Federal Court of Australia

Pacific Current Group Limited v Fitzpatrick [2024] FCA 1480

ORDERS

THE COURT ORDERS THAT:

1.    The applicant’s proceeding against the first and third to fifth respondents be dismissed.

2.    The applicant pay the first and third to fifth respondents’ costs of and incidental to this proceeding concerning the applicant’s claims against those parties.

3.    There be a stay on the operation of order 2 until further order.

4.    Any period stipulated under the Federal Court Rules 2011 (Cth) for the filing and service of any notice of appeal from orders 1 and 2 be suspended until further order.

5.    A case management hearing be fixed at 9.30 am on 7 February 2025 to determine the procedure under which any outstanding issues concerning, inter-alia, any of these orders, the case against the second respondent, any cross-claim between the respondents or any other costs question are to be resolved.

6.    To the extent necessary, any prior confidentiality orders made in this proceeding or proceeding VID 608 of 2019 are varied so as to allow public access to and public dissemination of the reasons of the Court published today.

7.    Liberty to apply.

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

REASONS FOR JUDGMENT

BEACH J:

1    This proceeding concerns a merger that was completed on 25 November 2014 between Pacific Current Group Ltd (PAC) and Northern Lights Capital Partners LLC (Northern Lights). As part of the merger, each of PAC and Northern Lights transferred substantially all of their assets to a unit trust known as the Aurora Trust in exchange for units.

2    PAC has brought the present proceeding against the then directors of PAC who approved the merger asserting that those directors breached their various statutory and other duties as directors.

3    Now by way of background, in the decade leading up to 2014, the business of PAC involved making investments by taking minority shareholdings in fund managers who were not aligned with major institutions. In these reasons I will refer to these fund managers as boutiques.

4    By 2012, PAC’s boutiques were regarded as too Australian-centric as most were located in Australia and specialised in Australian asset classes. Further, PAC’s income and consequently its ability to pay dividends to its own shareholders largely depended on two mature boutiques. The board of directors recognised that PAC needed to diversify its boutiques including by geography and by asset class.

5    From 2012 to late 2013, PAC endeavoured to diversify, including by merging with or taking over one of its competitors being Pinnacle Investment Management Ltd. This was without success as I will detail later when I discuss the sequence of discussions with representatives of its holding company, Wilson HTM Investment Group Limited (WIG).

6    Now Northern Lights and its related entities had for several years prior to 2014 conducted a similar business to PAC’s business but predominantly in the United States.

7    It was perceived to be advantageous to both PAC and Northern Lights to merge their businesses. And as I have identified, in November 2014 PAC and Northern Lights merged their businesses. PAC and Northern Lights transferred their respective interests in various boutique fund managers to a new, unlisted Australian company, being Aurora Investment Management Pty Limited (the Aurora trustee) in exchange for units in the Aurora Trust.

8    As part of the merger, PAC held approximately 61% of the units in the Aurora Trust and Northern Lights including the interest of BNP Paribas Asset Management Inc held approximately 39% of the units in the Aurora Trust.

9    Now in the proceeding before me PAC asserts that the then directors of PAC who approved the merger breached s 180 of the Corporations Act 2001 (Cth) and various other cognate duties at four key decision points. The relevant directors at the time are respondents to the present proceeding.

10    The four key decision points identified by PAC are the following. First, on 24 February 2014 the board of directors resolved that it execute a terms sheet to formalise negotiations for the merger. Second, on 16 April 2014 the board resolved that PAC sign a revised terms sheet. Third, on 23 July 2014 the board resolved that the merger be approved. And fourth, on 16 November 2014 the board signed a circular resolution to proceed with completion of the merger.

11    PAC says that at each of these four key decision points, and particularly on 23 July 2014 when the board resolved that the merger be approved, the directors failed to exercise their powers and discharge their duties with the degree of care and diligence required under the general law and s 180 of the Act.

12    Further, it is said that the directors failed to seek and obtain the approval of PAC’s shareholders to the merger as required by PAC’s constitution and listing rule 11.2 of the ASX listing rules.

13    Let me at this point say something more about the respondents to the proceeding.

14    Mr Michael Fitzpatrick was a director of PAC between 5 October 2004 and 1 March 2019, and the chairman of PAC’s board and a member of PAC’s audit committee at the relevant time.

15    Mr Andrew McGill was the managing director and chief executive officer of PAC between 30 August 2013 and 28 August 2015.

16    Mr Peter Kennedy at the time of trial was a director of PAC and had been from 4 June 2003. He was also the chairman of PAC’s audit committee during the relevant period.

17    Ms Melda Donnelly was a non-executive director and member of PAC’s audit committee from 28 March 2012 to the time of trial.

18    Mr Reubert Hayes was a director of PAC between 22 February 2007 and 31 March 2015, and a member of PAC’s audit committee at the relevant time.

19    Now generally speaking, Mr McGill and Mr Fitzpatrick were largely responsible for effecting the merger. The other non-executive directors, Mr Kennedy, Ms Donnelly and Mr Hayes, were less involved in the proposed merger. I should also note that Mr Hayes was overseas for some of the period in which the key decisions concerning the merger occurred.

20    Before proceeding further and given the wholesale attack made by PAC against the then directors, let me make various observations concerning how the board of PAC operated around the time of the merger and its management practices based upon the voluminous witness and documentary evidence led before me.

21    First, members of the board had both the necessary and sufficient complementary commercial backgrounds, motivations, personalities and skill sets. The productive yield of this was an operative and direct intellectual diversity as between the individuals, which by several orders of magnitude trumped any superficial ex facie diversity or irrelevant self-referential identification. This advantageously reflected itself in the decision-making processes of the board and the debates which took place.

22    Second, given that the time frame of the decision-making processes under consideration was over ten years ago, there was little in the way of meretricious mission statements and correlative performative processes that one normally associates with public companies these days.

23    Third, the board operated a relatively lean management structure where shareholders’ funds were efficiently managed and spent for proper purposes. This was all quite refreshing when one compares this to many boards of public companies today that even go so far as to pride themselves on allocating shareholders’ funds to social causes of the directors for which they have an affinity or affection, with such expenditure or donation of others’ money purportedly justified by little more than humbug and adding no real economic value to the company and its shareholders.

24    Fourth, meta-themes concerning social licence theory can be put to one side. They are a superfluous add-on to the legislative regime applying to directors and companies. It is not necessary to cite Milton Friedman to state the obvious. Any so-called social licence granted on incorporation has its boundaries and content provided by the company’s constitution and the detailed legislative regime, albeit ultimately built upon social policy. Nothing more, nothing less.

25    In summary, and notwithstanding the litany of complaints made by PAC against the then directors, in my view the board of PAC and the management of PAC appears to have been well run, generally speaking.

26    Now each of the directors gave evidence and was cross-examined at trial. Further, I directed that Mr Fitzpatrick be recalled for further cross-examination to address some matters that arose during Mr McGill’s cross-examination. I will say something more about their evidence later.

27    Now in its third further amended statement of claim, PAC alleges that by voting in favour of specific resolutions in relation to the merger in 2014, each of the directors breached his or her statutory duty under s 180 of the Act and their common law and equitable duties to PAC to exercise reasonable care, thereby causing it loss. For the moment I will not distinguish these duties by characterisation but merely refer to their characterisation in the singular. The directors have denied such breaches.

28    The first claim of breach of duty concerns the decision to vote in favour of the resolution passed at the board meeting on 24 February 2014 that PAC enter into a non-binding terms sheet with Northern Lights in the form contained in the board papers for that meeting.

29    The second claim of breach of duty concerns the decision to vote in favour of the resolution passed at the board meeting on 16 April 2014 that PAC sign a revised terms sheet with Northern Lights in the form put before the board.

30    The third claim of breach of duty concerns the decision to vote in favour of the resolution passed at the board meeting on 23 July 2014 that approved the merger subject to various conditions being satisfied or waived. I will refer to this as the transaction documents execution resolution.

31    The fourth claim of breach of duty concerns the signing by each of the directors on or prior to 16 November 2014 of the circular resolution to proceed to complete the merger and to authorise execution of the documents necessary to achieve completion.

32    The fifth claim of breach of duty concerns the decision to vote in favour of the transaction documents execution resolution and the signing of the circular resolution without first causing PAC to seek or obtain approval of the merger from PAC’s shareholders in an extraordinary general meeting as allegedly required by PAC’s constitution and rule 11.2 of the listing rules of the ASX. A related claim involves PAC seeking restitution of the value of PAC’s assets allegedly dissipated as a result of the contraventions. PAC alleges that by failing to obtain shareholder approval, the transaction documents execution resolution and the circular resolution were ultra vires. Further, it is alleged that by failing to obtain shareholder approval, the directors breached their duty in equity to exercise care and diligence to ensure that PAC’s assets were applied in accordance with PAC’s constitution.

33    Now I should at this point note various allegations which are no longer pressed by PAC.

34    First, it is no longer pressed that the directors breached their duties of care and diligence by voting in favour of the merger in the absence of any analysis of the broader US funds management market including regulatory risk.

35    Second, it is no longer said that the directors breached their duties in failing to seek shareholder approval, even in circumstances where, on an alternative scenario to PAC’s principal case, such approval may not have been required by the listing rules or PAC’s constitution.

36    Now in addition to the claims against all directors, PAC has made separate allegations against Mr McGill claiming that he breached his duties in the following respects. First, it is said that he failed to give the non-executive directors the Deloitte due diligence report. Second, it is said that he failed to bring to the non-executive directors’ attention two versions of the financial model prepared by Gresham Advisory Partners Limited (Gresham) and information concerning risks as to whether WHV Investment Management Inc (WHV) would make a distribution to Northern Lights. WHV was formerly known as Wentworth, Hauser and Violich, Inc.

37    Mr McGill has also filed a cross-claim against Mr Fitzpatrick in respect of the alleged failures concerning WHV and the financial modelling of WHV’s value in the merged business and the alleged failures to bring matters to the attention of the other board members prior to them resolving to enter into the merger.

38    Now the present trial has focused on the principal liability issues, with issues such as relief and specific statutory questions including potentially under s 1317S or s 1318 postponed to a second stage to the extent necessary.

39    In summary and for the reasons that follow, in my view PAC’s claims against Mr Fitzpatrick, Mr Kennedy, Ms Donnelly and Mr Hayes have not been made out. PAC’s case against them will be dismissed.

40    And as to PAC’s case against Mr McGill, in my view the only part of its case that it has made out against Mr McGill concerns various issues relating to the WHV dividend and appreciation rights agreement and the question of the potential dividends and distributions. I will hear further from Mr McGill and PAC concerning any outstanding questions including as to relief.

41    Now before proceeding further, I should deal with one other matter by way of background. On 20 February 2020, orders were made by Moshinsky J in proceeding VID 608/2019 pursuant to s 237 of the Act granting leave to Mr Michael de Tocqueville and ASI Mutual Pty Ltd, two shareholders of PAC, to bring proceedings on behalf of PAC against certain of its directors and former directors. Pursuant to those orders, those shareholders commenced the present proceeding before me on behalf of PAC.

42    Now in terms of my detailed reasons, it has been convenient to divide my discussion into the following topics:

(a)    Some relevant background – ([43] to [148]).

(b)    Relevant witnesses and evidentiary questions – ([149] to [222]).

(c)    General principles: directors’ duties – ([223] to [302]).

(d)    The sequence of events – ([303] to [754]).

(e)    The alleged breaches of directors’ duties – ([755] to [1253]).

(f)    The question of shareholder approval — listing rule 11.2 – ([1254] to [1422]).

(g)    General principles concerning listing rule 11 – ([1423] to [1509]).

(h)    The ultra vires question – ([1510] to [1628]).

(i)    Relevant facts concerning WHV – ([1629] to [1858]).

(j)    The various issues concerning WHV – ([1859] to [2193]).

(k)    The terms of the implementation deed – ([2194] to [2257]).

(l)    Voting in favour of the circular resolution – ([2258] to [2265]).

(m)    Causation – ([2266] to [2304]).

(n)    Some aspects of potential loss and damage — Pinnacle and WIG – ([2305] to [2446]).

(o)    Sections 1317S and 1318 potential application – ([2447] to [2453]).

(p)    Conclusion – ([2454] to [2455]).

Some relevant background

43    Prior to the merger, PAC was an ASX-listed investment and financial services business based in Australia.

44    PAC, which was until 18 October 2015 known as Treasury Group Limited, was at all material times engaged in the business of investing in fund managers. Its business model involved investing capital in and providing support services to fund managers or boutiques. In these reasons and for convenience I will simply refer to PAC.

45    As at 12 November 2013, PAC’s business insofar as it involved investing in fund managers comprised holding interests in the following boutique fund managers being Investors Mutual Ltd (IML), Orion Asset Management Ltd, RARE Infrastructure Ltd (RARE), Celeste Funds Management Ltd, Aubrey Capital Management Ltd, Evergreen Capital Partners Ltd, Octis Asset Management Pte Ltd, Treasury Asia Asset Management Ltd, Global Value Investors Limited and AR Capital Management Pty Ltd.

46    As at 21 February 2014, approximately 60 per cent of PAC’s forecast financial year 2014 earnings were generated from its 40 per cent ownership of RARE, and approximately 30 per cent of PAC’s forecast financial year 2014 earnings were generated from its ownership of IML.

47    If the owners of the remaining 60 per cent of RARE put it up for sale, PAC had a right of first refusal to purchase the 60 per cent it did not own. If it did not exercise its right to purchase the remaining 60 per cent, it could be obliged to sell its 40 per cent interest to the purchasers of the 60 per cent interest.

48    At around this time, there was an increasing possibility of RARE being divested within the next 12 months. If RARE was divested, PAC’s earnings before interest, taxes, depreciation and amortisation (EBITDA) would fall by approximately 85 per cent. PAC’s net profits after tax (NPAT) might fall by a lesser amount depending upon whether or not the RARE divestment proceeds were returned to shareholders. If the divestment proceeds were retained, interest income would have become the largest component of NPAT until there were significant new investments completed.

49    Now I note that there was an inherent risk in investing in boutiques and of PAC’s own expertise in selecting investments in boutiques. So, between 2003 and 2014, PAC made 10 investments that failed or meandered until being sold for no profit, during which period PAC made 3 investments which were successful. This experience of investing in boutiques in a volatile industry is significant to some of my later discussion. What PAC alleges were “red flags” were regarded by the directors for the most part as matters which needed to be considered when making a decision to merge.

PAC before the merger

50    In early 2014 PAC was a small but profitable company in ASX terms. It had a small paid-up capital, a small number of shareholders, a five-member board including the CEO, a small number of executives, a small number of employees and an office which was part of one floor of a building in Martin Place, Sydney.

51    In the financial year (FY) ended 30 June 2014, PAC had issued capital of 23,697,498 $0.50 shares. PAC’s top 20 shareholders consistently held over 50% of PAC’s shares. PAC’s NPAT for FY14 was $13.06 million.

52    In 2014 PAC had a workforce of 16, being 3 executives, 6 managers and 7 other employees.

53    In 2014, board meetings usually occurred in PAC’s Sydney office, but the board regularly held meetings where some or all directors participated by telephone.

54    Mr Fitzpatrick ran board meetings in a collegiate manner. The board papers were delivered a few days ahead of a board meeting. Mr Fitzpatrick would take agenda items in the order that suited the board or executives or advisers attending the meeting. On any given agenda item he asked each of the other directors what he or she thought and he encouraged dialogue. After every director, including him, had had a say, he would summarise what the board decision was to ensure it reflected the discussion. He was careful about formal board resolutions and often discussed the wording with the directors slowly until they all agreed upon it.

55    There were various board committees. In 2014, and as I have said, each of the non-executive directors was a member of PAC’s audit committee.

A little about boutiques

56    A boutique obtains funds from sources including institutional investors such as industry superannuation funds and life insurance companies, employers on behalf of employees and retail investors including high wealth individuals and people who manage their own superannuation funds.

57    A boutique typically invests the funds in a particular asset class or classes such as Australian or international equities, bonds and infrastructure assets according to the boutique’s investment strategy.

58    The boutique makes its money by charging the investors a fee for managing the funds. Ordinarily, a substantial part of the fee is calculated as a percentage of the funds under management. In addition, performance fees may be charged if the boutique outperforms industry benchmarks.

59    A boutique is usually founded by one or two people with investment or industry experience. Most founders have worked for some years as an investment manager or merchant banker for an institutional investor and have an established record and reputation as an investor or advisor.

60    When a boutique commences, one of the challenges to its business is finding the money to pay expenses until the boutique generates sufficient income to break even. PAC provided to boutiques those funds by investment or loan.

61    Further, back-office management issues such as regulatory compliance needed to be solved. Until a boutique became mature and able to employ the necessary staff, a boutique would solve these issues by outsourcing them to a service provider which was paid for performing the back-office functions. PAC provided such services for a fee to boutiques in which it invested.

62    Now another aspect of the varying skills of the founders of a boutique was their ability to attract funds under management.

63    In the funds management industry the process of obtaining institutional or retail funds to manage is called distribution or sales. A start-up boutique would need assistance with distribution and it usually did this by hiring a distribution team or by paying third parties for distribution services.

64    Now once a boutique started to generate income it took time for it to break even. For each boutique there is a funds under management figure at which it breaks even and covers its expenses.

65    It can take up to 3 years for boutiques to break even. The challenge facing the boutique is financing its operations up to the break-even point. So, it can take a long time for a start-up boutique to impact on PAC’s profitability.

66    Once the boutique starts operating and is receiving investment funds, performance is very important. Institutional investors will move their money from one fund manager to another if the manager’s investment strategy is not producing returns at the level predicted, and will move it even quicker if performance is below the average return of fund managers generally.

67    The problem of funds under management outflows is not so great with retail funds because retail investors tend not to change investments so often and so quickly, which is why money from retail investors is termed sticky money by fund managers.

68    Poor performance comes about either because the boutique is invested in the wrong market sector, for example, in Australian equites at a time when equities in the United States outperformed Australian equities, or the boutique simply makes poor choices.

69    Poor performance ultimately leads to more distribution problems. As the funds under management shrinks, it is harder for a distributor to persuade an institutional investor to invest funds in what the market may perceive as a sinking ship.

70    Boutiques do not have shareholders with the resources of institutional fund managers and so stagnating or outflowing funds under management for a few years often leads to closure.

71    On the other hand, if the boutique exceeds estimated returns or the market average rates of return or wins an industry award, funds under management inflows occur and can do so rapidly. This can make the boutique very profitable relatively quickly because once the boutique reaches a level of funds under management that allows it to break even or reach the funds under management threshold for performance fees to be payable, the expenses do not proportionally increase. Rather, the same investment team just makes larger investments without the boutique employing extra investment personnel.

72    After a boutique reaches a break-even, it takes about a further 1 or 2 years before it can be said with confidence that the boutique will be successful, bounce along breaking even or fail. It can take longer. Events like the global financial crisis make it more difficult to determine whether a boutique will fail because funds under management disappear for all fund managers.

73    By FY14 PAC’s business had been investing in boutiques and providing distribution, regulatory compliance and other services to boutiques for a fee via PAC’s subsidiary Treasury Group Investment Services Ltd.

74    PAC usually invested by taking a minority shareholding in a boutique, but PAC also provided seed capital by making loans to boutiques until they broke even. PAC was not itself a fund manager. It did not receive funds from institutions or others to invest on their behalf.

75    PAC monitored the boutique by usually having one of PAC’s directors or executives sit on the board of the boutique. The boutiques reported to PAC regularly about their performance.

76    Because PAC was not taking a controlling interest in a boutique in which it invested, there was always a shareholders’ agreement which provided a mechanism for PAC to buy out the founders and vice versa if certain events occurred. A typical triggering event was a proposed sale by either the founders or by PAC of their shareholding in a boutique. If either wanted to sell, the other could acquire the shareholding. If founders wanted to sell their shareholding, PAC’s policy has always been to sell its shareholding to the purchaser.

77    Now valuing a boutique, particularly in its start-up phase, is difficult for several reasons.

78    First, most of the market sectors in which boutiques operate are volatile, which means funds under management can move to or from a boutique quickly if the market changes or changes relative to other sectors. So an investor in a boutique is making assumptions about the sustainability or viability of the boutiques’ chosen investment sector.

79    Second, the value of the boutique depends on its ability to attract and retain funds under management. This largely depends on the founders’ skills. They have to obtain mandates and have a good investment performance. This in turn depends upon the founders staying with the business and keeping the investment team together. Boutiques are really about the founders. An investor is making a judgment about the founders’ ability to do these things. A lot depends on experience and reputation of the founders prior to them wanting to start a boutique, and the only way to assess these sorts of matters is to meet the founders and discuss strategies, performance and expectations.

80    Until the merger, the role of the CEO and his executive team was to identify and evaluate a potential boutique investment. Sometimes the founders would approach PAC because of PAC’s model, but usually PAC’s management learned that a well-known institutional investment executive was thinking of starting a boutique and PAC approached the executive. After due diligence, PAC management would advise the board about an investment if one was potentially advantageous to PAC. PAC’s executives and some of its employees were skilled at providing an assessment of the calibre and potential of founders and their boutiques.

81    The progress with respect to potential investments was reported on regularly by the CEO. By 2013 a regular document in the papers for a board meeting was a deal pipeline memorandum which listed management’s progress with potential investments in boutiques.

82    A recommendation to invest in a boutique was usually contained in a separate paper to the board. PAC had a rigorous approach to assessing potential boutiques and PAC ended up investing in very few of them. The papers took different forms but contained much the same detail.

83    Now investing in boutiques is inherently risky as I have indicated. From 2003 to 2014 PAC’s investments showed mixed results.

84    PAC’s investment in IML in 2003 was very successful. PAC’s stake in IML varied to up to 50% over the years. IML specialised in long only investing in Australian equities. IML was based in Sydney.

85    IML’s funds under management at 30 June 2014 were $4.9 billion.

86    PAC sold its 40% stake in IML in FY18 for $120 million. PAC made more than 30 times the value of its original investment in IML.

87    PAC acquired 40% of RARE in 2007. After a slow start RARE’s funds under management increased extremely rapidly from 2009 and it became one of PAC’s best investments.

88    RARE specialised in the investment and management of securities in the global listed infrastructure sector, including airports, gas, electricity, water and roads. RARE had product offerings in Europe, North America and Australia.

89    RARE’s funds under management at 30 June 2014 were $9.1 billion.

90    In FY16, PAC sold 75% of its interest in RARE, retaining 25%. So after the sale, PAC held 10% of RARE. PAC received $112 million up front with the right to further payments up to $42 million depending on RARE’s performance. Coupled with the dividends and trust distributions from RARE, the return on the sale of the 30% stake in RARE meant a cash return of 33 times PAC’s investment. PAC sold its remaining 10% stake in FY19 for $21.5 million plus dividends.

91    ROC Partners Pty Ltd was based in Sydney and specialised in investing in Asia Pacific markets. PAC invested in ROC in FY14 and had an initial holding in ROC of 15% which it increased to 30%. ROC’s funds under management at 30 June 2015 were $5.3 billion.

92    Let me say something about investments that succeeded at first and then failed.

93    Orion Asset Management Ltd was an example of a boutique which had been very successful for about 10 years and paid good returns to PAC, which fell out of favour with institutions very quickly after poor investment returns and reputational damage as a result of one of its employees being charged with and being later convicted of insider trading.

94    PAC originally invested in Orion in FY02 and increased its holding in Orion from the original 19% to 42% by FY06. Orion specialised in investing in Australian equities. Orion was based in Sydney. Orion closed its fund management operations in FY14.

95    Further, many of PAC’s investments failed or were not successful usually due to a failure to attract sufficient funds under management.

96    Confluence Asset Management Ltd, in which PAC invested in FY04, specialised in investing in ASX listed companies that had a small capitalisation. Confluence was based in Melbourne. By FY06 Confluence’s funds under management were $233m and in FY07 they were $376m. Confluence was not sustainable at those levels of funds under management and its operations were wound down in FY08. PAC lost its investment.

97    Global Value Investors Ltd, in which PAC invested in FY05, was a Melbourne based boutique. GVI specialised in investing in global equities.

98    Treasury Asia Asset Management Ltd, in which PAC invested in FY06, was based in Sydney and also had offices in Singapore. TAAM specialised in investing in Asian and Pacific equities. TAAM failed because of deteriorating investment performance. PAC sold its stake in TAAM in FY14 at a price that recovered PAC’s capital outlays without any profit.

99    Cannae Capital Partners Ltd, in which PAC invested in FY08, was based in Sydney. Cannae failed and was merged with IML in FY10. Mr Hugh Giddy, Cannae’s founder, went to work for IML. PAC wrote off its investment in Cannae in FY10.

100    AR Capital Management Ltd, in which PAC invested in FY10, was Melbourne based and specialised in investing in Australian equities. AR Capital never attracted sufficient funds under management to survive and once its founders left in FY12 it was doomed. AR Capital ceased trading in FY14 and was wound up in FY15.

101    Celeste Funds Management Ltd, in which PAC invested in FY10, was based in Sydney and invested in Australian equities. PAC sold its investment in Celeste in 2018 for $1.6 million.

102    Aubrey Capital Management Ltd, in which PAC invested in FY10, was based in Edinburgh and specialised in investing in global equities. Aubrey never attracted sufficient funds under management to break even.

103    Evergreen Capital Partners Ltd, in which PAC invested in FY12, was based in Melbourne and specialised in investing in Australian equities. Evergreen was another boutique that did not attract enough funds under management to survive. In FY14 Evergreen merged with a property fund manager, Freehold Investment Management Ltd, and PAC obtained an interest in Freehold. PAC sold its interest in Freehold in October 2019 for book value.

104    Octis Asset Management Pty Ltd, in which PAC invested in FY13, specialised in investing in Asian equities. Octis was based in Singapore. Octis was not able to attract sufficient funds under management to continue. PAC’s 20% interest in Octis was sold in FY16 with PAC’s outlaid capital being recovered but with no profit.

General

105    PAC’s share price and its ability to pay dividends to PAC’s shareholders depended on the dividends, distributions and interest that it received from its boutiques and to a lesser extent on the fees it received for PAC’s services.

106    PAC’s dividends paid for FY13 and FY14 were $0.40 and $0.50 per share respectively.

107    There was a significant increase in the dividends paid by PAC over the period from FY09 to FY14 due to the performance of IML and RARE and the dividends and distributions they paid PAC.

108    The challenge with PAC’s investment model was that PAC had to continue to find and make boutique investments with the aim that one of them would succeed and replace the income that would be lost if one of PAC’s mature successful boutiques was sold or collapsed like Orion.

109    If PAC could not make a series of new boutique investments, PAC risked a mature boutique like IML or RARE being sold. Whilst such a sale might produce a one-off significant taxable capital gain for PAC in one FY, as it ultimately did with IML and RARE, going forward PAC would lose the revenue it had been receiving from that boutique. Consequently PAC’s share price would suffer as its ability to pay dividends would diminish.

110    Now in July 2011 the board had recognised that PAC’s investments were too Australian focused, both in terms of the locations of its boutiques and in terms of investment sectors. Because the majority of PAC’s boutiques specialised in Australian equities, PAC risked funds under management stagnating or shrinking if other sectors outperformed Australian equities.

111    The board had already started to address the problem of PAC being too focused on Australia before Mr McGill became CEO in July 2011 with the acquisition of Aubrey in FY10. However, being located in Australia made it difficult for PAC to form the relationships with northern hemisphere founders that might lead to an investment in a boutique.

112    Let me at this point say something about Northern Lights and its boutiques.

Northern Lights

113    Northern Lights was founded in 2006 and headquartered in Seattle, USA. At all material times, Northern Lights was a private limited liability company incorporated under the laws of Delaware, and carried on the business of funds management and investing in fund managers, including in the USA and UK until 25 November 2014. Its assets which were illiquid were investments in private boutique fund managers.

114    First, prior to the merger there were holdings in several boutique fund managers, including Seizert Capital Partners LLC (Seizert), Alphashares LLC (Alpha), del Rey Global Investors LLC, Elessar Investment Management LLC, Tamro Capital Partners LLC (Tamro), and Aether Investment Partners LLC (Aether).

115    Second, there were a number of investments in immature and alternative boutique fund managers including Blackcrane Capital LLC (Blackcrane), EAM Global Investors LLC (EAM), Goodhart Partners LLP (Goodhart), Nereus Holdings LP (Nereus), Northern Lights Alternative Advisors LLP, and Raven Capital Management LLC (Raven).

116    Third, I should say something about WHV. Northern Lights had no equity interest in WHV, only certain contractual rights pursuant to a dividend and appreciation rights agreement. I will return to discuss this in more detail later.

Implementation of the merger

117    Between July and November 2014, PAC and Northern Lights and the Aurora trustee entered into a series of agreements to implement the merger. Those agreements included the following: a deed of amendment to the Aurora Trust; a replacement constitution of the Trustee; an implementation deed between PAC and Northern Lights and an implementation agreement and restatement deed between PAC and Northern Lights; PAC’s implementation deed – disclosure letter and Northern Lights’ implementation disclosure letter; a securities sale agreement between PAC and the Trustee; a PAC other assets contribution deed and PAC other assets services deed; an exchange deed between PAC, Northern Lights and Class B parties; a unitholders deed between PAC, Northern Lights, NL Sub Y LLC (NL Sub Y), BNP Paribas Asset Management Inc (BNP Paribas), various key employees and the Trustee; a partnership allocation deed between PAC, Northern Lights, NL Sub Y, BNP Paribas and the Trustee; a securities sale deed between PAC and Treasury RARE Holdings Pty Ltd; a contribution agreement between Northern Lights and Northern Lights Midco LLC (Northern Lights Midco) and first amendment to contribution agreement; an amended and restated limited liability company agreement of Northern Lights Midco; a subscription agreement between NL Sub Y, LLC and the Trustee; a contribution and assignment agreement between Northern Lights, NL Sub Y and NL Sub LLC (NL Sub); a first amendment to dividend and appreciation rights agreement; a securities sale agreement between Northern Lights and the Trustee; a Medley committed loan notice; an Aether purchase agreement; an Aether securities purchase agreement; an Aether third amended and restated limited liability company arrangement; and a Seizert promissory note.

118    The key agreements and deeds were executed on or around 4 August 2014 and between 21 and 24 November 2014. I will analyse aspects of these instruments later.

119    As part of the merger, PAC and Northern Lights created the Aurora Trust and the Aurora trustee. And PAC and Northern Lights transferred substantially all of their boutiques to the Aurora Trust in exchange for units. Let me set out some of the detail concerning the merger.

120    PAC was given consideration in the form of units in the Aurora Trust of $255,624,260 for the transfer of its net assets to the Aurora Trust.

121    Northern Lights was given consideration in the form of units in the Aurora Trust of $161,925,984 for the transfer of its net assets to Northern Lights Midco which became a wholly owned subsidiary of the Aurora Trust.

122    Northern Lights and BNP Paribas were issued 32,771,555 and 9,228,445 class X redeemable preference units respectively in the Aurora Trust with an aggregate issue price of USD 42 million (XRPUs).

123    NL Sub Y, a company owned 99% by Northern Lights and 1% by NL Sub, and BNP Paribas were issued 11,704,127 and 3,295,873 class Y redeemable preference units respectively in the Aurora Trust with an aggregate issue price of USD 15 million (YRPUs).

124    A debt of USD 45.6 million was drawn down by Northern Lights Midco to fund cash payable in relation to additional equity in Seizert and Aether.

125    The Aurora Trust issued debt notes with an aggregate value of USD 17.5 million on completion of the acquisition of Seizert.

126    Now at the completion of the merger the following was the position.

127    PAC was issued 23,837,479 class A units in the Aurora Trust representing 61.22% of all the units in the Aurora Trust and 2,065,000 class A-1 units in the Aurora Trust.

128    Northern Lights and BNP Paribas were issued 11,782,095 and 3,317,830 class B units in the Aurora Trust, representing 38.78% of all the units in the Aurora Trust, and 2,140,503 and 235,194 Class B-1 units in the Aurora Trust.

129    Further, as part of the merger, the following transactions also took place.

130    First, let me say something about the Aether transaction. Northern Lights Midco and a further Northern Lights subsidiary, Northern Lights Earn Out Co LLC (Earn-Out Co) acquired the remaining equity in Aether for consideration of USD 40 million plus additional earn-out payments and further cash consideration of USD 3.7 million. And the Aether company management agreement was amended so that Northern Lights Midco, which was the manager of Aether, and Earn-Out Co had rights to certain income distributions.

131    Second, let me say something about the Seizert transaction. Northern Lights Midco acquired the remaining equity in Seizert in exchange for Seizert debt notes, being notes with an aggregate value of USD 17.5 million, and upfront cash consideration of USD 21 million, and deferred cash consideration of USD 7 million (USD 6 million to be paid by PAC and USD 1 million by Northern Lights). Further units were issued to the Seizert employees.

132    Now as part of the merger, the Aurora trustee assumed debts of approximately AUD 131,191,729, comprising the following.

133    First, on 24 November 2014, Northern Lights entered into a debt facility of USD 47 million with Medley Capital Corporation (the Medley loan). The facility was entered into to fund the acquisition of additional equity in Seizert and Aether. The Medley loan was repaid by the Aurora Trust on 4 January 2016 for USD 45.85 million.

134    Second, the Aurora Trust issued debt notes amounting to USD 17.5 million to the former owners of Seizert as part of the consideration for the acquisition by Northern Lights Midco of the equity interest in Seizert. The Seizert debt notes were paid in 2018 and 2020.

135    Third, as I have indicated, 42 million XRPUs were issued to Northern Lights and BNP Paribas. The repayment obligations were contingent on the performance of certain boutiques contributed to the Aurora Trust. At the merger date, the XRPUs had a value of USD 35 million.

136    Fourth, as I have indicated, 15 million YRPUs were issued to NL Sub Y and BNP Paribas with a total redemption price of USD 15 million.

Events subsequent to the merger

137    The first meeting of the Aurora trustee’s board saw a report from Mr McGill, who was its CEO, dated 3 December 2014 which indicated, inter-alia, the following matters.

138    First, following the merger, group liquidity was very low.

139    Second, critical cash inflow assumptions for December and January included, as a top priority, the WHV dividend of USD 2 million in December 2014.

140    Third, if actual cash receipts were lower than the inflow assumptions then this could potentially have significant liquidity consequences for Aurora.

141    No WHV dividend was declared or distribution paid in 2014.

142    By 30 June 2015, the Aurora Trust’s interest in WHV was written off.

143    Following the merger, PAC’s interest in the Aurora Trust was increased. On or around 13 April 2015, PAC’s interest in the Aurora Trust increased to 64.03%. And on or around 7 September 2015, PAC’s interest in the Aurora Trust increased to 65.15%.

144    On 13 April 2017, the Aurora Trust became wholly owned by PAC.

145    In the period between the merger closing on 24 November 2014 to 30 June 2017, the Trustee wrote down the carrying value of the former Northern Lights boutiques by approximately AUD 218,340,159.

146    This is reflected in the following table:

147    In the year ending 30 June 2016, PAC reported a net loss of AUD 48.2 million.

148    I will return later to discuss the specific and relevant sequence of events.

Relevant witnesses and evidentiary questions

149    Let me say something about the respondent directors.

Evidence of the directors

150    As at 2014 Mr Kennedy had been the longest serving of the directors having been appointed a director on 4 June 2003. At the time of trial he still remained a director. He had extensive experience in commercial law and had been a director of other public and private companies.

151    Mr Kennedy was careful in his evidence during cross-examination. He answered questions directly, although he was a little feisty at times in response to some of my gentle queries. Nevertheless he was an impressive and reliable witness.

152    Mr Fitzpatrick was a director of PAC from 5 October 2004 until 1 March 2019 and its chairman for most of that period. Through his companies in 2014 he owned about 11.45% of PAC’s shares. Mr Fitzpatrick had had extensive experience in the funds management sector. He had also had considerable experience as a company director.

153    Mr Fitzpatrick made numerous concessions in cross-examination, particularly where he accepted his inability to recall discussions and events from 2013 and 2014. Mr Fitzpatrick’s evidence was thoughtful and reliable.

154    Mr Hayes was a director from 22 February 2007 to 26 November 2012. He had been the founder of Ausbil Dexia Ltd, a boutique, and part of Barclays Bank’s Australian investment operations. Mr Hayes had an extensive knowledge and understanding of boutiques and investment operations generally.

155    Mr Hayes was the first to acknowledge that there were limitations on his ability to give detailed evidence due to his failing memory. Mr Hayes was 80 at the time of giving evidence. Despite these difficulties, Mr Hayes’ high level evidence on factors that caused him to vote in favour of the merger was generally reliable.

156    Ms Donnelly joined the board on 28 March 2012. Her background was in accounting and tax and then funds management. She held management positions at Australia New Zealand Banking Group Limited and Queensland Investment Corporation.

157    Since finishing as CEO at QIC, she had established, and then sold, her own company which educated investment executives in the superannuation and funds management industry world-wide.

158    She has held numerous directorships on the boards of public and private fund managers and has held positions on the investment committees of government and private investment bodies and industry superannuation funds.

159    Ms Donnelly, although she was prepared to make concessions, was firm in what she recalled. She gave short and sharp reliable answers. I accept Ms Donnelly’s evidence unequivocally.

160    Mr McGill was PAC’s chief executive officer. He had been employed as CEO by PAC in July 2011. He was appointed as a director of PAC in August 2013. He ceased to be a director on 28 August 2015.

161    Mr McGill had an impressive employment history with decades of experience in investment banking before coming to PAC. His experience included being a strategy consultant at LEK Partnership, holding senior roles in Macquarie Bank’s corporate finance and direct investments teams and then being the founding partner at Crescent Capital, which was an independent specific purpose private equity firm, and where he worked from 2000 to 2010.

162    Most of Mr McGill’s evidence was honestly given, although there were some problematic aspects which I will discuss in more detail later concerning the reliability of his evidence on the WHV question.

163    It is necessary at this point to identify some other individuals and entities who are relevant to the events.

PAC executives and employees

164    Mr Joe Ferragina was PAC’s chief financial officer and had extensive business qualifications. By 2014 Mr Ferragina had been PAC’s CFO for about 10 years. Before that he had extensive experience in finance roles at large organisations.

165    Mr Ferragina’s responsibilities included all of the financial aspects of PAC’s business such as the preparation of financial statements. He was also involved in analysing potential investments that PAC may make in a boutique.

166    Mr Ferragina’s regular reports to the board included reports about PAC’s finances. His reports were incorporated into Mr McGill’s CEO reports to the board.

167    Based on his work the board considered Mr Ferragina to be a very capable financial officer with a good knowledge of funds management. He sat on the boards of some of PAC’s boutiques.

168    Mr Andrew Howard was PAC’s chief investment officer. He started at PAC in August 2013.

169    Mr Howard had qualifications in business and in finance before working for PAC. Mr Howard was chief investment officer for the Asia Pacific region at Mercer (Australia) Pty Ltd, part of an international firm specialising in investment consulting, wealth management and associated professional financial services. He had 15 years’ experience in assessing fund managers’ performance.

170    Mr Howard’s role at PAC was to assist in identifying and assessing boutiques which PAC might invest in. Mr Howard developed PAC’s portfolio of investment products and identified and reported on new boutique investment opportunities.

171    Ms Ramswarup was PAC’s company secretary before and during 2014. Her involvement in the merger was peripheral in that she took board minutes, circulated some emails about board meetings and undertook general administrative functions for, and at the request of, the board.

172    Ms Batoon had an accounting qualification. In 2014 she was PAC’s finance manager. She reported to Mr Ferragina. She had previously worked and had experience in accounting for, and integrating finance activities relating to, mergers and acquisitions, minority interests and various types of financial instruments.

Northern Lights’ executives

173    Mr Paul Greenwood was a managing director of Northern Lights.

174    Mr Jack Swift was a managing director of Northern Lights and the sales and distribution manager of WHV.

175    Mr Timothy Carver was an executive director and co-founder of Northern Lights and a director of WHV from around the beginning of 2013.

176    Mr Trent Erickson was the chief financial officer of Northern Lights.

177    Mr David Griswold was the general counsel and chief compliance officer of Northern Lights.

178    Mr Jeff Vincent was a non-executive director of Northern Lights. He was also the CEO of Laird Norton Investment Management, Inc., which was a major shareholder in Northern Lights and the sole shareholder of WHV. Mr Vincent was also a director of WHV.

179    Mr Andy Turner was a non-executive director of Northern Lights and one of the original founding partners of Northern Lights. He was a significant shareholder, owning approximately 25% at about May 2014. However his direct involvement with Northern Lights was relevantly through the running of WHV as CEO since the beginning of 2013 and as a board member of Northern Lights.

Gresham

180    Gresham was a typical merchant bank type advisor and was highly regarded in its field.

181    PAC had retained Gresham between 2011 and 2013 with respect to the proposed acquisition of Pinnacle Investment Management Ltd and so the directors were familiar with the quality of Gresham’s analysis and work product. In particular, Gresham had valued both Pinnacle and WIG, which owned about 83% of Pinnacle, in 2012 and 2013, respectively.

182    The project name given to the merger and which was used by Gresham and others was Project Bondi. The Gresham executives advising PAC with respect to Project Bondi were Mr Charles Graham (managing director), Mr Alistair Pollock (associate director), Mr Darren MacGregor (executive director) and Mr Timothee Moulin (executive).

Herbert Smith Freehills

183    HSF was PAC’s legal advisor in respect of the merger. Like Gresham, HSF had advised PAC with respect to Pinnacle and WIG in 2012 and 2013.

184    The responsible partner at HSF was Mr Peter Dunne and the senior associate assisting Mr Dunne was Ms Shing Lo.

Deloitte

185    There are several entities with the name “Deloitte” involved in the merger to various extents and for different parties.

186    First, Deloitte Touche Tohmatsu (Deloitte Australia) were PAC’s auditor and assisted PAC in accounting aspects of the merger. Mr Stuart Alexander, Mr Stephen Connors and Mr Jack Lee were responsible for coordinating with their US counterpart and advising PAC management on accounting issues with the merger.

187    Second, Mr Mark Goldsmith of Deloitte Tax Services Pty Ltd (Deloitte Tax Australia) advised PAC on the tax aspects of the merger. Deloitte Tax Australia’s role is of marginal relevance to the proceeding.

188    Third, Deloitte Tax Australia co-ordinated tax issues with its US counterpart (Deloitte Tax USA) which was acting for Northern Lights. Deloitte Tax USA’s involvement is of no relevance.

189    Fourth, Deloitte & Touche LLP (Deloitte USA) was also involved. The role of Deloitte USA developed into a significant part of PAC’s case as the trial proceeded. Deloitte USA provided the following.

190    It provided a quality of earnings (QoE) data book to Northern Lights which was subsequently provided to PAC management and Gresham on 14 May 2014.

191    Further, it provided the Deloitte due diligence report provided to PAC management on 18 June 2014.

192    Mr Alan Warner, Mr Bruce Gibbens, Mr Masaki Noda and Ms Erika Mitchell of Deloitte USA were primarily responsible for advising Northern Lights. They were also in frequent contact with PAC management.

William Blair

193    William Blair were the financial advisors to Northern Lights, providing Northern Lights with valuations of boutiques, assistance with the due diligence and managing the debt raising aspects of the merger, for example, obtaining loans to acquire majority interests in Seizert and Aether.

Expert witnesses

194    I should say something briefly at this point concerning the expert witnesses.

195    Mr Graham Bradley was an expert called by PAC. As a professional company director and chairman since 2003, he was called to give an expert view as to how reasonable directors in the position of PAC’s directors ought to have acted concerning various aspect of the merger.

196    Now according to the respondents, Mr Bradley allowed himself to become effectively an adviser on how PAC’s claim should be formulated which tainted his evidence.

197    The respondents point to the fact that on at least four occasions Mr Bradley’s report used words strikingly similar to PAC’s particulars. Apparently Mr Bradley had assisted to formulate those particulars. According to the respondents, Mr Bradley’s evidence understandably adopted pleadings which he assisted in formulating.

198    Further, the respondents say that on numerous occasions where Mr Bradley selected quotes from the Howard assessment, which I will discuss later, he did so in a manner that distorted the original text of document. Mr Bradley agreed that he had used incomplete sentences and accepted that he should have quoted full sentences.

199    Further, the respondents say that Mr Bradley was prepared to rely upon supposedly damaging examples of accounting outcomes from the Deloitte due diligence report which, when explained to him, he accepted were incorrect.

200    But I agree with PAC that these criticisms are somewhat over-stated.

201    Mr Bradley’s evidence was that he had a discussion with PAC’s solicitors, where he communicated his views about the documents he had reviewed. PAC then subsequently drafted its particulars in a way that was consistent with the views communicated by Mr Bradley. Mr Bradley otherwise did not have any involvement in drafting the particulars. There is nothing untoward about this approach.

202    First, in some cases where the reverse occurs, namely if the documentary trail reveals that an expert has revised and tailored their expert opinion so as to match the pleadings on which the party retaining that expert relies, it may be possible to impugn the independence of the expert. The sequence of events here was the other way around.

203    Second, there is nothing unusual about discussing issues with an expert, including the questions to be formulated for their report to address.

204    As to the criticism concerning whether Mr Bradley distorted the original text of the Howard assessment, Mr Bradley explained in his evidence that the purpose of the passages that he identified was to highlight red flags that the directors should have taken seriously. Although counsel for Mr McGill may have put to Mr Bradley other aspects of the text that provided a favourable picture of certain boutiques, Mr Bradley’s purpose was to identify statements that he considered should have put the directors on further enquiry. Now I accept that explanation. But of course there were many parts of the Howard assessment that supported the respondent directors’ case.

205    In my view, Mr Bradley was a competent and straight-forward expert, but his evidence did have its limitations. He seemed not to be clear about PAC’s business. PAC was not a funds manager but rather an investor in funds managers, usually with a minority interest. Further, he had little if any experience in running or investing in boutique managers. More generally he collapsed the distinction from time to time between the business of investing in boutiques and the business of funds management. Further, he was not aware of documents dealing with weekly meetings between PAC, Gresham personnel and others.

206    In my view, on the substance, there were significant limitations in the use and therefore the weight that I could place on his evidence.

207    I will address aspects of his evidence in more detail later.

208    Mr Barry Lewin was an expert relied upon by the respondents. He had a background as a lawyer and professional director. He covered the same topics as Mr Bradley.

209    In my view Mr Lewin was also a competent and straight-forward expert. But like Mr Bradley, his evidence also had its limitations. Moreover, he did not have direct expertise in the type of business PAC was conducting, with perhaps one exception.

210    I will discuss some aspects of his evidence in more detail later.

The quantum/valuation experts

211    There were two such experts which I will say something more about later concerning valuation questions dealing with WHV.

Jones v Dunkel, adverse inferences and other matters

212    The unexplained failure by a party to call a witness or tender a document may, in appropriate circumstances, support an inference that the uncalled evidence would not have assisted that party’s case. The principle in Jones v Dunkel (1959) 101 CLR 298 is one of common sense. But by itself the inference is frequently somewhat barren, for knowing that the evidence of a witness would not have assisted tells one nothing about what the witness’s evidence affirmatively would have been.

213    Now PAC has largely conducted a documentary case, which is explicable partly because this is a derivative proceeding. That context justifies me in not drawing the usual Jones v Dunkel inferences because there is not the same control or capacity to adduce evidence from former PAC executives or consultants in a co-operative fashion.

214    Let me address one specific matter. Now the directors assert that I am entitled to draw an inference that evidence given by Mr Dunne, a partner of HSF, would not have assisted PAC’s case. But no Jones v Dunkel inference of the type adverted to by the directors is available in the circumstances of this case.

215    Three conditions must be satisfied for the principle in Jones v Dunkel to apply, namely, that the missing witness would be expected to be called by one party rather than the other, the witness’ evidence would elucidate a particular matter, and the witness’ absence is unexplained. But even if all three conditions are satisfied, I am not required to conclude that the uncalled evidence would not have assisted the party’s case

216    Now care is required in assessing the degree to which any particular witness can be said to be in the camp of a party. In the present case there can be no realistic suggestion that PAC was the party expected to call Mr Dunne or that Mr Dunne’s knowledge is to be regarded as the knowledge of PAC or that Mr Dunne is in PAC’s “camp”.

217    The directors’ submission ignores the reality of this proceeding. The proceeding is a derivative one, brought with leave of the Court, which was resisted by PAC, and where PAC acting in a different capacity instructed Mr Dunne’s firm to represent PAC separately in the proceeding. The directors include current directors of PAC.

218    As I observed during the trial, PAC has largely had to reconstruct events from the documentary record, whilst the relevant corporate knowledge was within the heads of the directors. And as I also observed, there is no reason why the directors could not have approached HSF directly. A common sense assessment of the circumstances of the case does not suggest that PAC could be regarded as the party expected to call Mr Dunne.

219    Let me deal with one other matter concerning the question of the content of board minutes.

220    The requirements for the content of minutes include that a minute of a directors’ meeting is not meant to be a report. They must be as concise as circumstances permit. Further, speeches, disagreements and reasons for resolutions are not normally to be recorded.

221    I reject PAC’s assertion that to the extent that the non-executive directors say that they considered matters not recorded in the board minutes, their contention should not succeed because the absence of any record of any discussion of important matters tends to show that they were not, or at the best scantly, discussed.

222    Such an assertion misconceives the purpose of minutes being to concisely record key outcomes of discussions. Moreover, the absence of reference to a specific matter being discussed is little if any positive evidence in and of itself that the matter was not discussed. One must consider the omission in its proper context.

General principles: directors’ duties

223    Section 180 of the Act provides:

Care and diligence—directors and other officers

(1)    A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a)    were a director or officer of a corporation in the corporation’s circumstances; and

(b)    occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Business judgment rule

(2)    A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a)    make the judgment in good faith for a proper purpose; and

(b)    do not have a material personal interest in the subject matter of the judgment; and

(c)    inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d)     rationally believe that the judgment is in the best interests of the corporation.

The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

(3)    In this section:

    business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

224    Section 180(1) is normative and cast in mandatory terms. The section imposes an obligation to meet a statutory standard of care and diligence applicable to the exercise of all of the powers and the discharge of all of the duties of a director or officer, whatever the source. If the required degree of care and diligence is not met, then the section will have been contravened.

225    Section 180(1) creates an objective test, as I said in Australian Securities and Investments Commission v Mitchell (No 2) (2020) 382 ALR 425 at [1397]. The “reasonable person” is an ordinary person who possesses the knowledge and experience of the relevant director.

226    The core duty of the director is to take reasonable steps to place themselves in a position to guide and monitor the management of the company. The directors must become familiar with the fundamentals of the business in which the corporation is engaged and are under a continuing obligation to keep informed about the activities of the corporation. Directorial management requires a general monitoring of corporate affairs and policies. The directors should maintain familiarity with the financial position of the corporation.

227    The duty mandates, at its core, that a director’s involvement in the company’s management requires ordinary competence or reasonable ability. Equivalently, the duty of diligence requires directors to take reasonable steps to place themselves in a position to guide and monitor the company’s management.

228    The purpose of s 180(1) is not to punish the making of mistakes or errors of judgment. Directors and officers are expected to take calculated commercial risks. However, they must exercise care and diligence in the assessment of risk and reward.

229    As stated by Robson J in Australian Securities and Investments Commission v Lindberg (2012) 91 ACSR 640 at [72]:

Section 180(1) does not seek to punish the mere making of mistakes or errors of judgment. Making mistakes does not by itself demonstrate lack of due care and diligence. The business judgment rule in s 180(2) also recognises that business judgments made in good faith and on a proper basis do not fall within s 180(1). Directors and officers of corporations are expected to take calculated commercial risks. A company run on [the] basis that no risks were ever taken would be unlikely to be successful. The proper taking of risk in making business decisions is entirely consistent with exercising care and diligence. The proper assessment of the risks and potential rewards is a matter that demands the exercise of care and diligence. The two concepts complement each other in the management of corporations.

230    Now in order for an act or omission of the director to be capable of constituting a contravention of s 180(1) there must be reasonably foreseeable harm to the interests of the company caused thereby.

231    In Australian Securities and Investments Commission v Mariner Corporation Ltd (2015) 241 FCR 502, I said (at [447] to [452]):

It is wrong to assert that if a director causes a company to contravene a provision of the Act, then necessarily the director has contravened s 180.

No contravention of s 180 would flow from such circumstances unless there was actual damage caused to the company by reason of that other contravention or it was reasonably foreseeable that the relevant conduct might harm the interests of the company, its shareholders and its creditors (if the company was in a precarious financial position) (see ASIC v Maxwell at [99]-[110] and Australian Securities and Investments Commission v Macdonald (No 11) (2009) 230 FLR 1; 256 ALR 199 at [236]).

In order for an act or omission of the director to be capable of constituting a contravention of s 180 there must be reasonably foreseeable harm to the interests of the company caused thereby.

Further, relevant to the question of breach of duty is the balance between, on the one hand, the foreseeable risk of harm to the company flowing from the contravention and, on the other hand, the potential benefits that could reasonably be expected to have accrued to the company from that conduct.

Not only must the Court consider the nature and magnitude of the foreseeable risk of harm and degree of probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action, but the Court must balance the foreseeable risk of harm against the potential benefits that could reasonably be expected to accrue from the conduct in question.

After all, one expects management including the directors to take calculated risks. The very nature of commercial activity necessarily involves uncertainty and risk taking. The pursuit of an activity that might entail a foreseeable risk of harm does not of itself establish a contravention of s 180. Moreover, a failed activity pursued by the directors which causes loss to the company does not of itself establish a contravention of s 180.

232    Observations resonating with these themes were made by Edelman J in Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209 at [675] where he said that the Court must balance “the foreseeable risk of harm to any of the interests” of the company against “the magnitude of that harm, together with the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question, and any burdens of further alleviating action”.

233    Further, as Thawley J observed, the balancing exercise is not confined to balancing competing commercial considerations or their varying financial consequences, but extends to considering “all of the interests of the corporation, including its continued existence and its interest in pursuing lawful activity” (Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533 at [459]). I should say for completeness that State intermediate appellate courts have applied Cassimatis; see DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts (2022) 163 ACSR 23 at [112] to [115] per Leeming and Kirk JJA and Basten AJA.

234    In Mariner Corporation I also said (at [440] and [441]):

It is not in doubt that the circumstances of the particular company concerned inform the content of the duty. These include the size and type of the company, the size and nature of the business it carries on, the terms of its constitution, and the composition of the board of directors.

It is also not in doubt that in considering the acts or omissions of a particular director, one looks at factors including the director’s position and responsibilities, the director’s experience and skills, the terms and conditions on which he has undertaken to act as a director, how the responsibility for the company’s business has been distributed between the directors and the company’s employees, the informational flows and systems in place and the reporting systems and requirements within the company.

235    Further, it may be necessary, when examining the corporation’s circumstances for the purposes of s 180(1)(a), to have regard to whether the company is listed or unlisted (Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1 at [7201] per Austin J).

236    Now the responsibilities referred to in 180(1)(b) include the responsibilities that the director has within the corporation, regardless of how those responsibilities came to be imposed on that director. As such, it is not the case that “responsibilities” refer only to specific tasks delegated to the relevant director.

237    Let me say something about the position of chairman as it is relevant to Mr Fitzpatrick’s position.

238    I outlined the specific role and responsibilities of the chairman in Australian Securities and Investments Commission v Mitchell (No 2) at [1398] to [1426] in which I identified the usual powers and responsibilities, including having the power, authority and responsibility where relevant to manage board meetings, to ensure that the board has before it sufficient information, to ensure that sufficient time is allowed for the discussion of complex or contentious matters and to ensure that there is appropriate communication with and taking into account the interests of members of the company. It is worth setting out again with necessary modification what I said at [1398] to [1426].

239    The Act does not make any express reference to the roles or functions of a chairman of the board, although there are legislative rules able to be displaced or modified by a company’s constitution (s 135 and also Chapter 2G) concerning formalities or procedural matters involving the chairing of directors’ meetings or shareholders’ meetings.

240    Further, there was regulatory guidance around the relevant time in the form of the ASX’s Corporate Governance Principles and Recommendations. Recommendation 2.5 (3rd edition, 2014) provided that the chairman of a listed entity should be an independent director, and should not be the same person as the CEO. The commentary to Recommendation 2.5 (3rd edition, 2014) described the responsibilities of the chairman:

The chair of the board is responsible for leading the board, facilitating the effective contribution of all directors and promoting constructive and respectful relations between directors and between the board and management. The chair is also responsible for setting the board’s agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues.

241    The prior version (2nd edition, 2007 with 2010 amendments) had a similarly worded but differently numbered Recommendation 2.2. The commentary to it provided:

The chair is responsible for leadership of the board and for the efficient organisation and conduct of the board’s functioning.

The chair should facilitate the effective contribution of all directors and promote constructive and respectful relations between directors and between board and management.

Where the chair is not an independent director, it may be beneficial to consider the appointment of a lead independent director.

The role of chair is demanding, requiring a significant time commitment. The chair’s other positions should not be such that they are likely to hinder effective performance in the role.

242    In AWA Ltd v Daniels (t/as Deloitte Haskins & Sells) (1992) 7 ACSR 759, Rogers J said at 867:

The chairman is responsible to a greater extent than any other director for the performance of the board as a whole and each member of it. The chairman has the primary responsibility of selecting matters and documents to be brought to the board’s attention, for formulating the policy of the board and promoting the position of the company. In discharging his or her responsibilities the chairman will cooperate with the managing director if the two positions are separate or otherwise with senior management.

243    This judgment was appealed, but the Court of Appeal did not question these observations (see Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438).

244    In Woolworths Ltd v Kelly (1991) 22 NSWLR 189 at 225, Mahoney JA said:

…a person who is a chairman of the board of directors has additional rights and duties and additional opportunities. Ordinarily it is the function of a chairman to settle the agenda of the meetings of the board: at least he exercises a significant influence upon it. He is in a position, in the sense here relevant, to ensure that proposals are brought forward for consideration by the directors at their meetings. And this, in a particular case, may affect the content of fiduciary duties which he owes to his company.

245    Let me delve a little deeper into the position of the chairman of the board.

246    Clearly, he has no power or authority to manage the corporation. His primary function is to preside at board meetings and accordingly to exercise procedural control. But save for that, and his power to exercise a casting vote (if applicable), he has no greater authority than an ordinary director. He is not some sort of directorial overlord. But he does have the power and authority to manage board meetings and to that extent he may have greater responsibility for the performance of the board as a whole.

247    But the chairman does have the power, authority and responsibility for setting the agenda items for board meetings, although these may be added to by the agreement of other directors. He can also discharge that responsibility in consultation with the CEO.

248    He also has the power, authority and responsibility to ensure that the board has before it sufficient information, whether presented in written or oral form, such as to be able to meaningfully consider, discuss and decide on the agenda items before the board at the relevant meeting taking into account the context of the decision required or consideration necessary by the board at that meeting. Of course, he may discharge such a responsibility in consultation with the CEO.

249    The chairman also has the power, authority and responsibility to manage the board to ensure that sufficient time is allowed for the discussion of complex or contentious matters; for this purpose it may be necessary to arrange meetings outside board meetings so that board members are thoroughly prepared.

250    Further, the chairman is there to ensure that the board members work effectively together and to ensure that their skill sets and personalities complement each other. Moreover, he should endeavour to facilitate the effective contribution of each director.

251    Further, the chairman is there to ensure workable and harmonious relations between the executive and non-executive directors, and more generally to ensure workable and harmonious relations between the board on the one hand and the executive management on the other hand, particularly the CEO. It should go without saying that the relationship between the chairman and the CEO needs to be productive and harmonious; the chairman should facilitate this.

252    Further, the chairman may have greater responsibility for defining and ensuring that the board sets and implements the corporate culture of the organisation in the neutral sense referred to in s 12.3(6) of the Criminal Code (Cth) meaning “an attitude, policy, rule, course of conduct or practice existing within the body corporate generally”. So, in one sense, such culture may be described as the organisation’s set of shared values and assumptions. For present purposes it is not necessary to elaborate on such themes, let alone seek to infuse them with any discussion of contemporary community expectations or standards if it was ever possible to distil their essence at any particular time.

253    Further, the chairman may have greater responsibility for defining and ensuring that the board sets and implements the appropriate corporate governance structure within the organisation. I use corporate governance here in the sense described in the ASX’s publications that I have referred to above adopting what was said by Justice Neville Owen in the HIH Royal Commission report, being the framework of rules, relationships, systems and mechanisms under which authority is exercised and controlled within the corporation and under which it is accountable.

254    Further, there are other responsibilities of the chairman including assisting to identify new directors, dealing with the induction of new directors and ensuring continuing education and development of each director. More generally, he is responsible for monitoring the performance of the board, board members and board committees.

255    Further, the chairman is there to ensure that there is appropriate communication with and the taking into consideration of the interests and concerns of members.

256    Finally, the chairman may have a public relations role in representing the board and the organisation to outside parties.

257    Let me now shift the focus slightly and say something about the chairman’s role in the context of corporate practices. In this context, one has to look at what I would describe as two types of corporate practices relevant to an organisation.

258    The first type is descriptive corporate practices. In other words, what were the types of actual corporate practices within the organisation? What was actually done in terms of the division of corporate structure and responsibilities? In that context, one might then identify what the organisation expected of the chairman, and then compare it with what the chairman actually did.

259    The second type is normative corporate practices. In other words, what should have been the corporate practices within the organisation? These may differ from the actual practices. Further, such a normative question may only be able to be answered by looking at actual corporate practices both within and outside the organisation. Now these may identify what could be described as the “usual practices”. But even identifying such usual practices does not necessarily identify what should have been the practices. Normative corporate practices and “usual” corporate practices are not one and the same thing.

260    Let me deal with another dimension. What did the chairman undertake to do or represent that he would undertake to do? The latter question may inform or be part of the foundation to assess expectation. But of course expectation may travel beyond and be informed by matters broader than the latter question.

261    Further, the chairman’s represented personal qualities and skills may affect the question of expectation. There is no reason why a chairman’s represented special qualifications and experience ought not be considered in this context. Indeed, they may have formed part of what the chairman represented as demonstrating his suitability for the position in the first place, which may inform expectation.

262    So position, responsibilities and represented personal qualities all feed into the question of expectation.

263    Let me make some other observations.

264    With respect to the “office”, although the duty is the same for executive and non-executive directors, it has been said that non-executive directors are not subject to the same higher standard as executive directors (Rich at [7196]). The role of non-executive directors is to guide and monitor the management of the corporation rather than to be involved at an operational level.

265    Further, the “responsibilities” referred to in s 180(1)(b) are not confined to statutory responsibilities; they include all responsibilities held by the officer within the corporation, irrespective of the manner or reasons by which those responsibilities came to be imposed on that officer.

266    Consequently, in considering the acts or omissions of a particular director, one looks at factors including the director’s position and responsibilities, the director’s experience and skills, the terms and conditions on which he or she has undertaken to act as a director, how the responsibility for the corporation’s business has been distributed between the directors and the corporation’s employees, the informational flows and systems in place and the reporting systems and requirements within the corporation.

267    Further, although s 180(2) contains a statutory form of “business judgment” rule, s 180(1) itself contains a tolerance or margin of appreciation for the business judgment of directors in relation to a particular act or omission, including a decision to act or not to act, such that so to act or not act may not constitute a breach of s 180(1).

268    Further, as I have already indicated, the statutory duty of care recognises a distinction, which must be kept firmly in mind, between negligence and mere mistakes, with liability arising for the former but not for the latter. The standard is reasonable care and skill, not perfection. In this regard Austin J said in Rich (at [7242]):

… The statute requires the court to apply a standard defined in terms of the degree of care and diligence that a reasonable person would exercise, taking into account the corporation’s circumstances, the offices occupied by the defendants and their responsibilities within the corporation. That requires the defendants’ conduct to be assessed with close regard to the circumstances existing at the relevant time, without the benefit of hindsight, and with the distinction between negligence and mistakes or errors of judgment firmly in mind. If the impugned conduct is found to be a mere error of judgment, then the statutory standard under s 180(1) is not contravened and it is unnecessary to advert to the special business judgment rule in s 180(2). …

269    Now in relation to decisions made in expectation of events that might happen in the future, courts are conscious that forecasting is a difficult and uncertain process, with much room for mistakes and errors of judgment, and for differences of opinion. As Austin J said (at [7241]):

In [Vines], I held that the quoted passages from McLelland CJ in Eq’s judgment were applicable to people in the position of officers of a corporation, such as the defendants in that case. They are also relevant to the present case. In [Vines] the facts concerned forecasting in a reinsurance business, whereas in the present case the facts concern, amongst other things, financial forecasting in a telecommunications company. In both situations, forecasting is a difficult and uncertain process, with much room for mistakes and errors of judgment, and for differences of opinion.

270    Further, directors are entitled to rely upon others unless they know, or by the exercise of ordinary care should know, facts that deny reliance. The degree of a director’s permissible reliance on others will turn on similar considerations as those that determine the overall standard of care for an individual director. They focus particularly on the characteristics of the corporation, the skills and experience of the director concerned and the delegate, and the reasonably anticipated risks entailed in so doing. What is expected is a level of scrutiny as befits supervision, not the detailed direct involvement that is associated with operational responsibility. Where there is no cause for suspicion or circumstances demanding critical and detailed attention, it is reasonable for an officer to rely on advice without independently verifying the information or scrutinising the data or circumstances upon which that advice is based.

271    Further, a non-executive director may rely on management and other officers to a greater extent than an executive director.

272    Further, if its requirements are satisfied, s 189 deems reliance by a director to have been reasonable unless proven otherwise. Section 189 provides:

If:

(a)    a director relies on information, or professional or expert advice, given or prepared by:

(i)     an employee of the corporation whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned; or

(ii)     a professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within the person’s professional or expert competence; or

(iii)     another director or officer in relation to matters within the director’s or officer’s authority; or

(iv)     a committee of directors on which the director did not serve in relation to matters within the committee’s authority; and

(b)     the reliance was made:

(i)     in good faith; and

(ii)     after making an independent assessment of the information or advice, having regard to the director’s knowledge of the corporation and the complexity of the structure and operations of the corporation; and

(c)     the reasonableness of the director’s reliance on the information or advice arises in proceedings brought to determine whether a director has performed a duty under this Part or an equivalent general law duty;

the director’s reliance on the information or advice is taken to be reasonable unless the contrary is proved.

273    Further, the duty under s 180(1) is in addition to the common law and equitable duties owed by directors to their corporations; see s 185.

Section 180(2) - business judgment rule

274    An officer relying upon s 180(2) bears the onus of proving its elements.

275    In Mariner Corporation, I said (at [484] to [490]):

The concept “business judgment” is defined in s 180(3) to mean “any decision to take or not take action in respect of a matter relevant to the business operations of the corporation”.

Mr Olney-Fraser bears the onus of proving each element of the rule (Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364 at [197]).

The first requirement of the rule is that there must be a “business judgment”. To be a business judgment there must be a decision to take or not to take action in respect of matters relevant to the business operations of the corporation. In the present context, the relevant “business judgment” was the decision to initiate a takeover bid for Austock, the necessary starting point for which was the making of the 25 June announcement. Having regard to the nature of Mariner’s business and the evidence concerning the potential benefits to Mariner of attaining control of Austock, the decision to commence the takeover and make the 25 June announcement was a business judgment. ASIC’s characterisation of the directors’ decision as a judgment not to comply with the Act and its reliance upon ASIC v Fortescue Metals Group Ltd at [197]-[198] (set aside on other grounds), is a misconceived analysis of the judgment made by Mr Olney-Fraser. No decision was made not to comply with the Act, indeed the converse.

…

The second requirement is that the judgment be made in good faith for a proper purpose. This requirement is satisfied. Mr Olney-Fraser decided to support the takeover and make the 25 June announcement because of the potential for Mariner to make a significant profit, and where he believed that the decision to make the announcement and pursue a takeover bid for Austock was in the best interests of Mariner.

As to the third requirement, that there be no material personal interest in the subject matter of the judgment, this was satisfied.

As to the fourth requirement, to “inform themselves of the subject matter of the judgment to the extent they reasonably believe to be appropriate”, in ASIC v Rich at [7283] and [7284], Austin J stated:

The element of the business judgment rule set out in s 180(2)(c) is that the director or officer must inform themselves about the subject matter of the judgment to the extent that they reasonably believe to be appropriate. I agree with ASIC’s submission (APS [2096(e)]) that the reasonableness of the belief should be assessed by reference to:

•     the importance of the business judgment to be made;

•     the time available for obtaining information;

•     the costs related to obtaining information;

•     the director or officer’s confidence in those exploring the matter;

•     the state of the company’s business at that time and the nature of competing demands on the board’s attention (referring to the ALI Principles at 178); and

•     whether or not material information is reasonably available to the director (citing Smith v Van Gorkom 488 A.2d 858 at 872 (Sup Ct Del, 1985)).

ASIC submitted (APS [2096(f)]) that the requirement that the director or officer inform themselves “to the extent they reasonably believe to be appropriate” reflects the view that regard must be had not only to what the director or officer actually knew, but what he or she should have known (citing People’s Department Store Inc v Wise [2004] 3 SCR 461 at [67]). In my view that submission distorts the statutory language, for it would deny protection unless the director were able to show previous compliance with the duty of care and diligence on another issue, namely to keep informed of material matters affecting the exercise of the powers and the discharge of the duties office. The statutory language relates to the decision-making occasion, rather than the general state of knowledge of the director. It requires the director to become informed about the subject matter of the decision prior to making it, since the business judgment rule should not protect decisions taken in disregard of material information readily available. The qualifying words, “to the extent they reasonably believe to be appropriate”, convey the idea that protection may be available even if the director was not aware of available information material to the decision, if he reasonably believed he had taken appropriate steps on the decision-making occasion to inform himself about the subject matter.

276    For the business judgment rule to apply, the facts must show that the director has made an identifiable business judgment. The definition of “business judgment” is expansive. The words “in respect of a matter relevant to” show that the matter concerned need not itself be a business operational matter. Business judgments include matters that are preparatory to the making of a business decision, including planning, budgeting and forecasting activities.

277    So, for example, a decision to make a takeover bid was a decision about “business operations” in the particular circumstances in Mariner Corporation.

278    The characterisation test is whether the decision has any effect, and was intended to have any effect, on any aspect of the corporation’s existing or potential business operations or a matter relevant to such operations.

279    Further, s 180(2) is not engaged where the director fails to turn his or her mind to a particular issue. In that circumstance the requirements of s 180(2)(c) and (d) could not be satisfied.

280    Further, with respect to the requirement in s 180(2)(a) that the judgment be made in good faith for a proper purpose, this is satisfied if the Court accepts evidence from the director that he or she saw the transaction as beneficial to the corporation and he or she believed it was in the best interests of the corporation.

281    Further, where the decision is made in order to promote the director’s personal interest, by making or pursuing personal gain where there was a real possibility of a conflict of interest, the decision will not have been made in good faith.

282    Further, with respect to the requirement in s 180(2)(b) that the director not have a material personal interest in the subject matter of judgment, the words “material personal interest” appear in many sections of the Act such as ss 191, 195 and 237.

283    Further, in relation to the requirement in section 180(2)(c) that the director informs himself to the extent he reasonably believes to be appropriate, the reasonableness of the belief should be assessed by reference to:

(a)    the importance of the business judgment to be made;

(b)    the time available for obtaining information and the costs related to obtaining information;

(c)    the director or officer’s confidence in those exploring the matter;

(d)    the state of the company’s business at that time and the nature of competing demands on the board’s attention; and

(e)    whether or not material information is reasonably available to the director.

284    Further, in relation to the requirement in s 180(2)(d) of a rational belief that the business judgment is in the best interests of the corporation, the director’s belief will be rational if it was based on reason or reasoning, whether or not the reasoning was convincing and therefore reasonable in an objective sense, but it would not be a rational belief if there was no arguable reasoning process to support it.

285    Austin J put it this way in Rich (at [7290] and [7291]):

On this view, which I favour, subpara (d) is satisfied if the evidence shows that the defendant believed that his or her judgment was in the best interests of the corporation, and that belief was supported by a reasoning process sufficient to warrant describing it as a rational belief, as defined, whether or not the reasoning process is objectively a convincing one. Consequently the Australian position on this matter is very close to the US position and s 180(2) has some protective work to do in cases where in its absence, there would or would arguably be a contravention of s 180(1).

The director or officer’s belief about the best interests of the corporation is to be formed, and its rationality assessed, on the basis of the information obtained through compliance with subpara (c). It is not to be assumed, for the purpose of applying subpara (d), that the director or officer knew everything that he or she ought to have known, but only the things that he or she reasonably believed to be appropriate to find out.

Fiduciary duty

286    I will not dwell on questions concerning the position of a director as a fiduciary at this stage other than to make some brief points.

287    First, I am concerned here only with s 180(1) and analogue equitable duties that a director might have. So, accepting that a director is a fiduciary, a director may also have an equitable but non-fiduciary duty to exercise skill and care in discharging his functions as a director. Such a prescriptive duty is by its very formulation neither of the two usual proscriptive fiduciary duties that in the present context are of no relevance. I am not concerned at all with ss 181 to 183 or with associated or analogue fiduciary duties that a director is subject to, being not to obtain an unauthorised benefit for himself or for others from his position qua director and not to act or to place himself in a position of conflict between his duties as a director and any other duty or interest extraneous to that office. And I will pass by the question of whether implicit or inherent in the two usual proscriptive duties are correlative but debatable prescriptive duties such as the duty to disclose or the duty to account, unless one just treats the fact of failure to disclose or the fact of failure to account as part of the breach of one of the proscriptive duties.

288    Second, the equitable duty to exercise skill and care for present purposes can be treated, in terms of the liability phase of the trial, as being co-extensive with the statutory duty under s 180(1). At the least, none of the parties before me suggested any different boundaries or content. I am here not concerned with remedies flowing from any breach of duty where the source of the duty may dictate the available potential remedies, whether against the wrongdoing director or third parties tainted by or implicated in the director’s conduct or its consequences. Further, it is not in doubt that although a director has sometimes been said to be in a position akin to or as if he were a trustee vis-à-vis the company because of his individual or collective control with others (as the case may be) over the company’s assets, the equitable duty of care here or at least its context or application is not analogous to a trustee’s duty of care. A director is expected to take calculated and commercial risks in deploying and growing a company’s capital. Contrastingly, a trustee’s concern is one of conservatism and conservation concerning the trust’s capital.

289    It is both unnecessary and unwise to ruminate further on these topics as others have done so with much more skill and flair; see the Honourable William Gummow KC’s article, The equitable duties of company directors (2013) 87 ALJ 753.

290    It is unnecessary because in the circumstances before me the factual analysis is one and the same, and in terms of findings of breach, there will be either breaches of both the statutory and the equitable duties or breaches of neither.

291    It is unwise because I may unwittingly trespass into heresy and unintentionally excite equity scholars, which would be a distraction given that this case rises or falls on facts that I have mined from the coal face of forensic inquiry, rather than nice distinctions which in the present context are of theoretical interest only and may only lead to shilly-shallied intellectualisation.

292    Finally, I do not need to say anything concerning analogies with negligence at common law.

The board’s charter

293    Let me address one other matter.

294    I was provided with a document titled “Board of Directors Charter” issued in March 2011 and a further version which was re-issued in October 2014. The board of PAC had from to time resolved to comply with this charter.

295    The charter dealt with the role of the board and its procedures, including the role of the chairman and the managing director. Apart from the plain vanilla provisions in clauses 3.1 to 3.3, other specific provisions should be noted.

296    The charter provided in clause 3.4:

3.4    Chairman and Deputy Chairman

3.4.1    Each year the Board will appoint from among the Members a Chairman and Deputy Chairman.

3.4.2    Both the Chairman and Deputy Chairman will be non-executive Members (Unless otherwise determined). The Deputy Chairman will deputise for the Chairman in his or her absence or at his or her request.

3.4.3    The Chairman is responsible for representing the Board to Shareholders.

3.4.4    The Chairman is responsible for ensuring the integrity and effectiveness of the governance process of the Board as set out in this Part 3.

3.4.5    The Chairman is responsible for maintaining regular dialogue with the MD over all operational matters and will consult with the remainder of the Board promptly over any matter that gives him or her cause for major concern.

3.4.6    The Chairman will act as facilitator at meetings of the Board to ensure that no member, whether executive or non-executive, dominates discussion, that appropriate discussion takes place and that relevant opinion among Members is forthcoming. The Chairman will ensure that discussions result in logical and understandable outcomes.

297    Further, clause 3.5.4 concerning the audit committee stated:

3.5.4    The board has three standing committees, namely the audit, remuneration and nomination committees. Other committees are formed for specific purposes and disbanded as required. The purposes and membership of the standing committees are as follows:

The Audit Committee consists of two Members all of whom, whenever possible, must be non-executive. The committee provides a forum for the effective communication between the Board and the external and internal auditors. The committee review the annual and half-yearly financial statements prior to their approval by the Board, the effectiveness of management information systems and systems of internal control, and the efficiency and effectiveness of the external and internal audit functions.

298    Further, in terms of the position of the managing director, clause 4.1 stated:

4.1    Position of MD

4.1.1    The Board will link the Company's governance and management functions through the MD.

4.1.2    All Board authority conferred on management is delegated through the MD so that the authority and accountability of Management is considered to be the authority and accountability of the MD so far as the Board is concerned. The Board must agree to the levels of sub-delegation immediately below the MD.

4.1.3    The Board will agree with the MD to achieve specific results directed toward the Company Goals. This will usually take the form of an annual performance contract under which the MD is authorised to make any decision and take any action within the Management Limitations, directed at achieving the Company Goals.

4.1.4    Between Board meetings the Chairman maintains an informal link between the Board and the MD, the Chairman expects to be kept informed by the MD on all important matters, and is available to the MD to provide counsel and advice where appropriate.

4.1.5    Only decisions of the Board acting as a body are binding on the MD. Decisions or instructions of individual members, officers or committees are not binding except in those instances where specific authorisation is given by the Board.

299    Further, clause 4.2 in terms of the accountability of the managing director to the board stated:

4.2    Accountability of MD to Board

4.2.1    The MD, in association with the Chairman, is accountable to the Board for the achievement of the Company Goals and the MD is accountable for the observance of the Management Limitations.

4.2.2    At each of its normal monthly meetings the Board should expect to receive from or through its MD:

•    the operational and other reports and proposals referred to in paragraph 3.3.6; and

•    such assurances as the Board considers necessary to confirm that the Management Limitations are being observed.

300    Further, clause 4.3 dealing with management limitations provided:

4.3    Management Limitations

4.3.1    The MD is expected to act within all specific authorities delegated to him or her by the Board.

4.3.2    The MD is expected to not cause or permit any practice, activity or decision that is contrary to commonly accepted good business practice or professional ethics.

4.3.3    In allocating the capital and resources of the Company the MD is expected to adhere to the Company Goals.

4.3.4    The MD is expected to not cause or permit any action without taking into account the health, safety, environmental and political consequences and their effect on long-term shareholder value.

4.3.5    In financing the Company the MD is expected to not cause or permit any action that is likely to result in the Company becoming financially embarrassed.

4.3.6    The assets of the Company are expected to be adequately maintained and protected, and not unnecessarily placed at risk. In particular, the Company must be operated with a comprehensive system of internal control, and assets or funds must not be received, processed or disbursed without controls that, as a minimum, are sufficient to meet standards acceptable to the Company's external auditors. One of the tools used as a framework is an asset management plan for both on and off balance sheet assets. In managing the risks of the Company, the MD is expected to not cause or permit anyone to substitute their own risk preferences for those of the Shareholders as a whole.

4.3.7    The MD is expected to not permit employees and other parties working for the Company to be subjected to treatment or conditions that are undignified, inequitable, unfair or unsafe.

4.3.8    The MD is expected to not cause or permit payments to be made or rewards given unless that are in return for contributions towards the purposes of the Business and are proportional to the extent that the contribution in question has furthered such purposes.

301    Further and for completeness, the “Company Goals” (see clause 1.1 definition) were set out in clause 2.1 in the following terms:

2.1    General

2.1.1    The purpose of the Company is to maximize shareholder returns through the provision of funds management services.

2.1.2    The capital and resources of the Company will be allocated to those assets and activities which will enable it to achieve the Company Goals in a manner best serving the interests of the Shareholders as a whole.

302    I have taken the contents of this charter into account in considering the powers, duties and responsibilities of Mr Fitzpatrick, Mr McGill and the other directors and any relevant differences between them insofar as they impact on the scope or application of s 180(1).

The sequence of events

303    In October 2013, Mr McGill entered into discussions with Mr Carver, the managing director of Northern Lights, regarding opportunities for PAC and Northern Lights to work together on a potential merger. The potential opportunity gave both firms an international presence and greater diversity of earnings. This project ultimately became known as Project Bondi.

304    In the early part of their communications there had been some email and telephone contact between Mr McGill and Mr Carver which was later followed up by personal meetings in Australia between them in Sydney and between Mr Fitzpatrick and Mr Carver in Victoria in late 2013.

305    From 1 November 2013 PAC and Northern Lights exchanged information pursuant to a mutual evaluation and non-disclosure agreement.

306    On 6 November 2013 a PAC board meeting was held.

307    Prior to the board meeting, board papers were circulated which included Mr McGill’s 30 October 2013 report which reported on an investment in a boutique to be established by Macquarie Bank’s private equity team, which subsequently became one of PAC’s boutiques in May 2014, and on Northern Lights.

308    Mr McGill described Northern Lights’ corporate profile and his view that there was potentially strategic merit for both firms to explore some form of relationship, potentially a merger.

309    The minutes for the meeting record that early stage discussions with Northern Lights had commenced concerning a potential merger.

310    On 7 November 2013, the PAC annual general meeting took place. At that meeting, Mr Fitzpatrick addressed the shareholders and spoke by reference to a slide presentation.

311    Mr Fitzpatrick told the meeting that PAC had been unsuccessful in its attempt to acquire 20% of shares in WIG, that WIG’s shareholders had an unrealistic view of WIG’s share price and that the board had decided not to proceed further with acquiring WIG shares. He said that PAC had reviewed 73 investment opportunities since July 2012 which had led to one investment. And he said that PAC’s strategy continued to include pursuing merger and acquisition opportunities at a corporate level.

312    Mr McGill also addressed the AGM and spoke of the need for expansion and diversification of investment opportunities to facilitate PAC’s growth strategy.

313    Now in relation to any merger with Northern Lights, from the outset it was understood by Mr McGill and PAC management that the deal had to be earnings per share (EPS) accretive for PAC shareholders.

314    On 28 November 2013 PAC retained Deloitte Tax Australia to advise PAC about taxation issues relating to the proposed merger.

315    After PAC retained Deloitte Tax Australia to assist in coming to grips with taxation aspects of the proposal, there were direct discussions between Mr Goldsmith and Mr Erickson of Northern Lights. Deloitte Tax Australia also consulted with Deloitte Tax USA. Work on the tax structure continued throughout December 2013.

316    On 28 November 2013, Mr Carver sent via email to Mr McGill and others a terms sheet timeline and what was described as an “NL Valuation Model”.

317    The model included projections for future revenue growth in respect of Northern Lights’ boutiques. Total revenue for all of Northern Lights’ boutiques was expected to increase from USD 83.2 million to USD 222.3 million between FY13 and FY20. The document also included a discounted cash flow analysis prepared by Mr Carver, which produced a net present value of $255.4 million for Northern Lights’ boutiques.

318    Concerns over the robustness of the valuation model were raised by PAC’s chief financial officer, Mr Ferragina, with Mr McGill, at the time.

319    Mr McGill had concerns over the reliability of Northern Lights’ forecasts at the time and considered that they were aggressive and optimistic in the context of negotiations.

320    Mr Ferragina prepared a model which produced valuations and an EPS analysis into which could be fed information such as Northern Lights’ annual projections for its boutiques on a seven year forward estimate basis which were provided to PAC on 28 November 2013. Northern Lights valued itself at USD 255.4 million.

321    By the end of November 2013 Mr McGill and Mr Ferragina continued discussions directly with Mr Carver and other Northern Lights executives about matters such as the assumptions for terminal value in the net present value and forecasting. Further, Mr Ferragina was providing regular updates, particularly as to valuation, to Mr McGill and Mr Fitzpatrick.

322    On 2 December 2013 Mr Howard provided Mr McGill and Mr Ferragina with his preliminary comments and queries about Northern Lights’s managers. Mr McGill then requested a comprehensive list of follow up questions to ask Northern Lights. Mr Howard provided them later in the day.

323    Further, on 2 December 2013 Mr McGill sent Mr Ferragina an updated but incomplete financial model for the merger. Mr McGill had made amendments to the model. Mr McGill provided a slightly more developed version of the model to Mr Howard on 5 December 2013.

324    Later on 2 December 2013, Mr McGill wrote to Mr Carver setting out issues to work through, particularly as to valuation and the importance of the transaction being EPS accretive for PAC and suggesting a meeting.

325    Subsequently, Mr Ferragina met with Mr Goldsmith of Deloitte Tax Australia to discuss various options for the structuring of the transaction.

326    On 4 December 2013, the potential merger was discussed at a PAC board meeting.

327    Prior to the 4 December 2013 board meeting, board papers were circulated which included Mr McGill’s 27 November 2013 report and Northern Lights’ data presentation.

328    In his report to the PAC board dated 27 November 2013, Mr McGill noted that discussions with Northern Lights had continued. He provided a presentation to the PAC board, which contained information about Northern Lights and its boutiques. The report relevantly noted that:

…

•    The investment structures are complex as evidenced by the number and type of boxes on the group structure charts;

…

•    Aggregate portfolio company revenue in 2013 (note, NL is December year end) was USD$90.0m which compares to [PAC]’s aggregate boutique revenue of $84.3m in FY13 making both portfolios similar in scale. However, [PAC]’s portfolio is more profitable - aggregate boutique PBT in FY13 was $47.9m compared to NL’s aggregate EBITDA of $20.0m

•    NL achieved a significantly higher level of cash distribution (USD$11.5m) from its portfolio in FY13 than in prior years however a large amount of this was a capital return and non-recurring. We understand that the recurring cash distribution was around USD$6.0m. Also, we have been told that the FY14 forecast is USD$10.0m.

•    We do not yet properly understand the structure of each of NL’s investments. At this stage, we believe that the cash distributions to NL from its portfolio are received on a pre-tax basis. This is in contrast to [PAC]’s situation where 51% of our FY14 forecast cashflow from associates will be received as fully franked dividends post tax;

…

329    Mr McGill’s CEO report relevantly addressed two important topics, being retaining Berkshire Capital Securities LLC and providing an update about the potential transaction with Northern Lights.

330    First, insofar as Berkshire was concerned, Mr McGill informed the directors that in the absence of a deal like Northern Lights, PAC needed an international search for a global equities boutique. He informed them that Berkshire was his and Mr Howard’s preferred adviser to conduct the search which should occur in parallel with the Northern Lights deal. He informed them that Berkshire’s fee proposal was $75,000 per month for the first three months, then $15,000 per month and a success fee of $750,000 for a search which may extend into 2014. He recommended retaining Berkshire as an international search was fundamental to PAC’s future.

331    Now as the later Berkshire retainer letter demonstrated, PAC was looking to invest in a mature boutique, with the investment being up to $50 million. As Mr Fitzpatrick explained, a lot of thought had been given to the possibility of the sale of RARE. Replacing the investment in RARE with a similar investment in a mature US boutique was being investigated.

332    Berkshire was retained on a partial success fee basis. The need to hire Berkshire arose because, although Mr McGill and Mr Howard had good contacts in Australia and PAC had a good reputation as an investor in start-up boutiques in Australia, PAC did not have the same relationship with potential founders or with start-up boutiques anywhere else in the world.

333    PAC wanted access to the capital markets in the northern hemisphere, particularly the USA, because the funds under management there dwarfed the funds under management in Australia.

334    The minutes for the board meeting on 4 December 2013 record the board’s resolution to appoint Berkshire.

335    Second, with respect to Northern Lights, in summary Mr McGill informed the non-executive directors that there had been further management discussions and PAC management wanted to progress commercial discussions but needed Northern Lights financial information in order to undertake valuations of Northern Lights’ investments.

336    Mr McGill gave the board his comments upon some of the information Northern Lights had provided which he attached, including that PAC management did not have sufficient information to understand Northern Lights’ complex structure at that time.

337    He informed them that the next step was to obtain Northern Lights’ model and mutually appoint Deloitte Tax Australia and Deloitte US to advise on the transaction. And he gave a warning that tax issues were looming as so significant that they may prevent the deal occurring.

338    Now the merger started with a different structure from the one that eventuated in that originally only mature boutiques were to be merged. Moreover, from the beginning it was anticipated that the deal would be complex because of tax considerations.

339    It was apparent from Mr McGill’s report that the next step in the possible merger process was for PAC to assess Northern Lights’ financial model and for both PAC and Northern Lights to obtain tax advice.

340    Further, the minutes of the board meeting noted that Northern Lights was preparing a financial model for assessment by PAC.

341    On 9 December 2013, Mr McGill sent Mr Ferragina and Mr Howard an updated version of the merger model, noting that it was “[s]till very much a work in progress”. Thereafter revisions to PAC’s model were made.

342    On 12 December 2013 Mr McGill sent the PAC model to Mr Carver and Mr Erickson and referred to a “slightly negative [EPS] outcome for FY14”. Mr McGill did this as a negotiation point to indicate that PAC could not offer more than the existing amount and, indeed, the existing amount may already have been too much.

343    On 13 December 2013 Mr McGill sent the model, with commentary, to Mr Fitzpatrick. The attachment was entitled “13.12.12 NLCG Model.xlsx. “

344    This version of the model adopted the figures for Northern Lights’ boutique forecasts provided by Mr Carver on 28 November 2013. Mr McGill gave Northern Lights a net present value of USD 207.3 million based on a 25% discount rate whereas the Carver numbers gave it a net present value of USD 255.4 million based on a 20% discount rate.

345    In relation to WHV, there were only figures for 31 December 2013 and in the notes the comment provided “Why no forecasts for WHV?”.

346    On 21 December 2013, Mr Carver sent Mr McGill a proposed terms sheet for the transaction.

347    The terms sheet contemplated PAC shareholders receiving a 49.26% interest in the trust holding the combined assets and Northern Lights and the owners of Seizert holding the remainder.

348    Throughout December 2013 and January 2014, Mr McGill and Mr Carver continued to discuss and calculate the appropriate terms of the potential merger and the modelling of the merged business.

349    Negotiations between Mr McGill and Mr Carver about the terms sheet was the focus in January 2014. Mr McGill obtained input from Mr Howard and Mr Ferragina about the terms sheet. PAC’s model continued to be revised.

350    On 15 January 2014 Northern Lights informed PAC that Northern Lights would move to own 100% of Seizert pursuant to contractual rights Northern Lights held.

351    On 23 January 2014 Mr McGill emailed Mr Ferragina and Mr Howard a copy of an amended terms sheet and the latest version of the PAC model, being “14.01.23 NLCG Model.xlsx”. The attached model gave Northern Lights a net present value of USD 207.4 million based on a 25% discount rate, equivalent to the 13 December 2013 model.

352    However, there was a change on the “NLCG Summary” tab where the “Aggregate EBITDA” for Seizert had been increased, highlighted in yellow and a comment inserted which provided “<-- adjusted to eliminate 15% revenue share (on assumption that new Seizert deal proceeds)”.

353    Mr McGill emailed the proposed revisions to the terms sheet and the PAC financial model to Mr Carver later that day.

354    Mr McGill then forwarded Mr Fitzpatrick the email and attachments he had sent to Mr Carver in anticipation of Mr Fitzpatrick travelling to the US during which trip he had scheduled a meeting with Mr Carver.

355    Mr Fitzpatrick was sceptical about the valuation to be assigned to Northern Lights. Mr Fitzpatrick said that the model which Mr McGill had prepared showed the outcomes that Mr McGill was trying to negotiate.

356    He did not consider it unusual for Mr McGill and PAC management to have a preliminary model at this early stage, and prior to formal due diligence. He said it was necessary for Mr McGill and PAC management to have a base case to work from when commencing negotiations with Northern Lights. He expected that the base case would be tweaked and re-modelled as due diligence was completed and, in the event the figures thrown-up in the model became wildly different from the base case, then the transaction would fall away.

357    In the days before Mr Fitzpatrick met Mr Carver, Mr McGill provided Mr Fitzpatrick with an updated model and with a Deloitte Tax Australia presentation on the deal structure.

358    By the end of January 2014, neither Mr Fitzpatrick nor Mr McGill had formally escalated to the board their consideration of the proposal as it was premature given there was insufficient information then available for the board to make an informed decision whether to proceed with entry into a non-binding terms sheet with Northern Lights.

February 2014

359    On 2 February 2014, Mr Fitzpatrick emailed Mr McGill with his analysis of the metrics of the split with Northern Lights and the status of negotiations following the meeting with Mr Carver and Mr Fitzpatrick on 31 January 2014. The email stated:

…

I need to say at the outset I still do not understand the model. I do not understand the minority interest going the Seizert, given we appear to be paying for its earnings. I don’t understand the two for one or one for one conversion either, or which is in the model.

I love the strategy to get critical mass and go global.

However, They want 4 board seats, that would put them close to control,

Especially with 20 % plus around the board table. I will push back on this in an email to him tomorrow. But at present I reckon we may be paying a premium (no illiquidity discount, no premium for control) to let them gain close to control. Not much point [PAC] controlling the convert if we don’t control [PAC].

…

Valuation, I think they are kidding themselves and I still agree with you the arbitrage is tax.

Alignment is questionable, I don’t like them taking assets out, even if they are giving up carry. The fact its earnings flattens out after a couple of years is a concern.

We may need an independent valuation for this deal to go through, I was wondering if we should ask Berkshire (expensive) or an accounting firm to throw one up to give us an independent benchmark.

…

I am not totally across the Seizert deal, I assumed he is paying cash, and we would then pay a price that reflects those earnings he had acquired, while he said he wanted to use stock as well and execute at settlement. That was confusing as we seem to be paying twice.

360    This email accurately summarised Mr Fitzpatrick’s thinking at that time regarding the need for an independent valuation.

361    On 5 February 2014, Mr McGill sent an email to Mr Carver which stated:

… In relation to earnings forecasts, I’m worried that [PAC] is at risk of being left behind on valuation if the assumptions around future NL boutique earnings are more aggressive/optimistic than the market consensus numbers that have been used for [PAC] so far. I think we’ll beat the FY14 number and in truth we haven’t really considered the FY15 figure. Achieving an eps enhancing outcome will get harder if we revised the [PAC] earnings forecasts upwards.

362    In early February 2014 Mr Howard prepared a presentation on the PAC boutiques and a list of due diligence questions about Northern Lights’ boutiques.

363    On 7 February 2014 Mr Carver emailed Mr McGill a marked up copy of the terms sheet which contemplated a 50/50 equity split in the trust and a composition of the board structure where neither party has voting control. Mr McGill circulated the draft for comment and each of Mr Fitzpatrick and Mr Howard responded over the next few days.

364    Also on 7 February 2014 a revised model was circulated to Mr Fitzpatrick, Mr Howard and Mr Ferragina by Mr McGill. PAC management and Mr Fitzpatrick exchanged views about the model over the next few days.

365    The structure of the proposed transaction had evolved into a 60/40 split of the units in an Australian trust (with 60% in favour of PAC) into which PAC and Northern Lights would contribute all of their current and future assets.

366    The origin of the 60/40 split appears to have been a suggestion made by Mr Fitzpatrick prior to any due diligence or any input from PAC’s advisors.

367    In an email to Mr Howard on 10 February 2014, Mr McGill wrote:

…

I had an hour on the phone with Mike last night. I’m not sure if he’s had the chance to consider the attached model or not - I think maybe not and therefore his comments were not in response to it specifically but rather more general. He had 2 main messages:

1.    he doesn’t like the proposed pricing - I think his view is that NL should be worth 2/3’s of [PAC] value, no more. He’s also worried about the growth profile of their earnings versus [PAC]’s and thinks lower growth deserves a lower multiple. Maybe if the deal is changed so that we vend into the trust [PAC] Share of Associates NPAT then the proportions will be much closer to the 2/3’s that Mike refers to.

2.    he doesn’t want NL to get control or de-facto control over either the trust or [PAC] unless they pay a premium for control (which they are not).

The 3 of us should have a chat about this today. Thanks

368    On 13 February 2014 the valuation of each of the assets of PAC and Northern Lights appears to have been determined by Mr Carver, Mr Fitzpatrick and Mr McGill at a meeting in Mr Fitzpatrick’s office where they sketched out on a whiteboard a 60/40 ownership split; this was referred to at trial as the whiteboard meeting.

369    An image of the whiteboard is extracted below. It would seem that the handwriting was that of Mr McGill rather than that of Mr Fitzpatrick.            

370    In summary, the whiteboard produced a “60/40 split” based upon two matters.

371    First, a value of PAC’s portfolios using FY14 profits after tax.

372    Second, a value of Northern Lights’ portfolios using FY14 profits before tax, including USD 9.5 million allocated to Seizert, an asset which Northern Lights did not wholly own. I should say that the Northern Lights’ total value was discounted by 15% in order to convert pre-tax figures to post-tax figures to then compare with the PAC total value figure.

373    Now Mr Fitzpatrick and Mr Carver were responsible for negotiating the 60/40 ownership split. There was no one else involved in assessing the appropriateness of the 60/40 split. Further, there had been no analysis at this point on the quality of Northern Lights’ earnings.

374    Mr McGill did not seek formal advice from Gresham as to the precise percentage split and on whether it ought remain 60/40 or whether different percentages would be appropriate.

375    In an email the same day, Mr McGill summarised the position as follows:

Very brief update. Good progress today. Yet more creativity to bridge remaining issues! Key elements:

- all boutiques/assets from both sides included up front (ie no more core vs alternative distinction) into trust

- [PAC] 60%, NL 40%

- NL to receive upfront cash payment of $50-60m (subject to due diligence!) being consideration for inclusion of Alternatives upfront

- cash amount to be funded from borrowings by trust. NL units to bear interest & principal of loan until threshold condition met. Threshold condition = alternatives deliver sustainable earnings of >=$6m

- NL responsible for $20m cash payment to Seizert

- dual listed structure (Rio style). Common board with 5 [PAC] directors and 4 NL directors. Technically not stapled but cross pref share holdings, agreements etc = should trade largely in sync. Deloitte briefed and working on this.

- Tim, Paul + other NL exec to receive approx 80% of their carried int entitlement as script which will be subject to trading restrictions for some years.

Might have missed something. Mike briefed and supportive. Snap shot of today’s whiteboard attached. Next step = me to produce term sheet tomorrow.

376    An email was later circulated by Mr McGill to Mr Howard and Mr Ferragina, where Mr McGill summarised significant changes in negotiation with Northern Lights, being primarily that the split in the Aurora Trust was to be 60/40 and all boutiques were now to be included in return for PAC making a cash payment of $60 million.

377    On 14 February 2014, Mr McGill emailed Mr Carver a revised terms sheet consequent upon the whiteboard meeting together with an indicative value calculation of all boutiques. Over the next few days this terms sheet was the focus of consideration within PAC management and with Northern Lights.

378    On 19 February 2014, an email from Mr McGill to Mr Howard stated:

… Eva tells me that Mike was wandering around the [PAC] office yesterday after the Audit Comm meeting. He commented to Eva that “the NL deal is too expensive for us”...

379    Also, on 23 February 2014, in an email about Northern Lights sent to Mr McGill, Mr Fitzpatrick stated:

… One issue in the term sheet is the restriction on other corporate activity, we may find that too limiting.

Otherwise I am supportive, tho still concerned about valuation. The Seizert deal makes me want to buy out the rest of IML to restore the equilibrium. As it is they appear to be getting the same multiple as us, but with pretax earnings. It is a little illusory given the debt deal, but that is complex and needs some explaining.

380    Now prior to the 24 February 2014 board meeting, Mr Fitzpatrick had expressed concern about the pricing of the merger.

381    Mr Fitzpatrick’s evidence in respect of the 60/40 split was that the fact that the 60/40 split survived to the end was accidental. He said that the “60/40 split” was a stake in the ground.

382    And he said that the Gresham financial model 245 did not support the 60/40 allocation as between PAC and Northern Lights in terms of units in the Aurora Trust.

383    Let me say something about the board meeting on 24 February 2014 and the documents prepared for it.

384    There were three relevant board papers for the 24 February 2014 board meeting, being Mr McGill’s 17 February 2014 CEO report, Mr McGill’s and Mr Howard’s 21 February 2014 memorandum, and Mr McGill’s misdated 22 March 2014 memorandum, which I will refer to as the 22 February 2014 memorandum.

385    The 17 February 2014 memorandum informed the non-executive directors that Berkshire was progressing slowly, with six boutiques identified for further investigation from 50 already reviewed. It said that discussions with Northern Lights had been ongoing and most of the key commercial terms for a merger had been agreed at management level.

386    It said that Mr Fitzpatrick and PAC management had been involved in the discussions with Mr Carver. It said that the merger involved each party placing all of its boutiques, both mature and those in start-up phase, in an Australian trust in which PAC would hold 60% of the units and Northern Lights would have 40%.

387    It said that strategically, the merger would be compelling. The merged group would have international deal flow, distribution and capital raising capabilities on top of strong cashflows from a diverse portfolio of 17 boutiques. It said that from a valuation perspective, the deal structure that management was pushing towards was one that would deliver an EPS and value enhancing outcome for PAC. It said that the merger would involve a complex structure and further explanation and careful thought would be required.

388    It said that there had been no due diligence. It said that there was a long way to go. And it said that management would circulate a further memorandum about the merger and the latest draft of the non-binding terms sheet prior to the board meeting.

389    The 21 February 2014 memorandum informed the non-executive directors that PAC management was recommending the merger to the board on a non-binding and indicative basis. It said that PAC management sought “…approval to execute a term sheet with Northen Lights in the form attached … or in a form not materially dissimilar to that”. It said that the costs of the next phase of work would be significant. It discussed the merger timetable. It said something about the features of the merged entity and operations post-merger, including the 60:40 ownership split of what became the Aurora Trust and the strategic logic behind the merger. It said that the proposed merger was expected to be EPS accretive for PAC.

390    It said something of the effect of a sale of RARE as in 2014 it was forecast to contribute 60% of PAC’s earnings. In particular the board was informed that:

In addition, there is an increasing possibility of RARE being divested within the next 12 months. If RARE were divested, Treasury Group’s EBITDA would fall by approximately 85%. NPAT may fall by a lesser amount depening [sic] upon whether or not the RARE divestment proceeds are returned to shareholders. If the divestment proceeds were retained, interest income would become the largest component of NPAT until there were significant new investments completed. [PAC] would effectively become a cash box. Currently there appears to be a reasonable chance that as a stand-alone business, Treasury Group will be a [sic] significantly smaller within 12 months. However, if merged with Northern Lights it is more likely that justifications for retention of RARE’s divestment proceeds could be credibly argued.

Following the merger, the largest single boutique (RARE) would account for 33% of portfolio level earnings. (Seizert would be the next largest at 31%, then IML at 17%).

391    Further, it said something about how management had valued the two groups, including the choice of multiples and why they were appropriate, for example, Northern Lights had a lower multiple because its earnings were pre-tax.

392    Further, it said that Northern Lights only owned 30% of Seizert Capital Partners LLC, but whether or not the merger occurred and, if it did, simultaneously with completion, Northern Lights would acquire the other 70% and the merged entity would borrow USD 61 million to do so. It said that Northern Lights would acquire the 70% of Seizert on a 100% valuation of USD 81 million because of the deal with Seizert management, whereas PAC management valued 100% of Seizert at USD 121 million out of a valuation of USD 175.8 million for all of Northern Lights’ boutiques.

393    Further, it said that Northern Lights held no equity interest in WHV. Rather, it had a revenue share agreement with WHV.

394    Appendices to the 21 February 2014 memorandum included a draft of the non-binding and indicative terms sheet and a document entitled “Summaries of NL Boutiques” and was Mr Howard’s initial assessment of Northern Lights’ boutiques.

395    The 22 February 2014 memorandum informed the non-executive directors that the merger was expected to be value enhancing for PAC shareholders, but warned that it was difficult to present outcomes with confidence because the structure (particularly for tax) was yet to be finalised. It also informed them of the EPS enhancement by reference to the table attached, including explaining the data used, such as “based on Tim Carver estimate”, and the assumptions made.

396    The 22 February 2014 memorandum stated:

…

The proposed merger is expected to be value enhancing for Treasury Group shareholders from the outset. …

The key outcomes for [PAC] shareholders shown are:

•    2H14 basic eps increases by 5.0% (or 14.2% before impact of transaction costs)

•    FY15 basic eps increases 12.7% relative to [PAC’s] expected stand-alone FY15 eps

•    Fully diluted FY15 eps increases by only 3.6% ...

•    NL’s 40% equity share of trust implied a multiple of 10.7x forecast FY14 PBT [profit before tax].

…

397    At the board meeting it was resolved that PAC enter into a non-binding terms sheet with Northern Lights on terms not materially different to the document titled “Memorandum of Terms for a merger between Treasury Group Ltd and Northern Lights Capital Partners”.

398    The minutes of the board meeting record that:

The Board noted the report from Messrs McGill and Howard dated 21 February 2014 regarding a merger between [PAC] and Northern Lights Capital Group. Mr McGill spoke to the report, taking the Board through the documentation in detail, discussing:

•    the strategic rationale for the deal;

•    the specifics of the proposal;

•    the valuation logic; and

•    Northern Lights boutiques

After a comprehensive discussion on this matter the Board requested and a sensitivity analysis on the financial impact of AU-US dollar FX movements and AGREED that it is supportive of the transaction at this stage.

IT WAS RESOLVED that Treasury Group enter into a non-binding term sheet with Northern Lights on terms not materially different to Appendix 1 to the report.

399    The terms sheet provided to the PAC board at this time provided the following key terms.

400    First, PAC and Northern Lights would each contribute all of their existing and new investment portfolios into an Australian trust.

401    Second, PAC would be issued with Class A units entitling it to an approximately 60 per cent interest in the economics of this trust.

402    Third, Northern Lights would be issued with Class B units entitling it to an approximately 40 per cent interest in the economics of this trust.

403    Fourth, the proposed trust ownership would be based upon the value of assets to be sold into the trust by PAC and Northern Lights respectively, which was to be estimated using a multiple of earnings based upon estimated cash earnings for the year ended 30 June 2014. The expected cash earnings for the year ended 30 June 2014 for Northern Lights were AUD 14.4 million and for PAC were AUD 19.6 million.

404    Fifth, at completion, the sum of USD 61 million would be borrowed with cash being paid to Northern Lights and the owners of Seizert.

405    Sixth, it was non-binding except for the clauses concerning, amongst others, “Exclusivity & Availability”.

406    Seventh, the purpose of the terms sheet was to allow due diligence to occur. The introduction provided that:

This memorandum of terms (‘Memorandum of Terms’’) is intended to provide for the basis of understanding between the parties as to key terms of a transaction (the “Transaction’’). If the parties are in agreement on the terms herein, as evidenced by their signatures hereon, it is their intent to proceed to a formal due diligence process and drafting of binding legal documentation. It is understood that any such binding legal documentation must be approved by each parties’ [sic] governing bodies, and may be subject to certain regulatory approvals …

407    Eighth, the 60:40 split was subject to a maximum adjustment of 5% depending upon respective earnings.

408    Ninth, the Trust would borrow USD 61 million at completion.

409    Tenth, there were numerous and important conditions precedent.

410    Eleventh, after completion PAC and Northern Lights would have common boards of nine directors, with PAC nominating five including the chairman.

411    Clearly, the parties intended to proceed to a formal due diligence process and drafting of binding legal documentation.

412    Now at this stage of the process, the board appears to have been aware that the 60/40 split was not based upon any independent valuation of the respective assets of PAC and Northern Lights, but was merely a stake in the ground.

413    Now as I have indicated, at the February 2014 board meeting, Mr McGill presented his valuation methodology used to value Northern Lights’ assets and to make some assessment of the proportion of units in the Aurora Trust that PAC and Northern Lights would each be allocated.

414    The valuation of each company’s boutiques was based upon multiples of FY14 earnings.

415    USD 13.555 million of earnings for the year ended 30 June 2014 was attributed to Northern Lights. Of that, USD 9.5 million was attributed to Seizert, based on an assumption that Northern Lights owned 100% of Seizert. And of the information before the PAC board in February 2014, Seizert had a net profit of USD 800,000 in the 2012 year.

416    As to the valuation multiple adopted, Mr McGill reported a multiple of 10.8x for alternative managers similar to Northern Lights. A multiple of 11.7x was used by Mr McGill to value Northern Lights. However, Mr McGill derived the multiple from publicly traded companies, compared with Northern Lights which was privately owned, as set out in a Goldman Sachs report contained within the February 2014 board papers.

417    Further, Northern Lights’ management had attributed a value of USD 81m to Seizert. But a total value of USD 175m was ascribed to Northern Lights’ boutiques by Mr McGill, of which USD 121 was attributed to Seizert.

418    Further, Northern Lights’ earnings were based, in part, upon assets which were not owned by Northern Lights such as seventy percent of Seizert which it did not own, and also WHV which was the subject of a contractual right to a discretionary distribution rather than a direct equity investment.

419    Let me now say something about the evidence given by the directors concerning the board meeting.

420    Mr Kennedy had the best recollection of what was said at the 24 February 2014 board meeting. He recalled Mr McGill saying that PAC was going to use the same team who had worked on Pinnacle, namely HSF, Gresham and Deloitte, to advise PAC in relation to the merger and that the process including shareholder approval would be expensive. Mr McGill also said that his valuation model was a bit rough and it was difficult at that time to value several of Northern Lights’ boutiques because only a few of them were mature; many only had a short performance history. He said that more work would be done once due diligence had occurred.

421    There were deferred and immediate risks and benefits. The deferred risks and benefits would arise later if and when the decision was made to enter into the merger. The immediate risks and benefits would arise from voting in favour of the February resolution.

422    The deferred benefits were well understood. For several years PAC had been seeking to diversify for the reasons identified in Mr McGill’s March 2012 report.

423    Ms Donnelly identified the deferred position this way. Her state of mind before the board meeting was that the merger would be very beneficial for PAC. PAC would diversify its boutiques and would have the added value of Mr Greenwood’s and Mr Carver’s experience. The transaction would be EPS accretive for PAC shareholders. The main risk was that one or more of the many assumptions that would underly the ultimate decision to merge, especially the earnings projections of the Northern Lights’ boutiques, might turn out to be incorrect. There were other risks such as the merged entity failing to comply with steps necessary to maintain its expected tax status and such as cultural differences between the Australian and US executives. She knew from the board papers that there was a lot of due diligence and expert advice to be undertaken and given about the benefits and the risks.

424    Mr Kennedy’s state of mind before the board meeting was that the risk in the overall merger as then contemplated was that Northern Lights’ boutiques’ projected performance would not be delivered or that one of the other assumptions identified in the memoranda would not materialise.

425    With respect to that overall risk, he thought that the merger looked like a good deal because of its strategic global aspects. The numbers would have to be tested. In the 21 February 2014 memorandum Mr McGill had provided his valuations of PAC’s and Northern Lights’ boutiques, which roughly confirmed the 60:40 split of ownership of the merged entity. In his 22 February 2014 memorandum Mr McGill provided projections of combined earnings which showed that the merger would be EPS accretive for PAC shareholders and that on his qualified model the 60:40 split was justified. However, Mr Kennedy understood that those valuations and projections were only early and indicative, were subject to formal due diligence and would be the subject of an external expert review.

426    Mr Kennedy said that the immediate risk with respect to the terms sheet execution resolution, because of the non-binding nature of the terms sheet, was that if he voted in favour of it and the merger did not eventuate, PAC would lose the value of management time and the money spent on external advisers investigating the merger. He thought at the time that that risk was outweighed by the potential benefits that the merger offered for PAC’s shareholders.

427    Before the board meeting, based upon what he had read, he was strongly inclined to pass the resolution about terms sheet as requested by management. He did not need any more information than had been provided to him in order to vote on the terms sheet execution resolution.

428    The other non-executive directors gave similar evidence.

March and April 2014

429    The terms sheet continued to be negotiated and updated as between PAC and Northern Lights between February and April 2014.

430    Gresham commenced work on the merger in early March 2014, although it was not formally retained until early April 2014. Mr McGill accepted that Gresham was not formally retained until 2 April 2014 but said that he was “on the phone to Gresham before they were formally retained” and “was having discussions with Charlie [Graham] … and Gresham … before their formal appointment”. Mr McGill’s evidence is confirmed by the contemporaneous emails.

431    On 5 March 2014 Mr McGill emailed to Mr Graham of Gresham a draft structure deed for the transaction. Mr McGill’s recollection was that this was the first time that he had contacted Gresham about the Northern Lights transaction, being a month before the formal retainer letter was signed.

432    On 6 March 2014 Mr Graham sent an email to Mr Ferragina (copied to Mr McGill) which stated:

… could you please send over the NL forecasts and structure model so we can start our valuation analysis.

433    On 7 March 2014 Mr McGill sent a copy of PAC’s model to Mr Graham.

434    On 7 and 8 March 2014 Mr Ferragina and Mr Erickson exchanged emails which included a discussion about a QoE report and the professional advisor to be appointed for that work. In the exchange Mr Erickson asked Mr Ferragina to confirm whether Deloitte was conflicted from doing a QoE and suggested PwC as the next option. Mr Erickson stated:

…

Quality of Earnings report – I am starting conversations with folks at a couple accounting firms to talk about the QoE – the timing, the report, the cost, etc.. Ultimately, I suspect it will be one report that takes the information and moves it both into a combined $AU and a combined $US currency, as well as reflecting all of the information on a US GAAP basis and a IFRS basis. Feels like an awful lot but I think that is what we are both going to need to satisfy the [PAC] shareholders, the AU market, and the U.S. lenders in the transaction.

…

435    Mr Ferragina replied:

…

The corporate finance guys at deloitte are going to suggest a couple of people to contact. This would be to do the independent accountants report which will opine on any forecast data if required in the EM

I think Tim is after aggregated financial information for the upcoming discussions with lenders. This may be a separate exercise to the investigating accountants report. We probably need to understand and establish what information a US bank will want to see

…

436    There were subsequent emails about the QoE report leading up to Mr Ferragina meeting Deloitte US in the US later in March 2014.

437    The Northern Lights’ management team, Mr Greenwood, Mr Swift, Mr Erickson and Mr Griswold, arrived in Australia to conduct its due diligence on PAC on 9 March 2014.

438    On 11 March 2014 they met the board at Bottega Restaurant in Bourke Street, Melbourne.

439    Apart from meeting with PAC’s management, the Northern Lights team conducted its own due diligence by meeting the founders or senior officers of some of PAC’s boutiques.

440    On 16 March 2014, Mr Hayes circulated a list of queries to Mr Howard and others concerning Project Bondi. Mr Howard responded on 17 March 2014 saying that the aspects he had raised particularly concerning Seizert and Tamro would be explored.

441    On or about 17 March 2014, PAC’s management consisting of Mr McGill, Mr Howard and Mr Ferragina travelled to the US and United Kingdom to conduct due diligence meetings and inquiries with Northern Lights and its boutiques.

442    On 17 March 2014 they met with representatives of WHV it would seem in San Francisco, on 18 March 2014 with representatives of Laird Norton and Aether in Seattle, and on 19 March 2014, still in Seattle, met with representatives of Raven, Tamro, Seizert, Nereus and NLAA.

443    These meetings enabled Mr McGill to get a sense of the various boutiques and the individuals operating them, particularly whether they were suitable commercial partners to merge with. Mr Howard made detailed notes of discussions at these meetings.

444    What was noted concerning WHV was the following:

…

WHV (meetings arranged in San Francisco)

•    Outline structure of relationship; rights of each party, objective, governance, decision making

•    Business strategy for WHV

•    $10 - $30 million flagged – is this WHV’s commitment?

•    Is there an expectation that NL will also help fund new teams?

•    How will teams that are jointly funded by WHV and NL be structured?

•    Does NL have co-investment rights and right of first refusal?

•    How do you manage the competing requirements/expectations between BNP and WHV?

•    WHV have indicated they are looking to attract 1-2 new teams a year – are they completely reliant on NL to identify these new teams?

•    What areas are WHV specifically targeting (noting that they recently wound up their fixed income business)

•    Outline NL’s obligations to WHV

•    Outline profit share agreement

•    Under the agreement what are the exit clauses?

•    Outline distribution agreement between NL and WHV

•    Overview of WHV’s distribution capability including access to mutual fund market

•    Meet with Richard Hirayama to present on International equity fund

•    Are the performance issues impacting on net flows?

•    Outline WHV’s current client base

•    Is there the potential for conflicts of interest, if so, what protocols have been established to manage for this?

…

445    During the visit PAC management also met with Northern Lights’ executives and Northern Lights’ advisers and had detailed discussions about structuring and other matters.

446    On 19 March 2014, Mr Ferragina had a conference call with Northern Lights, Northern Lights’ financial adviser William Blair and Mr Alan Warner of Deloitte US with the subject line “QoE”. The joint consultative work between the professional advisers of PAC and Northern Lights was beginning to emerge.

447    By this date PAC had decided to use the Deloitte US material on QoE, who was to prepare QoE material on both PAC’s and Northern Lights’ boutiques for the purposes of the merged entity borrowing funds to acquire the 70% of Seizert, for PAC’s purposes. This was discussed between Mr McGill and Mr Ferragina with Mr Carver and Mr Erickson.

448    Ms Donnelly saw no problem with PAC relying upon Deloitte US’ work as the debt raising was for both PAC’s and Northern Lights’ benefit as part of the merger process and she did not contemplate that Deloitte US would do anything but a professional job.

449    Now I should also note that by 24 March 2014, and despite HSF’s retainer not being reduced to writing until July 2014, HSF was already advising PAC and performing legal due diligence.

450    Further, on 24 March 2014 Gresham, as manager of the due diligence process, provided a due diligence list.

451    On 26 March 2014 there was a board meeting at which all board members participated.

452    The board papers for the meeting included Mr McGill’s CEO report dated 14 March 2014 which informed the board of the following matters. First, commercial due diligence had commenced since the February board meeting. Second, the retainers of Gresham, HSF and Deloitte Australia had not been finalized, but their costs of the transaction were expected to be $1 to 2 million. Third, the transaction structure proposed by Deloitte Tax Australia had changed such that PAC and Northern Lights were now to retain ownership of their respective boutiques but to have a profit sharing arrangement. Fourth, the commercial terms of the transaction had not materially changed, and the terms sheet had yet to be signed.

453    Mr McGill, Mr Howard and Mr Ferragina attended the board meeting via teleconference as they were then conducting due diligence on Northern Lights’ boutiques in the US. I note that Mr Kennedy also attended by teleconference. Mr McGill discussed the structure of the transaction. Mr Howard provided the board with his assessment of each of Northern Lights’ boutiques.

454    It was anticipated that the terms sheet would be signed in April 2014. It was noted that the terms sheet had yet to be signed as it “require[d] updating and it [was] anticipated that it [would] be signed in April 2014.”

455    On 27 March 2014, Mr Alastair Pollock of Gresham sent an email to Mr Ferragina and Mr McGill about “leverag[ing] the work Deloitte is undertaking on QoE for the Tama Explanatory Memorandum”. At this stage, with shareholder approval still presumed necessary, Gresham was proposing to utilise Deloitte US’ QoE work in that process.

456    Now the suggestion that the 60:40 split had somehow been set in stone at the whiteboard meeting in February 2014 is not borne out by the evidence. The deal kept changing, for example, with the acquisition of the remaining interest in Aether.

457    By the end of March 2014, the terms sheet had not been executed by PAC. Mr Fitzpatrick explained that more work needed to be done before signing the terms sheet.

458    On 1 April 2014, Mr Carver emailed Mr McGill a spreadsheet. Mr McGill responded later that day and referred in part to the whiteboard meeting, adding two “important comments/adjustments” to Mr Carver’s spreadsheet. The first related to a QoE adjustment in favour of PAC’s earnings. The second was a value adjustment in consequence of contingent liabilities associated with Seizert and Aether earnings.

459    According to Mr McGill, those adjustments made “a big difference to the ownership split - could be back at 60/40 or even beyond!”.

460    Mr Carver responded almost immediately, expressing his disinclination to discount Northern Lights’ multiple relative to PAC, instead justifying a higher multiple in Northern Lights’ favour in addition to other factors which justified, in Mr Carver’s view, increased value being offered by Northern Lights to the merger. Mr McGill and Mr Carver agreed to discuss matters.

461    Later that day, Mr McGill sent an annotated version of Mr Carver’s values spreadsheet and justified his different view from Mr Carver’s view about the respective values and apportionment (60:40) of the two businesses. Mr Howard reviewed the exchange between Mr McGill and Mr Carver and agreed with Mr McGill that the apportionment should remain at 60:40.

462    The renegotiation continued for several days, with Mr McGill obtaining advice from Gresham and input from PAC management.

463    On 2 April 2014, Mr Charles Graham of Gresham sent a retainer letter to Mr McGill, which was accepted on 3 April 2014. The Gresham letter included the following about Gresham’s role:

…

Project Bondi

Further to our recent discussions, this letter (including Annexure “A”) outlines the terms upon which Gresham Advisory Partners Limited (“Gresham”) would be pleased to act as corporate advisor to Treasury Group in relation to the proposed transaction with Northern Lights Capital Group (“Project Bondi”).

Proposed Role

In relation to this project, we understand that Gresham’s role is to:

…

•    Prepare a financial model for the transaction and undertake sensitivity analysis, including in relation to forecast financial performance, foreign exchange, dividend policy and credit analysis;

•    Provide corporate finance advice in relation to valuation, corporate structure and capital structure;

•    Manage the due diligence, Q&A process and data room in relation to Treasury Group’s business, as well as manage the due diligence process and Q&A to be undertaken on Northern Light Capital Group’s business;

…

•    In relation to the explanatory memorandum, assist in the drafting and the management of other advisers;

•    In relation to the independent expert report, brief and manage the independent expert in their preparation of the report;

…

464    Self-evidently, as of that date, Gresham proceeded on the basis that another corporate adviser would be retained by PAC to prepare the independent expert report needed for shareholder approval.

465    The fee structure in Gresham’s retainer was partly fixed and also included a discretionary success fee element capped at 1% of the equity value of the business acquired.

466    Gresham was to coordinate meetings of the Project Bondi group comprising Gresham, HSF, Deloitte Tax Australia and PAC management to progress due diligence work in anticipation of the board’s consideration of the merger proposal.

467    There were regular weekly meetings between PAC’s representatives, particularly Mr McGill and Mr Ferragina, and Gresham representatives. These regular meetings were usually by way of dial in telephone conferences. Moreover, there was usually a printed agenda which set out the matters to be discussed concerning Project Bondi. Sometimes the meetings were by way of video conference or face to face meetings.

468    The first meeting was held on 7 April 2014. Gresham prepared the agendas for these meetings and the principal topics concerned the status of the due diligence work on Northern Lights (Narrabeen) and PAC (Tama).

469    The renegotiations continued and Mr Carver came to Australia and met with Mr McGill and Mr Howard over a few days. With the renegotiation, modelling continued.

470    By 11 April 2014 the model was significantly developed by Gresham.

471    On 11 April 2014 Mr McGill sent a detailed email to Mr Fitzpatrick. In that email Mr McGill referred to the continued negotiation by himself and Mr Howard on amended commercial terms for the deal with Northern Lights. His email stated that “We now have something that we are comfortable recommending to the PAC board as a variation to the in-principal terms that the board previously approved. In summary the amended deal is as follows: …”. Mr McGill summarised the structure of the new proposal in eight points. He also provided Mr Fitzpatrick with the updated model.

472    On 14 April 2014, Mr Fitzpatrick sent a list of queries to Mr McGill, copied to Mr Howard, concerning the relevant model. These queries were answered by Mr McGill on the same day and incorporated Mr Howard’s input.

473    Over the next four days further negotiations between Mr McGill and Mr Carver occurred about the draft revised terms sheet, including taking advice from Gresham and HSF about it, and further revisions of the model were made.

474    Let me turn to consider the 16 April 2014 board meeting and the lead up to it.

475    The board papers comprised Mr McGill’s 15 April 2014 email to the non-executive directors, Mr McGill’s and Mr Ferragina’s 15 April 2014 memorandum entitled “Project Bondi - Further Background & Clarification in relation to some aspects” and the draft revised terms sheet.

476    Mr McGill’s 15 April 2014 email informed the directors of the following matters. First, Mr McGill had disclosed to Northern Lights the possible sale of RARE. Second, there were changes to the deal since February 2014, such as the inclusion in the deal of ROC Capital on the PAC side and the inclusion of the extra 75% of Aether on the Northern Lights side. Third, there were new comparative earnings of PAC and Northern Lights. Fourth, the post-acquisition adjustment to the 60:40 split of up to 5% remained for PAC (but not Northern Lights). Fifth, there was a special bonus to Northern Lights’ founders if the merged entity was able to make an investment in a new boutique of Mr Rajiv Jain. Sixth, the proposed merger was EPS accretive. Seventh, the revised terms sheet remained non-binding and conditional as due diligence was not complete and there needed to be various board and shareholder sign-offs.

477    The 15 April 2014 memorandum informed the non-executive directors of key valuation outcomes of the merger as then proposed, of the trigger for Northern Lights’ obligation to repay amounts to PAC, and that on PAC’s base case the merger would be EPS accretive for PAC shareholders, on the basis of the base forecasts for Northern Lights’ and PAC’s earnings.

478    The revised terms sheet mirrored the summary of it given by Mr McGill in his 15 April 2014 email.

479    Two days prior to the 16 April 2014 board meeting, Mr Fitzpatrick had expressed concern to Mr McGill about the merger model. He said:

…

I still have a commercial concern on the model. It is to do with what we bring, what they bring, and what become a trust obligation. Tim has now done 2 deals he could not do without us, Seizert and Aether. Are the earn outs our obligation, or the trusts – of which we are 60%

...

480    On 16 April 2014 at 7.20am, Gresham sent an email to Mr McGill and Mr Ferragina which stated in relation to QoE:

… QoE/Accounting report - scope and timing to be further discussed with Narra this morning. In terms of financials for the banks, in the first instance we will use preliminary numbers coming out of the model (we will use the updated Narra numbers that come through from Trent in the next few days). The Deloitte report can progress in parallel with lenders who go to the next phase getting access when it becomes available.

481    On that day at 10.30am there was a conference call between Mr Erickson, Mr Ferragina and Deloitte US regarding “QoE with Australia”.

482    Let me turn to the 16 April 2014 board meeting itself which commenced around 10:00AM.

483    The board meeting lasted two hours and concerned only the potential merger with Northern Lights. The non-executive directors did not have much independent recollection of the meeting. Nonetheless, they all recalled the importance of the revised terms sheet being non-binding and the deal being EPS accretive.

484    Representative of the non-executive directors’ approach to the risks and benefits associated with passing the April resolution was the following evidence from Ms Donnelly.

485    She recalled thinking both before and during the board meeting that she would vote in favour of a resolution that PAC sign the revised terms sheet unless someone said something material that would change my mind. Her view had not changed since February 2014.

486    The immediate risk for PAC in April 2014 remained that if the merger did not eventuate, PAC would be wasting more costs on advisers and management time pursuing the merger. In her view that risk was worth taking because of the benefits of the merger that Mr McGill had identified in February 2014, particularly the obtaining of global diversity, with which she agreed.

487    The overall merger risk which was obvious to her in April 2014 was still that Northern Lights would fail to perform as projected. Since the February 2014 board meeting PAC management had not informed her that the 60:40 split was inappropriate or that the merger would not be EPS accretive. She also understood that management’s figures were yet to be tested by PAC’s experts.

488    She decided to vote in favour of the revised terms sheet execution resolution.

489    Other non-executive directors gave similar evidence.

490    The minutes record that:

The Chairman provided an update on the status of the Northern Lights deal and his meeting with Tim Carver, CEO of Northern Lights on Mr Carver’s recent visit to Australia.

Mr McGill advised the Board on developments on this matter since the last Board meeting, including the business updates he has provided to Northern Lights.

The Board noted the draft Memorandum of Terms for a Merger between Treasury Group ([PAC]) and Northern Lights Capital Partners LLC. The Board went through the memorandum on a page by page basis discussing the proposed terms, raising queries and requesting amendments.

IT WAS RESOLVED that Treasury Group sign the Memorandum of Terms for a Merger between Treasury Group Ltd and Northern Lights Capital Partners LLC subject to deletion of the governing law clause in the memorandum.

Further it is noted that Treasury Group and Northern Lights will work exclusively and confidentially together on this matter and that each party will pay its own costs.

491    At the board meeting, the revised terms sheet, which had been sent to the directors the day before the meeting, was presented to the board which provided the following.

492    First, the “Economics” would include all cash and/or property available for distribution or dividend whether derived from earnings or sale proceeds or otherwise.

493    Second, PAC would be issued with Class A trust units and be entitled to 60 per cent of the economics of the Aurora Trust and Northern Lights would be issued with Class B trust units and be entitled to the remaining 40 per cent of the economics of the Aurora Trust.

494    Third, Northern Lights’ shareholders would be issued an aggregate of USD 42 million in redeemable preference units in the Aurora Trust.

495    Fourth, the Aurora Trust would borrow, initially, an amount of USD 46 million less all cash available to invest to fund the cash portion of the acquisitions of Seizert and Aether.

496    Fifth, the anticipated EBITDA from Northern Lights for the period ending 30 June 2014 would be USD 19.2 million.

497    Sixth, PAC would be entitled to a preferred return pursuant to a sale of assets of the Aurora Trust, subordinated to the merger debt, in the amount of cash delivered at closing, initially anticipated to be roughly AUD 22 million.

498    Seventh, the closing in respect of the transaction was anticipated to be on or before 30 June 2014.

499    The differences between the February and April term sheets were summarised in Mr McGill’s 15 April 2014 email.

500    It was resolved that PAC sign the document dated 15 April 2014 and titled “Memorandum of Terms for a merger between Treasury Group Ltd and Northern Lights Capital Partners LLC”, subject to the deletion of the governing law clause in that document.

501    Now at the time of the April board meeting, it was still contemplated that shareholder approval would be required for the merger. I will elaborate in more detail on the relevant chronology as to this in a separate section of my reasons.

502    On 16 April 2014 at 4.02pm, Mr Ferragina sent an email to Mr Erickson, Mr Alan Warner and Mr Stuart Alexander with the subject line “conf call”. He stated:

Please confirm whether you are available for a conference call tomorrow at 7.30am Sydney time.

…

Need to discuss the QofE report and overall progress that will also tie into the Investigating Accountant’s report.

503    On 17 April 2014, Mr Howard requested that Gresham send through the latest version of their financial model. Gresham sent this to Mr Howard and copied Mr McGill.

504    On 18 April 2014, Moss Adams sent an email to Mr Erickson which attached draft financial statements for Northern Lights’ boutiques for the year ended 31 December 2013. Mr Erickson forwarded this email to Mr Ferragina and said that the financial statements would be posted in the data room. Mr Ferragina then forwarded the draft statements onto Gresham (copied to Mr McGill) stating “These will help with the model”.

505    The due diligence that was occurring can be seen from Gresham’s agenda for the 22 April 2014 due diligence meeting. The agenda refers to data rooms and the financial model, amongst other workstreams. Mr McGill explained that the data rooms were electronic and apart from documents, questionnaires were uploaded to be answered by the opposing party.

506    On 23 April 2014, Mr Carver responded to some of Mr Ferragina’s queries about the financial statements and attached what appears to be the final Moss Adams report together with valuation workbooks for Tamro, Seizert, Redwood, Raven, NLAM, Nereus, Goodhart, Elessar, del Rey, AlphaShares and Aether. Mr Ferragina forwarded these documents to Gresham.

507    Further, on that day Gresham sent an email to Mr McGill and Mr Ferragina which stated:

…

Deloitte AUS / Deloitte US - QoE discussion

•    US side data book to be completed by 30 April, with full report for the US only assets due by 1st week May

…

•    Narra have agreed to share US Deloitte outputs with Tama side when available.

508    The email confirms the agreement about PAC being able to use the Deloitte US QoE material.

509    Prior to 28 April 2014 Northern Lights provided to Gresham what was described as “NLCP Portfolio Company Valuations” as of 31 December 2013 valuing the interests in the various boutiques in Northern Lights’ portfolio. Notably, there was nothing for WHV, although of course Northern Lights did not have an equity interest in WHV. Further, in relation to these valuations for the other boutiques it was stated on the front cover of the report:

The materials herein represent estimated projections of potential outcomes. NLCG presents the information herein as estimates, which does not accurately represent actual data or returns information. This information is for discussion purposes only, and not intended for, nor may it be used for any investment decisions.

510    Further, the report contained a table setting out a total carrying value for all of the boutiques as at 31 December 2013 of USD 106.2 million. And as I have said, there was no reference to WHV as it was not an equity investment.

511    On 28 April 2014, Mr Timothy Moulin of Gresham sent an email to Mr McGill and Mr Ferragina which included this material. The email stated:

…

Please find attached two documents that have been uploaded today in the Project Three data room: NLCP Valuations (includes valuations of the two boutiques as well as financial forecasts) and Revenue by Geography.

When comparing (see attached Narra P&L Reconciliation) the numbers received in November 2013 with the numbers received today (31 December 2013 valuation report), key observations are as follows:

•    Overall, updated forecast earnings are down ~25% FY15 – FY17, but catch up by FY20 (although remain overall down materially on a cumulative basis)

•    Seizert accounts for the large majority of the downward revision in the period to FY17, with roughly a ~35% decline in proportionate EBITDA over the forecast period relative to November numbers, due to a significant increase in expenses (footnote suggests this does not relate to revenue share)

•    Aether – we didn’t have forecasts for Aether until only recently so a consistent comparison is more difficult. That said, these numbers appear consistent in the early years (FY14-FY15) but materially higher in the outer years (FY17 onwards) relative to the numbers provided to us by Andrew 2 weeks ago.

We note the valuation report does not include Nereus, WHV, Blackcrane, NLAA or EAM.

The updated forecasts open up a number of questions that we will add to the data room. We’re also keen to confirm you’re comfortable with Gresham updating the model to use these forecasts in place of the November 2013 numbers.

…

512    On 30 April 2014, Mr Erickson of Northern Lights sent through to Mr Ferragina an attachment described as “Project Three Preliminary Data Book” in an excel spreadsheet.

May 2014

513    On 2 May 2014, the non-executive directors received an email from Mr McGill enclosing Gresham’s 2 May 2014 process update.

514    Gresham’s 2 May 2014 process update informed the board of the following matters.

515    First, it informed about due diligence, including that “Quality of Earnings analysis on historical NLCP financials is being prepared by Deloitte for the debt process…”.

516    Second, it informed about “financial Model/Valuation”, including that “Gresham is currently undertaking a detailed modelling exercise, including boutique level valuation analysis …”. The board was to be invited to a Gresham presentation in mid-May.

517    Third, it informed in the QoE milestone that PAC would first receive a QoE draft data book and later a final long form QoE analysis.

518    Fourth, it informed in the board approval milestone that there would be a “Board financial model & valuation session”.

519    At the time Mr Kennedy thought that Deloitte Australia was preparing the QoE analysis and whilst he did not expect to see it, he did expect Gresham to use it as Gresham saw fit. Further, he understood that Gresham was preparing the model, including EPS analysis and boutique valuations, which the board was to rely upon when making its decision about the merger and was to give the board a workshop about the model.

520    Mr Fitzpatrick at the time understood that Gresham was undertaking a detailed modelling exercise which included a boutique level valuation analysis and he understood that Gresham was incorporating values for the boutiques in their financial model. Mr Fitzpatrick maintained that evidence under cross-examination.

521    Ms Donnelly’s evidence at the time was that she thought Deloitte US was preparing the QoE analysis because US banks would want to see a US firm doing it. She did not expect to see the QoE analysis herself but expected that the QoE analysis would be taken into account in the valuation and EPS analysis process undertaken by Gresham. Ms Donnelly maintained that evidence in cross-examination.

522    On 14 May 2014 Mr Ferragina forwarded to Gresham an “updated data book” sent by Deloitte US to Mr Erickson. The attachment was the Deloitte US QoE data book. The Deloitte US QoE data book appears to contain the figures from the Deloitte due diligence report, but there are no qualitative comments or figures on a boutique-by-boutique basis. It includes the combined income statement for 31 December 2012, 31 December 2013 and the last twelve months to March 2014 for each of NLCP, Seizert and Aether - consistent with the format contained in the Deloitte report.

523    On 14 May 2014 Mr Erickson sent an email to Mr McGill and Mr Ferragina which stated:

…

Attached is a breakdown of the EBITDA to distributions for 2013. Apologies for the delay in sending along. We will also get this in the dataroom for Gresham’s perspective. Happy to chat more as helpful.

524    On 14 May 2014 Gresham sent model v213 to Mr Fitzpatrick, Mr McGill, Mr Ferragina and Mr Howard. Model v213 did not update the data for WHV. The email stated that Gresham over the next few days would “[u]pdate the model to reflect information in the QoE and distributions material received today on Narra boutiques”.

525    On the same day Mr McGill attended a meeting with Gresham to discuss Gresham’s model but he had no independent recollection of what was discussed.

526    According to Mr McGill’s understanding at the time, development of the model was managed by Gresham and inputs to the model included data from Northern Lights and PAC as well as input from Gresham, Deloitte, Mr Howard and Mr Ferragina. The inputs were also assessed by Gresham personnel. By then, the model was quite advanced and Gresham had consolidated all of the information available to produce financial forecasts for the merged PAC/Northern Lights business.

527    Mr McGill said that the information resulted from the due diligence process conducted over several months including input from PAC’s advisers and answers from Northern Lights to the due diligence questions. Northern Lights’ answers and data were “vetted” by PAC and Gresham personnel and in some cases adjusted.

528    Mr McGill said that they and their advisers undertook extensive due diligence to confirm that Northern Lights’ earnings and likely forecasts were as they had been represented to be.

529    Between 14 and 20 May 2014 Mr Pollock communicated with Mr Erickson to obtain further financial information for use in the model.

530    On 16 May 2014, Gresham sent the directors an email enclosing a note covering forex sensitivities related to the merger. Gresham’s analysis was extracted from the draft financial model and focused on the impact of different exchange rates.

531    On 19 May 2014, Gresham sent an email to the board attaching model v245 and its financial model presentation material dated 19 May 2014.

532    This Gresham presentation explained how the model worked and analysed the EPS of the merged entity under four scenarios, with all being EPS accretive after FY15. There were extracted figures from the “EPS Impact” sheet in model v245, and there was provided the results of the DCF valuation of Northern Lights’ boutiques from the model and this was compared with a DCF valuation of PAC’s boutiques. The results were displayed in a pie chart with the split being 45:55.

533    Insofar as WHV was concerned, in model v245, the following may be noted.

534    First, the “NLCP Valuation Summary” showed that WHV was valued using a DCF methodology at $7.6 million using a discount rate of 14%. That valuation was made on the basis that Northern Lights had a 30% entitlement to distributions from WHV.

535    Second, the “11.WHV” tab did not include any information on WHV’s forecast financial performance. A flat EBITDA was included of $5 million in FY14 and FY15 and $2.5 million in FY16 to FY21 with the note “Implied from April 14 Merger Model - Waiting for distribution reconciliations”.

536    On 21 May 2014 there was a meeting between the directors and Gresham representatives at which the Gresham presentation was given. It is convenient at this point to elaborate on some of the evidence concerning this.

537    Mr Kennedy said that he did not look at model v245. He remembered reading the 19 May Gresham presentation and noting the information above.

538    Mr Kennedy did not remember much about the Gresham presentation in PAC’s boardroom.

539    He remembered being given an updated financial model presentation. The structure of the presentation was that Gresham showed the board something, gave an explanation and then fielded questions. The board had a lot of questions about the Gresham model. He remembered Ms Donnelly in particular asking questions about tax and forex variables. The meeting was long, a few hours.

540    During the meeting he read the updated Gresham presentation to see whether it had different conclusions to those in the 19 May Gresham presentation. He could find no material differences.

541    He remembered that the outcome of the presentation was that the board decided to keep proceeding with the merger.

542    Mr Fitzpatrick said that he could not remember much about the presentation other than it lasted several hours, the board grilled Gresham about the content and outcomes of the Gresham model, Gresham’s responses satisfied the board and the board was of the view that PAC should continue to pursue the merger.

543    Mr McGill’s evidence was that at the meeting the directors had the opportunity to ask questions, and request the input of various assumptions into the model. One of the attendees was Mr Pollock with his laptop set up and a projector showing the Gresham model and Gresham delivering its presentation and providing a walk-through of the model, including an explanation of how the model worked. There was also the opportunity for directors to ask for changes to various assumptions and observe the impact on outcomes. For example, in real time, directors could see the effect of various changes to assumptions, for example, assuming losing of funds under management.

544    So, each of the non-executive directors, who were experienced in investing in boutiques, met over several hours with the Gresham representatives and directly questioned them about the model and its outputs.

545    Now Mr Bradley criticised the Gresham presentation because it did not indicate that any independent analysis was performed by Gresham or any other party on the future forecasts upon which the DCF values had been calculated. That criticism of the presentation itself is partly correct.

546    But generally, in this long presentation, outcomes, especially EPS and valuation outcomes that were favourable to PAC, were discussed and explored. The board decided to continue with the merger work.

547    On 22 May 2014 Mr MacGregor sent an email to Mr McGill and Mr Ferragina in which he suggested that a requested distribution reconciliation was being sent through by Mr Erickson at that time. He stated:

…

the sensitivity analysis Tim sent through tonight shows that the real Armageddon scenario for Tama is if Seizert earnings materially decline over the forecast period

…

Given the above, I think there is merit in one last look at the numbers for these two entities to be sure we are all comfortable. One valuable input to this will be the updated Nara forecast model and distributions reconciliation that Trent is sending through now.

548    On 22 May 2014 Mr Ferragina forwarded to Gresham a 5-year business plan for WHV received from Mr Erickson. The figures from the WHV 5 year business plan were incorporated by Gresham into later versions of its model, but only the FY13 actual financials. Gresham’s forecasts extrapolated from the FY13 actual figures using growth assumptions on a different tab in the Gresham model.

549    On 23 May 2014 the non-executive directors were given a sensitivity analysis adopting three 80/20 scenarios, requested by the non-executive directors at the 21 May presentation which gave visibility of potential outperformance or underperformance of the combined boutiques.

550    Also on 23 May Mr Ferragina provided Northern Lights’ modelling of boutiques to Gresham.

551    On 23 May 2014 Mr Erickson sent an email to Mr Ferragina which stated:

…

Good morning. Hope this finds you well. As discussed with Gresham yesterday, attached are our excel models for the portco’s, including Blackcrane and EAM. I will send WHV along in short order.

Reiterating the discussion yesterday, we prepared these models using December 31, 2013 actual information and the December 31, 2014 budgets prepared by the respective portfolio companies. …

…

552    In relation to WHV, the attachment entitled “NL Valuation Model - 2013 as used for Audit Valuations.xlsx” at row 59 on the summary page showed a flat $4 million distribution from WHV for FY14 to FY19 and then $31.4 in FY20.

553    On 25 May 2014 Mr Howard prepared and sent Gresham two presentations about Blackcrane and EAM, which were both Northern Lights’ boutiques, and his questions for Northern Lights concerning them.

554    On 25 and 26 May 2014 Ms Donnelly was sent emails concerning the topic of taxation, which she had raised. Ms Donnelly was aware of the importance of getting taxation matters right so as to avoid the prospective double taxation of earnings.

555    On 27 May 2014 there was a due diligence conference call between PAC management, Gresham, HSF, and Deloitte. Gresham circulated an updated version of its board presentation.

556    On 28 May 2014 the non-executive directors were provided with what I have previously identified as the Howard assessment, being Mr Howard’s “Northern Lights Due Diligence – Manager Assessment” document which Mr McGill had asked Mr Howard to prepare. Ms Donnelly gave evidence that she knew Mr Howard from his previous job at Mercer and that he was experienced in assessing US fund managers.

557    The Howard assessment itself was broken into two analyses, being of Northern Lights itself and then of its individual boutiques. Mr Howard’s analysis was critical, in the sense that he sugar-coated nothing and drew attention to “red flags” in the Northern Lights portfolio, including the following.

558    First, he referred to the forthcoming restructure of WHV, which he referred to as a “broken business”. Mr Howard devoted more attention to WHV than perhaps any other individual Northern Lights’ boutique, highlighting its past 18 months of poor performance and consequential outflow of funds under management.

559    Second, he referred to Northern Lights having written off three investments since inception.

560    Third, he referred to key man risk issues associated with Seizert and its founder, Mr Gerry Seizert.

561    Fourth, he referred to Aether’s offering being unlikely to resonate strongly in the Australian market, but the important point was that it was gaining strong traction in the US market.

562    Mr Bradley’s criticisms of the Howard assessment were that it was little more than a summary of what was told to Mr Howard by the people he interviewed regarding the history, management style, past performance and future prospects of their respective funds, together with qualitative observations from Mr Howard. And it did not include any third-party or independent analysis.

563    Further, Mr Bradley said the report raised “red flags”, which Mr Bradley described as key risk issues that should have been of grave concern to PAC directors.

564    Ms Donnelly gave evidence about having read the Howard assessment. She disagreed with PAC’s criticisms of the board about the “red flags” in the assessment, saying that they represent a reading of the document by someone who does not understand the risks inherent in investing in boutiques and because the allegations select only small parts of the assessment on any one of Northern Lights’ boutiques.

565    It was put to Ms Donnelly that as the minutes for the 2 June 2014 board meeting did not refer to the Howard assessment she was mistaken when she said it was discussed. Ms Donnelly rejected that assertion, adding that not to have discussed the Howard assessment was not the board’s style. She said that any data that came to the non-executive directors between board meetings was always updated and discussed, and Mr McGill’s style was always to incorporate what had transpired in the interim. Ms Donnelly confirmed that Mr Howard was present at the 2 June 2014 board meeting and the preparation of his due diligence summary explained his presence at the meeting. Ms Donnelly explained why the contents of the Howard assessment gave her comfort.

566    Mr Kennedy gave extensive evidence about what he obtained from reading the Howard assessment. He regarded Mr Howard’s analysis as being thorough and comprehensive. He said that the Howard report was precisely the type of report he expected to receive because it highlighted risks and the strengths and weaknesses of different Northern Lights’ boutiques.

567    Mr Fitzpatrick read the Howard assessment. He gave evidence about his perception of its content.

568    He said that the assessment sought to analyse Northern Lights’ boutiques drawing attention to the relative strengths and weaknesses of a boutique on their own and in comparison with other Northern Lights’ boutiques. Further, he said that the fact that there were or may have been boutiques which performed better than others within a portfolio of boutiques was unremarkable. The same observation could validly be made of a number of the PAC boutiques, at that time specifically, Orion, Aubrey and Octis. Indeed, he said that that was precisely the observation which might have been made in May 2013 when reviewing the performance of PAC’s boutiques in 2013/14. He recalls in the early 2000s that he was keen to offload RARE as he believed it was an underperformer at the time. He was dissuaded from pressing that view by Mr Hayes and Mr Kennedy who said that RARE should be given more time. To the extent that the assessment put board members on notice of matters that were relevant to the value that should be attributed to Northern Lights’ boutiques, he believed that such matters would be communicated to Gresham by management which was involved, unlike board members, in the process of valuing Northern Lights and its boutiques.

569    He believed he had also had informal chats with Mr Howard about it.

570    He said in relation to the alleged “red flags” identified by Mr Howard, that with most transactions, one would be very lucky if one got to the stage where every red flag would be satisfactorily addressed. He said that with most transactions, there is going to be a few red flags outstanding so that one was just going to have to deal with them.

571    Mr Fitzpatrick said that there was an effort to address the red flags and that was at management level, and that they just worked their way through them, at least those ones that could be resolved.

572    It was put to Mr Fitzpatrick that Gresham had informed the board that the due diligence process was completed by 31 May 2014, but that the Howard assessment was provided only three days earlier on 28 May 2014, so that there was no ability to deal with red flags going forward. But Mr Fitzpatrick rejected that hypothesis. He said that if a red flag issue arose thereafter, there remained scope to continue to work on it as part of any due diligence inquiry.

573    In cross-examination Mr Fitzpatrick’s attention was drawn to several of the red flags identified by Mr Howard and there was the following focus on WHV:

MR WALLER:    By way of example, the due diligence assessment of Mr Howard noted on page 2, in respect of Northern Lights generally, that they had written off three investments since inception, you would regard that as a red flag?

MR FITZPATRICK:    I would regard that as a red flag, but we were about the same, so I would have seen it as being not uncommon in the industry.

Q:    And then in relation to WHV, it was said on page 3 of the report that:

This business is one of the more appealing pieces within the L structure despite its main strategy clearly struggling with performance.

            That statement would have been a red flag?

A:            I would have thought a green flag.

Q:            A green flag? Even though it does say -

A:    A green flag. To say it’s the most appealing and it was at the time very appealing.

Q:            And why was it so appealing?

A:    It’s appealing because it provided distribution into the - what we would call the retail market in Australia, and retail investors are notoriously sticky; poor performance has to, sort of, run for several years before they withdraw their money, and WHV had that as part of their armory.

Q:    WHV was particularly attractive, wasn’t it, also because it had this $4 million distribution year-on-year that you expected to receive?

A:    That’s right.

Q:    And, to be clear, you understood that that distribution arose under a contractual arrangement in circumstances where, if the company declared a dividend, it also had to make a distribution to Northern Lights?

A:    That’s right.

Q:    And any dividend that WHV would declare would be declared prior to the end of its calendar year, 31 December; is that right?

A:    That’s right.

Q:    Yes. The Mr Howard assessment also said in relation to WHV, on page 5:

Currently the main strategy within the WHV stable is     the international equity fund run by Richard Hirayama -

A:            Yes.