JUDGMENT No. 261. 722 CATCHWORDS ans , - \ D t > * 2 >4 en ' oo 0 >) \- TRADE PRACTICES - misleading and deceptive conduct - gtaténent ' tor, - = s \ fe ed shareholders relating to acquisition by subsidiary" 'company. "+, ae & \ us allegedly misleading summary of concerns expressed by independent accountants - unsuitability of interim injunction to "Pegdie. e detail of commercial debate in takeover context ~ serious question to be tried and balance of convenience favouring applicants in respect of one statement ~ interim relief granted in part. Trade Practices Act 1974 s.52 MULLINS INVESTMENTS PTY LTD, STYLEWEST NOMINEES PTY LTD and MYTRON PTY LTD, FALCON AUSTRALIA LIMITED, MINEFIELDS EXPLORATION NL, INTERCAPITAL HOLDINGS LIMITED and MAXWELL DE RUSSO No. WAG 89 of 1988 FRENCH J. PERTH 6 JULY 1988 IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION eee BETWEEN: No. WAG 89 of 1988 MULLINS INVESTMENTS PTY LTD STYLEWEST NOMINEES PTY LTD and MYTRON PTY LTD First Applicants and FALCON AUSTRALIA LIMITED Second Applicant and MINEFIELDS EXPLORATION NL Third Applicant and INTERCAPITAL HOLDINGS LIMITED First Respondent and MAXWELL DE RUSSO Second Respondent MINUTE OF ORDER JUDGE MAKING ORDER: FRENCH J. DATE OF ORDER: 6 JULY 1988 WHERE MADE: PERTH THE COURT ORDERS THAT: Upon the applicants and each of them undertaking to this Court that they will pay to interlocutory injunction granted in favour of the applicants compensation (if any) as the any party adversely Court thinks just in such manner affected by any such as the Court directs IT IS ORDERED THAT:- The respondents and each of them, whether by themselves, their servants or agents or otherwise, be and are hereby restrained until the trial of this action or further order from repeating or publishing the statement, or any statement to the effect, that in its report of March/April 1988 on the proposed acquisition by Chariah Resources NL of interests in Falcon Australia Limited and Minefields Exploration NL the firm of accountants Arthur Andersen & Co. said or expressed any concern that none of the gold or oil tenements held by those companies or their subsidiaries were the subject of independent geologist's valuations. There be Liberty to apply to vary or discharge this injunction upon 48 hours' notice. The costs of this claim for interlocutory relief be reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION wee eer No. WAG 89 of 1988 BETWEEN: MULLINS INVESTMENTS PTY LTD STYLEWEST NOMINEES PTY LTD and MYTRON PTY LTD First Applicants and FALCON AUSTRALIA LIMITED Second Applicant and MINEFIELDS EXPLORATION NL Third Applicant and INTERCAPITAL HOLDINGS LIMITED Pirst Respondent and MAXWELL DE RUSSO Second Respondent CORAM: FRENCH J. 6 JULY 1988 REASONS FOR JUDGMENT ON CLAIM FOR INTERLOCUTORY INJUNCTION This claim for interlocutory relief arises out of one of those struggles for the control of publicly listed companies that have become a feature of Australian commercial life in recent 2. years. The relief sought relates to the publication by the respondents of a statement reflecting adversely on the financial standing of the second and third applicants. The statement is said, in various respects, to be misleading or deceptive and its publication to be in contravention of s.52 of the Trade Practices Act 1974. Although the background to the claim is somewhat convoluted, the real issue between the parties falls within a narrow compass. On 31 March 1988 Intercapital Holdings Limited ("IHL") announced that it would offer 38 cents per share to acquire all the issued shares in MEH Limited ("MEH") to which it was not already entitled. The offer was conditional upon IHL becoming entitled to not less than 75% of the total issued capital, and on 28 April it became unconditional. On 4 May 1988, Chariah Resources NL ("Chariah"), a wholly owned subsidiary of MEH, announced its intention to acquire controlling interests in Falcon Australia Limited ("Falcon") and Minefields Exploration NL ("Minefields"). The shares the subject of the acquisition represented 37.7% of the issued capital in each case and were to be purchased from Mullins Investments Pty Ltd, Stylewest Nominees Pty Ltd and Mytron Pty Ltd (who are the first applicants in this case). This acquisition has been opposed by IHL and its managing director, Maxwell de Russo, who contend that the interest of the first applicant in Falcon and Minefields was overvalued. It is unnecessary for present purposes to refer other than in passing, to litigation instituted by IHL in the Supreme Court of Victoria on 10 June 1988. In those proceedings, IHL 3. sought injunctions restraining Falcon and Minefields from seeking shareholder approval of the sale of the first applicants' interest in those companies to Chariah. The claim for interlocutory relief was dismissed by Southwell J. On 17 June 1988 the agreement for sale and purchase of the Falcon and Minefields shares was effected with their transfer to Chariah. On 1 July 1988 IHL sent to each of the 1400 shareholders of MEH a letter critical of Chariah's acquisition. The letter annexed what was described in it as a "summary of the circumstances surrounding Chariah's entry into this transaction and subsequent events" and referred to reports prepared by the accountants, Arthur Andersen & Co.. It asserted that "INTERCAPITAL REMAINS TOTALLY OPPOSED TO THE ACQUISITIONS" and referred shareholders to "the concerns expressed by Arthur Andersen & Co. as set out in the attached summary". The paragraph numbered "1" on page 2 of the attached summary recited that the accountants had been retained by Chariah to conduct a "purchase evaluation" of Falcon and Minefields and their respective subsidiary companies. Reference was made to their report provided under cover of a letter dated 19 April 1988, in which report, it was said, they had expressed a number of serious concerns regarding the acquisitions. The concerns attributed to the accountants were set out in sub-paras. (a) to (i) of the IHL summary as follows:- "(a) severe liquidity problems being experienced by Falcon and Minefields, with insufficient cash flow to meet obligations; 4. (b) an urgent restructuring of Falcon and Minefields' debts are required; (c) contingent liabilities may exceed $2.4 million; (d) poor returns on oil operations; (e) valuations of gold and oil tenements were not supported by independent geologists' valuations; (£) total liabilities to financiers exceed $38 million; (g) poor production results at Georgetown and Paynes Find; (h) high overheads; (i) management requires restructuring." The document referred at para.8 to a further report from Arthur Andersen dated 4 May 1988 and a letter of 30 May from that firm to Chariah which, it was said, stated:- "...that their key finding summary should be read in conjunction with their original letter of instruction from Chariah, their original March/April 1988 report...and the subsequent Arthur Andersen & Co. report of 4 May 1988. Arthur Andersen & Co. strongly emphasised that the objectives of their March/April 1988 report and the 4 May report were different; and that the 4 May report contains information and explanatory comments not contained in the key findings summary referred to in item 1 above." Paragraph 8 went on to refer to a review of the report of 4 May by Stephen Blackman an "expert investment analyst" who is said to have concluded, inter alia, that the report did not "address and dispel each of the adverse findings set out in the key findings summary -attached to the original report of March/April 1988 of Arthur Andersen & Co.". Paragraph 6 of the IHL summary similarly asserted that the report of 4 May did not specifically address the individual concerns expressed in the key findings summary 5. accompanying the March/April 1988 report. The principal complaint made by the applicants is that the assertion in sub~para.l(e) of the IHL summary, that Arthur Andersen & Co. expressed a concern that "valuations of gold and oil tenements were not supported by independent geologists' evaluations", was simply and factually wrong. And it does appear from the key finding summary that the valuations said by the accountants not to be supported by independent geologists related only to tenements designated therein as Peregrine, Ladd, Ocelot, QRM and Minefields Mt. Mulgine. The key findings did not make that criticism with respect to tenements at Yam Creek and Georgetown held by the Falcon subsidiary, Dundas Gold Exploration NL and valued by Chariah at between $22 million and $39 million. And when reference is made to the full March/April 1988 report, it 1s found at page 10 to contain the following statement referring to those tenements:~ "Chariah have obtained independent valuations of the tenements in April 1988. These valuations were prepared by Terra Search Pty Ltd. They assign valuations of $10,000,000 and $20,000,000 to Western Creek and Yam tenements respectively." There 1s also appended to and forming part of the same document a report of the findings of Terra Search Pty Ltd. The IHL summary at sub-para.l(e) conveys the clear impression that none of the tenements in question were the subject of independent geologist's evalutions. I am satisfied that there 1s a strong prima facie case for saying that the IHL statement is incorrect and to that extent is misleading and deceptive. I am also satisfied that 6. given the apparent importance of the resources in question to the overall financial health of Falcon and Minefields, the apparent mis-statement is potentially seriously damaging to them and their shareholders. On the other hand, I am satisfied that it would not impose any significant burden on the respondents to require that the assertion that Arthur Andersen & Co. complained of the lack of any independent valuations for any of the tenements in question, not be repeated. Such a restraint would not, of course, preclude an attack upon the reliability or independence of the "independent valuations". It is the attribution to the accountants of a view at odds with that which they in fact expressed, that is misleading and deceptive. I do not propose to canvass in detail the other complaints about IHL's summary which were made by the applicants. The reference in l(a) and (b) to the concerns about "severe liquidity problems" and the requirement for urgent restructuring of Falcon and Minefields' debts should, it is said, have been balanced by reference to the companies' intention disclosed in the report of 4 May to refinance the liabilities by way of a gold loan of up to $48 million. The reference to contingent liabilities in sub-para.1(c) was not balanced by any disclosure of contingent assets and the statement of total liabilities to financiers was unqualified by any reference to the net asset position of the companies. The summary did express concerns set out in the Arthur Andersen report. It did not, it seems, show the whole picture. There is, of course, nothing to prevent the applicants or any of 7. them from publishing such responses as they may consider necessary to redress the balance. It may be that they will succeed in obtaining final relief in relation to such imbalances as can be shown in the summary. But the provisional nature of the findings made by the court in interlocutory proceedings and the rushed and necessarily incomplete character of the evadence and submissions before it, render the interim injunction generally a rather blunt and inappropriate tool with which to regulate the detail and balance of commercial debate in a fast moving takeover struggle of the kind which gave rise to this application. Iam satisfied on the material before me that the applicants' have shown a serious question to be tried on the statement concerning the accountants' report as to the existence of independent valuations for the tenements held by Falcon and Minefields. I am also satisfied that the balance of convenience strongly favours the grant of relief in relation to that statement. There is, 1t would seem, some risk of its repetition as the respondents do not concede the incorrectness of the statement, contending for its construction as a reference to the absence of valuations in relation only to some and not all of the tenements. With all due respect to the submissions to that effect, the only reasonable construction of the assertion in the summary is, in my opinion, a reference to all the tenements. It is not to the point to say that the damage has been done. The repetition of the statement may well do more damage and given the strength of their case on this point, the applicants are, I think, entitled to some interim protection against that event. I propose to make orders accordingly. I certify that the preceding seven (7) pages are a true copy of the Reasons for Judgment of his Honour Justice French. Ks Associate: Betsoro he WY ~ Date: b SUS) (F8S . Counsel for the Applicants: Mr D. Stone with Mr S.F. Mullins Solicitors for the Applicants: Messrs. Northmore Hale Davy & Leake Counsel for the Respondents: Mr A.N. Siopis Solicitors for the Respondents: Messrs. Parker & Parker Date of hearing: 5 July 1988 Date of Judgment: 6 July 1988