FEDERAL COURT OF AUSTRALIA
HADID v LENFEST COMMUNICATIONS INC
[1999] FCA 1798
NG 36 of 1995
SUMMARY
Introduction
In accordance with the practice of the Federal Court in certain cases of public interest or complexity, I have prepared a brief summary to accompany my reasons for judgment, delivered today. The summary is necessarily incomplete. The only authoritative statement of my reasons is that contained in the published reasons for judgment.
Nature of Proceedings
Mr Albert Hadid (“Mr Hadid”), the principal shareholder and director of a group of companies known as the UCOM Group (“UCOM”), commenced these proceedings against six respondents: Lenfest Communications Inc (“LCI”), a United States cable television operator; LCI’s Chief Executive Officer, Mr H F Lenfest (“Mr Lenfest”); Bain Capital Markets Limited (“Bain”); Dr Wayne Burt (“Dr Burt”), an executive director of Bain at the time of the events with which the case is concerned; Australia Media Ltd (“Australia”); and a former Chairman of Australis, Mr Rodney Price. Mr Hadid claimed substantial compensatory damages, and exemplary or punitive damages as well, against each of the respondents. He relied on a number of causes of action including breach of contract, breach of fiduciary duty, deceit and conspiracy as well as conduct on the part of the respondents which, he claimed, was misleading or deceptive and thus infringed s 52 of the Trade Practices Act 1974 (Cth) and s 42 of the Fair Trading Act 1987 (NSW). He alleged also various breaches of the Corporations Law causing loss for which he claimed other entitled compensation.
During the course of the trial, Australis went into liquidation. As a result, Mr Hadid could not proceed with his claim against it without leave. No leave was sought.
Background
Mr Hadid’s claims arose from events following the announcement by the Federal Government in early 1993 of a price-based tendering system for the allocation of two satellite pay television licences (known as licences A and B), each of which would give its holder, under the Broadcasting Services Act 1992, the right to broadcast through four channels.
Under the allocation system, each licence was to be awarded, provisionally, to the highest bidder. The bid might then be examined by the Trade Practices Commission for anti-competitive effects and by the Australian Broadcasting Authority for compliance with the Broadcasting Services Act and the “suitability” of the bidder. Once the bidder passed those tests, it was entitled to a licence if it paid the full price bid within 30 days. If it did not, or if it failed the tests administered by the Trade Practices Commission or the Australian Broadcasting Authority, there was a cascade to the next bidder and the process began again. Two aspects of the process were significant. One was that there was nothing to prevent a number of associated companies lodging bids at successively lower levels. Secondly, there was no requirement that a bidder have any particular financial substance. It was necessary, initially, only to lodge an application of $500 with a bid. The successful bidder then had a substantial period within which to seek investors. There was a potential for substantial prolongation of the process if a number of successive bidders failed to attract the necessary investment. That potential was recognised and, about two weeks after the close of tenders, dealt with by an amendment which required the successful bidder to lodge, within three business days of provisional allocation, a deposit equal to 5% of the price bid. Failure to provide the deposit resulted in a cascade.
After a series of cascades, between late April and late August 1993, following provisionally successful, but ultimately unsuccessful, bids by UCOM and another consortium, both licences were, on 25 August 1993, provisionally allocated to UCOM companies, licence A to Focus Telecommunications Pty Ltd, which later changed its name to UCOM Australia Pty Ltd (“UCOM Australia”) and licence B to New World Telecommunications Pty Ltd (“New World”). Each, if its bid were to remain alive, had to pay a deposit by the close of business on the following Monday, 30 August 1993.
Events giving rise to claims
(a) Introduction to Mr Lenfest; deposits paid
Shortly after the announcement that UCOM Australia and New World were (provisionally) successful, Mr Hadid was put in touch with Mr Lenfest. Following conversations between Mr Hadid and Mr Lenfest on Friday 27 August and during the weekend, Mr Lenfest agreed to provide the funds necessary to pay the deposits on both licences. The principal terms, at least, on which that was done were set out in two letters exchanged between Mr Hadid (on behalf of himself and the other UCOM shareholders) and Mr Lenfest (acting for LCI as well as for himself). The agreement provided, among other things, that LCI was to be entitled, on capitalisation of the licence holders, to one-half of the free carried interest in one of them (ie, in essence, shares that were to be issued to LCI and the UCOM shareholders without payment). That entitlement was subject to certain qualifications. LCI might elect to take its interest either in the holder of licence A or in the holder of licence B.
(b) Claims about terms of relationship between Mr Hadid and LCI
Mr Hadid claims that the terms of the conversations gave rise to an obligation, on the part of LCI, to cooperate in raising funds from investors to pay the balance of the prices bid for the licences. LCI denies that. LCI claims that during the conversations Mr Hadid made false representations about the availability of an underwriting and about the time at which the Broadcasting Services Act would permit competition with satellite from other technologies. That, in turn, is denied by Mr Hadid.
Mr Hadid claims that a further conversation which he had with Mr Lenfest on 1 September resulted in agreement by Mr Lenfest that LCI would use its best efforts to seek investors in the licences. That is denied by LCI.
Mr Hadid claims that his dealings with Mr Lenfest between 27 August and 1 September gave rise to a joint venture, in the nature of a partnership, between LCI and the UCOM shareholders. As a result, he says, LCI owed him and his fellow shareholders duties arising under express and implied contractual terms and fiduciary obligations, including obligations of full disclosure and duties not to enter into transactions involving conflicts of interest. LCI owed Mr Hadid also, he claims, a duty of care.
(c) Search for investors; business plan
Between 4 and 8 September, two representatives of LCI visited Sydney. They were Mr Donald Heller, the Vice President of LCI, and Mr Stephen Plant, a former banker who became an executive of LCI. They had a number of meetings with UCOM representatives, financial institutions and organisations potentially involved in various aspects of the pay television business. There began a process of collaboration between LCI and UCOM extending both to the search for investors and to the refinement of a business plan and projections prepared by UCOM in relation to a business based on the two licences. LCI concentrated principally on seeking to attract investors among companies involved in cable television in the United States; UCOM’s representatives approached certain other investors.
(d) Bain’s investment; its relationship with Mr Hadid and LCI
Bain – particularly, Dr Burt – had been introduced to Mr Hadid shortly after UCOM Australia and New World were announced as the successful bidders. Bain proposed an indicative timetable for an underwriting. Dr Burt had conversations with Mr Hadid following payment of the deposits, before Mr Heller and Mr Plant arrived in Sydney. The terms of the conversations, like the terms of many other important conversations, are highly controversial. Dr Burt was introduced to Mr Heller and Mr Plant during the course of their visit to Sydney. Subsequently, on 10 September, he participated in a meeting with, among others, representatives of UCOM at which matters relevant to underwriting were discussed. Bain was provided with information about UCOM’s bid, including the business plan and projections. One of the matters in controversy is when Bain was provided with that material; for reasons given in the reasons for judgment, I hold that it happened after 10 September. Bain, principally through Dr Burt, from time to time offered to Mr Hadid and LCI views about matters relating to underwriting and the financial markets. Particularly, Bain provided to both Mr Hadid and LCI, on 13 October 1993, a letter expressing views as to the feasibility of an underwriting on particular terms. Mr Hadid claims that Bain assumed contractual obligations as an adviser both to himself and to the joint venture between the UCOM shareholders and LCI. He says also that Bain assumed duties of a fiduciary character both to him and to the joint venture; they included duties of full disclosure and avoidance of conflicts of interest; Bain also, he says, became subject to a duty of care.
(e) Investor search fails; suggested renegotiation
The search for investors was unsuccessful. Particularly, according to LCI, companies approached in the United States declined to invest on grounds which included that the level of free carried interest insisted upon by Mr Hadid was too high and that the bid prices were themselves excessive. Equally, no investment resulted from the endeavours of Mr Hadid and the other UCOM shareholders. As Mr Hadid effectively controlled the two bidders, no investment could be obtained except on terms which he was prepared to accept.
Mr Plant formed the view during a visit to Sydney towards the end of October, and reported to Mr Lenfest, that progress could be made only if LCI took control of the process of capitalising or selling the licences. LCI, at about the same time, commenced negotiations with bankers which resulted, ultimately, in a facility being made available to LCI sufficient to pay the balance of the bid price on one of the licences. In addition, correspondence and discussions had begun between Mr Lenfest and Mr Hadid, in which Mr Lenfest sought to negotiate to acquire the shares in the bidding companies and thus control of the process of capitalisation. During the same visit by Mr Plant, he told Mr Hadid (according to Mr Hadid’s evidence) that LCI had decided to finance the acquisition of licence A. The potential significance of that was that the licence A bid had passed the statutory tests, and the balance of the price was required to be paid (to avoid a cascade and forfeiture of the deposit) by 17 November. Mr Plant denied making any such statement.
(f) Project Midsummer conceived; Australis
During the weekend of 23 and 24 October, Dr Burt conceived what became known as “Project Midsummer”. Project Midsummer involved the acquisition by LCI of the shares in New World (the successful bidder for licence B) and a merger of some kind with Australis followed by a capital raising by Australis, possibly by an unwritten public offer of its shares.
Australis had acquired a large number of MDS television licences for both Sydney and Melbourne. MDS was a form of microwave transmission. It had certain advantages and disadvantages by comparison with satellite technology. Under the Broadcasting Services Act, Australis could use its MDS licences for pay television broadcasting services from 1 July 1994.
Australis had taken the view, and had raised money under a prospectus on the basis of it, that MDS, rather than satellite or cable, was the preferred means of delivering pay television to the major Australian population centres. Australis had been approached during the search for investors, early in October, but had demonstrated no interest. Dr Burt’s idea was that there might be advantages in an arrangement by which MDS and satellite complemented each other, and that Australis might be interested if funds for the acquisition of a satellite licence were available from a source other than Australis itself, for example LCI.
Dr Burt outlined his proposal to both Mr Steven Cosser, then the Managing Director of Australis, and Mr Plant on or shortly before 27 October.
(g) St Louis meeting
The proposal was discussed between Mr Price and Mr Cosser, representing Australis, Mr Lenfest, Mr Heller and Mr Plant, representing LCI and Dr Burt in St Louis, Missouri, on 2 and 3 November 1993. Substantial consensus was reached between Australis and LCI as to the terms on which a transaction of the kind proposed by Dr Burt might take place. The extent of the consensus was such that Mr Heller was able to reduce its terms to a letter, expressed to record an agreement, which on 3 November was signed by Mr Price (but by no one else). The evidence makes it clear, however, that neither LCI nor Australis was in a position to commit to a binding agreement and that neither did. Among the matters on which consensus was reached at St Louis were that, if a transaction were to proceed, Australis would not provide any funds – funding would have to come from LCI; Mr Price was not prepared to countenance any continuing participation by Mr Hadid or his fellow shareholders and, consequently, they would have to be bought out; negotiations with Mr Hadid and the UCOM shareholders were to be a matter for Mr Lenfest; and the matters discussed were to be kept confidential.
So far as Mr Price was concerned, confidentiality was essential; Australis was a public company; it was publicly committed to the MDS technology; if the discussions became public knowledge in circumstances where no transaction had been agreed upon, the result could be highly damaging. Mr Lenfest approached the matter from a different perspective; he feared, he claimed, that if Mr Hadid found out about the possibility of a deal with Australis, he might make demands so unreasonable that the deal could not proceed.
LCI and Australis agreed, in St Louis, that if Project Midsummer proceeded, Bain would be paid a success fee; and it was agreed also that, if Bain tendered competitively for appointment as underwriter, there was a good prospect that it would be appointed.
(h) Conspiracy allegation
Mr Hadid claims that the consensus reached at St Louis, including, he says, agreement to take steps outlined in two action plans which were in evidence, demonstrated a conspiracy by those who participated in the discussions to cheat and defraud him by dishonestly inducing him to part with his shares in New World at an undervalue. He claims that the conspiracy was then implemented by the steps which I will proceed to describe.
(i) Negotiations after St Louis
Shortly after the St Louis meetings, LCI nominated, by letter to Mr Hadid, licence B as the licence in which it wished to take its substantial interest under the 29 August agreement. Thereafter, both by correspondence and in discussions between Mr Heller and Mr Hadid in Sydney from 10 November, negotiations continued between LCI and Mr Hadid as to terms on which LCI might acquire New World and itself fund the acquisition of licence B. Mr Hadid was not told about Project Midsummer or about any interest on the part of Australis in a satellite licence. In the course of the negotiations, Mr Heller referred to the failure of the search to find investors and to the lack of other persons prepared to invest. According to Mr Hadid and to other witnesses called by him, Mr Heller also made specific statements to the effect that Australis had been approached and had shown no interest.
The negotiations did not bear fruit until, on or shortly before 15 November, Dr Burt suggested to both Mr Heller and Mr Hadid that he might mediate a final negotiation. That occurred starting during the evening of 15 November; it continued until the parties reached agreement in principle on the morning of 16 November. The essential terms of the agreement reached were that nominees of LCI were to acquire the New World shares for $13,000,000, payable on the issue of the licence. Mr Hadid would be appointed agent for the purpose of commissioning the 10 per cent Australian drama content required of the operator of the licence; and Mr Hadid could deal with the existing, and any subsequent, bid for licence A free of any claim by LCI. The final negotiation was conducted, in one respect at least, under pressure: as I have mentioned, the price bid for licence A had to be paid no later than 17 November (no such constraint applied to licence B).
Draft documents, giving effect to what had been agreed, were negotiated on 16 November. According to Mr Hadid, on the evening of 15 November and on 16 November representations were made by Dr Burt, Mr Heller and LCI’s solicitor to the effect that there were no plans to resell the licence. Agreements ultimately were signed on 17 November.
Meantime, solicitors for Australis had worked on the structure and documentation of a transaction to give substantial effect to Project Midsummer. Terms were agreed and the transaction was announced to the Stock Exchange on 18 November; the essence of the transaction was that LCI would transfer to Australis the shares in New World, in exchange for the issue to LCI of shares and other securities in Australis.
(j) Mr Hadid’s claims in deceit and under the Trade Practices Act and Fair Trading Act
Mr Hadid claims that he suffered loss as a result both of positive misrepresentations madeby Mr Heller, Dr Burt and LCI’s solicitor and of deceptive or misleading conduct, attributable to the respondents, engaged in during the negotiations which concluded on 16 November. His evidence was that, had he been informed about the prospect of the transaction between LCI and Australis earlier in November, or even during the final negotiation commencing on 15 November, he would have negotiated a substantially more advantageous deal with LCI.
Nature and extent of the evidence
I heard about seven months of oral evidence. There are many volumes of documentary evidence. I have said that this summary is incomplete. That is always true of such summaries, but it is particularly true in a case where the evidence is as voluminous as it is in this case. The summary is a bare outline; it omits not only details but also any mention of a number of significant events considered in the reasons for judgment.
Additionally, many of the claims depend heavily on oral evidence about numerous conversations and meetings which took place during a period of several months. In several cases, there were only two people involved; in many cases, no notes were taken; in others, the contemporaneous record of what was said is an incomplete one. It has been necessary, therefore, for me to form views about the reliability of much of the evidence and the extent to which particular versions are consistent with documentary evidence and, in the context of the evidence as a whole, with the probabilities. On a number of important aspects of the case, I have preferred the evidence of witnesses called by the respondents to that given by Mr Hadid and witnesses called by him.
Decision
· Joint venture agreement and agreement to use best endeavours to find investors
Where there are conflicts of evidence over the terms of the conversations between Mr Hadid and Mr Lenfest in the period from 27 August to 1 September 1993, I accept, substantially, the evidence of Mr Lenfest. That leads me to conclude that the contract between the UCOM shareholders and LCI incorporated only the express terms set out in the letters of 29 August. The contract included neither any additional express terms nor any implied term alleged by Mr Hadid. Nor did the alleged fiduciary duties arise. Although the relationship between LCI and the UCOM shareholders might be described as a joint venture, it was not one analogous to partnership and did not give rise to reciprocal duties of the kind which exist between partners. My conclusions about the terms of the contract between LCI and the UCOM shareholders leads to the further conclusion that a duty of care on the part of LCI, alleged by Mr Hadid, did not arise.
· Advisory and related obligations said to have been owed by Bain
An examination of the evidence about occasions on which Dr Burt (or others on behalf of Bain) expressed views or offered advice, and of correspondence relied on, leads me to conclude that Bain did not agree to advise either Mr Hadid or LCI and the UCOM shareholders jointly. That examination leads also to the conclusion that an alleged duty of care on the part of Bain did not arise, nor did the alleged fiduciary obligations.
· Licence A representations
I find that the licence A representations (those said to have been made by Mr Plant during his visit in late October) were not made; I find also that, if they were, Mr Hadid did not rely on them so as to suffer loss.
· Conspiracy; misleading and deceptive conduct
I find on the evidence that no agreement was concluded at St Louis; that one of the action plans was created by Mr Heller but was not shown to anyone within Australis or Bain and that the other was prepared later, probably also within LCI, and did not relate to matters discussed at St Louis. An examination of the evidence of what happened at St Louis and subsequently leads me to conclude that there was no agreement by dishonest means to induce Mr Hadid to sell his shares in New World at an undervalue.
I am not satisfied, on the evidence, that statements to the effect that Australis was not interested, said to have been made by Mr Heller on or shortly after 10 November, were made. Nor am I satisfied that the additional representations said to have been made by Dr Burt, Mr Heller and LCI’s solicitor, on 15 and 16 November, were made. In the circumstances, as they had developed by late October, I conclude that it was not misleading or deceptive on the part of LCI not to disclose to Mr Hadid the prospect of a transaction with Australis following shortly upon the acquisition, by LCI’s nominees, of the shares in New World. I find that to be so because LCI had no legal duty to inform Mr Hadid about Australis’ interest and because, in the context of the negotiations from late October, Mr Hadid had no reasonable expectation that, if LCI had plans for subsequent dealings with the shares in New World or licence B, he would tell Mr Hadid about them. I reject the submission that the failure to disclose the prospect of the transaction involved dishonesty on the part of LCI. That is equally so in the case of Bain and Dr Burt. It is even more clearly so in the case of Mr Price.
· Corporations Law claims
The majority of these claims fail for the same reasons as the claims based on the Trade Practices Act and the Fair Trading Act. A separate claim against Bain and Dr Burt, based on an allegation that Dr Burt made a “securities recommendation” during negotiations on 15 and 16 November, failed also as I am not satisfied, on the evidence concerning the negotiation, that Dr Burt made a recommendation.
· Derivative liability
Although, given my other conclusions, it is not necessary for me to decide this point, I find that there is in any event no basis on which Bain, Dr Burt or Mr Price could be held liable for conduct of Mr Heller or LCI in the course of the November negotiations.
· Damages
Mr Hadid’s claim, as I have mentioned, was that if he had been informed about Australis’ interest before or during the November negotiations, he would have done a better deal with LCI. He suffered, therefore, a loss the measure of which was the difference in value between the deal he did with LCI and the deal which, he said, he would have done fully informed. Evidence had been given in support of claims on a wider basis, but that was the claim pressed in closing submissions.
Mr Lenfest was the decision-maker on behalf of LCI. His evidence was that he would not have agreed to pay more to the UCOM shareholders than he agreed between 15 and 17 November.
The claim for damages requires an examination of the reliability of that evidence of Mr Lenfest; it requires also an examination of the evidence concerning LCI’s perception, at the time of the negotiations, of the value of licence B and of the amount which might prudently be paid to acquire the company which had the right to obtain the licence. That examination leads me to conclude that there is no sufficient basis in the evidence to find that Mr Hadid, fully informed, would have obtained more than he negotiated without information as to the prospect of a transaction involving Australis.
· Cross-claim by LCI
LCI cross-claimed against Mr Hadid seeking damages for loss which it claimed to have suffered as a result of misleading or deceptive conduct on the part of Mr Hadid. The conduct alleged comprised two representations said to have been made by Mr Hadid during the late August telephone conversations. One was to the effect that there was in place an underwriting of the shares in the two licence holders. The other was to the effect that, under the Broadcasting Services Act, MDS broadcast transmissions could not commence until 1997, whereas in fact they could commence on 1 July 1994. I am not satisfied, on the evidence, that Mr Hadid made either of the representations alleged against him.
· Conclusion
The decisions which I have summarised lead to the orders which I have made, that Mr Hadid’s application and LCI’s cross-claim are dismissed, in each case with costs.
