary duties
[204]-[208]
4
Analysis
4.1 Date and effectiveness of Hurd’s resignation
[210]-[223]
4.2 Period prior to 12 February 2011
[224]-[305]
4.2.1 Diversion of the Newedge opportunity
[225]-[233]
4.2.2 Development and marketing of OptiCast
[234]-[261]
4.2.2.1 Introduction
[234]-[237]
4.2.2.2 Breaches of the Service Agreement
[238]-[251]
4.2.2.3 ZeptoLink
[252]-[261]
4.2.3 Development and fundraising of the Crosswise ATS
[262]-[276]
4.2.3.1 Introduction
[262]-[264]
4.2.3.2 Breaches of the Service Agreement
[265]-[276]
4.2.4 Development and marketing of ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX
[277]-[304]
4.2.4.1 Introduction
[277]-[286]
4.2.4.2 Evidence regarding the creation of each device
[287]-[294]
4.2.4.3 Breaches of the Service Agreement
[295]-[303]
4.2.4.4 Breach of Hurd’s fiduciary duties
[304]
4.2.5 Conclusion
[305]
4.3 Period after 11 February 2011
[308]-[351]
4.3.1 Development and marketing of OptiCast, ZeptoCast and then ZeptoLink
[308]-[309]
4.3.2 Further development and marketing of the Crosswise ATS
[310]-[311]
4.3.3 Development and marketing of ZeptoMUX, ZeptoNIC, ZeptoSwitch and ZeptoAccess KRX
[312]-[325]
4.3.3.1 ZeptoMUX
[312]-[317]
4.3.3.2 ZeptoNIC
[318]-[319]
4.3.3.3 ZeptoSwitch
[320]
4.3.3.4 ZeptoAccess KRX
[321]-[325]
4.3.4 Dealings with Newham, Snowdon and Fitzpatrick
[326]-[342]
4.3.5 Zepto Markets and SunGard and Zeptonics and Leading
[343]-[350]
4.3.6 Conclusion
[351]
4.4 Claims against Corporate Respondents
[352]-[368]
4.4.1 Knowing assistance
[353]-[361]
4.4.2 Inducing Breach of Contract
[362]-[368]
5
Relief
5.1 Breaches of cll 3.1, 3.3, 3.4 and 3.5 of the Service Agreement, s 181(1) of the Corporations Act and Fiduciary Duties
[370]-[377]
5.2 Breaches of cl 10 of the Service Agreement
[378]-[381]
5.3 Breaches of cl 9 of the Service Agreement, s 183(1) of the Corporations Act and fiduciary duties
[382]-[399]
5.4 Breaches of cl 12.1(b) of the Service Agreement
[400]-[401]
5.5 Breaches of cl 12.1(c) of the Service Agreement
[402]-[404]
6
Hurd’s Shares
6.1 Introduction
[405]-[406]
6.2 Facts
[407]-[431]
6.3 Issues
[432]-[470]
6.3.1 Did cl 4.7(b) form part of the ESOP and bind Hurd?
[439]-[451]
6.3.2 Was Hurd a bad leaver?
[452]-[455]
6.3.3 Was cl 4.7(b) a penalty?
[456]-[461]
6.3.4 Did cl 4.79(b) apply to all of the Hurd Shares
[462]-[469]
6.3.5 Conclusion
[470]
6.4 Validity of the Resolutions of the Zomojo Board on 30 June 2011
[471]-[478]
6.5 Alleged failures to act fairly and breach of implied terms to act in good faith
[479]-[494]
6.6 Amount to be paid for the Hurd Shares
[495]-[505]
6.7 Hurd’s Oppression Claim
[506]-[512]
7
Other Matters
7.1 Amendments to Zomojo’s Pleadings
[514]-[515]
7.2 Paragraphs 92-95 of Hurd’s written submissions
[516]
7.3 Future Conduct of the Trial
[517]-[519]
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 1478 of 2011
BETWEEN: ZOMOJO PTY LTD (ACN 114 604 269)
ApplicantAND: MATTHEW HURD
First RespondentZEPTONICS PTY LTD (ACN 141 647 716)
Second RespondentCROSSWISE PTY LTD (ACN 140 717 317)
Third RespondentMD HAMMER PTY LTD (ACN 149 869 189)
Fourth RespondentZEPTO MARKETS PTY LTD (ACN 150 529 301)
Fifth RespondentZEPTO FABRICS PTY LTD (ACN 156 138 000)
Sixth RespondentZEPTOIP PTY LTD (ACN 156 133 087)
Seventh RespondentTRADEMACH PTY LTD (ACN 115 683 864)
Eighth RespondentAND BETWEEN MATTHEW HURD
First Cross-ClaimantJOLENE (TAS) PTY LTD (ACN 082 267 516)
Second Cross-ClaimantHURD FAMILY SUPERANNUATION FUND
Third Cross-ClaimantAND: ZOMOJO PTY LTD (ACN 114 604 269)
Cross-Respondent
JUDGE:
GORDON J
DATE:
19 DECEMBER 2012
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
1. INTRODUCTION
The Applicant, Zomojo Pty Ltd (Zomojo), was and remains involved in high frequency trading (HFT) primarily on the Korean Stock Exchange (KRX) using proprietary technology it developed in house. HFT is a broad term encompassing various quantitatively derived, computer driven and high volume trading strategies where equities and derivatives are traded based on small perceived mis-pricings over short, intra-day periods of time.
Zomojo’s involvement in HFT was, and remains, multifaceted. It was and remains engaged in:
1.developing, marketing and supplying low latency market gateway products and services for use by professional traders in equity and like markets (Zomojo’s Gateways), principally for use on the KRX;
2.trading in equity and like markets by using and exploiting the low latency of Zomojo’s Gateways and proprietary trading engine (Zomojo’s Trading) again, principally on the KRX;
3.developing proprietary low latency hardware and software products, including its own firmware for third party network interface cards (NICs), and later its own NICs, called the Z1 and Z10 (Zomojo’s NICs), and a communication and scheduling framework called the Ion framework (Ion); and
4.developing, marketing and supplying an alternative trading system (ATS) for equity and like markets that utilises software and hardware so as to achieve minimum latency (Zomojo’s ATS).
Matthew John Hurd (Hurd) (the First Respondent) was a director, an officer, an employee, the company secretary and a shareholder of Zomojo from its incorporation on 3 June 2005 until early 2011. Under a Service Agreement Hurd signed with Zomojo on 2 December 2005 (the Service Agreement), Hurd was appointed as a co-managing director of Zomojo and was required, inter alia, to diligently perform specified duties, devote the whole of his time and attention during normal business hours to the performance of those duties, at all times use his best endeavours to promote Zomojo’s interests and not be (directly or indirectly) involved or interested in any other business or occupation which materially interfered with the performance of those duties or competed in any respect with the business of Zomojo. Hurd was also Zomojo’s key decision maker with respect to the technological direction of Zomojo and, under the Service Agreement, was required to make prompt and full disclosure to Zomojo of the evolution, discovery or invention of any invention.
From no later than September 2010, Hurd set out on a covert course of conduct that was nothing more than a flagrant and deplorable attempt to appropriate benefits for himself which were properly those of his employer. In Hurd’s own words, his conduct from late 2010 onwards was not “flattering” and was disreputable.
Hurd’s conduct was blatant, deliberate and done by him knowing that what he was doing was wrong. Hurd was a most unsatisfactory witness. Except for admissions against his interests, I cannot and do not accept his evidence unless, and only to the extent that, his evidence was corroborated by independent contemporaneous evidence. During the course of his evidence, he admitted on no less than 26 occasions that what he wrote or said was false, a lie or both. But that evidence itself had problems. Hurd’s admission that something was false or a lie was itself, often, false. Hurd gave evidence he thought would advance his case as he saw it. Why? Because Hurd was, and remained, focussed on securing for himself an advantage over Zomojo whilst consciously disregarding his legal and ethical obligations. He “adapted” his evidence accordingly. Hurd said in evidence that he thought a description of his conduct during this period as “reprehensible” was “harsh”. It was not harsh. Hurd’s conduct was dishonest. He showed no remorse, just bitterness.
Hurd’s conduct needs to be addressed by reference to two time periods:
1.up to and including 11 February 2011, when his resignation as an employee of Zomojo took effect; and
2.the period after his resignation took effect on 11 February 2011.
Did Hurd breach the Service Agreement, one or more of ss 181(1) and 183(1) of the Corporations Act 2001 (Cth) (the Corporations Act) and his duties of fidelity and good faith to Zomojo? The answer is yes. It will be necessary to deal with each period separately. The facts relevant to each period are, of course, to some extent interconnected but the applicable legal framework is different.
2. FACTS
2.1 2005 – The establishment of Zomojo
Zomojo was the brainchild of three individuals: Dr Greg Robinson (Robinson), Mr Ian Heddle (Heddle) and Hurd. Robinson, Heddle and their associates provided the start-up capital. Hurd did not provide any start-up capital.
Zomojo was established in order to undertake HFT on the KRX. In a Zomojo “trading proposal” document produced by Hurd on 31 May 2005, Hurd described Zomojo’s business as an “index option arbitrageur”. The proposal acknowledged that every other trader was a competitor – “[i]f you aren’t fast enough, you don’t win the race to trades and you can’t participate. Too slow, no trades, the door is firmly shut”. As Hurd went on to say “[t]o enable participation you have to be able to win on the technology front to capture trades”. In that document, Hurd also noted that “[s]ecrecy and staff retention is very important to maintaining proprietary advantage” and that “knowledge of the IP [intellectual property] should be carefully managed within Zomojo so the techniques used are not widely known”. Hurd said that it was important not to disclose “all implementation details” to shareholders or directors with conflicts of interest. Hurd identified as Zomojo’s principal business risk “important staff leaving with enough IP [intellectual property] in their heads to competitively hurt the venture”.
Zomojo was incorporated on 3 June 2005. As at that date, Hurd and Heddle were the directors of Zomojo, Hurd was the company secretary and Hurd and Heddle each owned one share.
Hurd commenced writing code for the KRX trading engine in June 2005. By the end of July 2005, three further programming staff had been hired. It took Hurd approximately nine months to develop the software for Zomojo’s trading engine. The first version of the trading engine was slow and the hedging algorithm was inadequate. Hurd rewrote the program and, by May or June 2006, the system was fast enough to undertake basic trading activity and profitable enough to cover Zomojo’s costs.
During the second half of 2005, Robinson supervised the drafting of documentation including Zomojo’s Constitution, a Shareholder Agreement, an employee share ownership plan (ESOP), an Zomojo Employee Option Plan (ZEOP) and employee service agreements. Robinson utilised the services of Dr Nick Brash (Brash), a lawyer of Brash Solutions, to draft those documents. Robinson provided those documents in draft form to Heddle and Hurd, where relevant, for their comment. One such communication was an email from Brash to Robinson on 14 October 2005, attaching a draft of the Plan Deed and Offer Booklet (in relation to the ESOP), which Robinson forwarded to Heddle and Hurd (on the same day). That email noted that there was a further document, a “Plan Information Booklet”, which was still to come. Hurd gave evidence that he did not specifically recall receiving Robinson’s 14 October 2005 email but that he recalled receiving documentation at around that time.
On 21 November 2005, the Board of Zomojo (consisting of Heddle and Hurd) passed resolutions which had the following effect:
1.Hurd and Heddle each transferred their one share in Zomojo to entities nominated by a Zomojo investor, Mr Bill Burdett, and Robinson;
2.2,998 shares were issued in Zomojo to entities nominated by Mr Burdett, another investor, Mr Tim Batho and Robinson, as follows:
2.1Mr Batho – 1,000;
2.2Mr Burdett – 999; and
2.3Robinson – 999; and
3.Zomojo entered into the Shareholder Agreement with the three shareholders.
Under the Shareholder Agreement, Robinson was appointed Chairman of the Board. On 2 December 2005, the Board of Zomojo (consisting of Robinson, Heddle and Hurd) approved:
1.the establishment of the ZEOP in accordance with the Plan Rules and the issuing of options pursuant to the ZEOP;
2.the establishment of the ESOP in accordance with the Plan Deed and, upon approval by the shareholders, the signing of the Plan Deed and the transfer or issuing of shares and the making of loans pursuant to the ESOP;
3.the entry by Zomojo into the Service Agreement with Hurd and a service agreement with Heddle; and
4.the offer by Zomojo and, upon acceptance, the issuing of, options pursuant to the ZEOP as follows:
4.1Hurd – 400,000; and
4.2Heddle – 100,000.
On 2 December 2005, the shareholders of Zomojo passed resolutions approving:
1.an amendment to Zomojo’s Constitution;
2.the establishment of the ZEOP in accordance with the Plan Rules and the issuing of options pursuant to the ZEOP; and
3.the establishment of the ESOP in accordance with the Plan Deed, Zomojo entering into the Plan Deed, and the transfer or issuing of shares and the making of loans pursuant to the ESOP.
On the same day, Hurd was offered, and accepted, 400,000 options in Zomojo. By accepting the options, Hurd agreed “to be bound by the terms and conditions of the offer, the Plan Rules, the Constitution of Zomojo and Zomojo’s Shareholder Agreement in force from time to time”. Hurd’s nominee also signed an accession to the Shareholder Agreement on that day.
It is necessary to examine the terms of several of the documents executed on 2 December 2005 in some detail.
First, the Service Agreement. It was between Hurd and Zomojo. Its terms governed his role as one of two co-managing directors of Zomojo. From the outset, his role “involved managing all aspects of the business including technology and developments at Zomojo”.
Under cl 3.1(a), Hurd was required to “diligently perform the Services”. “Services” was defined in cl 1 to mean the duties specified in Item 2 of Sch A to the Service Agreement and such other duties as were consistent with the position to which Hurd was appointed, subject to any modifications or additions agreed by the parties from time to time. Item 2 of Sch A defined the duties as follows:
Co-Managing Director, each having concurrent powers as Managing Director, but in practice the co-Managing Directors will each focus on complementary aspects of the business, with Matt Hurd managing technology and developments and Ian Heddle managing trading and operations.
The Shareholder Agreement defined the role of Managing Director in the same terms: see cl 15(a).
Consistent with cl 3.1 of the Service Agreement, other obligations were imposed on Hurd. Clause 3.3 provided:
Unless absent on leave or through illness or injury, the Managing Director shall devote the whole of his time and attention to the performance of the Services during normal business hours and at such other times as may reasonably be necessary to the business of [Zomojo], …
In addition, at all times Hurd was to “use his best endeavours to promote the interests of [Zomojo]”: cl 3.4. Finally, cl 3.5 provided that:
The Managing Director shall not while employed by [Zomojo] (without the written consent of the Board) be directly or indirectly involved or interested in any other business or occupation which:
(a) materially interferes with the performance of the Services; or
(b)competes in any respect with the business for the time being of [Zomojo] …, however this provision shall not prohibit the Managing Director from holding:
(i)less than 10% of the issued capital in a publicly listed company; or
(ii)any interest in a business unassociated with the core businesses of [Zomojo].
Hurd’s obligations did not end there. Zomojo was a start up company. The stakes were big. Hurd was the technological driver of Zomojo. Hurd had not contributed capital to the start up – his contribution was his computer programming expertise. Unsurprisingly, other clauses specified what Hurd had to do and what he could not do with technology whilst he was at Zomojo and if he left Zomojo.
Clause 10, headed “Inventions and Assignment”, was in the following terms:
10.1 The Managing Director … assigns to [Zomojo]:
a.all inventions, discoveries and novel designs whether or not registrable as designs or patents throughout the world;
b.the entire copyright throughout the world in all writing (including but not limited to product designs, product sketches, computer software, source code, object code, flow charts, programmer’s notes and other documentation and all adaptions, alterations or modifications of any computer software, source code or object code),
created previously while in [Zomojo’s] employ, created now or created in the future as a result of or pursuant to his performance of the Services.
10.2In addition to disclosing any inventions, discoveries, designs or copyright works referred to in the preceding clause, the Managing Director shall disclose and, if required by [Zomojo], assign to [Zomojo] any other inventions, discoveries, designs or copyright works devised or created by the Managing Director at the request of [Zomojo] during a period for which the Managing Director has been paid by [Zomojo].
10.3The Managing Director shall both during this agreement and after the expiry or termination of this agreement do all such acts and things, and sign all such documents, as [Zomojo] may reasonably request to secure [Zomojo’s] ownership or rights to inventions, discoveries, designs or copyright works referred to in clauses 10.1 and 10.2.
10.4The Managing Director shall make prompt and full disclosure to [Zomojo] of the evolution, discovery or invention of any invention.
10.5The Managing Director irrevocably appoints [Zomojo] as his attorney to execute all such documents and do all such things as are required to be executed or done to give effect to the provisions of this clause.
That clause survived termination of the Service Agreement: cl 17.
The Service Agreement also addressed what was to occur if the agreement was terminated. Clause 12.1, under the heading “Future Employment”, provided:
After termination of this agreement for any reason the Managing Director shall not, except with the written consent of [Zomojo], at any time until the expiration of the Restraint Period and within the Restraint Areas specified in item 9 of Schedule A, directly or indirectly, either on his own account or jointly with or on behalf of any other person, organisation or company, whether as a director, employee, member or otherwise:
a.endeavour to entice away from [Zomojo], offer to perform services for or otherwise solicit the custom of any client or customer of [Zomojo] which was a client or customer of [Zomojo] within the last 12 months of the Managing Director’s employment with [Zomojo];
b.offer employment or business opportunities to any employees of [Zomojo] or counsel, or procure or otherwise assist any person to do so; or
c.be employed by, provide services or advice, or otherwise assist any company or entity that is involved with the trading of securities on any of the exchanges listed in item 10 of Schedule A.
(Emphasis added.)
The “Restraint Period” was 12 months: Item 9 of Sch A. The “Restraint Areas” were:
Sydney, Seoul, Tokyo, Osaka, Singapore, Hong Kong, New York, London, Frankfurt, Boston, Chicago, Honolulu, Los Angeles, Philadelphia, San Francisco.
The “exchanges listed in item 10 of Schedule A” were extensive. Again, cl 12.1 survived termination of the Service Agreement: cl 17.
Two other subject matters were relevantly covered by the Service Agreement both during and after termination of the Service Agreement. They were described as “Confidential Information” and “Remuneration”. Clause 9, entitled “Confidentiality”, provided:
9.1The Managing Director shall not during or after his employment by [Zomojo]:
a.use any Confidential Information for any purpose not related to the business of [Zomojo]; or
b.disclose any Confidential Information to any third party except pursuant to a confidentiality agreement approved by [Zomojo] and for the purposes of [Zomojo’s] business.
9.2The Managing Director shall use all reasonable endeavours to prevent disclosure of any Confidential Information by any third party to whom he discloses it.
(Emphasis added.)
“Confidential Information” was defined in cl 1 of the Service Agreement to mean:
… matters not generally known outside [Zomojo], information relating to the business of [Zomojo], including existing and future products and services, information relating to the technology, infrastructure, strategic plans, business plans, research, development, financial affairs, sales, costs, profits, organisation, customers, pricing methods, business partners …, the work (including computer programs) performed by the Managing Director pursuant to this agreement, and any other information which the Managing Director ought reasonably to be aware is confidential.
Again, cl 9.1 survived termination of the Service Agreement: cl 17. A careful reader of cl 9.1 will notice that unlike cl 12, cl 9 applied to Hurd without limitation as to period or area.
Finally, in the area of remuneration, cll 4 and 8 of the Service Agreement were relevant. Hurd’s remuneration had four components – salary (cl 4.1), issue of options in Zomojo (cll 4.2(a) and 4.5), entitlement to a profit-share bonus and shares (cll 4.2(a) and 4.6) and, of course, Superannuation Contribution (cl 4.2(b)). Clause 4 does not refer to any of the Plan Deed, Plan Rules, Offer Booklet or Plan Information Booklet.
Clause 8 was entitled “Termination”. It relevantly provided that:
8.1[Zomojo] may terminate this agreement immediately by notice in writing if the Managing Director:
(a)commits any breach of the Managing Director’s obligations and duties under this agreement or any agreement or arrangement with [Zomojo] which is, in the reasonable opinion of the Board, material;
(b)in the reasonable opinion of a Managing Director is guilty of conduct tending to bring the Managing Director or [Zomojo] … into disrepute;
…
8.2Upon termination of this agreement pursuant to clause 8.1, the Managing Director shall not be entitled to any further compensation or damages other than pro rata salary and accrued annual leave to the date of termination.
…
8.9.The Managing Director may terminate this agreement by giving one month’s notice and upon such termination shall be entitled to all compensation due to the Managing Director under this agreement.
…
The Plan Rules governed the ZEOP, while the Plan Deed (and its Schedules, the Offer Booklet and Plan Information Booklet) governed the ESOP. No provision of the Plan Rules (or cl 4.5 of the Service Agreement) specifically dealt with what was to occur if a participant in the ZEOP ceased employment with Zomojo. That is not surprising. Options could only be granted to an employee: Rule 6.2. Options could only be redeemed by an employee: Rule 7.2(a)(i). Options which had not vested lapsed upon cessation of employment: Rule 11.1(g)(i). Even if vesting had occurred, options would lapse upon cessation of employment if the employee was terminated for breach of the Service Agreement: Rule 11.1(g)(ii). Otherwise, vested options would lapse 60 days after cessation of employment: Rule 11.1(i).
If the options had been converted to shares, however, the position was different. Upon the exercise of options, in respect of the resulting shares, the participant agreed to be bound by the Plan Rules, Zomojo’s Constitution and the Shareholder Agreement: Rule 9.6 of the Plan Rules. The participant also undertook not to take any action which would infringe the restrictions on sale of shares imposed by Rule 13: cl 9.7 of the Plan Rules. Rule 13.2 of the Plan Rules relevantly provided that:
The Participant shall be permitted or obliged to deal with Shares if the participant would be permitted or obliged to do so had the Shares been acquired pursuant to the [ESOP].
Finally, Rule 30.8 of the Plan Rules provided that Zomojo could buy back shares resulting from the exercise of options at a mutually agreed price.
Next, the Plan Deed for the ESOP. Recital 4 of the Plan Deed noted that the “terms of issue upon which employees will acquire shares are to be set out in the offer booklet containing the invitation to participate in the Plan and the information booklet, which are set out as Schedules to this Plan Deed ... and which are to be sent to eligible employees selected by the Board.” Clause 1.2 of the Plan Deed stated that the “Plan Deed sets out general provisions governing how the Plan generally is to be operated, and the offer booklet and information booklet in the Schedule to this Plan Deed ... sets out the provisions to be incorporated into contracts between Zomojo and employee participants.” There were, however, no Schedules to the Plan Deed as at 2 December 2005.
On 5 December 2005, Brash emailed the Plan Information Booklet for the ESOP to Robinson. Robinson forwarded Brash’s email on the same day to Heddle and Hurd. Although Hurd, in his witness statement in reply, professed to have never received the 5 December 2005 email from Robinson (and its attachment), in his oral evidence he said he believed he would have received it and had no reason to think otherwise. Brash’s email included the following explanation of how the ESOP documents fitted together:
Fitting the documents together: To remind you how these documents fit together: the ESOP is constituted by the entering into of the Plan Deed pursuant to the ‘stage 2’ Board minutes previously provided, and the Offer Booklet and the Plan Information Booklet constitute schedules to the Plan Deed. I have ensured the attached Plan Information Booklet is in line with the ESOP Offer Booklet, clause 4.6 of the Employment Agreements, and with section 4 of the Employee Ownership Strategy paper last sent on 8 November 2005. To open the Word version of the Offer Booklet, you will be prompted to select the attached Excel spreadsheet (it might be easier if you first save the Excel document to a location so you know where to find it when prompted to select it).
The Plan Information Booklet contained the following relevant terms:
4.7 Selling Your Shares on Cessation of Employment
(a) General Principles
Following cessation of employment, you are not prevented by the Plan from selling your shares, however again you would need to comply with the relevant provisions and procedures set out in Zomojo’s shareholder agreement.
Zomojo has an option to procure a purchase of your shares within 30 days after your cessation of employment either for an amount equal to your loan outstanding if you are a bad leaver (see paragraph (b) below) or otherwise on the basis of a Plan valuation formula being 5 x the previous year’s pre-tax profit (see paragraph (c) below).
If the company does not exercise either option to procure a purchase of your shares, then if you so request, Zomojo must use its best endeavours to assist you in finding a buyer subject to the terms of Zomojo’s shareholder agreement.
Where a transfer of shares is to take place, you need to execute a transfer (or if you fail to, the Plan administrator may do so on your behalf) and Zomojo will record the change in ownership of the shares in its share register.
Unless otherwise previously determined by the Board, if your employer ceases to be a member of the Zomojo group, your employment will be deemed to have ceased at that time, unless you re-commence employment with a member of the Zomojo group within 30 days after such cessation.
(b) Special Rule 1: Bad Leavers
The only exception is if you are a bad leaver, that is if you cease employment in circumstances that entitle Zomojo to dismiss you without notice.
In this case, the Board has discretion to determine within 30 days after your cessation of employment by notice in writing to you that you must transfer your shares to Zomojo or its nominee for an amount equal to your loan outstanding. In this case, the share sale proceeds will be applied to discharge your Plan loan, and you would be entitled to a refund of any voluntary loan repayments and your deferred bonus would include the full amount of any salary and bonuses sacrificed without any offset for notional interest.
If the Board does not exercise its discretion to require you to transfer your shares as set out above, then you may keep your shares and sell them when you please subject to complying with the provisions of Zomojo’s shareholder agreement. In this case, your deferred bonus would be calculated in the usual way (ie accumulated salary/bonus reduction less notional interest) and the after-tax amount of the deferred bonus will be applied to discharge your Plan loan, and if there is still an amount that remains outstanding on your loan, you are required to pay this amount to Zomojo within 30 days after you are notified of the shortfall figure.
(c) Special Rule 2: Zomojo Option
The other exception is that within 30 days after your cessation of employment, Zomojo may elect by notice in writing to you to procure a subsidiary to purchase your shares on trust for the purposes of the ESOP on the basis of a Plan valuation formula, being 5 x the previous financial year’s pre-tax profit divided by the total number of shares on issue, and then multiplied by the number of shares being sold.
In that case, Zomojo may elect to pay you either:
→in one lump sum instalment, or
→in 3 instalments over a 2-to-3 year period from and including the year of cessation of employment, each instalment being pegged to the Plan value measured at that time.
‘One Lump Sum Instalment’ Scenario
In this case, the sale price would be paid to you within 3 months of cessation of your employment, or within 1 month of the relevant accounts becoming available if this turns out to be a later date. Your shares will be transferred to the purchaser only once you have received payment of the applicable sale price.
…
(Emphasis in original.)
The Offer Booklet contained the following relevant terms:
2.4 Zomojo ESOP
The Zomojo ESOP is a set of rules governing the provision of shares in Zomojo Pty Ltd (‘Zomojo’) to employees of Zomojo. The rules may be amended at any time pursuant to a Board resolution approved by a Special Majority, or by approval of a Special Majority of Zomojo shareholders, as defined in the Zomojo Shareholder Agreement. Any such amendment will bind any employees already participating in the Plan, as well as applying to any offers made after the date of the amendment.
…
● When you cease employment:
→you will be entitled to the deferred bonus nominated in your offer or accrued under a salary sacrifice facility if applicable;
→Zomojo will deduct PAYG tax from the deferred bonus in accordance with its statutory obligations, and on your behalf apply the after-tax amount of the deferred bonus towards repayment of any outstanding balance of your Plan loan; and
→your loan must be repaid in full – if you are able to negotiate a sale of your shares at the time of cessation of employment (see below), Zomojo will offset the share sale proceeds against any outstanding loan amount (if this has not already been discharged fully by the above repayments), and any surplus proceeds will be paid to you, and any shortfall will be payable by you.
●Your ability to sell the shares will be governed during employment with Zomojo, and once you cease employment, by Zomojo’s shareholder agreement. However:
→[if you are a bad leaver (ie if you cease employment in circumstances that entitle Zomojo to dismiss you without notice), then at Zomojo’s option you must transfer your shares to Zomojo or its nominee for an amount equal to the lower of net tangible asset backing as at the most recent 30 June or the most recent arm’s length transaction price; or]
→Zomojo may elect to procure a subsidiary to purchase your shares on the basis of a Plan valuation formula, being 5 x the previous [average three] years pre-tax profit. In that case, Zomojo may elect to pay you in one lump sum instalment, or to pay in 3 instalments over a 3-year period from and including the year of cessation of employment, each instalment being pegged to the Plan value measured at that time.
If the company does not exercise its option to procure a purchase of your shares, then at your request, Zomojo must use its best endeavours to assist you in finding a buyer subject to the terms of Zomojo’s shareholder agreement.
(Emphasis in original.)
Hurd converted his options into shares (pursuant to the Plan Rules) and his nominee acquired shares in Zomojo (pursuant to the Plan Deed) on the following dates:
Date Entity Price Shares 30 June 2007 Jolene (Tas) Pty Ltd $1.43 32,000 30 June 2007 Jolene (Tas) Pty Ltd - (from options) 133,333 30 June 2008 Jolene (Tas) Pty Ltd $7.40 32,000 30 June 2008 Jolene (Tas) Pty Ltd - (from options) 133,333 30 June 2009 Jolene (Tas) Pty Ltd $14.65 32,000 30 June 2009 Jolene (Tas) Pty Ltd - (from options) 133,334
2.2 2006 to 2010 – The development of Zomojo’s products
2.2.1Zomojo’s Trading and Zomojo’s Gateways
In the beginning, Heddle and Hurd were co-managing directors of Zomojo while Robinson remained employed by his previous employer (until 2007). Hurd was primarily focused on technology and trading strategy development, including supervising the construction of Zomojo’s Gateways and, later, its ATS, as well as conducting research into its continuing development and improvement. Heddle’s role was complementary to Hurd’s; he focused on Zomojo’s trading activities and operations.
Hurd was initially paid a salary of $150,000 per annum. In approximately May 2009, Hurd’s salary was increased to $400,000 per annum. Hurd also received bonus payments and dividends. From 2005 until February 2011, Hurd received total remuneration in excess of $3 million.
As mentioned at [11] above, Hurd spent half of 2005 and part of 2006 developing the software for Zomojo’s trading engine. Zomojo’s trading engine analyses market information and performs calculations to determine when to buy securities, how many to buy and when to sell them. A necessary corollary of the trading engine is a gateway – a connection to the particular securities exchange which receives market data and transmits orders. Both the trading engine and the gateway must be capable of extremely low latencies in order to enable the trader to realise a profit.
In March 2006, Zomojo commenced trading on the KRX.
Initially, Zomojo utilised a single broker which gave it a direct connection to the KRX. In October 2006, the KRX introduced new regulations which meant that Zomojo’s broker was not permitted to offer Zomojo a faster connection to the KRX than any of its other clients. All connections to the KRX were required to be processed through a broker’s front end processor (FEP), which checks orders and monitors risk. Zomojo no longer had a speed advantage and its profitability fell. The solution which Zomojo devised was to integrate its own low latency FEP into its Gateway technology and to convince its broker to use that technology. The solution worked and Zomojo returned to profitability.
Over time, Zomojo expanded its broker base to include five or six brokerage firms, all of whom used Zomojo’s Gateways.
In 2007, Robinson retired from his previous employment. He came out of retirement in July 2007 to work for Zomojo on a part-time basis, focusing on business development.
From 2008 to the present, Zomojo has marketed Zomojo’s Gateways to a variety of exchanges, brokers and vendors. Robinson gave evidence that Zomojo did not attempt to sell its Gateways outright. Rather, Zomojo attempted to enter into “technology for access” arrangements whereby Zomojo would provide its technology to brokers in exchange for no commissions or low commissions on trading conducted through those brokers. Robinson’s evidence was that Zomojo has entered into a number of such arrangements with brokers in the Asian region.
2.2.2Zomojo’s ATS
In early 2007, Hurd conceived of the beginnings of Zomojo’s ATS. Hurd gave evidence that an ATS is a term which describes an entity that conducts the same sort of function and service as a stock exchange but without being an officially sanctioned stock or futures exchange. Other countries have a similar concept but with different names. ATSs, like stock exchanges and futures exchanges, need a computing solution to operate their trade matching service (sometimes referred to as a matching engine).
Zomojo had already designed and exploited Zomojo’s Gateways to great effect on the KRX. The brokerages which Zomojo used were inadvertently benefitting from the speed of Zomojo’s Gateways. Hurd believed that the challenges that were faced by stock exchanges, whether sanctioned or otherwise, were similar to the challenges being faced by Zomojo, to which the Zomojo computer system provided an effective solution.
Hurd wrote a paper which proposed two models for growing Zomojo’s business:
One scenario, a good one, has us remaining just an arb and stat arb player and role out around the world making hay whilst our latency and processing benefits are exploitable. Eventually, various parts of the world will catch up and we will be left with little latency advantage within the context of the jitter of an exchange and our trading will be driven more by smarter analytics rather than speed.
Another scenario has us rolling out aspects of our technological advantage as product for the benefit of others. We have already been forced into this in Korea where our tech has become an EMS for a bank and a broker for all clients so we can cut through the compliance issues that prevented us from hooking directly to the exchange.
The second paragraph recorded Zomojo’s impetus for creating an ATS.
The idea of an ATS was essentially a reapplication of the proprietary technology which Zomojo already possessed and utilised. In Hurd’s view, there was no further research or investigation to be done, merely the creation of the device which primarily involved combining hardware parts that had been identified and writing the software.
In July 2007, Dr Matthew Chapman (Chapman) commenced his employment at Zomojo as a research engineer.
During 2008, Hurd and Chapman developed a prototype of Zomojo’s ATS. On 10 November 2008, Zomojo lodged a patent co-operation treaty application in respect of its ATS. Thereafter, Hurd and others at Zomojo attempted to market Zomojo’s ATS to various exchanges. Robinson gave evidence regarding a number of business trips that he, Hurd and Chapman undertook during 2007 while attempting to market and sell its ATS. Those trips frequently combined marketing of both Zomojo’s ATS and Zomojo’s Gateways to potential customers.
The first business trip relevant to the ATS was to Brazil in May 2008. Robinson and Hurd met with a former colleague of Robinson’s, Mr Josh Rose, who was at that time a consultant to Morgan Stanley in New York. Mr Rose told Robinson and Hurd that Morgan Stanley was investigating the possibility of launching an ATS in Brazil but that it did not yet have a technology platform on which to host the ATS. Robinson and Hurd also explored the possibility of establishing an ATS with Bovespa Exchange, a regulatory lawyer and a number of brokers. Robinson’s evidence was that at the conclusion of the trip he and Hurd formed the view that it was unlikely that a new ATS could be set up in Brazil in the short term because of regulatory issues. However, they formulated the idea that Zomojo could start an ATS in North America by finding a partner to invest capital and local knowledge with Zomojo to contribute the technology.
In November 2008, Robinson, Chapman and Hurd travelled to Chicago and New York. At the conclusion of their time in North America, Hurd and Chapman travelled to Brazil. During the trip, Robinson, Chapman and Hurd performed technical demonstrations of the prototype ATS. Importantly, Robinson’s evidence described how they used optical splitters to enable speed measurements without affecting the latency of the prototype. Robinson, Chapman and Hurd also described Zomojo’s Gateways and explored technology for access agreements with the brokers that they met.
During July and August 2009, Robinson and Hurd travelled to New York, Toronto, Seoul and Hong Kong to market Zomojo’s technology and to further explore Zomojo’s trading opportunities and capabilities in the US, Canadian and Korean markets. On those roadshows, Hurd used presentation slides that said that Zomojo had “developed technology which will enable the production of the world’s fastest Exchange Matching Engines”. He said that low latency was achieved from an “innovative use of commercially available hardware, FPGAs [Field Programmable Gate Arrays] and comm[unication]s”. He demonstrated the capabilities of Zomojo’s ATS (known as Rapide), including its latency of less than 10 microseconds, its ability to handle more than 1 million orders per second, and its use of deterministic, parallel matching engines for the purposes of redundancy/fault tolerance.
During their time in Toronto, the pair met with the Toronto Stock Exchange (TSX) and performed a demonstration of Zomojo’s ATS. The TSX was interested in the prototype ATS. After the meeting with the TSX, Zomojo signed a mutual non-disclosure agreement (NDA) with the TSX and also agreed to a period of exclusivity, the effect of which was that Zomojo agreed it would not market or sell Zomojo’s ATS to any other party for use in the United States or Canada while the TSX conducted its due diligence between August and October 2009.
The TSX subsequently sent representatives to Australia to complete technical due diligence on Zomojo and the ATS. Robinson and Hurd then went to Toronto in mid-September 2009 to negotiate the financial agreement with the TSX. However, before the agreement could be finalised, in late January 2010, the TSX withdrew from the deal with Zomojo.
While in Hong Kong, Hurd and Robinson met with representatives of Goldman Sachs. They gave a presentation which outlined Zomojo’s technology. Included in that presentation were several claims about Zomojo and its ATS technology, including:
1.“[p]rincipals have backgrounds in equities, derivatives, broking, funds management, technology, alternative trading systems, algos etc” and “[s]taff are exclusively developers and/or scientists/engineers – R&D culture”;
2.“[s]ub 10 microsecond accept/execute”;
3.“[u]tilizes a combination of hardware & software”;
4.“[s]ub 10µs timing budget”, showing a traversal time of less than 10 microseconds for a round trip, with wire time over 400 metres of 1.5 microseconds each way, or 3 microseconds for a round trip (Chapman gave evidence that the reference to 400 metres should be 300 metres);
5.“[e]ngine latencies” of between 3.40 and 4.11 microseconds;
6.“[d]emo layout” showing a client, monitor with Endace card, exchange and two optical taps;
7.latency distribution graphs and summaries;
8.“[q]uorum – closer view” showing the splitting of inputs using high speed links and deterministic processes;
9.“[s]cales to tens or hundreds thousands of instruments per quorum … Suitable for option exchanges”; and
10.“Final protocol – Closer to Nasdaq? Nasdaq closer to us?” and “[c]urrently supports outer session with PKI & embedded firewall”.
During 2009 and 2010, Robinson and Hurd conducted a number of other business trips. In July and August 2010, they went to Toronto, New York, London, Mumbai, Hong Kong and Singapore. While in Toronto, Robinson and Hurd met with representatives of TD Securities. Those negotiations continued after the pair returned to Australia. In November 2009, Zomojo commenced trading on the TSX and the NASDAQ with a view to leveraging short-term gains in price differentials between the two exchanges. While that venture had not produced a profitable outcome, Robinson decided to keep the project going on the basis that Zomojo might enter into a joint venture with TD Securities. The joint venture proposal involved Zomojo contributing ATS technology and TD Securities contributing capital and trading strategy (with their staff to run the trades). It was intended that in the first stage, the joint venture would trade inter-listed arbitrage between the TSX and NASDAQ. Further stages involving US trading and client facing technology were contemplated in the draft agreement. Profits would be shared 50/50. In December 2010, Zomojo was advised that TD Securities was not prepared to proceed with the deal.
Throughout 2011 and 2012, including after Hurd’s departure from Zomojo, Zomojo continued to market its ATS and Gateways.
2.2.3Ion
The first iteration of Zomojo’s trading engine was a “fairly conventional” design using the computer programming language known as C++. There were difficulties with the design. The foremost difficulty was that it was not “deterministic”. That is, the same inputs would occasionally produce different outputs. Zomojo’s software engineers encountered difficulties reproducing engine behaviour for the purpose of locating bugs.
The solution which Chapman devised in May 2008 was to convene a project to develop a deterministic and high-performance software design. The result was Ion. The relationship between Ion and the trading engine was not clearly explained at trial. Chapman gave evidence that Ion was a “library which is … a piece of code that’s used by developers”. It was not a standard library. It was a custom library developed by Zomojo with the aim of producing a deterministic engine capable of interpreting inputs from multiple sources adopting multiple protocols.
2.2.4Zomojo’s NICs
In late 2007, Hurd told Chapman he had had discussions with various hardware suppliers about the possibility of using FPGAs to accelerate some portion of Zomojo’s trading. In February 2008, Chapman discovered that the NIC Zomojo was using in its Korean trading, a card provided by Sangoma Technologies Corp (Sangoma NIC), also contained an FPGA. The principal benefit of an FPGA is its ability to be programmed to perform in a certain way, independent of the operating system. That means that it can perform faster, since certain tasks can be performed wholly within the FPGA.
In March and April 2008, Chapman set about designing custom firmware for the Sangoma NIC. Chapman implemented what he called “receive FIFOs” (first-in-first-out buffers) and kernel bypass. The aim of the custom firmware was to reduce latency. It achieved that aim by performing a limited amount of processing on the NIC itself. In September 2008, Chapman adapted the custom firmware to a NIC supplied by Xilinx, Inc (Xilinx NIC). The Xilinx NIC was used to build the prototype of Zomojo’s ATS: see [46]-[51] above.
Eventually, Chapman decided that it would be prudent for Zomojo to develop its own NIC which would be capable of performing the functions contained in Zomojo’s custom firmware, as well as others. Between May and July 2009, Chapman developed the schematics for the first iteration of Zomojo’s NICs, the Z1. Compared to the Xilinx NIC, the Z1 was smaller, increased the number of network ports from two to four and added a time synchronisation port and a backup power input. The first prototypes of the Z1, like the Xilinx NIC before it, were used in the prototype of Zomojo’s ATS. In January 2010, Zomojo began to deploy Z1s in its systems in Korea to replace the Sangoma NICs which had previously been used. In July and December 2010, Chapman developed schematics for the second iteration of Zomojo’s NIC, called the Z10.
2.3 January 2010
Over time, Hurd became unhappy at Zomojo. He was frustrated with what he perceived to be a failure by Zomojo to commercialise its technology, in particular, Zomojo’s ATS. In addition, he and Heddle had a personality clash. They did not get on.
Zeptonics Pty Ltd (the Second Respondent) (originally known as Metamatta Pty Ltd and then Shopkii Pty Ltd) (Zeptonics) was established by Hurd in January 2010. Hurd was not originally registered as a director of, or shareholder in, Zeptonics. The fact that Zeptonics was established is, of itself, of little interest. It is what happened over the next 14 or so months that needs to be considered in some detail.
2.4 May 2010
In early May 2010, Hurd started to reorganise his affairs. 7,810 shares in Zomojo held in the name of Jolene (Tas) Pty Ltd (Jolene), his private company, were sold to the Hurd Family Superannuation Fund (HFSF) at $14.65 per share. Another 3,500 shares (at $14.65 per share) were sold by Jolene to Louise Heddle (as trustee of the Louise Heddle Family Trust).
2.5 September 2010
By no later than September 2010, Hurd’s position had fundamentally changed. Hurd’s unhappiness at Zomojo had reached a point where he was taking definite and public steps to leave Zomojo. Hurd had new plans, his plans and ideas were concrete and he was moving to execute them. To understand the gravity of his actions it is necessary to assess them step by step. The steps cover a period of in excess of 12 months. Hurd’s actions included the development of a suite of products. .Over that period of time, the names of the products changed. The relevant products were as follows:
Product Name(s)
General Description
Opticast / OptiCast
24 port or 48 port, 19″ rack mount splitter box which used an optical splitter to achieve low latency.
ZeptoLink / ZeptoCast
50 port layer 1 circuit switch that can forward data in around 5 nanoseconds.
ZeptoNIC
1-3µs 1G/10G/40G Ethernet card with integrated timing.
ZeptoSwitch (not built)
48/64 port L3 data centre switch at 300ns.
ZeptoMUX
23-to-1 multiplexing switch for latency sensitive trading. 10GbE layer 2 switch.
ZeptoAccess KRX / ZeptoRisk
Direct market access gateway which achieves negative latency through various programmatic techniques.
Crosswise ATS (including ZeptoMatch)
Alternative trading system for equity and like markets that utilises software and hardware to achieve minimum latency.
Hurd took “sabbatical” leave from Zomojo in September 2010. Although Hurd was on “sabbatical” leave, he had access to his Zomojo email address. From 14 to 21 September 2010, he communicated by email with Ms Joanne Chardaloupas (Chardaloupas) of Newedge Canada Inc (Newedge) using his Zomojo email address. On 14 September 2010, Chardaloupas told Hurd that Newedge was seeking a “partner to build [Newedge] a FIX adaptor”. Hurd replied saying that “[w]e have gateways that support Nasdaq UFO-like protocol for HFT orientated trading called SPUD/Poke and a FIX 4.2 to Poke converter”. The “we” was a reference to Zomojo. The next day, 15 September 2010, Chardaloupas sent a reply to Hurd at his Zomojo email address stating, “I very much appreciate the response. Yes, this does sound along the right path”. Hurd did not respond. On 21 September 2010, Chardaloupas sent a further email to Hurd at his Zomojo address “just following up to see if you have any available [sic] this week to discuss / re-visit this opportunity”. Hurd did not reply immediately.
By this time, Hurd had conceived of “Opticast”. Hurd’s evidence was that in September 2010 he came up with the idea of splitting an optical fibre signal into multiple paths in order to replicate network traffic. Hurd explained the idea as follows:
The basic premise … was that it is faster to split an optical fibre signal than a conventional computer signal. The process of converting the optical fibre signal back into a conventional computer signal is a very past process. Thus, so the idea went, by splitting the optical fibre signal and then converting it back to a conventional computer signal, [he] could speed up a process for distributing the same signal to a large number of destinations. This became the Opticast idea.
Zomojo had already implemented the use of optical splitters in its prototype ATS to permit the measuring of speeds with no discernable effect upon latency: see [53] above. Hurd’s Opticast idea and Zomojo’s prior use of optical splitters were not unconnected.
In addition to developing Opticast, in September Hurd created, and registered in his name, the domain name “ Hurd admitted that his reason for registering the domain name was to “see if anyone was interested” in Opticast. Hurd also started writing to people in the industry about Opticast. For example, on 23 September 2010, Hurd emailed AusOptic International Pty Ltd (AusOptic) to enquire about acquiring components for Opticast:
I’m the MD for Zomojo whom you helped out with some splitting and all earlier this year. Thanks to your advice, everything has worked swimmingly in Seoul. Your help was much appreciated.
(Emphasis added.)
So far so good. Hurd knew (as was the fact) that he was one of the managing directors at Zomojo and Hurd knew that splitting had been and remained a core part, or essential element, of Zomojo’s business of HFT especially on the KRX.
But the email continued:
I have another little enterprise, Zeptonics, that I’m looking to launch a new product for. Basically a 24 port and / or 48 port 850nm, 1310nm or 1550nm 19̎" rackmount splitter box.
Was thinking of just splitting lots with an EDFA or Raman amp but their 10-20m cable loops etal don’t help when I’m trying to keep the propagation delay to a bit under 10ns in the box. It seems simply doing OEO [optical electrical optical] to clean the signals and n way optical splits internally and perhaps just using SFP+s might be best.
Would like to come by and talk to you about components etal if you have a few minutes so I can pull a design brief together to get a prototype built. …
This email is important. Hurd admitted the product referred to in the email was Opticast. Further, it was a public statement of Hurd having already established “another little enterprise, Zeptonics” and that he was looking to launch a product through Zeptonics.
The next day, 24 September 2010, Hurd emailed Mr Larry Tabb of Tabb Group. Tabb Group is a publicity / media company and Hurd contacted them to seek marketing and publicity advice for Opticast and, in particular, information about the potential avenues for, and costs of, marketing Opticast. The email was sent by Hurd from his “zeptonics.com” email address. The email stated:
…
I’ve been using optical techniques for a while to replicate data streams for prop trading. Have done more than a million index options some days in Asia with such tricks. Have a little start-up just about ready to release a product to do this publicly. Thought you’d be interested in the head line latency of <9 nanoseconds from port to port on the device ;-) Currently running in the range of 5 to 7 nanos. Bit of a scoop for you.
… Opticast, as I call it, has compelling relevance to HFTs [high frequency traders] and exchanges just because it takes packet duplication down from 700-800ns 10G switch speeds to single digit nanoseconds for market data distribution.
(Emphasis added.)
Hurd was cross-examined about this email. Hurd claimed he was lying when making these claims about Opticast being ready for release.
On 27 September 2012, Mr Tabb responded saying he “would love to hear” what Hurd had. Hurd responded saying he was based in Sydney but had trading racks in Toronto and New York and would look to set up a meeting next time he was in New York. Another person at Tabb Group (Kevin Parltand) also responded saying “[w]hat you explain is very intriguing. Would love to hear more”. Hurd did not tell anyone at Zomojo about these communications with Tabb Group.
The next day, 28 September 2010, Hurd emailed Chardaloupas. Hurd had not responded to Chardaloupas’ email of 21 September: see [69] above. The email was entitled “Sabbatical” and it was sent by Hurd using his Zeptonics email address, not his Zomojo email address. Hurd used his Zeptonics email address to communicate with Newedge about Zomojo business despite having access to, and the ability to use, his Zomojo email address. The email read:
Apologies for not being in contact about the FIX licensing question. I’ve been largely away for most of the last three weeks, working on a little personal side project and will not be back in the Zomojo office until next week and will be in contact then.
The FIX licensing question related to Chardaloupas’ earlier email seeking a “partner to build [Newedge] a FIX adaptor” (see [69] above), a question directed to Hurd as one of the co-managing directors of Zomojo.
Chardaloupas responded: “Hope it was a fruitful sabbatical ... seems like you’ve been working on something new, zeptonics? Sorry I couldn’t help, but check.” The next day, 29 September 2010, Hurd responded to Chardaloupas and Mr Mike Gilbert (Gilbert), the Global Head of PTG and Head of Sales Asia Pacific for Newedge:
Yep busy sabbatical. Got a box doing 5-7ns packet replication which is quite difficult to measure, lots of fun. Might be a handy thing for market data distribution in a data centre but I’m not really convinced there is much of a market for it so it is just a bit of an expensive hobby for now.
Hurd admitted he was referring to the Opticast product.
The same day, 29 September 2010, Hurd emailed AusOptic using his Zeptonics email address. Hurd thanked “Rob” for his time and sought a quote for “SMF splitters with LC connectors 16-way, 32-way and 64-way” – an optical splitter. Hurd’s email concluded:
Preannounced on and already have a couple of interested parties ... Looks like I may actually sell a few, fingers crossed.
The next day, Hurd also asked AusOptic to quote a 64 way splitter. Hurd admitted that Zeptonics later purchased splitters from AusOptic which he used in the Opticast prototype.
If the clock had stopped then, Hurd was already in serious trouble. His activities were in breach of his contractual obligations and in breach of his duties as a director and employee of Zomojo.
2.6 October 2010
On 2 October 2010, Gilbert contacted Hurd by email at his Zeptonics email address. Hurd did not discover this email. The email was produced by Newedge. As ultimately produced by Hurd, the email from Gilbert was redacted. Hurd denied deliberately redacting the email. I reject Hurd’s evidence. Hurd provided no explanation, let alone a plausible explanation, of why he did not discover the email or, when produced, why it appeared as it did.
Gilbert’s email said:
Are you around next week as I would like to have a discussion with you concerning a global pre market risk tool (API) that we could have working in conjunction with our clients accessing exchanges natively that would have say a sub 5 micro second impact. We are seeking a company to build this for Newedge on a global basis. Understand if this doesn’t interest you but thought if any one can do this you can.
Hurd responded:
Zomojo would not be able to do this as it has existing commitments.
Zeptonics may be interested in this if it was a significant enough project with the right structure and support within Newedge. This is not a trivial nor inexpensive undertaking and if there is interest from yourself and Newedge I would like to understand your scope, priorities, time frame and budgetary thoughts. Based on previous experience I suspect it may be difficult to marshal and co-ordinate sufficient cross-cutting concerns within Newedge to make such a project work smoothly and I would like to understand who the stakeholders would be and the level of global support.
If I dedicated myself to this with an appropriate team, sub five micros is achievable and also remember sub one micro is usually achievable though not without considerable effort. For some exchanges I can get surprisingly close to zero. Native, common HFT oriented and FIX 4.2 protocols can be supported. Simple risk, complex correlated risk with simpler real-time distributed risk leases, client embedded or gateway based, can be done.
You would certainly end up with an unusually fast offering and be #1 in the world for broking latency, if the world stood still. However, the effort required should not be underestimated even when you've done it as many times before as I have.
Off the shelf frameworks, such as FTEN, will give you 200 to 300 microseconds. Are you sure you want to bite off the expense of going close to zero?
On 2 October 2010, Gilbert of Newedge responded saying “[w]e definitely have the interest to move this forward and as the directive came from our board with a budget attached we are serious in having this implemented”.
Hurd did not tell anybody at Zomojo about the contact from Newedge or his response on behalf of Zeptonics. This was an opportunity being offered to Zomojo, which Hurd took, or attempted to take, for the benefit of Zeptonics. Or, at the very least, it was an opportunity which he ensured Zomojo could not take. An opportunity which Hurd conceded, in cross-examination, perhaps was a very significant project and could have potentially been a big project. Hurd’s conduct continued on a downward spiral.
On 4 October 2010, Hurd posted to a blog on the internet called “Beowulf” about Opticast. Hurd’s post on the blog read:
I’m associated with a somewhat stealthy start-up. Only teaser product with some details out so far is a type of packet replicator.
Designed 24 port ones, but settled on 16 and 46 port IRC designs as this seemed to reflect the users needs better.
This was not designed for HPC but for low-latency trading as it beats a switch in terms of speed. Primarily focussed on low-latency distribution of market data to multiple users as the port to port latency is in the range of 5–7 nanoseconds as it is pretty passive device with optical foo at the core …
(Emphasis added.)
Over the next few days, Hurd continued to post blogs and engage in a prolonged exchange on these subjects. In his oral evidence, Hurd admitted that the ‘start-up’ was stealthy, in the sense that he had not disclosed to Zomojo the start up of Zeptonics. However, Hurd asserted that was not what he meant by the term “stealthy start-up” at the time of writing the post. Hurd contended that he was using the term to refer to a start up company that remains “under the radar” until it launches a product and then takes the market by storm with a product that is new and innovative. The difference in meaning, if any, is irrelevant. The essential element of both is non-disclosure. And that is what occurred – non-disclosure by Hurd when he was under obligations not to engage in conduct of that nature.
On 7 October 2010, Hurd entered into a NDA with Cavium Networks. Hurd described Cavium Networks as a provider of highly integrated semiconductor processors that enabled intelligent networking, communications, storage, video and security applications. Hurd signed the NDA as “Managing Director” of Zeptonics even though, according to him, “the company did not exist at this time”. I reject Hurd’s evidence that Zeptonics Pty Ltd did not exist at this time. In the Further Amended Defence filed on behalf of Hurd, he admitted he has been a director of Zeptonics since 25 January 2010. The fact that Hurd used the word “Zeptonics” rather than “Zeptonics Pty Ltd” does not avoid the inevitable finding that he was acting for and on behalf of Zeptonics Pty Ltd. Hurd also admitted that he did not contact Cavium Networks in connection with his duties as a co-managing director of Zomojo or as an employee of Zomojo. Hurd did not tell Zomojo that he had signed the NDA with Cavium Networks. Hurd was cross-examined about the NDA. His evidence was that he entered into the NDA with Cavium Networks for two purposes: to get information about the chips it produced, to learn if they may be useful, and because the information was not publically available and, secondly, to assist him in finding something else to do outside Zomojo. One of the “things” Hurd was potentially searching around to do was use Cavium Network’s chips in HFT.
Hurd continued to look for suppliers of components for his “new” projects. At 1:06pm on Tuesday, 12 October 2010, Hurd emailed Michael Rouh at Tresmine Pty Ltd (Tresmine) using his “zeptonics.com” email address. The email read, in part:
Beside running Zomojo, I’ve got a project out of my garage I’ve been running, Got some firms in the US and Europe after some product now, including a couple of big exchanges, so I’m looking at building some prototypes if you’re interested in the jobs. Trying to outsource as much as possible so it doesn’t interfere with my day job so there may be some additional component sourcing for you as well perhaps.
(Emphasis added.)
Hurd’s evidence was that he contacted Tresmine in relation to the supply by Tresmine of printed circuit boards (PCBs) for the Opticast prototype. His email was sent during normal working hours. Mr Rouh replied thanking Hurd for considering Tresmine and stating that Tresmine was more than happy to look at it.
What then is sought to be implied? Hurd submitted that what should be implied was an obligation for Zomojo to act in good faith and to deal fairly with Hurd and Hurd’s nominees in the exercise of Hurd’s contractual rights.
At the time that the Service Agreement, the Shareholder Agreement and the ESOP were entered into, it is reasonable to conclude that the parties did not intend Zomojo to be deprived of its contractual right under cl 4.7(b) when an employee was a bad leaver. Indeed, in Hurd’s own words, it was integral to the establishment of Zomojo that there be an employee share ownership scheme that provided incentives to employees to stay with, and loyal to, the company. It was recognised that if employees left Zomojo with knowledge of its technology, techniques and ideas, they could destroy the whole of the value of the company. Clause 4.7(b) was one of the contractual provisions designed to address that concern.
It is then necessary to look again at the relevant provisions. Clause 4.7(b) of the Plan Information Booklet gave the Board a discretion, where an employee was a bad leaver, to acquire the shares held by the employee or the employee’s nominee for the amount of any loan outstanding by the employee to Zomojo. Clause 8.2 of the Service Agreement provided that if Hurd’s employment was terminated by reason of him committing a breach of his obligations and duties, he would not be entitled to any further compensation or damages other than pro rata salary and accrued annual leave. There was nothing unfair about those provisions. Parties are free to retain their economic autonomy and liberty: Russell v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (2007) 69 NSWLR 198 at [112]. Put another way, it was neither reasonable nor necessary for the terms identified by Hurd to be implied: Burger King at [167].
Moreover, even if contrary to the view formed, implied duties of good faith are to be implied into the Service Agreement, Shareholder Agreement and ESOP, they were not breached. There are two aspects to be kept in mind. First, the implied terms are to be understood in the context of the express rights afforded to Zomojo by cl 8.2 of the Service Agreement and cl 4.7 of the Plan Information Booklet. Such implied duties of good faith do not require a party to subordinate that party’s own interests, so long as the pursuit of those interests does not entail an unreasonable interference with the enjoyment of a benefit conferred by the express terms of the contract: Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17 at [65].
Next, the facts relied upon by Hurd to constitute a breach of any implied term. They are not capable of constituting a breach. In particular, none of the facts support a finding that Zomojo “took steps to minimise its balance sheet”.
Hurd submitted that striking a price of $458,000 was a breach. In particular, he submitted:
At the heart of the bargain for the purchase of shares between Mr Hurd and Zomojo was that Zomojo would pay a price in buying back the shares that reflected their value. The very existence of a formula to ascertain that price indicates that this was contemplated by both parties. This is not a matter where the Court needs to decide whether one party’s obligation to act honestly and with fidelity to the bargain might conflict with its own interests: a healthy share price would indicate a healthy company.
The mischief that the law seeks to remedy in reading into contracts an implied term of good faith and fair dealing is a cynical exercise of a power by one party in order to deprive the other of a true reflection of the bargain made. If Zomojo took steps to minimise the true position the 2010-2011 accounts in order to short change an employee-director, this is just such a cynical exercise deserving of the Court’s intervention.
(Emphasis added.)
The relevant facts are set out at [407]-[431] above. The bargain made included cll 4.7(b) and 8.2 of the Service Agreement. It is true that a significantly lower number was expected as a result of Deloitte “recasting the accounts” and that Robinson and Boyle were hopeful of Deloitte arriving at a fairly low number. But none of that evidence is consistent with Zomojo seeking to deprive Hurd of the bargain he made with Zomojo or with Zomojo taking steps to minimise the true position of the 2010-2011 accounts in order to short change Hurd.
Hurd then contended that Sincock was given assumptions that “were just wrong”. In support of that contention, Hurd produced a table which sought to analyse the five research and development projects and, in particular, the state of those projects for the purposes of determining whether or not it was appropriate to capitalise the costs of those projects. There was insufficient factual material before the Court for it to consider the state of those projects and, in particular, whether one or more of the projects satisfied AAS 138. In fact, subsequently, Hurd submitted that an issue for determination at the quantum hearing was whether the research and development costs should have been capitalised.
Next, Hurd submitted that the Court should find that Robinson and Boyle were actively working to keep the figures arrived at by Deloitte low. That contention is rejected. Zomojo retained Deloitte, Deloitte asked for information, information was provided (including from Hurd Senior) and Deloitte prepared the report. Sincock gave evidence. He was a witness of truth. There was no, and could be no, suggestion, that Deloitte acted improperly.
Finally, Hurd referred to the fact that Robinson knew that the last sale of shares in Zomojo was at $14.25 per share and that the sale to Hurd was $0.93 per share. That is true. But it is necessary to understand that the sale price of $14.25 per share was calculated by reference to the same contractual provisions but in relation to a different financial year. Further, that sale price was calculated based on accounts prepared by Hurd Senior which did not comply with AAS 138.
After receiving advice from Deloitte, Zomojo changed its mind about the price to be paid for Hurd’s shares. Zomojo benefitted from that change in position. Zomojo intended to satisfy its contractual obligation and, while doing so, wanted to pay as low a price as possible. Its remaining directors knew that the last sale was at $14.65 per share. None of that conduct, taken on its own, or collectively, is improper.
The contention that the act of retaining Deloitte when Zomojo was unhappy with the number in the accounts was in bad faith is absurd. As Robinson said, there was a dispute. Hurd Senior was the accountant. Any company would have sought independent advice on the issue. The further contention that the instructions to Deloitte produced a very low number and that the instructions were given in bad faith is not proved: see [422] and [488]-[490] above.
In electing to acquire the Hurd Shares for $458,025, Zomojo did no more than exercise the discretion available to it under cl 4.7 of the Plan Information Booklet, by applying the formula set out therein based upon a pre-tax profit figure that had been supplied by Deloitte. In so acting, Zomojo did not act in bad faith or unfairly to Hurd or his nominees.
6.6 Amount to be paid for the Hurd Shares
The next two issues concern the amount payable for the Hurd Shares and Zomojo’s application for rectification of the Service Agreement. In short, Hurd submitted that the price Zomojo was required to pay for the Hurd Shares was higher than the $458,025 that was paid by Zomojo and that there was no basis for rectification. Zomojo contended to the contrary. Given the conclusion reached above, it is strictly unnecessary to consider these issues. However, given the level of distrust and animosity between the parties, it is necessary to say something about each of these issues.
First, the principles of construction. Hurd submitted that there were three relevant principles. The principles were not in dispute. First, the construction of commercial contracts is to be determined by reference to what would be understood by a reasonable person having background knowledge of the circumstances which were common to both parties in the situation they were in at the time of contract: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [11]. Next, that construction requires consideration not only of the text of the contract, but also the surrounding circumstances known to the parties, and the purpose and object of the transaction: Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40] and Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 at [46]. Third, the contract will be interpreted in a way which will result in a sensible and businesslike meaning: Australian Broadcasting Commission v Australian Performing Rights Association Limited (1973) 129 CLR 99 at 109. Fourth, where two constructions are open, the Court will avoid consequences that are unreasonable, unjust or inconvenient: TCN Channel Nine Pty Limited v Hayden Enterprises Pty Limited (1989) 16 NSWLR 130 at 146. Fifth, where there is doubt about the meaning of a clause in a contract, it will be construed against the person for whose benefit it was inserted: Johnson v The Edgware & Co, Railway Co (1866) 35 Veav 480. However, that presumption only applies if the Court cannot reach a conclusion as to the construction of the provision in question: St Edmundsbury & Ipswich Diocesan Board of Finance v Clark (No 2) [1975] 1 WLR 468. Generally, any ambiguity will be construed against the person who drafted the agreement. The last principle is wider than the contra proferentem rule, and is applied generally to circumstances where a party tenders a printed form: State Lotteries Office v Burgin [1993] NSWCA 254 and North v Marina [2003] NSWSC 64.
The relevant contractual provision is cl 4.6(e)(ii) of the of the Service Agreement It states that, on cessation of employment:
the Company is able to arrange for the purchase of the shares [acquired under clause 4.6] from the Managing Director for an amount equal to 5 x the Company’s previous financial year’s pre-tax profit, and if the Company does not choose to do so the Managing Director will be able to sell the shares then or at a later time in accordance with the Company’s shareholder agreement.
It is inconsistent with cl 4.7(c) of the Plan Information Booklet which provided that Zomojo had an option to purchase shares on the basis of a “Plan valuation formula” being “5 x the previous financial year’s pre-tax profit divided by the total number of shares on issue, and then multiplied by the number of shares being sold”: see [35] above.
Hurd contended that the formula for compulsory acquisition of the Hurd Shares was misapplied in two ways. First, Hurd submitted that cl 4.6(e)(ii) of the Service Agreement was misapplied on its terms because Zomojo applied the formula provided for in cl 4.6(e)(ii) but then divided the figure by the number of shares held. Second, Hurd submitted that the pre-tax profit that was used was not the true pre-tax profit, but a number inappropriately adjusted downwards. The second issue has been addressed and dismissed in Section 6.5 above.
In relation to the first issue, Zomojo’s answer was that cl 4.6 was irrelevant for two reasons. First, cl 4.6(e)(ii) is not expressed in mandatory terms; it contemplates that Zomojo might choose not to acquire shares held by Hurd and, secondly, that the Hurd Shares were subject to the terms of the ESOP. For the reasons set out above, I accept that the Hurd Shares were subject to the ESOP: see [466]-[469] above.
Given the views formed, it is strictly unnecessary to consider the inconsistency between cl 4.6(e)(ii) of the Service Agreement and cl 4.7(c) of the Plan Information Booklet. However, the following matters should be noted. First, a literal construction of the first part of cl 4.6(e)(ii) would lead to the absurd result that, if Zomojo chose to do so, it could acquire any shares purchased by Hurd under cl 4.6 of the Service Agreement for a price equivalent to five times the whole of Zomojo’s pre-tax profit for the previous year, irrespective of the number of shares held by him. In other words, a shareholder with a single share would receive the same price as a shareholder holding 1 million shares. Such a result would be commercially irrational and cannot have been intended by the parties. But that is not the only problem with a literal construction of the first part of cl 4.6(e)(ii). Such a construction would also be inconsistent with cl 4.7(c) of the Plan Information Booklet: see [35] above.
For those reasons, I would accept Zomojo’s submission that it is both appropriate and reasonable to construe the first part of cl 4.6(e)(ii) so that it was consistent with the “Plan valuation formula” in cl 4.7(c) of the Plan Information Booklet. As the Court said in Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25 at [19]-[23], the words “should be construed so as to avoid the absurdity by supplying omitting or correcting words”: citing Fitzgerald v Masters (1956) 95 CLR 420 and Watson v Phipps (1985) 63 ALR 321; Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (Cth) (1991) 147 CLR 297. This is not a case of mere unreasonableness. The present case fell into the absurdity category. Therefore, as a matter of construction, the reference to “5 x the Company’s previous financial year’s pre-tax profit” in the first part of cl 4.6(e)(ii) should be taken to be a shorthand reference to the “Plan valuation formula” in clause 4.7(c) of the Plan Information Booklet.
Although it is unnecessary to resolve this inconsistency, it is appropriate to address the alternative mechanism proposed by Zomojo – rectification. Zomojo submitted that there was an obvious, common mistake in cl 4.6(e)(ii) of the Service Agreement that ought to be rectified by equity to reflect the true agreement between the parties. Zomojo submitted that the objective intention of the parties in relation to the formula in cl 4.6(e)(ii) of the Service Agreement was to be found in the formula in cl 4.7(c) of the Plan Information Booklet and, therefore, the omission in cl 4.6(e)(ii) was clearly and precisely identified.
Hurd contended that there was no basis for rectification. It is unnecessary to rehearse the relevant legal principles. Hurd’s objections to rectification were described as “procedural hurdles”. I will deal with each “hurdle” in turn.
First, Hurd contended that there was no formal claim for rectification or any articulation of the remedy and that the rectification claim by way of defence to cross claim was procedurally improper. That contention is rejected. There was a claim for rectification and the remedy was articulated: para 3(b)(iv) of the Amended Defence to Cross-Claim. The fact that a separate claim was not commenced seeking rectification of cl 4.6(e)(ii) is not a bar. Moreover, as is readily apparent, such relief was unnecessary.
Next, Hurd points to the prejudice allegedly caused by Zomojo’s delay in seeking rectification. Hurd’s evidence was that he would have taken a different course prior to the resolution approving the transfer of his shares to Zomojo Staff Holdings. I reject that evidence. It must be recalled that at that time, the formula was not in dispute. What was in dispute was one of the integers in the formula – the calculation of the pre-tax profit. For the same reasons, Hurd’s contention that Zomojo waived any right to seek rectification of the clause is rejected. Moreover, as noted earlier (see [494] above), Zomojo did not act in bad faith or unfairly to Hurd or his nominees in acquiring the Hurd Shares.
6.7 Hurd’s Oppression Claim
Hurd, Jolene and the HFSF submitted that Zomojo acted oppressively by passing the resolutions of 30 June 2011 that had the effect of causing the Hurd Shares to be transferred to Zomojo Staff Holdings for $458,025. They further contended that cl 4.7(b) of the Plan Information Booklet was itself oppressive.
Section 232 of the Corporations Act provides that the Court may make an order under s 233 if the conduct of a company’s affairs is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members whether in that capacity or in any other capacity. Section 53 of the Corporations Act defines the “affairs” of a company.
Whether conduct is unfair or oppressive is assessed objectively through the eyes of a commercial bystander: Aqua-Max Pty Ltd v MT Associates Pty Ltd (2001) 3 VR 473 at [54]; Wayde v NSW Rugby League Ltd (1985) 180 CLR 459; Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 and Endoline Pty Ltd v Drapac [2012] VSC 156 at [272]. The Court will look at the issue of oppression by considering the impact on the oppressed, not the intention of the alleged oppressor: M Dalley & C Pty Ltd; Re (1968) 1 ACLR 489.
If the conduct is so unfair that reasonable directors would not have thought it fair, then relief will be granted. The conduct is considered in its context and separate instances of conduct may, cumulatively, constitute oppression: Aqua-Max at [61] and Endoline at [272]. Although relief for oppression is based in the Corporations Act, equitable considerations have a role to play in determining whether relief should be granted.
Hurd submitted that the “starting point for the oppression claim is the overwhelming evidence that the sale of Mr Hurd’s shares was substantially below value”. In support of that contention, Hurd further submitted that:
There is no evidence that Mr Hurd agreed to the oppression. He never signed the Information Booklet. The draft by Dr Brash had a discussion of a fairer formula. The formula in the Service Agreement is in different terms. It cannot be said that Mr Hurd knowingly sacrificed his rights (as was the case in Re Terri Co Pty Ltd (1987) 12 ACLR 457; 6 ACLC 402).
If the Deloitte figures were right, 2009/2010 was an unusually low profit year. Alternatively, the cross claimants assert that the ESOP itself was an act of oppression. If the ESOP was allowed to operate in the way that the Zomojo [sic] alleges, it is an instrument of oppression. There is an obvious cross-over with the rectification suit because equity should not facilitate the oppression by further reducing the amount payable to Mr Hurd.
That submission is rejected. There was no oppression. Zomojo applied cl 4.7 of the Plan Information Booklet according to its terms. Hurd had notice of it: see [443] above. It caused Zomojo Staff Holdings to acquire the Hurd Shares for fair value, being the value arrived at by applying the “Plan valuation formula”, based upon a pre-tax profit figure determined by an independent and reputable firm, Deloitte. It gave Hurd 14 days’ advance notice of its intentions. It applied cl 4.7 despite the fact that, as the facts have emerged, Hurd was a bad leaver within the meaning of cl 4.7(b) of the Plan Information Booklet.
Hurd’s contentions are rejected.
7. OTHER MATTERS
At the conclusion of the trial, three issues remained outstanding. Counsel for the parties provided a short note which addressed the competing contentions on those issues. Each issue is addressed in turn.
7.1 Amendments to Zomojo’s pleadings
Zomojo’s application for leave to amend its Application and Statement of Claim addressed two broad categories of amendments; amended relied and amendments to Zomojo’s claim that Zeptonics and Zepto Markets induced Hurd to breach cl 12.1 of the Service Agreement. The second matter has been addressed earlier: see [345] above.
In relation to the first, leave to amend should be granted. The amended relief was directed to the injunctions and declarations sought by Zomojo. That relief necessarily must be moulded to fit the findings at trial: Farrow Finance at [178]. Hurd did not contend that he suffered any prejudice and none can be identified.
7.2 Paragraphs 92–95 of Hurd’s written submissions
This issue concerns the proper calculation of the “pre-tax” profit of Zomojo and, in particular, whether or not it was appropriate to capitalise the costs of research and development projects: see [489] above. Given the findings made, that issue does not arise for further determination or consideration.
7.3 Future conduct of the trial
At the conclusion of the trial, Zomojo sought to expand the issues to be determined by the Court by these reasons for judgment. That application was opposed by the Respondents. Put simply, the parties could not agree on the manner in which the trial would be split.
Orders were made on 23 October 2012 for the hearing of paras 6 to 16 (inclusive) of the Further Amended Cross-Claim and the corresponding paragraphs of the Amended Defence to Cross Claim to be conducted separately and as part of the quantum hearing.
Given the findings that have been made, the only issues that remain to be determined concern quantification of Zomojo’s claim for damages and, where appropriate, taking an account of profits. As a result, the orders of 23 October 2012 should be varied to reflect the manner in which the trial was conducted, namely, a trial on liability only.
I certify that the preceding five hundred and nineteen (519) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon. Associate:
Dated: 19 December 2012
Confidential Annexure A – Summary of evidence concerning “novelty” of Zomojo’s confidential information
REDACTED FOR CONFIDENTIALITY
61
17
0