FEDERAL COURT OF AUSTRALIA Futuris Corporation Limited (ACN 004 336 636 v ERG Limited (ACN 998 112 625) [2001] FCA 1126 TRADE PRACTICES – misleading or deceptive conduct – precontractual representations – content – reliance CONTRACT – construction of contract – surrounding circumstances – rectification – settlement of dispute involving contested acquisition of corporation. DAMAGES – mitigation – loss of opportunity – expert evidence – opinion evidence – admissibility questionable – no weight Trade Practices Act 1974 (Cth) Metropolitan Gas Co v The Federated Gas Employees' Industrial Union (1925) 35 CLR 449 cited Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 cited FUTURIS CORPORATION LIMITED (ACN 004 336 636), FUTURIS INVESTMENTS PTY LTD (ACN 009 134 963) v ERG LIMITED (ACN 998 112 625) and SIMMONDS CAPITAL LIMITED WAG 27 OF 1996 FRENCH J 15 AUGUST 2001 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAG 27 OF 1996 BETWEEN: FUTURIS CORPORATION LIMITED (ACN 004 336 636) FIRST APPLICANT FUTURIS INVESTMENTS PTY LTD (ACN 009 134 963) SECOND APPLICANT AND: ERG LIMITED (ACN 998 112 625) FIRST RESPONDENT SIMMONDS CAPITAL LIMITED SECOND RESPONDENT JUDGE: FRENCH J DATE OF ORDER: 15 AUGUST 2001 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicants are to pay the respondents' costs of the application. 3. The cross-claim is dismissed. 4. The first respondent is to pay the applicant's costs of the cross-claim. 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 WAG 27 OF 1996 BETWEEN: FUTURIS CORPORATION LIMITED (ACN 004 336 636) FIRST APPLICANT FUTURIS INVESTMENTS PTY LTD (ACN 009 134 963) SECOND APPLICANT AND: ERG LIMITED (ACN 998 112 625) FIRST RESPONDENT SIMMONDS CAPITAL LIMITED SECOND RESPONDENT JUDGE: FRENCH J DATE: 15 AUGUST 2001 PLACE: PERTH REASONS FOR JUDGMENT Introduction 1 In 1995 Exicom Limited ("Exicom") and subsidiary companies in the telecommunications industry were in serious financial difficulty. They required a substantial financial injection. Rival contenders with recapitalisation proposals were Futuris Corporation Limited ("Futuris") and ERG Limited ("ERG"), both substantial publicly listed companies. In November 1995, ERG formed a consortium with two other prospective bidders, Simmonds Communications Limited now known as Simmonds Capital Limited ("Simmonds") and Zilkha Limited ("Zilkha"). The latter two companies had jointly acquired an option from the Exicom Group's bankers over its debt to the bank and the bank's associated securities. 2 Zilkha subsequently withdrew from the consortium leaving ERG and Simmonds pitted against Futuris. On 7 December 1995, Futuris made an agreement with ERG and Simmonds that it would withdraw from the contest provided that it could assume their rights in respect of the bank debt in the event that they decided not to proceed with the recapitalisation proposal. 3 The recapitalisation proposal was approved by a meeting of shareholders of Exicom on 23 February 1996, but the group's financial position was deteriorating and on 13 March 1996 ERG and Simmonds decided to withdraw on the basis that a number of conditions precedent to their proposal had not been satisfied. There was exchange of correspondence with Futuris in which Futuris attempted to acquire control of the bank debt. In the event the option expired before that could happen. Futuris and its subsidiary, Futuris Investments Pty Ltd ("FIPL") now sue ERG and Simmonds for misleading or deceptive conduct by reason of alleged precontractual misrepresentations to Futuris' Chief Executive Officer, Alan Newman by ERG's Chief Executive Officer, Peter Fogarty. It also sues them for breach of warranty and contract in relation to the bank debt. 4 The narrow range of facts giving rise to the causes of action are set in a complex matrix of documentary and other evidence relating to the dealings between the two companies and the position of their target, Exicom. Exicom Limited 1995 – A Failing Company 5 Exicom was, in 1995, a publicly listed company incorporated in Australia and carrying on business as a manufacturer of telephones and telecommunications equipment. It leased premises at Villawood in New South Wales. It had two major clients in Telstra, to whom it supplied TF200 and TF400 touchphones, and Nortel Australia Pty Ltd ("Nortel"), a subsidiary of Bell Canada Enterprises Ltd. Exicom had a Distributorship Agreement, dated 30 June 1993, under which it agreed to distribute Nortel Meridan PABX systems in Australia and a Technology and Manufacturing Deed dated 4 March 1994 in relation to the development and manufacture of a series of P-phones on behalf of Nortel. The company had only one domestic competitor for Telstra's business from 1994 to early 1996. That was Alcatel Australia, a wholly owned subsidiary of a French company which had a manufacturing plant in Sydney. 6 Exicom was in difficulty towards the end of 1995. It was indebted to the Commonwealth Bank of Australia Ltd ("CBA") in an amount of not less than $20 million and contingently liable to the CBA under non-cash credit facilities for a further $5 million. It was in dispute with Telstra concerning allegations by Telstra of faulty components in the Touchphone telephone and related equipment known as TF200. The Financial Statements of the company for the year ended 30 June 1995 (X 41) showed accumulated losses of $99,113,000. The operating loss after income tax for that year was $31,167,000. The independent auditors, Deloitte Touche Tohmatsu, qualified their report of 28 September 1995 on the Financial Statements. The report had been prepared on a going-concern basis which contemplated "continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business". Recapitalisation of the company by a consortium of Simmonds and Zilkha , which will be referred to in more detail later, was then the subject of due diligence inquiries by that consortium. The auditors said: "The ability of the economic entity and the company to pay their debts as and when they fall due is dependent on the successful completion of the recapitalisation of the company, including the provision of sufficient working capital, and the continuing support of the economic entity's bankers." If that recapitalisation were not to proceed the ability of the economic entity and the company to pay their debts as and when they fell due would be dependent on the continuing support of their bankers until either an alternative recapitalisation proposal could be put in place or the economic entity were able to generate adequate cash flows and return to profitable trading operations. 7 A draft report by KPMG dated October 1995 and prepared for Simmonds and Zilkha described the position as at 30 June 1995 by observing that: "Exicom is not a going concern at the present moment in time without the successful recapitalisation of the group or the continuing support of the group's bankers. This is the major issue with regard to the group and any comments on the balance sheet should bear in mind that the financial statements as at 30 June 1995 have been prepared on a going concern basis." (X42 p 971) The report also referred to Exicom's past history as one of "…over optimistic budgeting and a failure to achieve budget, often by spectacular margins". It was nevertheless noted that the current management team had adopted a pragmatic and conservative approach to setting the 1995/96 budget to avoid past problems. KPMG saw the historical financial performance of Exicom and its situation as at 30 June 1995 as having "..little to commend it to a potential investor aside from certain manufacturing processes in the Villawood factory and the relationships built up with Telstra and Nortel". On the positive side, however, the company was seen as involved in an industry forecast to be at the forefront of economic growth into the twenty first century and offering tremendous opportunities for growth. Futuris – A Prospective Acquirer 8 Futuris is the principal entity of a group of companies which is involved, inter alia, in the acquisition and restructuring of other companies and businesses where opportunity presents. FIPL is a subsidiary of Futuris. Another subsidiary, Futuris Administration Pty Ltd operates as an administrative, banking, loan company within the group. (T236) The Chief Executive and Managing Director of Futuris is Alan Newman. He is an accountant by profession. He worked for an investment broking house from 1966 to 1972 and at Elders Australia Ltd as an investment banking executive from 1972 until 1980. In 1980, he commenced work at the Bell Group Ltd, initially as treasurer and later became managing director. He has been CEO of Futuris since 9 January 1989. He is its only Executive Director. The principal executives within the Futuris Group in 1995 and 1996 were: 1. Tony Davies, then General Manager, Finance and Administration. He was primarily responsible for the economics of transactions, dealing with issues of pricing, tax and interface with brokers, advisors and institutions. 2. Paul Depiazzi, who was Financial Controller for the Group. 3. Lawrence Clark, who was Company Secretary. 4. David Gilham, who was General Manager. 5. Bruce Griffiths, who was responsible for running Air International, another subsidiary of the Group. 6. Phil Patterson, who was responsible for running Bristile Ltd. 9 Newman had considered the possibility that Futuris might acquire a telecommunications business since 1993. He regarded Exicom as a potential acquisition because it was Australia's only domestic manufacturer of telephones. Futuris took a 5% shareholding in Exicom in that year but as the share price rose it disposed of its interest to ERG which had itself taken up a 4.9% shareholding (X56). ERG Limited – Another Prospective Acquirer 10 ERG is a publicly listed company involved in information and telecommunications technology. One of its principal businesses is the supply of telecommunications equipment particularly paging units and cellular base stations (X242). Its Chief Executive is Peter Fogarty, a legal practitioner, who joined the Board of ERG in 1984 and became its Chief Executive Officer in 1986. Other persons associated with ERG in connection with the present proceedings were its Chief Financial Officer, Peter Harley, its Manager, Corporate and Treasury, Dom Del Borrello, David Gordon, a partner in Freehill Hollingdale & Page, Sydney, the solicitors for ERG, ("Freehills") and Lynton McRostie, a consultant retained by the company. 11 ERG had considered the possibility of strategic alliance or investment in Exicom for a number of years prior to 1995 (T749). It acquired a 4.9% shareholding in Exicom in 1993 with a view to building on that holding and possibly acquiring the company. It purchased Futuris' shares in Exicom. The listed price of Exicom's shares subsequently strengthened and the company issued additional shares. ERG regarded the purpose of the share issue as the dilution of ERG's holding and regarded the Exicom Board as generally antagonistic to ERG. It was unable to meet with the Board to put to it a proposal for the restructuring of Exicom. In the event, ERG decided not to proceed with a takeover bid and sold its shareholding in Exicom in February 1994. 12 Early in 1995, the Exicom share price was falling and its former Chief Executive, Cruickshanks, was replaced by Stephen Newman. Fogarty contacted Barry Capp, the Chairman, and Charles Plumridge of ANZ McCaughan, consultants engaged by Exicom. Plumridge told Fogarty that Exicom was considering a recapitalisation and was already dealing with three separate groups doing due diligence checks. He did not want to expand the number of parties with whom Exicom was dealing and in any event, had been instructed not to deal with ERG. Fogarty continued to contact Plumridge from time to time in the following months but until October 1995 made no progress. 13 Fogarty believed that Exicom was not performing to its maximum capabilities. ERG was looking to expand its own operations. He took the view that it would make sense to merge the two companies. But in order to make Exicom a valuable entity it would be necessary to inject additional business and do a lot of other things with it in order to make it succeed. 14 In mid 1995, the ERG management was following the company closely and gathering detailed information on its activities and performance (X56). A note in an ERG Board paper produced in July 1995 assessed the strengths of Exicom as its total manufacturing capability and experience in manufacturing high volume items (X22A). The main weaknesses were identified as its lack of financial strength, a lack of flexibility in marketing and a failing technology transfer with Nortel. This assessment was done for the purpose of evaluating Exicom's prospects of securing a manufacturing contract with a United States company, ADC, which was looking for someone in Australia to manufacture products for it. In the event ERG signed a Memorandum of Understanding with ADC in 1995. The history of ERG's involvement with Exicom will follow in the appropriate chronological order. Exicom and Futuris Discuss Recapitalisation – June 1995 15 Early in June 1995, Bill Beischer, the Chairman of Futuris, telephoned Alan Newman and told him of a meeting with Bob Cruickshanks, the Deputy Chairman of Exicom that morning. Cruickshanks had said that Exicom was in financial difficulty and required recapitalisation. He had asked whether Futuris would be interested in taking a position in Exicom. He had told Beischer that: 1. Exicom was going to report a trading loss of $4 to $5 million for the 1994/95 financial year – a prediction borne out in the annual report which showed a loss of over $4 million before abnormal items and tax (X41). 2. Exicom had a major problem with Telstra which had been estimated at between $30 and $40 million. 3. Exicom had problems with the CBA who wanted to be replaced or wanted further comfort. Beischer told Newman that Cruickshanks had said he could deliver control of Exicom to Futuris. Newman said he would consider the transaction but the most important issue was going to be price. Cruickshanks told him, in a subsequent telephone conversation, that Exicom needed a substantial injection of capital in order to survive and that its Board had approached all shareholders of note and had not been successful in raising sufficient equity for its needs, which Cruickshanks estimated at $10 million. Cruickshanks also disclosed that Exicom was involved in a dispute with Telstra regarding one of its products which it could not settle and that the company had lost the confidence of its bankers. Newman said that Futuris would consider the matter. 16 Newman requested Tony Davies and Lawrence Clark to obtain background information on Exicom. That information came to hand at the beginning of June in the form of a document entitled "Exicom Group Forecast – 1996" (X214). Newman also reviewed the 1994 annual report for Exicom (X5). He formed the view that the acquisition of the Bank's secured debt over Exicom was crucial to control of the company. The extent of the debt and the security held by the lender would govern any recapitalisation especially if the debt could be acquired at a discount off its face value. 17 On 8 June 1995, Newman spoke with Beischer and told him that it would be necessary to conduct a due diligence examination of Exicom. The following day Newman received a facsimile from Beischer advising that Cruickshanks would forward a confidentiality letter and was ready to make available the information necessary to evaluate Futuris' interest in the company (X10). A confidentiality agreement was executed (X11). Newman asked Davies and Clark to conduct a due diligence examination of Exicom. They commenced that exercise. Newman spoke to Cruickshanks on 19 June 1995. The substance of their discussion was: 1. Futuris wanted an exclusive period of due diligence of between four to eight weeks before it could ascertain whether it would make a capital injection into Exicom. 2. Cruickshanks said he could not deliver an exclusive period. 3. Cruickshanks said he was seeing Mr O'Brien of the CBA and would try and ascertain what the CBA's base position was. 4. The Board of Exicom was not fully aware of the discussions with Futuris and he was reluctant to tell the Board at that time. 18 Even though he was aware that Exicom had a significant debt Newman believed it likely that the company would retain support from its creditors to enable it to recapitalise if a proposal could be put forward reasonably quickly. He believed that there would be significant growth in the telecommunications sector in the immediate future and that Exicom was uniquely placed in the Australian market to take advantage of that growth. He considered that Exicom had an urgent need for a substantial injection of capital and for strong management if it was to gain the confidence of its creditors and to survive. Futuris could supply both of these things and ensure that Exicom could continue to develop as an Australian telecommunications business. Newman was aware of the Telstra dispute and that Nortel had sent a notice of breach to Exicom in January 1995. He regarded the notice as Nortel "agitating for leverage" (T255). He was not concerned about negative reports relating to Exicom. He said, in reference to the KPMG report which he had not seen: "…I held the view then, as I held the view right throughout the process, that when people prepare reports such as this, they usually only talk about the negatives. They never talk about the positives." (T254) A person with vision and understanding would see the opportunity behind the bleak picture presented by such reports (T254). He placed some store on the need for a domestic manufacturer of telecommunications technology. Domestic industry would want it because "… there was always the need for just in time speedy delivery" (T254). 19 On 28 June 1995, Davies sent a letter to Exicom. It expressed interest in investing equity funds in Exicom but said that an accommodation had to be reached with the CBA and asked for Exicom's formal approval for Futuris to discuss the matter with the CBA. The letter said it was fundamental to the future of the Exicom Group that agreement be reached with Telstra with regard to alleged malfunction of Exicom telephones and Exicom's position as an ongoing supplier. The approval of the Board was sought for Futuris to discuss those matters with Telstra. A period of eight weeks to carry out a due diligence investigation was requested with Futuris to be given exclusive access for that purpose. Newman and Davies were of the view that come-what-may Telstra had to deal with Exicom as the only Australian manufacturer of telephones. Futuris Does a Limited Due Diligence – July 1995 20 On 5 July 1995, Newman and Beischer met with Cruickshanks and Stephen Newman in Melbourne. They agreed that Futuris would conduct a short "due diligence" examination of Exicom to confirm the matters discussed during the meeting. Davies and Clark carried out the inquiries in July 1995. Their inquiries included discussions with officers of the CBA. Newman was informed by Davies in July 1995 that the CBA had reached the view that the shareholders' funds of Exicom had been dissipated to the point that the CBA was prepared to sell its Exicom debt and securities at a twenty five per cent discount off face value subject to any necessary approval by the Exicom Board. If Futuris wished to make a counter-offer the counter-offer should be submitted by Exicom. Late in July 1995, Newman again met with Cruickshanks. Cruickshanks told him that the Board of Exicom was meeting to consider proposals for Exicom including the Futuris proposal on 28 July 1995. A request for Futuris representatives to be present was denied. Futuris Makes a Proposal – July 1995 21 On 27 July 1995, Davies sent a letter to Capp (X13) with a proposal summarised as follows: "In summary our proposal is that Futuris injects sufficient equity, subject to the matters set out below, to recapitalise the company and to enable it to expand. While the quantum will be defined during the due diligence process, Futuris is committed to a minimum of $10 million. . The Commonwealth Bank accepting an offer from Futuris to acquire the Exicom debt and security at a discount of 40% to face value with Futuris accepting the contingent liability at face value. This offer is based on the Exicom debt being approximately $21 million and contingent exposure approximately $3 million . A "due diligence" investigation of Exicom acceptable to the Board of Futuris. A period of eight weeks will be needed for this process . Agreement with the Exicom Board as to the terms of the equity injection Satisfactory resolution of key issues; particularly Exicom's relationship with Telstra . Necessary shareholder, Stock Exchange and any other approvals." The letter stated that there was an underlying business at Exicom that, with suitable financial restructuring could survive and expand. Futuris was an Australian public company and a strong supporter of the development of technology and the growth of manufacturing businesses in Australia. It intended to retain and expand existing customer relationships and to provide secure employment opportunities for both management and staff. It would give consideration to the position of shareholders notwithstanding that the equity base of Exicom had been extinguished. 22 The letter also contained a thinly veiled threat expressed thus: "The Bank's position, and the terms proposed by Telecom in their "without prejudice" offer for settlement of the warranty dispute, may well raise concerns for directors, given their responsibilities under Section 588G of the Corporations Law and the potential civil and criminal liabilities for breach. To assist directors in this regard, we feel that it may be appropriate to further clarify Futuris' position in relation to an equity injection into Exicom." According to Newman, this was a logical threat to make in any proposal (T278). He agreed in cross-examination that the letter went forward with his knowledge raising the prospect of the directors' personal exposure under the insolvency provisions of the Corporations Law notwithstanding that he then had no belief that the company was in fact insolvent. His object was to see the reaction of the directors "…to see whether the butterflies flew or the butterflies landed or whether they had any other party". The period of eight weeks requested for due diligence inquiries was a negotiating position. Futuris would not need that amount of time. Conditioning the proposal upon satisfactory resolution of key issues including the Telstra relationship again did not represent his commercial position, but was merely the way the offer was framed (T280). Newman regarded the approach to commercial communication reflected in the letter and explained in his testimony as entirely legitimate notwithstanding that it involved what he considered to be an incorrect statement about the solvency of the company. He was candid about this commercial realpolitik and perhaps this is understandable as it was against his interests to concede in these proceedings that Exicom was insolvent at the time. He conveyed the impression generally in his testimony that for him commercial communication was a tool or a probe for assessing the positions, the strength and weaknesses of others, rather than conveying truly held opinions or positions of his own. This approach has implications for the assessment of his evidence. For there is a risk that his recollection of contentious events would have been coloured by his adversarial temperament. It should be treated with caution and tested against independent evidence. 23 Newman had a thoroughgoing scepticism about commercial communication from others. No doubt this was prudent although at times he seemed to overstate it to the point of self parody. He referred to an Exicom information memorandum of 9 June 1995 as a "selling document" and said "I didn't believe it". Having regard to the projected increase in turnover from $160 million in 1994/95 to $230 million in 1995/96 which was set out in the document, that scepticism was well-founded. This was of some significance because the projections were in part relied upon by Futuris' expert witness, Willis, in relation to the quantification of its loss. Newman presented himself generally as a person who relied substantially on his own judgment and not upon the representations of others. On a document relating to Exicom forecast for 1996 (X214) he wrote the word "price" and explained it in his evidence thus: "It's all a function of price; don't let emotion get in your way; don't let the seduction of the opportunity get in your way; keep a focus on price; "Now tell me about price. Is there a price at which it can and should be bought?"" (T257) 24 On 28 July 1995, the Exicom Board responded to the Futuris letter of 27 July stating that it hoped to be in a position to consider a number of proposals and to make a decision in the near future about which of them would be in the best interests of shareholders. Any suggestion that the directors might be in breach of their legal obligations was "emphatically denied" (X14). Newman regarded the letter as a Clayton's response to a Clayton's offer. Nobody, he said, was really serious at that time (T281). 25 On 18 August, Stephen Mead, Group General Counsel for Telstra, sent a letter to Davies pointing out that, contrary what was said in Futuris' letter of 27 July to Exicom, no offer had been made by Telstra for the settlement of its dispute with Exicom. Telstra was willing to discuss a settlement with Exicom on certain terms but those terms fell "… a long way short of constituting any offer capable of acceptance" (X17). Again Newman was sceptical. He did not believe the letter reflected Telstra's true position. He believed that they were willing to negotiate with the highest bidder. He said: "It would be crazy for them to say that they had a firm offer that they were prepared to accept from any one party. They would just keep playing the game." (T302) Futuris Addresses the Exicom Board – August 1995 26 Newman appointed Charles Fear of Poynton Corporate on 3 August 1995 to act as Futuris' advisor in respect of the transaction. Fear prepared a strategy document for Futuris dated 3 August 1995 (X267) and an updated version dated 9 August (X270). The first element in his strategy was the acquisition of an option over the CBA debt or the debt itself subject to satisfactory discussions with Telstra. A "Velvet Glove" approach was outlined involving reassurances about Futuris' objectives and capabilities. An "Iron Fist" approach, to be adopted if the Velvet Glove failed, contemplated a destabilisation strategy against Futuris. That strategy would involve: · Notification to Exicom shareholders, bank and government sources that Futuris was not being given an adequate opportunity; · Going public on Exicom's financial position via selected "leaks"; · Increasing pressure on Telstra and the government for an Australian solution The "Iron Fist" strategy also required the application of market pressure by approaches to major shareholders to acquire a strategic holding in Exicom and strategies to drive the share price down with a view to destabilising the CBA and the Board and other potential parties. Newman said he accepted parts of the strategy. He said it would not be necessary to destabilise the company because it was already fairly destabilised. Notification to shareholders, the CBA and to government sources that Futuris was not being given an adequate opportunity was a logical thing to do. He said he did not knowingly adopt a strategy of driving the share price down. While the share price would have been important if Futuris had sought to acquire Exicom, he preferred to keep Exicom as a separately listed public company. Acquisition of the whole of the company was not his preferred option. The share price was only relevant to the pricing of any recapitalisation (T284). On 8 August, Fear met with Capp and ascertained that there were two other parties interested in the company of whom only one was "real" (X269). Newman's attitude reflected that of Davies' in his notes that if a foreign company were to try to acquire control of Exicom, Futuris would fight it through the Foreign Investment Review Board ("FIRB") approval process. This was put to Stephen Newman by Davies. 27 On 9 August, Futuris was invited by Exicom to make a presentation to the Board on 18 August. On 10 August, Newman received a copy of a facsimile from ANZ McCaughan addressed to Davies outlining the matters which the Exicom Board wanted Futuris to address (X15). Newman regarded the letter with some disdain. He said of it: "It was mumbo-jumbo to protect the directors and the adviser to ensure that he looked to be going through a process of fairness rather than trying to encourage particular parties to get up who at this stage, I think, had not tangibly appeared." When asked by the Court whether anybody ever believed anything anyone said, Newman responded: "Only the principals like me, your Honour. You never believe the advisers." (T 300) Newman's notes on the letter received from ANZ McCaughan included a warning to that firm to be "very careful" which he thought was conveyed to them verbally through Clark or Davies or Fear. This was a warning not to favour one party over another. 28 Newman authorised Davies, Clark and Fear to attend the Exicom Board meeting on 18 August and make their presentation. He also authorised a letter to be given to the Board on that day. This referred to Futuris' letter of 27 July 1995 and an earlier letter of 28 June 1995 and withdrew the offers contained in them. In lieu of the previous proposals Futuris offered to inject sufficient equity into Exicom to enable it to promote a scheme of arrangement with the purpose of recapitalising and restructuring the company. The outcome would be that control of Exicom would pass to Futuris. Futuris would invite other parties to participate in the equity injection required for the recapitalisation but would itself require an equity level of at least thirty five per cent. Futuris would negotiate the purchase of the CBA debt and was prepared to become banker to the company. Pending approval of the scheme but conditional on the acquisition of the debt, Futuris would make available to Exicom immediately a $5 million secured working capital facility. It was also prepared to make available a further $5 million secured working capital facility if required. Exicom would thus be enabled to continue trading while the restructuring was being implemented. The offer would remain open until 5pm, 18 August 1995 (X18). Newman did not expect anything more than an in-principle acceptance of the offer. Given the timeframe imposed by the letter even that outcome must have seemed highly unlikely to him. 29 On 21 August, Newman was told by Stephen Newman that the Futuris offer was not acceptable to Exicom because it was not capable of acceptance. He said the Board was considering its options and requested Futuris to submit a formal proposal by 1 September 1995. This was reiterated in a facsimile from ANZ McCaughan to Davies (X19). In that letter it was said: "The Board requests that you submit a firm offer by close of business on Friday, 1 September. The firm offer should clearly state the prices and terms and conditions of any securities that you require Exicom to issue. The firm offer should state who is making the offer, any arrangements between parties making a joint offer and to whom securities would be issued." 30 At about this time Newman was aware that Davies had been in touch with John O'Brien of the CBA (T303). On 21 August, the CBA sent Exicom a letter (X20) indicating its position with respect to its debt. The letter stated the CBA's desire to meet on the following day with all parties that had expressed an interest in investing in Exicom. The CBA sought an acknowledgment from all parties that any offers that might subsequently be made would provide for: 1. a minimum return of seventy five cents in the dollar in respect of direct credit lines provided by the CBA to Exicom and its subsidiaries; and 2. no discounting in respect of contingent liabilities, payroll and other sundry exposures. Newman became aware, from reports by Davies or Clark, that this was the CBA's position. His perception was that the CBA was keen to sell its debt. On 22 August, the CBA wrote to Davies that it would allow Exicom to manage its recapitalisation provided a given return was achieved by the CBA. It noted that Exicom had been told Futuris was in discussion with the CBA about the acquisition of Exicom's debt. Exicom had requested that traditional banker/client confidentiality be respected and the CBA would do that. The letter concluded: "Given current circumstances, should Futuris wish to pursue an investment in Exicom then it will need to progress such via means other than acquisition of CBA's debt. Should our position change, we will let you know." (X22) In Newman's opinion, the CBA took this stance in order not to upset the company's position and jeopardise its own security (T303-304). Notwithstanding this it was Newman's understanding, reflected in earlier notes by Davies, that the CBA would be willing to talk to anybody who was prepared to buy the debt as long as it was commercial (X276) (T306). 31 Towards the end of August Newman became aware that a New York-based party was considering taking a position in Exicom (T305). On 28 August, with his approval (T308), Fear wrote to the FIRB alerting it to the possibility that "a foreign person" would be notifying the Board of its intention to acquire a substantial shareholding in Futuris. Fear argued that Futuris' interest in Exicom was relevant to the FIRB examination of any proposal to acquire a shareholding in or assets of Exicom and that Futuris represented a "bona fide Australian solution to the future of Exicom" (X277). The New York-based interest was Zilkha, a merchant bank and investment house. It was exploring investment in Exicom in conjunction with Simmonds, a telecommunications manufacturer based in Canada. Simmonds had commenced operation in 1991 and in 1994 had acquired from Nortel its PCB manufacturing operation. It was supplying Nortel and had a good relationship with it. It had become involved with Exicom through its Nortel connection. 32 There was a preliminary meeting between Telstra and Zilkha and Simmonds on 23 August 1995. In a letter of that date Mead wrote to Zilkha and Simmonds pointing out that Telstra would not be in a position to conclude any arrangements with them or to commit to particular supply arrangements. Detailed discussions would need to be held if they wanted to conclude any arrangements prior to finalising their offer to Exicom (X465). Futuris Acquires Exicom Shares and is Sued by Exicom – 30-31 August 1995 33 In August 1995, the NRMA Group owned about 19.8 per cent of the issued share capital of Exicom. Newman asked Fear to approach the NRMA to ascertain whether it would give Futuris a proxy for its voting rights in Exicom. Fear advised him that NRMA would prefer to sell its shares and would be likely to accept an offer at 7 cents with a call option over the shares at 10 cents. Terms of the agreement reached with NRMA were set out in a memorandum from Fear to Newman, misdated 28/2/95. This appears to have been an error for 28/8/95 (X221). Futuris was to buy on-market NRMA's 19,200,780 shares in Exicom at 7 cents per share. It would grant NRMA a call option exercisable at 10 cents per share for a period of twenty four months. The option would not be capable of exercise for six months except in the event that Futuris promoted a Scheme of Arrangement or capital reconstruction for Exicom and the value of the Exicom shares in that Scheme exceeded 10 cents. In the event that NRMA called the shares they would be obliged to vote in favour of the Scheme. Alternatively, the option would be exercisable earlier than six months if a takeover offer were made by another party at a price greater than 10 cents and Futuris and NRMA wished to accept the offer. In that event they would agree to share equally any profit above 10 cents per share on the sale of the shares into the takeover bid. 34 There was discussion between Fear and Clark about the possibility that the acquisition of Exicom shares could constitute insider trading (X269). They concluded that the information they had was not materially price sensitive. Fear regarded Exicom's budgets as meaningless. He also thought the company unable to pay its debts even if it were to settle with Telstra Clark considered Exicom's shares to be of no value. Newman did not have as sanguine a view about the budget information as Fear did. The only budgets he had seen were those contained in an Exicom Information Memorandum of 9 June 1995 (X9) (T290). They included the prediction, on which he placed no weight, that the turnover would increase to $230 million in 1995/96. He agreed with Clark's view, in the note of his discussion with Fear concerning insider trading, that history had shown Exicom had not been successful with achieving budgets (T 291). 35 Newman saw the acquisition of the Exicom shares as a way of testing out the reaction of other parties: "It would test out whether they were themselves able to buy shares…It tested out their financial capability. It tested out their resolve. It tested out their ability to match our strength…". (T310) Asked whether the crossing of such a large parcel of Exicom's shares at significantly less than market price would put pressure on the Board, Newman said: "Again, without the definition of "pressure", I would have thought their antenna would have gone up a bit further." (T310) 36 On 30 August, Clark wrote to the secretary of Exicom, Peter Patterson, confirming the acquisition of the shares by Futuris' subsidiary, FIPL. Anticipating an insider trading allegation, the letter went on: "Futuris has been in a position to deal in respect of these shares for some time being in possession of generally available information. Indeed you have previously communicated to Futuris that you have kept your major shareholders fully informed of your financial position. Furthermore, Futuris believes that since commencing due diligence on Tuesday, 22 August it has not come into possession of any information which is not generally available or which is of a nature which might have a material effect on the price or value of Exicom's securities." (X24) 37 The acquisition was quickly public knowledge, articles about it appearing in newspapers on or about 30 August (X278). It was also the subject of a public announcement by Futuris on 31 August (X222). In the announcement Futuris said that "…at the invitation of the Exicom Board" it had been reviewing whether it should participate in a recapitalisation of Exicom. It referred to its two "proposals" submitted to the Exicom Board on 28 June and 18 August and the Board's requirement that any "firm offer…clearly state the prices and terms and conditions of any securities" Exicom would be required to issue as part of its recapitalisation. It referred to Exicom's advice that the offer would be subject to completion of arrangements with the CBA and Telstra. It then said: "The arrangement with Telstra will require the resolution of the present dispute between Exicom and Telstra and the compromise of any claim Telstra may have against Exicom. The arrangement with the Bank relates to the acquisition or compromise, at a discount, of the secured debt due by Exicom to the Bank." The notice concluded with a statement that Futuris intended to participate in the recapitalisation of Exicom. 38 Fear sent a letter to the ASX on the same day confirming telephone advice of Futuris' acquisition. Fear said it was Futuris' view that trading in Exicom shares should be suspended pending the outcome of the recapitalisation process. At that time there was a "trading halt" on trading of Exicom shares in the market. He went on to say: "The Sydney marketplace has been aware of the fact that Exicom's bankers have been anxious about the recovery of their debt and indeed have been prepared to compromise or sell their debt at a discount. The marketplace has also been aware of the need by Exicom to settle a dispute with Telstra, Exicom's major customer." (X223) 39 Asked why the trading suspension was proposed, Newman said: "Quite simply that the company had begun a process. We had made it sufficiently clear to the company on what basis we would recapitalise the company. They clearly were, using your own words, talking with somebody else and if those persons had made an offer, then it was in our view that the company had price-sensitive information and they should disclose it to the market. It was a test to see how far the company would go in the disclosure of their discussions with other parties. We clearly knew our position … but we didn't know the other positions so it was an effort to try and flush out that information." (T313) 40 At a meeting on 30 August, the Board of ERG authorised its management to acquire up to nineteen per cent of Exicom to a maximum price of 25 cents per share. Management was also instructed to prepare "a detailed plan on the path to control". The meeting considered the possibility of Exicom going into receivership and noted that a shareholding of nineteen per cent would place ERG in a dominant position in relation to discussions with Exicom's bankers and Telstra. Given the requirements of the United States company, ADC, with whom ERG wanted to secure a manufacturing contract, and the opportunity to further develop relationships with Telstra and Nortel, the Exicom organisation offered it substantial opportunities 41 The acquisition of its shares by Futuris led Exicom, on 31 August, to initiate proceedings in the Equity Division of the New South Wales Supreme Court. Futuris and FIPL were named as the defendants. Exicom alleged that the acquisition of its shares by Futuris involved contravention of the insider trading provisions of the Corporations Law. An ex parte interlocutory injunction was granted restraining Futuris and FIPL from dealing with any shares or securities in Exicom until further order. It also restrained them from approaching or otherwise dealing with the CBA in relation to any bank account maintained by Exicom with the CBA and any debt or other liability owed by Exicom to the CBA until further order. Confidentiality orders were made in respect of the contents of the affidavits supporting the application. The final relief claimed included orders for divestiture and cancellation of any agreement entered into by either Futuris or FIPL for the acquisition of securities in Exicom. Damages were claimed (X25). Futuris retained Blake Dawson Waldron to act on its behalf. Newman regarded this proceeding as a defensive action by Exicom's management or the management in conjunction with other parties who were proposing recapitalisation together with ANZ McCaughan (T313-314). 42 Davies sent a letter to Telstra on 31 August advising of Futuris' acquisition of Exicom shares and its interest in participating in the company's recapitalisation. However given Exicom's position, Futuris was "…only prepared to participate in this process in a prudent manner". The letter advised that Futuris would draw comfort if there were an understanding, short of a legally binding commitment, of the terms on which Telstra was prepared to resolve matters in dispute. Indicative settlement terms were submitted for discussion on the basis of a lump sum payment in satisfaction of all claims by Telstra and an agreement for a four year supply contract on conditions acceptable to Futuris, Exicom and Telstra for the supply of products from Exicom to Telstra. Asked if it were his negotiating position to tell the world that Exicom was in dire financial circumstances, Newman said it was not necessary to tell the world as the world already knew (X279, T314-315). As to the condition of the long term supply contract, that was a negotiating position which was never dropped as no final agreement was ever reached with Telstra (T315). Simmonds and Zilkha Prepare to Make an Offer to Exicom – August 1995 43 Simmonds and Zilkha had not been idle while Futuris was moving on Exicom's shares. Harold Morton, the Director-Business Development for Simmonds, and Chris Green, a Simmonds' employee, had prepared a report on Exicom entitled "The Exicom Group A Business Assessment" (X26). The assessment contained an overview of Exicom's current business activities, an initial outline proposal for restructuring the business and an assessment of its requirements for capital injection over the following twelve months. The "turn around project" proposal involved building on the "new Exicom Management 1995/6 budget". Implementation of a three year business plan would be supervised for at least the first two years by the creation of a post of turn-around manager reporting to the Simmonds/Zilkha joint venture. Working capital requirements were assessed at $7,330,000 to reduce creditor balances over sixty days to zero, $2,670,000 for short-term working capital and non-cash facilities totalling $8,500,000. 44 Morton, together with David Gordon and Andrew Pike of Freehills, acting on behalf of Simmonds and Zilkha, also met on 30 August with representatives of Telstra. On 31 August, Freehills sent Telstra a draft "Letter of Comfort" to be sent from Telstra to Simmonds and Zilkha setting out matters they had agreed in principle. These included payment to Telstra of $7.5 million, a standard two year rolling supply contract with Telecom Technologies for supply of TF400 telephones subject to six month quality reviews and as part of the supply contract a discount totalling $5 million over and above the negotiated price of the telephone. Telstra was to use its best endeavours to procure supply contracts for additional products over and above current core business levels to the value of $15 million per annum at normal commercial terms. Simmonds would provide Telstra with a right of first refusal to commercially exploit in Australia certain of its product and technology and Telstra and Telecom Technologies would provide an immediate unconditional release of their claim against Exicom. The proposed Letter of Comfort was said to reflect an in principle agreement not involving the creation of a legally binding obligation on any party. Simmonds and Zilkha Make an Offer to Exicom – 1 September 1995 45 On 1 September 1995, Morton submitted to the Exicom Board a proposal by Simmonds and Zilkha relating to the restructure and recapitalisation of Exicom. Simmonds and Zilkha requested a period of thirty business days designated as the "Exclusivity Period" to allow them to perform the due diligence inquiries necessary to evaluate the feasibility of the proposal and to effect settlement agreements with the CBA, with Telstra and with the landlord of Exicom's leased premises at Villawood. Under the proposed transaction they would ensure that sufficient funds were provided to Exicom by way of debt or equity or both to retire the cash component of the CBA facilities, to meet any cash payment required for settlement of the Telstra warranty claim and to provide the company with sufficient funds for working capital purposes. The letter referred to the "non-binding agreement in principle" they had reached with Telstra for the settlement of the warranty dispute and for an ongoing supply contract. A copy of Telstra's Letter of Comfort was attached. The letter also indicated that Simmonds and Zilkha had held discussions with the CBA and were confident that the CBA and Exicom would be able to reach an agreement under which the cash component of the CBA facilities would be retired with the CBA accepting a discount of between 25% and 35% on the face value of the cash component with the non-cash component of its facilities remaining on foot. The proposal was expressed to be conditional on the termination of research and development arrangements to which Exicom had become a party in 1990. The precise mix of debt and equity to be provided to Exicom would depend on further analysis and the outcome of the due diligence investigations. It was also conditional upon final agreement with Telstra and the CBA, the termination of the company's research and development arrangements, and completion of the restructure of the capital of the company by reduction of capital or similar means (X27). Nortel Welcomes Simmonds' Involvement – 1 September 1995 46 On 1 September 1995, Brian Davis, the Managing Director of Nortel Australia, wrote to Exicom indicating that Nortel would welcome Simmonds' involvement in Exicom and that it believed the already strong relationship between that company and Exicom would be further enhanced with Simmonds' involvement. Subject to a satisfactory recapitalisation of Exicom occurring, Nortel foresaw further business opportunities arising between Exicom and itself (X29). Telstra also wrote on that day to Freehills setting out the terms on which it was prepared to negotiate a settlement of outstanding claims against Exicom arising from the supply of faulty TF200 telephones between February 1993 and February 1994 (X403). The letter reflected broadly the terms of the Letter of Comfort Futuris Writes to Exicom – 1 September 1995 47 Futuris wrote to Exicom on 1 September saying it was prepared to submit a firm offer to the Board in accordance with the invitation from ANZ McCaughan but was unable to do so: "… because by reason of the injunction it cannot resolve issues sufficiently to remove unnecessary conditions." Futuris expressed its concern that the injunction had prejudiced its position to make a firm offer to Exicom, particularly since it constrained Futuris from dealing with the CBA. It expressed confidence that if discussions with the CBA and Telstra were to continue its offer would not be conditional upon resolution of settlements with them. Subject only to the acquisition of the CBA debt and its related security, Futuris would immediately provide Exicom with additional working capital facilities pending the convening of the necessary shareholder meetings. Futuris considered it to be imperative that Exicom inform the CBA of the contents of its letter. Any failure by the Board to do that or give Futuris the opportunity to finalise and submit an unconditional bid could occasion loss to Exicom. The letter threatened the Board: "As a major shareholder of Exicom, Futuris wishes to put the Board of Exicom on notice that it will hold the Board liable for any loss suffered by the shareholders arising from the Exicom Board's acceptance of a proposal which offers less value to shareholders than the Futuris offer or which carries greater completion risk." (X28) Futuris required that Exicom give it reasonable notice of its intention to accept any offer and asked for its confirmation by the following Monday, 4 September, that it would give such notice. Notwithstanding the statement of intention to submit an unconditional offer, a draft letter of the same date setting out the proposal in detail contained a conditional offer. It was conditional upon delivery to the shareholders of an Independent Expert's Report on the proposed transaction, completion of arrangements with the CBA and completion of arrangements with Telstra (T320). In the event, no unconditional offer was ever put (T321). Futuris Proposes Settlement Terms to Telstra – 1 September 1995 48 Telstra wrote to Futuris on 1 September proposing a basis for negotiation, albeit in somewhat different terms. The lump sum figure proposed was $10 million with no provision for a $5 million claw-back in relation to the supply of TF400 telephones. If Exicom were to become a wholly owned subsidiary within the Futuris group, Exicom would be included as a party to a Deed of Cross Guarantee (X226). Newman saw the letter. He maintained that he had no concern about securing from Telecom a contractual commitment to a particular volume of products. A restructured Exicom would be able to demonstrate to Telstra not only that it was able to meet the quality level required but would be able to provide increased volume. His proposition to Telstra would be: "Don't give me a long-term contract. Give me an opportunity and I will demonstrate to you that I can be a continuous supplier to you." (T322) 49 Reminded of the indicative settlement terms provided on 31 August with Telstra which included a proposal for a four-year supply contract (X279), Newman dismissed that as representing a "…starting negotiating position" (T322). Futuris Writes to Exicom and Various Advisors – 3-5 September 1995 50 On 3 September, Fear wrote to ANZ McCaughan expressing Futuris' dissatisfaction about the constraints imposed upon it by the injunction and its surprise at Exicom's strong reaction to its acquisition of shares in that company. The letter concluded: "Futuris, as a major shareholder in Exicom, has requested that I obtain from you details of your mandate including full particulars of your brief and fee arrangements." (X227). Fear also wrote to the Capp on 4 September 1995 reiterating that in order for Futuris to submit an offer it needed to resolve issues with the CBA and asking whether it was Exicom's intention to lift the injunction restraining Futuris from approaching and dealing with the Bank (X228). 51 Internal strategy notes within Futuris indicate that Futuris officers were contemplating proceedings against the Exicom directors for breach of fiduciary duty. The need to get the insider trader injunction lifted expeditiously was recognised. They thought that Fear should talk to the press. Newman agreed in cross-examination that, although he couldn't say whether the support of the media was enlisted at that time, it would be natural for them actively to solicit the press to help their cause (T325). The former Federal Treasurer John Dawkins was to be briefed with a view to making representations to the FIRB on behalf of Futuris (T325). 52 Futuris' solicitors, Blake Dawson Waldron, wrote to Exicom's solicitors, Corrs Chambers Westgarth ("Corrs") on 4 September seeking an undertaking that Exicom would not be a party to any agreement with another bidder that contemplated the acquisition of the Commonwealth Bank debt except on the basis that it would be conditional on shareholder approval. The letter was minatory in tone, heavy with warnings of potential breaches of duty by Exicom directors if they proceeded to make an agreement with another bidder (X284). A letter was also sent by Davies to Exicom's auditors, Deloitte Touche Tohmatsu on 4 September. It was written on behalf of Futuris in its capacity as a shareholder. It referred to the "heavily qualified" audit opinion on Exicom for the year ended 30 June 1994 and conveyed the view that adequate provision should be made in the June 1995 accounts for: · settlement of the Telstra dispute · writing off research and development costs which could not be supported · the cost of restructuring the company (X285) Newman described the objective of the letter as: "A tactic to test out how everybody was thinking including the auditors, and as to whether they considered the company to be a strong on going viable concern, not so strong or weak. It was just a testing mechanism." (T334) On 5 September, Clark wrote to Exicom requesting that Futuris be offered two seats on its Board with immediate effect (X31). A copy of the letter was sent to the ASX (X230). Asked if he expected the request to be met, Newman said he thought it was "an each-way proposition" (T335). I do not accept that this reflected his state of mind then or in retrospect. The evident purpose of the flurry of threats and demands from Futuris was to exert pressure on the Exicom Board and to build up a stockpile of ammunition for use in subsequent litigation. 53 On 5 September, Blake Dawson Waldron wrote to Freehills putting their clients, Simmonds and Zilkha, "on notice that, in the event that your clients were to proceed to conclude agreements with Exicom and/or the CBA, our clients reserve their right to institute proceedings seeking to set aside the transaction on the basis of the issues as to breach of directors' duties mentioned above." (X286) The letter was sent in accordance with Newman's instructions (T336). 54 On 6 September, Exicom wrote briefly to Futuris stating that the request for Board representation was obviously "not even a matter for consideration until the legal status of your purported shareholding is clarified in the Courts" (X32). Futuris Contacts the Stock Exchange and the CBA – 6 September 1995 55 Following the exchange of correspondence between Futuris and Exicom and their advisors, Futuris resolved to requisition a meeting of the shareholders of Exicom to consider the appointment of two Futuris nominees to the Board. This was announced to the Australian Stock Exchange ("ASX") on 6 September 1995 (X33). The announcement was calculated to inflict damage on the Exicom share price and the resolution of its Board. Futuris expressed its concern about the future of Exicom, a concern which it said was shared by the market. It stated that a number of significant institutional shareholders had, in recent months, sold down their interest in Exicom or departed the Register altogether. It said that Exicom's banker was understood to be dissatisfied with its Board and management. It pointed out that immediately prior to the suspension of Exicom shares on 1 September 1995 its market capitalisation was $14 million whereas eighteen months previously it had been in excess of $115 million. It directed attention to Exicom's reported losses of $66 million over the past five years and that its 1995 results should reflect a substantial loss if the Board were to provide for losses arising from the Telstra dispute and were to write down the carrying value of intangible assets. It also reported that Futuris had made three offers to the company, none of which had been embraced by the current Board. Futuris expressed its want of faith in the Board's ability to resolve outstanding issues for the benefit of all shareholders. 56 Asked why the ASX announcement referred to the CBA's dissatisfaction with Exicom, Newman said it "was just reaffirming to the world what the world already knew. It was just heightening the awareness". (T336) It was put to him that the purpose of including the statement and statements about a deterioration in Exicom's shares and trading performance was to destabilise the Board. Newman replied, "No, not necessarily" (T336). These were facts already known. The purpose of including them in the announcement was to "highlight the pressure on the Board". It was "…testing out the resolve of all the parties concerned, including the other combatants who may want to recapitalise the company" (T337). 57 Futuris wrote to the CBA on 7 September expressing its wish to recapitalise Exicom on terms acceptable to the CBA and the shareholders. It asked the CBA to advise whether it would require the agreement of Exicom and its Board as a condition of the acquisition of Exicom's debt and whether it would require any other purchaser of the debt to be subject to the same conditions (X287). The CBA responded on 8 September stating that its discussions and negotiations with respect to Exicom's banking arrangements would continue to be via that company's managing director and/or its non-executive directors (X288). Exicom and Simmonds/Zilkha Reach Agreement – 7 September 1995 58 On 7 September, Exicom executed an amended proposal from Simmonds and Zilkha in the form of a letter of that date from their solicitors, Freehills. On the amended proposal the exclusivity period to enable Simmonds and Zilkha to perform due diligence was to run from the date of signing of the "Letter Agreement" until midnight on 20 October 1995. Exicom undertook not to appoint or take any steps to appoint any directors to its Board during the exclusivity period or commit itself in any other way to any material transaction without the prior written consent of Simmonds and Zilkha. The amended proposal included certain warranties by the parties (X34). Exicom announced its agreement with Simmonds and Zilkha describing it as an agreement "… for a far-reaching recapitalisation of Exicom which [would] enhance its presence in the global telecommunications business". Exicom's announcement said that, following discussions with Exicom's bankers and one of its major customers, Telstra, the agreement also provided for restructuring of the group's bank facilities and an amicable settlement of the outstanding dispute with Telstra (X35). Futuris Responds – September 1995 59 On 8 September, Blake Dawson Waldron wrote to Corrs pointing out that Futuris had been in the process of completing the necessary steps to finalise a proposal for submission to Exicom. Futuris, it said, was in a position to put forward, for immediate and urgent consideration by Exicom's Board a proposal which was summarised in that letter. The proposal involved the provision of a minimum of $30 million to Exicom by way of a mix of debt and equity. The offer was made conditional on the CBA agreeing to discount its debt in accordance with its letter to Exicom of 23 August 1995 and agreement being reached with Telstra for an immediate and complete settlement of its dispute and claim against Exicom on the terms set out in a letter from Futuris to Telstra dated 1 September 1995. Futuris sought access to Exicom to carry out due diligence inquiries. The letter alleged that the want of an even-handed approach by Exicom's directors in relation to the bidding process indicated that they were in breach of their duties in failing to explore all commercially available opportunities for maximising benefits to Exicom. (X289) 60 Newman saw the Futuris offer as a tactical step. The best way to find out how to compete with the Simmonds and Zilkha proposal was to "… whack in a new offer, put any new conditions around that you like and get the running go again and ask for due diligence in the process. It was a responsible offer. We should see all of the offers." (T340) That was one of the things the letter was meant to achieve (T340). He accepted that before any working capital could be provided under the proposal, an agreement would have to be reached with the CBA (T341). 61 On 11 September, Exicom announced an operating loss of $4 million before abnormal items and tax for the year ended 30 June 1995. Provision was made in the accounts for the Telstra dispute and the termination of the research and development syndication. These gave rise to two abnormal items totalling $28.4 million after tax as shown in the profit and loss account (X231). Futuris Develops its Acquisition Strategy and Prepares Takeover Documents – 13 September 1995 62 On 13 September, Fear sent Exicom a document entitled "Futuris Corporation Limited Exicom Acquisition Strategy" (X291). Objectives of the strategy included applying pressure to the Board by continuing to emphasise its duties, killing the insider trading issue and winning the deal. Newman said it was important to kill the allegation of insider trading. This was "a heinous crime if you're dealing in the securities market" (T342). Asked if he saw the Exicom injunction as preventing another offer from Futuris, Newman denied that it should be assumed he always wanted to put an offer that could be achieved. Part of Futuris' tactics were to keep pushing offers through, to keep reminding the Board of Exicom that they had an offer and to keep reminding the Bank particularly that "we would always stump up". Nobody put a genuine alternative offer to the company until much later so it was in Futuris' interest to keep a level of high anxiety "… to test out where all parties were – the CBA, Telstra, Nortel, the company, the board, the other subscribers intending to inject equity into Exicom". Futuris had been prepared right from the beginning to buy the debt from the CBA and if it could have done that, sight unseen, unconditionally, it would have. All that it was doing at this stage was pushing through to see whether that option or any other option could emerge. 63 Fear's strategy document under the heading "Press Pressure" said: "Have spoken to Frith who may, now that Coles issue is quietening down, be prepared to pick up Exicom story and run with some vigour." (sic) This was a reference to Brian Frith, a financial journalist. Newman was aware that Fear was providing him with information in the hope that Frith would write an article favourable to Futuris' position (T343). 64 By 13 September, draft documents had been prepared by Bennett & Co, also acting for Futuris, for a takeover offer from FIPL to Exicom shareholders (X343, X344 and X351). The offer was expressed to be subject to a condition that no administrator be appointed to Exicom during the period commencing on the date of service of a Part A statement on the company and ending on the expiry of the Offer Period (cl 7.2). Another condition was that no settlement occur with Telstra or the CBA. Newman's instructions about that condition were that it was to be left in abeyance until he had determined which was the better way to go (X343). A draft Part A statement was also prepared (X359). It was characteristic of Newman's approach, as will appear, that he wanted Futuris at all times to be in a position to move quickly in adopting whatever course of action it decided upon. 65 On 14 September, Futuris formally requisitioned the directors of Exicom for an extraordinary general meeting, pursuant to s 264(1) of the Corporations Law to consider the appointment of Newman, Davies and Clark to the Exicom Board. The requisition also enclosed a draft notice together with consents by their proposed appointees (X37). Fear sent a fax to Davies and Clark attaching a copy of a file note of a conversation he had had that day with Capp. He had told Capp that Futuris wanted assurances that the Exicom Board had not, and would not, enter into a transaction with Simmonds and Zilkha that involved a sale of any of Exicom's assets or resulted in Exicom having any liability to Simmonds and Zilkha or any claim by them against Exicom in the event that the Exicom shareholders were to disapprove the proposal. Newman was briefed in general terms about Fear's discussions (X292, T344). The possibility of suing the directors of Exicom was still under active consideration at the time and Futuris was also positioning itself to have completed its Part A statement by the end of the third week in September (X293). Newman saw Capp as being very much in favour of the Simmonds/Zilkha proposal at this stage and very much opposed to Futuris (T346). 66 Futuris publicly announced its requisition for an extraordinary general meeting on 18 September. In the announcement it stated that it had requested the ASC to "…investigate the level of disclosure by Exicom of price sensitive information prior to and post the invitation by the Exicom Board to Futuris to submit recapitalization proposals to the Exicom Board". 67 Futuris approached the NRMA on 20 September by way of a letter from Fear seeking a variation of the profit sharing formula under the Call Option Agreement so that the 50/50 split for a share price exceeding 10 cents would apply "in all conceivable circumstances". As a fall-back position it sought acknowledgment that the profit sharing arrangement would apply to the case in which Futuris received and accepted "an offer to be taken out" (X295). 68 On 26 September, Nortel's Brian Davies wrote to Exicom acknowledging the agreement it had made with Simmonds and Zilkha. His letter was in substantially similar welcoming terms to that which he had written on 1 September (X29) in anticipation of the agreement. ERG Considers Its Position with Respect to Exicom – 27 September 1995 69 On 27 September 1995, the directors of ERG met. Fogarty updated the meeting on the status of Exicom. He referred to "discussions held with the preferred investor in the company". He said that there was an opportunity to pick up a sizeable portion of Exicom for little money and to optimise ERG's position with Exicom's technologies and manufacturing facilities. At that time he had not met with Simmonds and Zilkha. All of this was recorded in the minutes of the meeting. Fogarty could not recall the discussions referred to in the minutes (T821). Nor did he recall what was the "opportunity" to which he had referred (T821). The directors authorised him to purchase up to twenty million shares in the company to a maximum of 15 cents per share (X38). On the same day he sent to Colin Squires of SBC Warburg a draft of a fax to Freehills expressed to contain "information that will assist your client's understanding of our operation" (X39). It does not appear whether the fax reflecting the terms of the draft was ever sent (T821). The authority given to Fogarty to purchase shares in Exicom was never acted on (T820). Futuris – More Strategic Thoughts – 28 September 1995 70 Fear prepared a further "Acquisition Strategy Update" dated 28 September (X296). Newman maintained a scepticism about the strategy which reflected his approach to professional advisors generally. He nevertheless agreed with Fear's advice that it was desirable to keep up pressure on Exicom particularly pressure to disclose details of the agreement with Simmonds and Zilkha and to submit it to a vote of shareholders. Fear advised maintaining what he called "the press barrage". Newman said he discouraged Fear from talking to the press on his behalf. However he had earlier accepted, in cross-examination, on strategy notes prepared by Fear at the beginning of September, that it would be natural for Futuris actively to solicit the press to help its cause (T325). He agreed that Futuris should seek an explanation of the grant of exclusivity to Simmonds and Zilkha and that it should endeavour to discredit, in the eyes of the market, their financial capability to perform the transaction (T349). He distinguished this tactic from discrediting the individuals concerned. He did not think it necessary to discredit the directors of Exicom as Fear suggested. They had, in his view, already been discredited (T349). As it turned out, Futuris did launch strong personal attacks upon the directors of Exicom in subsequent public statements and correspondence. Exicom's Annual Report and Financial Statements for the Year Ended 30 June 1995 71 The Financial Statements for Exicom for the year ended 30 June 1995 were published at the end of September (X40). They showed accumulated losses of $99,113,000 for the end of the year. Accumulated losses to 30 June 1994 had been $67,709,000. The balance sheet showed net assets of $23,304,000. Newman said he probably would have thrown them in the bin. They did not tell him anything he did not already know: "I'd done due diligence. I knew all the major issues as to the financial viability of the company, the value of the company, so I'd challenge you to find anything that I did in relation to analysing these accounts." (T350) 72 Exicom's annual report for the year ended 30 June indicated that provision had been made in the company's accounts for resolution of the Telstra dispute. The Board had also decided to terminate its Research and Development Syndication and had "fully provided against the carrying value of the Marketing Licence which form[ed] part of the syndication agreement" (X41). 73 In early October Simmonds and Zilkha and their lawyers at Freehills were endeavouring to finalise, their due diligence inquiries, agreements with Telstra and the CBA and the detailed form of a proposed agreement with Exicom as well as a timetable for necessary approvals from shareholders and the FIRB (X46). KPMG was engaged on 6 October to produce a Financial Due Diligence Review on Exicom, a draft of which was put in evidence (X42). On 11 October, Gordon sent a fax to Zilkha indicating that he had met with O'Brien at the CBA and discussed, inter alia, an option "to buy out the CBA position" (X43) and the provision of new bank facilities for Exicom. 74 Nortel wrote to Exicom on 13 October demanding reduction of its debt to Nortel with a proposed schedule of repayments totalling $US9.7 million to be made by 31 December and incorporating repurchase of inventory. Nortel requested a "prompt written commitment" to the reduction of its debt and the associated inventory purchase (X44). Newman knew that a demand had been made involving a substantial amount in the range of millions of dollars. He also considered that Nortel would not act so precipitously as to bring Exicom down until such time as all propositions had been fully worked through. He was dismissive of the demand saying: "So it was a typical threat of a major supplier looking for leverage or customer looking for leverage." (T351) The Bank Option is Signed – 13 October 1995 75 On 13 October, Capp wrote to O'Brien stating that Exicom had "no objection to the Bank selling its debt or granting an option to sell its debt to Simmonds/Zilkha upon the in principle terms outlined". The "in principle" terms were not set out in the letter. However on the same day an Option Deed was executed between the CBA and Simmonds and Zilkha (X448). The Deed referred to Simmonds and Zilkha as "the Investors". The operative clause of the deed, cl 2.1, provided thus: "2.1 Grant of Option (a) In consideration of the payment of the Option Fee by the Investors to CBA and the Investors continuing to carry out due diligence referred to in Recital A, CBA grants to the Investors jointly (but not severally) the Option for the Investors (or their nominees) to purchase the Exicom Facilities and the Exicom Securities. (b) CBA acknowledges receipt of the Option Fee." 76 The Investors were entitled to exercise the option at any time during the option period which was defined as meaning the period from and including the date of the deed up to and including 5pm (Sydney time) on the Option Expiration Date (cl 1.1). The Option Expiration Date was defined as the date which is the earlier of: "(a) the date which is 15 Business Days after the general meeting of shareholders of Exicom Limited to approve the recapitalisation of the Exicom Group by the Investors; and (b) 29 February 1996." 77 Clause 2.3 provided for expiration of the Option in other circumstances thus: "2.3 Expiry of Option The Option expires automatically if the Exicom Group fails to comply with the Exicom Obligations (and that failure has not been rectified (if capable of rectification) within 10 Business Days of notice being given by CBA to Exicom Limited and to the Investors) during the Option Period." 78 Payment following the exercise of the Option was governed by cl 2.2(b) and (c). Within two business days after receipt of the Option Notice, CBA was to advise the Investors of the Exicom Cash Amount and provide documentation detailing its calculation. Completion of the purchase of the facilities and securities under the exercise of the Option was to occur within five business days after the Investors received the information referred to in cl 2.2(b). (cl 2.2(c)). The CBA covenanted not to sell or transfer the Exicom facilities or securities or grant any other option inconsistent with the Option or enforce any rights or take any other action under the Exicom Facility or Exicom Securities before the end of the Option Period or the expiry of the Option, whichever was the earlier. Moreover unless required by law the CBA could not do anything which would prejudice or be likely to prejudice the Investors' rights under the deed (cl 2.5). 79 The CBA also undertook at any time during the Option Period to do all things reasonably required of it by the Investors including the execution of documents for the novation of arrangements between CBA and the Exicom Group in order to restructure the arrangements between the CBA and the Investors as set out in the deed so as to minimise transaction costs. Notices and other communications were to be sent to the CBA at Level 8, Corner Pitt Street and Martin Place, Sydney marked for the attention of Mr John E O'Brien. Notices to the Investors were to be sent to Freehills also in Sydney marked for the attention of Mr David Gordon. Notice was regarded as being given by the sender and received by the addressee, if by facsimile transmission, whether or not legibly received, when transmitted to the addressee, but if the delivery or receipt were on a day which was not a business day or was after 4pm at the addressee's time it would be regarded as received at 9am on the following business day (cl 5.1(a)(3)). There was a confidentiality clause in the Option as follows: "5.3 Confidentiality (a) Subject to clause 5.3(c), no party may disclose any information in respect of this deed, other than for the purpose of enforcing this deed or as required by law. (b) Each party must use its best endeavours to ensure that none of its employees, servants, agents, officers or advisers disclose any such information. (c) This deed may be disclosed for the purposes of obtaining any approvals or consents required for the purposes of the recapitalisation referred to in Recital A." There was a prohibition on assignment in cl 5.8 thus: "5.8 Assignment Subject to the terms of this deed, rights arising out of or under this deed are not assignable by one party without the prior written consent of the other party." And under cl 5.12 time was made of the essence of the deed. More Futuris Strategy Development – Mid-October 1995 80 A further internal Futuris document setting out tactics in the ongoing battle was prepared about mid-October (X297). It was accepted by Newman as a fair summary of steps under consideration by his management team (T351). The document described the Futuris objective as obtaining "control of Exicom at the lowest possible price". Newman did not accept that as a statement of his objective at the time. His objective was: "To recapitalise the company and have something less than a controlling interest but if we had to have a controlling interest, then so be it, but to keep it as a separately listed public company." One of the steps in a strategy for obtaining that objective was to frustrate the Simmonds and Zilkha deal. In elaboration under that heading in the document it was proposed that an injunction be sought restraining the holding of the meeting to consider the Simmonds and Zilkha proposal. Handwritten notes by Davies at about the same time canvassed a similar suggestion (X298). 81 Newman said he had told Davies and Clark from the outset that the Exicom transaction was theirs. He wanted to see if they were good enough to do it without his full involvement (T356). After a time however, he felt that Futuris wasn't doing as well as it should be and he became more involved in reviewing strategy. Notes he made in October contained a reference to ERG under the heading "Other Parties". He did not know, but suspected, that ERG was interested in Exicom. It was only a question in his mind when he would speak to Fogarty because he knew that he had previously been interested (T354). Exicom Announces Anticipated Receipt of Simmonds and Zilkha Proposal – 16 October 1995 82 On 16 October, Patterson, the secretary of Exicom, published an announcement in the following terms: "The Board of Exicom wishes to advise that, in accordance with the agreement entered into with the Simmonds/Zilkha consortium of 7 September, 1995, the consortium will be submitting its proposal for a recapitalisation of the Company to the Board on Friday, 20 October. The Board expects that a final agreement will be entered into with the consortium during the week commencing Monday, 23 October. Any agreement entered into will be subject to all necessary approvals. Full details of the final agreement will be released immediately after it has been signed with the consortium." (X237) Futuris Turns Up the Heat – 17 to 19 October 1995 83 On 17 October 1995, Futuris made a press announcement of its nomination of Newman, Davies and Clark as directors at the forthcoming annual general meeting. It referred to Exicom's injunction and accused Capp, of "…abusing the Court system by simply endeavouring to disenfranchise the major shareholder at a time when he will be requesting support for a major reconstruction of the company". Reference was made to Exicom's "dire need of financial assistance" and the control of the company passing to new shareholders. It referred to the current Board as presiding over "…one of the largest corporate losses in the Australian telecommunications industry". The announcement indicated that Futuris had written to shareholders seeking the removal of Capp and other directors from the Board. It said: "Futuris believes that Mr Capp fortunately represents a "dying breed" of Australian independent directors who prophesies (sic) acting in shareholders interests. They attend meetings, seek advice on every issue of any contentious nature and then when the company's performance is below expectation they distance themselves by hiding behind the cliche that they acted on advice in the interest of shareholders." The release also complained about the absence of details of the Simmonds and Zilkha proposal and noted that Simmonds was a company with a capitalisation of about $45 million and was yet to make a profit. Zilkha was described as: "…a small investment bank in New York with the enviable record of trying for at least 12 months, based on full disclosure of information provided by Exicom, to put a capital reconstruction together and was not able to do so." (sic) The press announcement attached a copy of the letter written by Newman to Capp dated 17 October 1995 and by Clark to company shareholders. This was part of the strategy which had been evolved between Newman and his officers and Fear. One of two versions of the press announcement, both apparently identically worded, bore the heading "Futuris Turns Heat Up on Exicom Board" (X301). 84 On 19 October 1995, Newman wrote to Stephen Newman in what was described as an open letter to the Managing Director and all employees of that company. He expressed his disappointment that Stephen Newman had not responded to his calls and stated his opinion that managing directors should always talk to their major shareholders. He attached to the letter a copy of the letter he had sent to Exicom shareholders and the press release made by Futuris two days previously. The letter concluded: "Furthermore, through the process of this unacceptable behaviour period, I seek the opportunity to visit the company and meet as many employees and managers as I possibly can. I would appreciate it if you could arrange this as soon as possible." 85 Futuris wrote to Telstra and the CBA on 19 October 1995, in each case commenting on the risk associated with the Simmonds and Zilkha proposal. Both companies were said to have "little credibility". Capp was said to have prostituted the reputation of professional company directors by disenfranchising his shareholders (presumably Futuris). The letter to Telstra restated Futuris' support for the offer made by Telstra for settlement of its claim. The letter to the CBA said: "Given that you are well aware of our offer to purchase your debt, which still stands, your position is safe and therefore you should wait until the shareholder wrangle is concluded." Asked whether he expected Telstra to take seriously any reflection he made on another party, Newman responded in the negative (T361). I infer that he held the same belief in respect of the letter to the CBA. 86 On 19 October, Exicom extended the exclusivity period agreed in the letter of 7 September 1995 between Exicom and Simmonds and Zilkha. It was extended from 20 October until the date of execution of all necessary definitive agreements between Exicom, Simmonds, Zilkha and others for the recapitalisation of Exicom, or until Exicom gave written notice terminating the exclusivity arrangement (X48). 87 Futuris initiated action in the Supreme Court of New South Wales seeking injunctive relief against Exicom to prevent it from entering into any agreement with Simmonds and Zilkha. An interim undertaking was given by Exicom to the Court on 19 October not to enter into any such agreement before 5pm on 23 October 1995. This was proclaimed as a victory by Futuris with a press release headed "EXICOM LIMITED – FUTURIS SCORES" (X305). Futuris said in the press release that it was obliged to take action following the announcement by Exicom on 16 October that it was proposing to enter into an agreement with Simmonds and Zilkha when the terms of such agreement had yet to be submitted to the Exicom Board. Newman was reported in the press release as saying that he did not understand how any prudent board could propose to enter into an agreement regardless of its terms and without considering other alternatives to the company. An article reflecting the earlier press release of 17 October appeared in the Australian Financial Review of 19 October. It reported, at p 29, Newman's "scathing attack on the chairman and the directors of the struggling Exicom Ltd telephone and telecommunications group". Asked in cross-examination if he were pleased to see an article of that sort, he said: "I was desperately unhappy. I mean, look at the size of the article." He said he would have hoped for a much bigger coverage. 88 On 20 October, Clark wrote to Exicom complaining about the grant of exclusivity for due diligence purposes to Simmonds and Zilkha which he said had "not yet submitted a proposal capable of acceptance to the Exicom Board…". His letter included a contention that the grant of exclusivity "…cannot at any time be in the interests of shareholders" and that Capp, to whom the letter was addressed, had "… a fiduciary duty to consider all proposals on the recapitalisation of Exicom and submit them to shareholders for consideration". Futuris, it was said, stood "ready to negotiate a resolution in the interests of all shareholders" (X49). 89 Freehills also wrote to Exicom on 20 October adverting to the risk that Simmonds and Zilkha might be required to disclose their detailed proposal in the Supreme Court proceedings. For that reason they were not prepared to submit it to Exicom until the question of disclosure to third parties had been resolved (X50). 90 The proceedings instituted by Futuris continued on Monday, 23 October. The press release war also continued. Exicom put out a release accusing Futuris of engaging in "… a tactical campaign… to destabilise the restructuring of the company through a process of delay and misrepresentation" (X52). Futuris made an announcement to the ASX entitled "Exicom Board Fails Again" alleging that the Simmonds and Zilkha consortium was "… yet to submit a proposal capable of acceptance despite at least eight weeks of due diligence". It called on the Exicom Board to negotiate in good faith with any interested party to enable a sensible recapitalisation of Exicom to proceed in a timely manner (X307). On 24 October, the Supreme Court of New South Wales declined Futuris' application for interlocutory injunctive relief against Exicom. Futuris also failed to secure a discharge of the injunction restraining from it dealing in Exicom shares (T363). A press release to that effect was issued by Exicom's company secretary on that day (X308). 91 Bennett & Co immediately wrote to Corrs. They alleged that the conduct of Exicom in announcing to the ASX and the media that Futuris proceedings were part of a tactical campaign to destabilise the restructuring of Exicom through a process of delay and misrepresentation, was misleading or deceptive conduct by Exicom in contravention of s 52 of the Trade Practices Act (X309). The letter also stated Futuris' intention to appeal against the court decision. The action against Exicom and Simmonds and Zilkha would continue. 92 On 25 October, Clark wrote to O'Brien at the CBA referring to Futuris' proceedings against Exicom. He said that Futuris remained committed to participating in the recapitalisation of Exicom and that Exicom had refused to acknowledge or negotiate the terms of the Futuris offer of 8 September. The letter recommended strongly against the CBA committing to any proposal presented to the Exicom Board before deliberating on alternative proposals from any other party, including Futuris (X310). The letter did say, however, that if the Simmonds and Zilkha proposal were superior to the Futuris proposal then Futuris would not frustrate the recapitalisation but would encourage it. Newman said this was a true statement of the position (T364). ERG Opens Dialogue with Simmonds and Zilkha – October 1995 93 In September and October 1995 Fogarty was aware of market speculation that Simmonds and Zilkha were looking for an Australian partner. He contacted Plumridge at ANZ McCaughan who suggested he speak to Capp. Capp told him that ERG should feel free to deal directly with Simmonds and Zilkha. Capp or Plumridge gave him the name of Gordon at Freehills. In or about late September 1995, Fogarty spoke with Gordon who gave him the names of people he should contact at Simmonds. Between 11 October and 23 October, Fogarty had a number of conversations with representatives of Simmonds and Zilkha. He was in the United Kingdom on 18, 19 and 20 October and arranged to travel from there to Toronto to meet with representatives of the two companies on 23 October. In the meantime, Peter Harley, the Chief Financial Officer of ERG, had prepared a memorandum to ERG Directors dated 19 October 1995 about a proposed rights issue (X51). Among growth opportunities for the company he listed possible involvement in the ownership and management of Exicom. He referred to the approach which had already been made to Simmonds (presumably by Fogarty) for involvement in a "joint proposal for the restructuring of the company". He reported to the Board that Simmonds was keen to have a local "partner" who could value-add to the business and that there would be an opportunity for ERG to participate in the restructuring. Harley identified as key issues to be negotiated in the coming weeks: 1. Respective levels of ownership of Simmonds/ERG – ERG having indicated that it had a strong preference to move to at least 50% equity in the near term. 2. Negotiations over the debt due to the Commonwealth Bank (believed to be $25 million) and to Telstra, for rectification of product faults, estimated at $15 million. 3. An exit for Futuris. 94 Fogarty met with John Simmonds and David O'Kell who was Simmonds' Executive Vice-President on 23 October 1995. They were joined later by Donald Zilkha. They discussed the possible involvement of ERG in their consortium and agreed broad principles upon which they could proceed. It was agreed that Fogarty would return to Australia via Sydney and meet with Gordon to discuss how they could best structure a joint proposal to recapitalise Exicom. 95 The Board of ERG met on the same day in Perth and discussed Harley's memo of 19 October 1995 and a letter from SPC Warburg setting out the proposed terms of a rights issue to raise approximately $49 million. The Harley memorandum said, inter alia: "It has been the view of management for some time that, given the strong underlying contract base of the Exicom business, the fact that it is the largest local manufacturer of telecommunications equipment and therefore a key player in the industry, and that the company has not been well managed, provides considerable opportunity for ERG to be involved in a turnaround of the company." This reflected Fogarty's personal view which he expressed as being subject to due diligence checking (T837). Asked if he regarded Exicom as a key player in the industry, he said: "Well, I think that was a given. It had a large contract with Telstra, one of two organisations that had that contract." (T837) The Board agreed that further funding was required for the company to pursue expansion opportunities with ADC Telecommunications Inc and Exicom and to take up other opportunities. It resolved to proceed with the due diligence process and preparation of necessary documentation for a rights issue so that directors could further consider the position at a meeting to be held on 30 October. A final decision would depend upon, inter alia, progress with the various opportunities available to the company particularly with ADC and Exicom (X240). 96 Fogarty returned to Australia, arriving in Sydney on 25 October, where he met with Plumridge. He made notes of their discussions which covered working capital requirements for Exicom and the amounts necessary to settle with Telstra and to pay out the CBA (X388). Fogarty was told it would be acceptable for ERG to put a proposal. Exicom's Board, he was informed, now supported ERG's involvement. Fogarty said there would have to be due diligence as there were concerns about Exicom's forecasts and projections. ERG was to be allowed to undertake a limited due diligence in late October. By way of follow up, Harley, Michael Lamb the Managing Director, Telecommunications, and Roland Schmidt, the Managing Director, Manufacturing, were dispatched to Sydney to undertake due diligence work (X56) which proceeded on 27 October and the weekend of 28 and 29 October. The Simmonds/Zilkha Offer – 25 October 1995 97 On 25 October, an offer was sent on behalf of Simmonds/Zilkha to Exicom containing a proposal for its recapitalisation and restructuring (X53). The offer was set out in a letter from Freehill Hollingdale & Page which made reference to discussions between the two companies and "… Australian organisations interested in joining them in the Company's recapitalisation". So it was said "the Investors will have the right to nominate one or more third party organisations to join with them under the subscription agreement". The proposal was announced to the ASX on the same day (X244). 98 The Simmonds and Zilkha offer involved the provision of funds to Exicom by way of private placement and underwritten capital raising, the details of which need not be set out here. Simmonds and Zilkha were also to acquire the outstanding CBA debt in respect of cash facilities to be secured by a second rank fixed and floating charge. The provision of the funds was expressed to be subject to a number of conditions including requisite approvals and the non-occurrence of any material adverse change in the financial position or profitability of the company between the date of signing of the Subscription Agreement and the date on which Simmonds and Zilkha were to provide funds to the company. It was a condition that the CBA agree to continue Exicom's non-cash facilities and provide further cash facilities of $5 million. An additional condition required a new product supply agreement for TF200 and TF400 phones with Telstra and release from the current warranty claim on the TF200 phones. 99 On 26 October, Exicom made a public announcement of the proposal. Its release stated that there were various aspects of the proposal that were unacceptable and required further negotiation. The Board was pursuing discussions with Simmonds and Zilkha to achieve an outcome acceptable to both parties and to Exicom shareholders. Simmonds and Zilkha Negotiate with ERG – 27, 28 and 29 October 1995 100 Exicom made a counter offer to Simmonds and Zilkha which was forwarded to them by Gordon on the same day, namely 27 October. He enclosed his file note of a conversation with Newman in which they had discussed Zilkha's approach to Futuris. Also enclosed was a draft memorandum of understanding between Simmonds and Zilkha and ERG. In a conversation with Fogarty, referred to in his fax to Simmonds and Zilkha, Gordon and Fogarty agreed that they would discuss the draft over the weekend and subject to the ERG Board decision on 30 October, could enter into it (X55). Fogarty Reports to the ERG Directors – 27 October 1995 101 In a confidential report to directors of ERG on 27 October 1995, Fogarty, using the pseudonym "Exocet" for Exicom recounted the history of ERG's developing interest in Exicom and his meeting with the Simmonds and Zilkha representatives in Toronto (X56). He described Simmonds in his report as a small, but fast growing telecommunications manufacturer in Canada. Simmonds' objective, as he saw it, was to have a fifteen to twenty per cent shareholding and gain revenue through marketing Exicom products in North America. It was envisaged that control would be achieved through a thirty to forty per cent shareholding with Board control or a management contract. On that basis, Simmonds and ERG seemed to Fogarty to offer a logical fit. 102 Zilkha, on the other hand, according to Fogarty, was not keen on ERG having control and had suggested that they could perhaps obtain control by buying him out "down the track". Subsequently in discussions with ANZ McCaughan, Zilkha had advised that they wanted to deal with ERG and their timetable was for ERG to put up a proposal which could be accepted within twenty four hours. ERG's Directors Meet – 30 October 1995 103 A meeting of the directors of ERG on 30 October 1995 considered Fogarty's report of 27 October (X 56) and an Executive Overview of the Due Diligence dated 30 October which he prepared in light of the preliminary due diligence work carried out by Harley, Lamb and Schmidt on the preceding weekend (X 58). The Board agreed that the preferred course was to privatise Exicom with ERG owning fifty per cent and Zilkhar/Simmonds the balance (X57). In his Executive Overview, Fogarty reported to the Board that the company was badly structured and had poor quality systems and processes in place. It was a high volume, low margin business. Well run it should produce a five per cent net bottom line profit. Fogarty regarded its current arrangements with Telstra and Nortel as "at best shaky". Renegotiation of these arrangements would be a necessary condition of the acquisition of an interest in the company. Overheads were high, with premises a major factor. The rent for the Villawood factory was $3.6 million annually and the facility was too large. Manufacturing plant and equipment were in need of upgrade involving an investment of $5 million to $7 million. The company's financial forecasts had been poor and it was difficult to rely on their 1996 forecast. Although it was profitable in the first quarter it would probably break even in the second. Retrenchment costs would be a factor as the in-house metal shop and the in-house plastic injection were eliminated. Simmonds and Zilkha were offering ten cents while the Exicom Board wanted twenty to twenty five cents. The Board and Chief Executive Officer were substandard and would have to go. A proposed structure with 25% each of the shares held by ERG, Simmonds and Zilkha was outlined. Under that proposal 20% would be held by existing shareholders and 5% issued to institutions. 104 In relation to the CBA debt, Fogarty stated in the Overview: "Before proceeding, we should also insist that we have a part ownership of the debt from CBA over which SCL/Zilkha have an option. The option is to purchase the face value of the debt ($21 million) for $15.7 million. We could possibly agree that the debt be purchased one-third each but otherwise should insist on a higher equity stake." There was also reference in the paper to Exicom being based in the electorate of the then Prime Minister, the Hon Paul Keating. It was said that its failure during an election lead-up would be bad for the government. In cross-examination Fogarty said that the view being promoted at times, he thought it was by ANZ McCaughan and in discussions with the CBA, was that because the company was based in the Prime Minister's electorate it would be unlikely that the CBA would step in and take action against it (T 840). Futuris has Discussions with Zilkha and the CBA – 27 October 1995 105 Sometime around 27 October, Zilkha sounded out Alan Newman about the possibility of Futuris purchasing his position in the Simmonds' consortium. Newman did not pursue the prospect. However he did not wish to offend Zilkha who was a friend of his Chairman, Beischer. He wanted to keep the option alive of talking to Zilkha, while not vigorously pursuing the matter. He said: "I really was in the process of testing out whether he had the resources and the intestinal fortitude to go ahead with what he was proposing." (T365, X55) Newman agreed in cross-examination that he thought the possibility of joining forces with Simmonds was worthy of consideration. He doubted it was going to lead anywhere however because he doubted that Simmonds and Zilkha had the capacity to implement the proposed recapitalisation. He was of the view that they were saying that they had done a deal with Telstra or were able to do a deal with Telstra (T366). 106 On 1 November, Davies had a conversation with O'Brien of the CBA. He asked whether, if Futuris had the endorsement of the Exicom Board, the Bank would be free to sell its position. He was told that it probably would be but the Board would have to negotiate costs. If enough time passed, or negotiations were broken off, the CBA might be prepared to act unilaterally. The CBA was still interested in recapitalising Exicom (X313). Davies reported to Newman on his conversation with O'Brien (T366). Futuris' Application for Leave to Appeal Dismissed – 30 October 1995 107 On 30 October, the New South Wales Court of Appeal dismissed an application by Futuris seeking leave to appeal against the decision of Young J handed down on 24 October. This was greeted with a press release from Exicom, headlined "FUTURIS LOSES AGAIN" (X312). Exicom Obtain an Extension of Time for its Annual General Meeting – 31 October 1995 108 On 30 October, Exicom applied to the Australian Securities Commission ("ASC") for an extension of time for the holding of the Exicom annual general meeting to 31 January 1996. This was pursuant to a resolution of the directors of Exicom passed on 13 October 1995. The reasons given for the extension included the uncertainty surrounding the voting rights of members because of the still unresolved litigation with Futuris (X60). On 31 October, the ASC approved the extension under subs 245(5) of the Corporations Law to a date not later than 31 January 1996 (X61). Futuris Appeals Against the Extension of Time – 3 November 1995 109 On 3 November 1995, Futuris lodged an application in the Federal Court seeking an order that the directors of Exicom forthwith convene a general meeting of the company for the purpose of considering the election of directors. Futuris also filed an appeal with the Administrative Appeals Tribunal against the ASC's approval of the extension. 110 Futuris' general strategy at this time was set out in a document entitled "Futuris/Exicom Action" (X316) which, Newman agreed, listed the various steps that were to be taken to progress Futuris' proposal in relation to Exicom. Fear was to brief the financial journalist Brian Frith, putting to him the contentions that the Board of Exicom was incompetent, that it had given Simmonds and Zilkha de facto control, that it had sought an extension of time for its annual general meeting and was afraid that Futuris nominees would get elected. Fear and Clark were to prepare press announcements on the status of the legal action and the deferral of the AGM. There was to be a letter to shareholders and presentations were to be arranged to major shareholders to secure their support. Dialogue with Simmonds and Zilkha was to continue to extract as much information as possible to determine if they had a position to sell. Davies was to write to the CBA notifying that any extension of the Simmonds and Zilkha option would be a breach of statutory and regulatory duties as it would amount to passing of the control of the company without shareholder approval. Meetings were to be arranged with the ASX and the ASC. The legal actions were to be continually monitored and other collateral actions considered to continue pressure on the Exicom Board (X316, T378-379). 111 In a further strategy paper prepared by Fear entitled "Futuris/Exicom The Way Forward" and dated 3 November 1995 (X317), it was proposed that continued and sustained destabilisation of the Exicom Board in the press was essential if a break through were to be achieved. Newman said this was advice which he received. However, he was cautious about it because he said: "The market gets sick of that sometimes…" It was also recommended that Futuris be ready to react if Simmonds and Zilkha reached a recapitalisation agreement with the Board. One of the options Futuris would have in readiness, according to Newman, was a takeover bid (T380). 112 On 3 November, Bennett & Co wrote to the Chairman of the ASC complaining about its conduct in approving the extension of time for the annual general meeting without consulting Futuris or its Board nominees about it (X318). Newman instructed that the letter be sent (T381). 113 At about the same time, Fogarty had been in conversation with Capp who confirmed that it was alright for ERG to approach Newman and discuss his shareholding. Capp had discussed this with Stephen Newman who had agreed there was no down side (X391). ERG Explores Settlement with Futuris – 4 November 1995 114 With Capp's blessing, Fogarty began exploring ways of settling the disputes between Exicom and Futuris with Newman. He was concerned that a protracted court battle with Futuris would destroy Exicom. He first telephoned Newman on Saturday, 4 November 1995. Newman returned his call. They had a lengthy conversation from about 8.40pm to 9.50pm. Fogarty made notes of the conversation (X392). He told Newman that ERG's objective was to move forward and have management control of Exicom. As a result of proposed agreements, ERG would have rights to the CBA's debt. He said that ERG's primary interest in Exicom was getting the business as a whole because ERG was considering retaining and expanding Exicom's and ERG's manufacturing capability. 115 According to Fogarty, Newman said that no-one could do a deal without giving Exicom's shareholders something and that Simmonds and Zilkha had put a deal to him involving the sale of the CBA debt. Newman, who recalled this conversation with Fogarty, denied that he said that. However he was concerned to determine whether rights had been obtained by ERG in relation to the Bank debt which he regarded as a critical aspect of the control of Exicom. I accept that he held that view and wanted to know ERG's position. At the time he had had some discussions with Zilkha although, from his point of view, their object was to assess Zilkha's determination and ability to proceed with the recapitalisation. Fogarty's evidence was that Newman said he did not believe that Simmonds and Zilkha "had" the CBA debt. The CBA was Futuris' banker as well as Exicom's. 116 In re-examination, Newman was referred to point seven in Fogarty's handwritten notes of the conversation, which read "we have Bank debt". He was asked if he could remember the exchange with Fogarty in that connection. He said: "It was my continued fishing expedition to try and understand the strength of his position and what he did or didn't have for me to consider and I repetitively got that he had Telstra and Nortel locked up and that he had the bank debt and therefore we had nowhere to go; therefore we should sell out and go away." (T501) This does not mean that Fogarty said or that Newman believed that at that time ERG had acquired rights in relation to the Bank Option. The note "we have Bank debt" was a reference to the outcome of a proposed agreement with Simmonds and Zilkha. Indeed Futuris' letter to the Bank of 7 November, which will be referred to shortly in these reasons, is only consistent with Futuris' belief that the option holders were Simmonds and Zilkha. 117 Fogarty said that Newman told him that he could see some merit in ERG's relationship with Simmonds. He said, however, the situation was very political and suggested that a deal could be worked out with Nortel. Newman said he was happy to string the whole thing out for six months. He wanted to be appointed to Exicom's Board but, according to Fogarty, said he would consider going away if Futuris were paid out for its shares in Exicom. Fogarty's evidence was that when he put to Newman that he would presumably be willing to accept something less than $5 million to walk away from Exicom, Newman said he would. Newman denied saying that at such an early stage, Futuris would walk away from Exicom. He told Fogarty that his options included backing him, coming back into the deal at a later stage, contributing to ERG's capital raising by taking equity under its rights issue or joining with ERG to recapitalise Exicom when Simmonds and Zilkha failed. I accept that Newman said all these things, but in my view he was also prepared, even at that stage, to consider walking out if the exit premium were right and probably said so. ERG Enters Agreement with Simmonds/Zilkha – 6 November 1995 118 On 6 November 1995, ERG entered into a Memorandum of Understanding with Simmonds and Zilkha. It was expressed as setting out "…the legally binding understanding that has been reached for ERG to join SCL and Zilkha in a consortium (the "Consortium") to present a proposal to Exicom Limited ("Exicom") for its recapitalisation and to effect that proposal". The parties to the deed agreed to work together to structure a joint proposal to recapitalise Exicom as a publicly listed company and to provide funds for its working capital purposes. They agreed to share all information received or generated by any of them in relation to Exicom and the proposed recapitalisation (cl 2). They also agreed that they would work exclusively with one another in relation to the proposal and no-one would have dealings or enter into any discussions or agreements with Exicom without the prior consent of the other parties (cl 3). They were to determine and include in their proposal the types of securities and other interests they would each have in Exicom (cl 4). They envisaged that $17 million of new equity would be subscribed for by the Consortium and that their shareholdings immediately after the issue of shares to the Consortium members would be 35% as to ERG, 13.85% as to Simmonds and 13.85% as to Zilkha. ERG was to have the right to purchase further shares from Futuris or otherwise so as to take its undiluted equity shareholding to 40% (cl 4(a)). At clause 4(b) the following warranty appeared: "Debt SCL and Zilkha warrant to ERG that they have entered into an option (the "CBA Option") with the Commonwealth Bank of Australia to purchase the Bank's debt to Exicom at 100 cents in the dollar for the "non-cash facilities" of approximately $7.5 million and 75 cents in the dollar for the "cash facilities" of approximately $21 million (ie a purchase price of $15.75 million). It is envisaged that the Consortium will exercise the CBA Option and take an assignment of the CBA cash facilities, which will be amended as set out below, with the Bank continuing to provide the non-cash facilities. The parties will share the total discount equally and will have the following interests in the cash facilities…." ERG was to have a first right of refusal if Zilkha or Simmonds wanted to sell any of their shares or other securities in Exicom (cl 5(a)). The same was true if ERG wished to sell any of its shares or other securities (cl 5(a)(2)). It was the intention of the parties that the day to day operations of Exicom would be managed by ERG, that there would be two ERG nominees on the Board, three nominees for Simmonds and Zilkha together and two independent directors, including an independent chairman (cl 5(c) and (d)). Each party was to treat as strictly confidential and not disclose any information or intellectual property received or obtained as a result of or in connection with the memorandum of the proposal (cl 7.1). Any party to the memorandum was entitled to terminate its involvement in the Consortium at any time prior to the entry into any definitive Shareholder's Agreement by giving the other members written notice (cl 8(a)). This termination was subject to reimbursement for ERG's share of the Consortium costs (cl 8(c)). (X1 pp 82-90) Clause 8(b) provided that if either Simmonds or Zilkha were to terminate its involvement in the consortium the remaining parties shall be entitled to the CBA option on condition that they provide to the exiting party free of charge and without restriction options in Exicom with an aggregate exercise price of one sixth of the discount on the CBA facilities to Exicom immediately after the issue of shares with the same exercise price per option as the options issued to the remaining parties (X1 p 87). 119 Also on 6 November 1995, Gordon, at Fogarty's request, sent a copy of the option agreement between the CBA and Simmonds and Zilkha dated 13 October 1995 to ERG for the purpose of its Memorandum of Understanding. This was on the basis of the Bank's consent to ERG seeing the document. Gordon said that other than the parties to it, no one else had a copy (including Exicom) (X444). Fogarty was asked in cross-examination if he had seen the option before entering into the memorandum of understanding. At first he said he did not believe he had. He thought, however, that the circumstances of the option had been explained to him. But he was pressed with the letter from Gordon to Leigh Warnick at Mallesons enclosing the option. It was put to him that he was shown the option as he was about to sign the memorandum because he wouldn't have signed without seeing it. He then said: "I think we may have actually, from memory – I recall, I think, that we wouldn't actually sign the MOU until we'd seen the option because it actually says in the MOU that they have the option, and of course there'd been arguments about whether it existed or not, so I believe we did ask to see it prior to entering into the MOU." (T780) In my opinion he did see the option before executing the Memorandum of Understanding. 120 On 7 November, Fogarty arranged with Harley and Lynton McRostie, a financial consultant retained by ERG, to meet with Harold Morton of Simmonds in Sydney and to begin reviewing all the documentation relating to Exicom (X438 par 37). Fogarty himself, with Gordon, reviewed Exicom's agreements with Telstra and their status. At that time Simmonds and Zilkha had offered Telstra $7,500,000 plus deferred payments to settle its claim. The basis of the agreement "in principle" as Fogarty described it, was set out in the letter which Telstra had sent to Freehills on 1 September and which is referred to earlier (X403). Futuris Threatens the CBA – 7 November 1995 121 According to Newman, the discussion of 4 November with Fogarty played a part in the drafting of a letter which Futuris sent to the CBA on 7 November 1995 over the name of Lawrence Clark, the company secretary of Futuris. The text of the letter was as follows: "As you are aware, Futuris Corporation Ltd ("Futuris") owns approximately 19% of Exicom. It has come to Futuris' attention that the Commonwealth Bank has granted Zilkha and Company ("Zilkha") and/or Simmonds Communications Limited ("Simmonds") an option to acquire the Bank's debt. These facts have been confirmed by Exicom. The grant of an option to acquire the Bank debt effectively hands control of Exicom to Simmonds/Zilkha without requisite statutory and shareholder approvals. If the grant of the option was consented to by Exicom then the Board has breached its fiduciary duties. Alternatively if the option was not sanctioned by the Board then the Bank has breached its duty to the company. An option was neither required nor warranted. Futuris reserves its rights in either case. Futuris understands that the option is shortly due to expire. Futuris places on notice that should the Bank, with or without the sanction of the Board, agree to extend the option, Futuris, on behalf of the Exicom shareholders, regretfully will commence proceedings against the Bank." (X64) In cross-examination earlier, Newman had said that Futuris did not know the source of the information about the option to acquire the CBA debt. He regarded the acquisition of the debt or anything to do with the debt as the key to success in relation to Exicom's proposal (T382). He agreed that the threat to the CBA was a serious step to take and that it was a step that he agreed to take because of the significance he placed on the CBA debt (T382). He claimed that the letter was based on legal advice (T382). If that is so, the legal advice was questionable. It is not clear on what, if any, basis a shareholder of a company could assert a right to restrain a creditor of the company from disposing of its chose in action as it saw fit subject to compliance with any notice requirements at law. No basis was ever disclosed in this case either by submission or in the evidence presented. It was suggested in closing submissions by counsel for Futuris that ASX Listing Rules requiring shareholder approval for any change in "control" of the company were relevant. That, however, could have no bearing upon the rights of a creditor to assign a debt. Neither the advice nor its source was disclosed. Newman appeared to believe that it at least arguably represented the true position. So much emerges from his testimony about notes he made concerning a conversation with Fogarty on 13 November which is referred to later in these reasons. The CBA responded on 8 November to the Futuris letter of 7 November stating that any dealings with Exicom were matters between it and the CBA, which would continue to observe normal banker/client relationships and work within the parameters of its security documents (X320). A New Bank Option is Executed – 8 November 1995 122 On 8 November and pursuant to discussions held on 2 November 1995 and a letter from Gordon on 3 November 1995 (X63), the CBA, Simmonds and Zilkha, terminated the Option Deed made on 13 October and released each other from liability under it. They entered into a fresh deed which was substantially identical to the previous deed save that the grant of the option was expressed to be in consideration of the payment of the Option Fee and the Investors continuing to carry out the negotiations with a view to entering an agreement for the recapitalisation of the Exicom Group (X1). It contained a provision for compliance with the Foreign Acquisitions and Takeovers Act 1975 (Cth), the completion and lodgment of documents required by the Australian Securities Commission in connection therewith and the assignment of the Exicom Facilities and the Exicom Securities "…to the Investors or their nominees". It also provided in cl 2.2(2) that in exchange the Investors or their nominees must pay the Exicom cash amount to CBA. Fogarty Reaches In Principle Agreement with Telstra – 8 November 1995 123 Fogarty went to Melbourne on 8 November to meet Mead, Shane Nugent and Ken Walton of Telstra. He told them ERG would only be interested in making the proposed payment of $7,500,000 to Telstra if there were a minimum guaranteed commitment by Telstra as to volume of product to be purchased from Exicom and if the level of liquidated damages were capped. Walton spoke of Telstra's extreme unhappiness with the management of Exicom and the quality of its products. Telstra wanted a clear assurance that the quality issues were to be dealt with. According to Fogarty, Walton preferred not to deal with Futuris. There was discussion of changes introduced by ERG into the proposed settlement agreement. Notes of parts of the discussion were made by Fogarty at the time (X393). The discussion was followed up by a letter dated 10 November from Gordon to Mead (X395). Gordon by then was acting on behalf of ERG, Simmonds and Zilkha. His letter set out "…a number of conceptual issues" which his clients regarded as "the fundamental basis upon which the recapitalised Exicom would deal with Telstra". It involved provision for a quality improvement program and, linked to the progress of that program, staged terms upon which the agreement could be terminated by Telstra. It involved also a release of Exicom by Telstra from existing liabilities in relation to the TF200 telephone. The letter concluded: "As discussed, this proposal is to be a matter between Telstra and my clients, ERG Limited, Zilkha & Company and Simmonds Capital Limited (formerly Simmonds Communications Limited), on the basis that our final agreed documentation will be the documents Exicom will enter into if my clients' recapitalisation proposal is accepted and effected. This letter and our discussions are confidential and not to be disclosed by Telstra." Futuris Writes to Exicom Shareholders – 8 November 1995 124 Futuris kept up its public relations war on the Exicom Board with a letter to Exicom shareholders dated 8 November and headed "EXICOM BOARD IN CONTINUING STATE OF SUSPENDED ANIMATION" (X319). It referred to the Board as attempting to renegotiate and sell the CBA debt, reconstruct the capital of the company and making an exclusive arrangement with Simmonds and Zilkha which had yielded no recapitalisation proposal at its expiry on 20 October. It asserted that shareholders should see all offers. It accused the Board of being "moribund, in suspended animation and unable to make a decision for shareholders". Futuris stated its intention of ensuring that all offers made to recapitalise or change control of the company would be placed before shareholders with the necessary accompanying independent assessments required by law. Exicom Makes a New Employment Agreement with its Chief Executive, Stephen Newman – 8 November 1995 125 By a letter dated 8 November, Capp wrote to Stephen Newman setting out the terms of a new agreement to govern his employment as Chief Executive Officer of the company. It was said to override any existing agreement between him and the company (X394). The agreement provided for a remuneration package of $310,000 per annum, the make-up of which was to be agreed between the company and Stephen Newman from time to time. The termination provision provided for summary dismissal for specified cause (par 7.1). It also provided for termination on twelve months' notice by the company or payment in lieu thereof (par 7.2). The letter which was signed by Capp was countersigned by Stephen Newman signifying his acceptance of its terms and conditions. Fogarty Meets Nortel – 9 November 1995 126 On 9 November 1995, Morton from Simmonds and Fogarty met with Brian Davis of Nortel. Davis told them he was not willing to negotiate any changes to Nortel's arrangements with Exicom, but was interested in getting the existing arrangements to work. Nortel would be willing to put more business into Exicom once the existing problems were fixed and quality systems were working properly. Davis said he was looking for a win/win relationship and believed Nortel could have that with ERG, Simmonds and Zilkha if they recapitalised Exicom. Fogarty made brief notes of this conversation (X396). 127 Stephen Newman sent to Morton and Fogarty on 9 November an Information Memorandum on Exicom which had been prepared two weeks previously. It was said to set out "…the Exicom of today and not the plan for the future." Further changes, it was said, were needed within Exicom to improve its operations, manufacturing quality, commercialism and bottom line. Fogarty Speaks to Newman Again – 9 November 1995 128 Fogarty again spoke with Newman in the evening of 9 November 1995. He made file notes during and immediately after the conversation. The notes were typed up (X397). Newman told him that he intended bidding for Exicom. He did not want to go to litigation but he was willing, unilaterally, to announce an offer for Exicom by way of takeover in the next forty eight hours. He said Futuris had Exicom shareholders' support. Fogarty, however, did not believe this as his own discussions with shareholders indicated that the ERG, Simmonds and Zilkha combination had more shareholder support than Futuris. Newman also said that Cruickshanks had indicated to him that the ERG, Simmonds and Zilkha combination was looking at making an offer that valued Exicom's shares at ten cents. Newman told Fogarty: (a) he wanted Exicom and was willing to offer twenty cents and that ERG, Simmonds and Zilkha should just go away; (b) ERG, Simmonds and Zilkha were nowhere near the price he wanted; (c) if they tried to put up an alternative proposal, then he would fight; (d) his team had been in contact with shareholders and he knew that Futuris had support from them as well as from Telstra and Nortel. Fogarty said it was Newman's right to make a takeover bid but he had to deal with the issue of the validity of his existing shareholding and the prospect that, by the time he completed any deal over a six to nine month dispute period, Exicom might well be insolvent. Newman said that Exicom was basically a sound company and that any company with a turnover of $150 million managed properly would make profitable returns to shareholders. Fogarty told him that however long any recapitalisation took, whether by Futuris or ERG, things would look worse. Newman said that he was sure he would hear "bad news" but said that this did not alter his assessment of the value of Exicom. The reference to "bad news" was a prediction by Newman that those with an interest in driving down the Exicom acquisition cost would be happy to make the most of its difficulties in the public arena. Newman said he believed that if ERG, Simmonds and Zilkha put up a proposal, Futuris would simply over bid it. Futuris was in such a position that somebody would have to deal with it and it would wait six months if necessary. Newman also said he was confident that the Bank would not do anything precipitous and he didn't believe that Simmonds and Zilkha had an enforceable option over the debt with the CBA. According to Newman's account of the conversation, Fogarty assured him that Simmonds and Zilkha had an enforceable option over the CBA debt facilities for Exicom. That, of course, was the case and I accept that Fogarty probably made reference to it in the course of conversation. Fogarty said Newman was willing to consider a proposal that took him out but only at a fair value which he estimated at twenty cents per share and which would include a fee for buying out the shareholding and the option held by the NRMA. In his notes, Fogarty acknowledged that Newman had to be dealt with. It was clear that he would use the press and fight tooth and nail and would happily spend $50,000 to $100,000 on legal costs to "blow ERG away" and lever his price. The CBA Extends Exicom's Facilities – 10 November 1995 129 By a letter dated 10 November 1995 to Exicom, the CBA said it continued to have concerns regarding the delay in achieving an orderly restructuring of the group but was for the time being prepared to leave carriage of the restructuring and/or recapitalisation of the group with the Board. Accordingly, it was prepared to continue to provide the Exicom Group with facilities and limits which were set out in an attachment to the letter (X65). Davies' View of Exicom – 10 November 1995 130 On 10 November Davies swore an affidavit which was filed in the insider trading proceedings brought by Exicom against Futuris in the Supreme Court of New South Wales. In that affidavit he said that prior to Futuris' acquisition of the NRMA shareholding in Exicom he had formed the view that the shares were worthless. This was based upon information contained in the KPMG report and a Westpac Information Memorandum. Exicom, in his opinion, was not profitable, its assets were intangible, its tangible assets were less than any liability claim by Telstra and it had a secured creditor, ie the CBA, holding first ranking security on all of the real assets in the company (X373). He allowed no weight whatever to Exicom's forecasts of future profitability referred to in the Westpac and KPMG documents. Exicom, he said, "…had a history of preparing budgets and forecasts which were never met" (T536). He placed no credence whatever in any budget prepared by the company (T536). In re-examination he described Exicom as carrying "…the baggage of an incompetent board and incompetent management" (T545). Nevertheless he said he thought that if Futuris could recapitalise it then it could put value back in the company. He saw Futuris' successful 1990 acquisition and development of Air International Group Limited, a manufacturer of heating, ventilation and air conditioning systems for the automotive industry, as indicative of what it could achieve with Exicom (T546). The company in its current state was worthless but, as an opportunity, it had a different value (T546). Fogarty Speaks with Newman – 13 November 1995 131 On 13 November, Fogarty, who was evidently in Sydney, again spoke to Newman by telephone (X398). He no longer recalls the detail of the conversation but said, in his evidence, that Newman went through a very lengthy explanation of what he proposed doing to Exicom and the information he had on Exicom. Newman told him he was receiving information direct from Cruickshanks that the other directors of Exicom were not aware of and that he believed that ERG was on his patch. ERG and Simmonds and Zilkha either had to deal with him or get out of his way and they should understand he was not going to go away without a fight. According to Fogarty, Newman again questioned whether or not ERG and Simmonds and Zilkha had the Bank debt. Fogarty said that they had the ability to deal with the debt. Newman asked if they had taken a formal assignment of the debt and Fogarty said that they had not but that for the purposes of the conversation he should assume that they had the ability to end up with the Bank debt at lower than face value. Fogarty said Newman continued to question him on this, saying he could not understand how they could have a legal right to the debt under such a structure. Fogarty said he was not willing to disclose the precise details but that Simmonds and Zilkha had a clear option with the CBA to acquire the debt from it. 132 Newman told Fogarty that he had had discussions with the CBA and its Managing Director, David Murray, who had said that he was not going to interfere in the process and that the CBA would not assign the debt to ERG, Simmonds and Zilka. Futuris would be willing to go away if it were paid twenty cents per share. Fogarty responded that ERG and Simmonds and Zilkha were not willing to pay that amount for Futuris' shares in Exicom and, in any event, they were not in a position to buy them because they had access to inside information. Newman replied that the only basis upon which they could resolve the whole matter would be for Futuris to agree to dispose of its shareholding to them after the shareholders had approved such a transaction occurring and after full disclosure to all shareholders of all information concerning Exicom in the possession of ERG, Simmonds and Zilkha. 133 Fogarty told Newman that he had been informed by Telstra that it was extremely unhappy with Exicom, both as to the quality of its product and its management and that based on other information available, Telstra had broader and new claims. He also told him that Telstra preferred not to deal with Futuris. The Nortel debt position was worse than he had originally been told and that after his discussions with Plumridge it had become apparent that the cash flow of Exicom was worsening. Based on the information in relation to these three issues, namely, Telstra, Nortel and the cash flows, the position of Exicom was worse than when Futuris carried out its limited due diligence which was apparently in about August 1995. Fogarty said that ERG, Simmonds and Zilkha had the support of Exicom's Board. The conversation, as recounted by Fogarty thus far, was not contested by Newman in his evidence and I accept it as correct in substance. 134 Newman's version differed from that of Fogarty on certain critical matters. He said that during the discussion he was "probing Mr Fogarty to assess how strong the position was that ERG/Simmonds and Zilkha had achieved in relation to the Exicom recapitalisation proposal that they had put forward". He put to Fogarty that he had the deal "locked up" and, according to him, Fogarty replied "of course I have". He said Fogarty told him that Telstra would not go ahead without ERG. He said to Fogarty: "Peter, I know what you are going to do. I would do it in your position. You are gong to put conditions in the transaction to improve your pricing. You are going to use material adverse changes to try and do the best deal with the Bank and shareholders." Fogarty, he said, agreed with this. He told Newman that ERG was now controlling the future strategy of Exicom, that the future of Exicom had been taken out of the Board's hands and that he was involved in discussions with Telstra and Nortel and about the Villawood lease. According to Newman, Fogarty also told him that in order to raise equity ERG needed to complete the Exicom transaction. Fogarty took this to mean that without the deal locked up ERG would not be able to raise equity. As to the Villawood lease, Newman said to Fogarty words to the effect of "it really doesn't matter whether the rent is $1 million or $2 million or $3 million. You are not going to let this deal fall over for $1 million." He said Fogarty replied: "Of course I wouldn't." 135 Fogarty denied telling Newman during the conversations on 9 and 13 November or later conversations in early December 1995 that: (a) Exicom was committed to ERG, Simmonds and Zilkha who had the deal locked up; (b) that without the deal locked up, ERG would not be able to raise the equity to fund the recapitalisation proposal; (c) that ERG, Simmonds and Zilkha had agreements with Nortel and Telstra; (d) that a recapitalisation proposal would proceed even if the Villawood lease was not renegotiated; (e) that he, Fogarty, wanted to paint the worst picture; and (f) that he had his own management in Exicom. 136 I am not persuaded on the balance of probabilities that Fogarty would have been as unequivocal in his conversation with Newman at that time, as Newman suggested. I accept that he is unlikely to have said, in the conversation of 13 November, that Exicom was committed to ERG, Simmonds and Zilkha who had the deal locked up. If he had said it, however, it would not have been far from the truth. I accept that he did not have final agreements with Nortel and Telstra although what was necessary to satisfy each of them was fairly clear at that stage. He might have suggested that they had agreed in principle about what was necessary to satisfy their requirements and, again, that would have been a reasonable summation of the position. I accept that, in his view at that time, renegotiation of the Villawood lease was not going to be a "deal stopper". Indeed a draft proposal prepared a day or so later by ERG (X69) proposed that the Villawood lease renegotiation be a condition which, if not met, would lead to a revaluation of Exicom and an appropriate adjustment to the share price in the recapitalisation. 137 Fogarty denied saying that he wanted to paint the worst picture of Exicom. This denial was something of a feint. Newman did not suggest he said that. What he said was that Fogarty agreed with the proposition that he was "going to use material adverse changes to try and do the best deal with the Bank and shareholders". In all probability Newman said that and in all probability, Fogarty agreed. Newman would have seen material adverse change as a bargaining weapon to be argued up as much as possible. I think it improbable that Fogarty told Newman that he was controlling the future strategy of Exicom. He had by then considerable leverage because of the Bank debt and the particular relationship he appeared to have with the Board, with Simmonds and Zilkha, and with the major creditors and suppliers. I do not believe, however he would have been as unequivocal as Newman suggested in this respect. As a witness he displayed at times a degree of wordiness and argumentativeness in responses. It was suggested in closing submissions that this was a matter that went to his credit. I accept however, that generally his evidence of factual matters was given to the best of his recollection. 138 According to Newman's Responsive Statement, he asked Fogarty whether, if the ERG, Simmonds and Zilkha transaction didn't go ahead, his interest in the Bank debt could be assigned. Fogarty said that if ERG withdrew then Simmonds and Zilkha would maintain the right to the Bank debt. Newman said he asked Fogarty, in the event that Simmonds and Zilkha as well as ERG elected not to go ahead, "can I have your position?" He claimed that Fogarty responded "it can be done but I am not going to tell you the structure. Take my word for it, it can be done." I am satisfied that then or later Fogarty made a statement to that effect. Newman's Notes on the Conversation of 13 November 1995 139 Within a day or of the conversation of 13 November, Newman made some notes based on that conversation. They were, in part, a record of what he regarded as items of substance in the conversation, matters arising from them and notes to remind himself to do things. One of the notes read "major customers – put up – NORTEL – TELSTRA". He explained this, in cross-examination, as referring to Fogarty's argument, continually put to him, that Nortel and Telstra would not deal with Futuris. Newman's view, however, was that the two companies would be "… commercial in the finish and would deal with the party they considered to be either the only one that was going to get up or the better one to get up". (T386) I am not satisfied that Fogarty made the comment about Nortel attributed to him by Newman who made no mention of it in his witness statement even though it is a pleaded particular of alleged misleading or deceptive conduct on the part of Fogarty. 140 Another entry read "legal advice confirmed they have difficulty". Newman explained this was a reference to legal advice Futuris had received that any option granted over the CBA debt would be an illegal transaction, that the debt could not be acquired without the prior approval of the shareholders. Newman thought the transaction could be challenged in court. Asked if that was always the advice he had had, Newman said: "We never tested the advice, but we believed that to be the position…" (T385) Asked whether he therefore regarded the Bank option, absent shareholder approval, as "a very fragile right", Newman said: "Well, I've always been advised that it takes two to have an argument so I wouldn't have conceded it was fragile. I would've said it was at best a fifty-fifty proposition that it wasn't illegal. I said we retained the position that it was. We never tested it." (T385) He also made reference to the need to obtain agreement for any settlement from the Exicom Board. Fogarty, he explained, was putting proposals about how Futuris might leave the scene and they were exploring things that would have to be done. Any dealing in shares would probably need the agreement of the Exicom Board and any settlement would need its agreement. 141 He also indicated that one option which Futuris always retained and which he put to Fogarty, was the right to make a bid "as an ultimate weapon" (T386). If Futuris were to leave the scene the price would have to be reasonable and legal and confidentiality issues would have to be overcome. If Futuris were to sell its shares they would have to be purchased by someone against whom no allegation of insider trading could be made (T388). He wanted Fogarty to understand that his motivation for settling was not about insider trading. He also noted that there was no way of getting discovery of the details of the Bank Option (T389). He recorded his view that if a group of people who understood the industry could put up a better proposition than Futuris then that would probably have greater merit than Futuris' position, Futuris having no standing in the industry as such. However he was dismissive of Simmonds as having no experience in Australia, although he accepted that ERG was ahead of Futuris "… in the general concept of the industry". Fogarty's Memorandum to ERG Directors – 13 November 1995 142 On the same day, Fogarty wrote a memorandum to his directors (X445). He referred to the Memorandum of Understanding signed with Zilkha and Simmonds and said: "SCL and Z have a clear option to acquire the CBA Bank Debt." He referred to his meeting with Telstra and said that they had "a very good in-principle agreement with them" and that it was subject to recapitalisation. He referred to his meetings with the CBA and Nortel and due diligence undertaken by Peter Harley. He told the Board that it was proposed to meet the Exicom Board on the following Wednesday and to submit a proposal to them. A draft of the proposal was attached for consideration by members of the Board. It was being reviewed by Freehills for Simmonds and Zilkha and by Mallesons for ERG. As to Futuris he said: "A Newman seems to be chasing a big price to be bought out. We propose approaching him after we have in-principle acceptance of our Proposal by the Exocet Board." Fogarty was still using the term "Exocet" as a code for Exicom. Exicom Writes to Fear and Fear Replies with an Offer– 13 and 15 November 1995 143 On 13 November, Capp wrote to Fear referring to his letter of 1 November. In his letter he pointed to the difficulties of further discussions with Futuris about recapitalisation in circumstances where Futuris and Exicom had "…been in the courts almost constantly for several months". He also expressed his belief that Poynton Corporate Ltd and Futuris had been involved in a campaign of destabilising the recapitalisation of the company. He said he was prepared to meet with Futuris on a without prejudice basis but only on condition that Futuris withdrew both sets of proceedings it had commenced in the Federal Court of Australia and in the Administrative Appeals Tribunal (X324). Fear wrote back on 15 November describing Capp's continued refusal to meet, to receive or discuss any recapitalisation offers from Futuris as "… extraordinary given Exicom's precarious financial position, your public invitation for parties to submit proposals to recapitalise Exicom and your duty to Exicom's creditors, lenders and shareholders". He denied the accusation that Poynton Corporate Ltd and Futuris had been involved in "a campaign of destabilising the recapitalisation of the Company which, he said, was "… laughable in the light of your continued obdurate refusal to meet". It was the failure of the Exicom Board to come up with a recapitalisation proposal that was destabilising Exicom (X55). Fear's earlier strategies, and particularly his recommendation of 3 November for continued and sustained destabilisation of the Exicom Board in the press (X317), are obviously at odds with the denial in his letter of 15 November. 144 Newman was asked whether he was aware that Fear was going to assert that Capp's allegation of destabilisation was laughable. He said: "No, but I'm glad he did because it was a restatement of our position, as it was always." When it was put to him that it was Fear who had been producing strategy documents for some months advocating a program of destabilisation of the company, Newman replied: "That is true and I've already given you my response to whether I did or didn't use that." Newman's apparent condonation of Fear's approach in this respect does not assist his credibility. (T394) It also illustrates the very adversarial culture that seems to have informed Futuris' management at this time and to have been transmitted to its professional advisors. 145 Fear's letter referred to telephone conversations with Capp earlier in the day in which he had requested a meeting with him. The purpose of the meeting was to present him with an offer from Hartley Poynton Ltd, subunderwritten by Futuris to underwrite a one for one rights issue in Exicom. The offer, it was said, was immediately capable of acceptance and should be placed before Exicom shareholders. It did not require exclusivity nor any further due diligence. The Exicom Board was said to have a duty to consider all offers and an obligation to put the offer in the letter from Poynton Corporate to shareholders. A copy of the offer was attached. It had previously been circulated to the Board of Futuris and approved by them (X327 and T393). It involved a number of elements which it is not necessary to set out here. They included settlement of the Telstra dispute and the acquisition by Futuris of the CBA debt as well as invitation of a Futuris nominee to join the Exicom Board. Following completion of the rights issue the Board was to comprise five directors, including two Futuris nominees Futuris Seeks a Meeting of Exicom Shareholders – 15 November 1995 146 On the same day as the Futuris offer went to Exicom, a formal notice was issued by Futuris, in its capacity as a shareholder, requisitioning a meeting of shareholders of Exicom, under s 246 of the Corporations Law, to consider the recapitalisation proposal. The notice set out the terms of resolutions embodying Futuris' recapitalisation program. They were expressed to be subject to Futuris entering into an agreement with Telstra to settle all claims by Telstra against Exicom in accordance with what was described as Telstra's "letter of offer" to Futuris on 1 September 1995. Telstra wrote to Clark on 23 November about the proposed resolution. It took issue with the representation contained in the resolution that Telstra had made to Futuris or received from Futuris an offer to settle Telstra's claim. The letter stated Telstra's view that "…the extent, certainty or finality of its discussions with Futuris should not be misrepresented" (X336). The requisition required the Exicom Board to convene a meeting of Exicom shareholders forthwith and, in any event, within two months of the date of the requisition (X67). The requisition and recapitalisation offer were announced to the Australian Stock Exchange on the same day. An announcement to the press was also made (X328). Telstra Puts Pressure on Exicom – 15 November 1995 147 On 15 November, Mead sent a fax to Exicom noting that Telstra had for some time been paying Exicom on an accelerated basis for telephones and telephone products delivered to assist Exicom to remain solvent pending its recapitalisation. This was said to have been on the understanding that the contemplated restructuring was about to take place. The letter put Exicom on notice that unless it could establish to Telstra's satisfaction that a restructuring was in place subject only to necessary shareholder and regulatory approvals by Friday, 15 December, Telstra, would from that day be reverting to the contractually agreed thirty day terms of payment (X329). 148 In Fogarty's view, without a long term contract with Telstra, Exicom was worthless (T851). He identified as the arrangement that they were seeking to put in place with Telstra and which Telstra had in principle agreed to, as one involving payment of $7.5 million, a contract for three years with a minimum number of phones to be supplied and an extension of that for a three year term. A proposed claw back of $4.9 million on additional deliveries was still under negotiation (T851). Zilkha Withdraws from the Consortium – 16 November 1995 149 On 16 November 1995, Zilkha sent a fax to Simmonds notifying formally of Zilkha's intent to withdraw from the Consortium pursuant to par 8(a) of the Memorandum of 6 November 1995. The letter said: "We regret that the nature of the transaction as it has developed has altered Zilkha & Company's interest in participating. However, as a financial investor, Zilkha & Company has different investment objectives than Simmonds and ERG, both of which are active industrial participants in this industry." (X70) The notice observed that, as a financial investor, Zilkha's investment objectives differed from those of Simmonds and ERG (X 70). Fogarty Meets Newman Again – 17 November 1995 150 Fogarty said he met again with Newman at his office on 17 November 1995. At that meeting, which lasted from 4.30pm to 7pm, they discussed what he described as "…the broad parameters of a settlement of the Futuris/Exicom litigation which might involve the cancellation of Futuris' shares in Exicom". This was based on a proposal he had put to Capp at Exicom that day. He told Newman that he could only negotiate with Futuris and that all he was trying to do was to find a position that was acceptable to him so that he could take it back to Exicom. He was not there on behalf of ERG but had been authorised to speak to Newman by Exicom. He told Newman he had not been given authority to conclude any agreement. The risk to Futuris was increasing as there was a prospect that it might not be able to successfully defend the allegation of insider trading in the pending proceedings in New South Wales which were due to come on for hearing on or about 23 November. Newman, he said, replied that provided a sensible offer were put forward he would consider a proposal that settled the action and saw him dispose of his shareholding. Newman said he had been told that Fogarty had a lot of information on Exicom and that ERG and Simmonds knew much more than was in the market (X399, T759). Fogarty told Newman that naturally ERG and Simmonds had more information than was available in the market because they had been given access to it by Exicom. 151 Newman said he would agree to the following proposed methodology as a basis for trying to settle the transaction. Newman and the rest of the Futuris parties would: (a) agree to a stand still agreement; (b) support the ERG and Simmonds proposal; and (c) agree to the cancellation of Futuris shares at a set price. However he told Fogarty that he needed to know what ERG and Simmonds' proposal was before he could consider his position. He had put to his Board that Exicom, once turned around, would be worth about $100 million. This was based upon an EBIT of $10 million on sales of $160 million. He believed ERG and Simmonds had nothing and were not in any position to negotiate with him. 152 According to Fogarty, Newman referred to the Bank Option and said that as no-one had been willing to show him the Bank Option he didn't believe that it existed. Fogarty said that he was not willing to show him the Bank Option but he had to accept that ERG and Simmonds had a right to gain access to the CBA debt. Newman said he did not believe the directors would allow it to be assigned. He would sue them if they had or sue the CBA for $100 million (X399, T760). Fogarty said that Newman told him he felt Exicom, ERG and Simmonds and Futuris were too far apart to deal and that they would have to battle on and fight each other in court if appropriate. Fogarty's extensive handwritten record of the discussion includes a note that Newman "made it clear he would fight dirty unless he got what he wanted" (X399, T760). Newman also said that ERG and Simmonds were trying to get Exicom for the lowest possible price, effectively "screwing the shareholders". Fogarty responded that ERG and Simmonds were not and in fact were seeking to increase value to shareholders and to give them some upside. Newman told Fogarty that if Exicom and ERG and Simmonds were serious he should get back to Newman with a real proposal within twenty four hours. Fogarty said he would not be able to do that but could possibly get back to him on the following Monday, 20 November. 153 In Newman's Responsive Statement, nothing is said to contradict the substance of the account of this meeting given by Fogarty in his statement and I accept it. Newman recollected Fogarty telling him words to the effect of "I can't contract or deal, I can't buy your shares". He says that in the discussion they went through a number of alternatives only some of which were recorded in Fogarty's witness statement. 154 According to Newman, he asked Fogarty whether Exicom had approved the Bank granting an option over its facilities. He asked did the company support the assignment of its debt? Fogarty told him in emphatic terms, he said, that he "had the deal wrapped up". According to Newman this was an important consideration for him in determining whether or not Futuris could proceed successfully with its recapitalisation. He again discussed with Fogarty the question whether or not Futuris could step into ERG's position in respect of the Bank debt if ERG withdrew from its recapitalisation proposal. 155 Fogarty accepted that for ERG to acquire Futuris' 19% interest in Exicom it would require funding of about $3 million. He said, however, that the company could have proceeded with that transaction without any capital (T763). The conversation with Newman was left on the basis that if there were a serious proposition for settlement, Fogarty would get back to Newman by Monday, 20 November. Some conversation did ensue either over the weekend or on the Monday. Fogarty made a file note (X400) of the essentials of an agreement. Futuris was to come back with something in writing which he did on 20 November. Australian Stock Exchange Seeks Information about the Bank Option – 17 November 1995 156 The ASX wrote to Exicom on 17 November (X367) seeking information about the status of the recapitalisation foreshadowed in the announcement of 26 October. It also asked whether the company was aware the Bank had "…assigned an option to Zimmonds/Silkha (sic) over the Company's debt?". It requested a copy of the agreement. The information was requested by Monday, 20 November. 157 Exicom responded by letter on 20 November (X368). The company secretary, Patterson, advised that negotiations for recapitalisation were highly advanced with one of the parties. He also said: "We believe that the Commonwealth Bank has granted an option over the Company's debt to Simmonds/Zilkha. The Company was not a party to this transaction and does not have a copy of the relevant documents." Exicom anticipated early reinstatement of its securities following entry into a binding agreement for its recapitalisation and the issue of a Notice of Meeting and Explanatory Memorandum to shareholders. Futuris Receives Copies of Discovered Correspondence – 17 November 1995 158 On 17 November, Blake Dawson Waldron sent to Bennett & Co, Clark and Fear, copies of correspondence produced in the insider trading litigation in response to a notice to produce issued by Futuris. The correspondence included a letter from Exicom to the Bank of 13 October consenting to the CBA selling its debt or granting an option over it to Simmonds and Zilkha. A copy of a letter from the CBA to Exicom dated 25 October was also enclosed relating to the extension of facilities. The letter from Blake Dawson Waldron was accompanied by a warning against using the documents for anything other than the purpose of the proceedings (X366). Exicom Writes to Shareholders – 17 November 1995 159 Capp wrote to shareholders of Exicom on 17 November referring to what he called "a concerted campaign by Futuris to destabilise Exicom" (X71). The letter responded to a number of allegations made by Futuris in the public arena and asserted the Board's commitment to bring recapitalisation negotiations to the earliest possible conclusion. Newman wrote to Capp a week later on 24 November commenting on the letter to shareholders. In his response he asserted that the current capital of Exicom was "worthless" (X337). In evidence he said that this did not mean he regarded the shares as worthless (T405). His letter also accused Capp of failing to mention to Exicom shareholders that the company had "granted an option which has given rise to the destabilisation argument". By this he meant that Exicom had approved the grant of the option by the CBA (T405). 160 Prior to Capp's letter to shareholders, Newman had instructed Bennett & Co to prepare draft takeover documents in relation to Exicom. Drafts were sent to Futuris on 17 November. Asked in re-examination why he had them prepared, Newman said that if ERG's recapitalisation proposal was going to involve a "skinny price" it would provide the opportunity for Futuris to counterbid in one way or another. He wanted to be prepared for any eventuality so that offers could be made at short notice (T483). The ERG and Simmonds' Recapitalisation Proposal is Finalised – 19 November 1995 161 On Sunday, 19 November, Gordon sent to Fogarty and to Morton and O'Kell a copy of a final revised offer letter for comment. A copy had been given to Stephen Newman as a draft (X442). The revised draft contained a condition precedent for the offer by which Futuris and Exicom were to settle their actions against each other. The terms of the settlement required by the condition included cancellation of the Futuris shares for 12.5 cents per share, discontinuance of all current actions and mutual releases. The agreement was to be in a form acceptable to Exicom, ERG and Simmonds. Fogarty described that condition as his preferred way of proceeding, but said "it was never essential" (T776). Newman Puts a Proposal to Fogarty – 20 November 1995 162 Newman responded to Fogarty by way of a letter from Clark on 20 November (X72). It began by stating it was "to confirm your conversation with Alan Newman today and our agreement on a resolution of outstanding issues…". The letter acknowledged Zilkha's withdrawal and addressed Fogarty as representing Simmonds and ERG. It purported to confirm terms of agreement which were set out. They were to be embodied in necessary legal documents to be prepared by Gordon for signing on 21 November. The agreement provided for cancellation of FIPL's shareholding in Exicom in consideration of 12.5 cents per share payable within forty eight hours of court approval. That represented an amount of $2,400,097.50. The difference between that sum and the sum of $4 million was to be paid to Futuris or its nominee under a separate agreement with ERG and Simmonds in consideration of Futuris foregoing its present rights and entitlements. The latter payment was to be subject to a non-disclosure agreement. There was to be a joint press statement. Exicom was to consent to the settlement. Settlement of all actions between Futuris, FIPL and Exicom was to be concluded by 9am on 22 November. Paragraph 6 of the letter said: "In the event of ERG or Simmonds withdrawing from the recapitalisation process in respect of Exicom – that is resolving not to proceed with a recapitalisation proposal then, at the election of FCL, FCL can direct ERG/Simmonds to assign to FCL or its nominee the benefit of any Option Agreement currently in existence between ERG and Simmonds (or either of them) and the Commonwealth Bank of Australia." 163 Gordon sent Fogarty a further redraft of the recapitalisation offer which, inter alia, deleted the condition precedent requiring settlement between Futuris and Exicom (X443). It was put to Fogarty in cross-examination, as indeed seems probable, that in light of his discussion with Newman, he had instructed Gordon to make the deletion. He could not recall what had led to the deletion. He accepted that he would have discussed clause 6 of the Newman letter (T778) with Gordon. It was already contemplated on 20 November in his and Gordon's negotiations with Futuris that ERG and Simmonds might, at some stage in the future, wish to withdraw from the recapitalisation. He said: "Provision was made for this in the agreement under negotiation in that, it was proposed that if ERG/Simmonds did withdraw then, at the election of Futuris, Futuris could direct ERG/Simmonds to make available to Futuris the rights ERG/Simmonds had in respect to the option currently in place with CBA." (X438 par 64) 164 In his Responsive Statement Newman said that in these "earlier discussions" he had asked Fogarty on a number of occasions whether if he withdrew from the recapitalisation "he could leave me in their position". Fogarty had said that if ERG walked away then the transaction would go forward with Simmonds. This appears to have been a misstatement for "could go forward with Simmonds" for Newman then said Fogarty told him he could not imagine Simmonds staying without ERG. ERG was the key in the recapitalisation proposal. Fogarty told Newman that if they all walked away "we could have his position". This was never discussed in terms of the word "assign". Newman put it thus: "I asked for his position in relation to the option over the Bank debt and he told me that, without explaining the structure of how it worked, he would deliver to me their position." At this point, on his own testimony Newman was in effect, flying blind as to the precise content of ERG and Simmonds' rights with respect to the CBA debt. There was no real conflict in his evidence and that of Fogarty on this point as at 20 November. Fogarty said in cross-examination: "Well, what happened was Mr Newman said, "If I'm to do this deal, I want to have the right to come back into the deal." That's basically what he said. He said, "I want your position." (T768) He made it clear in answer to a question from the Court that when Newman spoke of stepping into ERG and Simmonds' "position" he understood him to mean their position with respect to the CBA debt (T771). I accept that the conversation to which Fogarty and Newman have testified in this respect reflects the substance of the questions asked by Newman and the answers provided by Fogarty respectively in relation to the CBA debt. 165 Following receipt of the Futuris letter of 20 November, ERG and Simmonds' lawyers, Freehills, Corrs and Bennett & Co, who were Futuris' solicitors in Perth, and Fogarty himself "…literally worked around the clock". Numerous agreements were drafted and circulated and comments made and received over the next two days. 166 A copy of the Futuris letter was sent by Fogarty to Gordon by fax on 21 November (X439). It appears to have been received at 1.30pm on that day. There was a handwritten note against par 6 in the letter relating to the assignment of the benefit of any Option Agreement between ERG and/or Simmonds and the CBA in connection with the CBA debt. The handwritten notation read "If withdraw, we'll allow option to expire". Fogarty said in cross-examination that the notation was not in his handwriting (T769). The only discussion he had with Gordon about the Option was whether the warranty could be given once they got to the final documents. ERG did not hold an option nor did it ever have one. 167 Fogarty received a memorandum from O'Kell on 21 November raising questions about the proposed settlement (X472). He wanted a firm deal set before they proceeded. "We must also", he said, "be careful of deal creep". The deal seemed to have crept a lot thanks to the efforts of the Exicom Board and Alan Newman regarding Exicom's potential. He and Harold Morton believed that Exicom should be able to earn $20 million profit before tax within two years. This would put a potential value on the shares of 60 cents to 75 cents, assuming a multiplier range of 12 to 15. Fogarty did not place any weight on these views. He would take account of the figures his own people prepared for him (T927). The memo also referred to Simmonds as having "negotiated the Telstra settlement which accrues to the benefit of the company". Fogarty contemporaneous note was "part negotiation by ERG". In cross-examination he said what they had was an in principle agreement (T926). Confidentiality Orders Relating to Documents in the Administrative Appeals Tribunal and the New South Wales Supreme Court – 20 November 1995 168 The application brought by Futuris in the Administrative Appeals Tribunal for review of the Australian Securities Commission decision to extend the time for Exicom's annual general meeting proceeded on 20 November. At that time the CBA was required to produce certain documents to the Tribunal which it did subject to an order that no-one have access to the documents until the following day (X455B). On the same day in the proceedings brought against Futuris by Exicom in the New South Wales Supreme Court, orders were made for access to documents produced under subpoena by the CBA. Gordon sent a facsimile to Corrs noting that documents provided by the CBA would be available to Exicom and to Futuris' legal advisors. The fax went on: "As you know, our clients regard the option arrangements as confidential. They have instructed us to request that if CBA must produce the documents relating to those arrangements, then those documents should only be available to the legal advisers for the parties." (X73) Draft Agreement with Futuris Sent for Execution – 21 November 1995 169 On the evening of 21 November, Gordon sent a fax to Bennett & Co enclosing a draft agreement between Exicom, Futuris, ERG and Simmonds (X441). Forty minutes after the first fax, a second was sent attaching a copy of the agreement with execution clauses (X333). The parties to the proposed agreement were Futuris, FIPL, ERG and Simmonds. The terms of the agreement reflected those agreed in principle between Fogarty and Newman. Clause 5 relating to the Bank Option provided: "If both the Investors [ie ERG and Simmonds] conclusively withdraw from any proposal to provide funds to Exicom Limited prior to shareholder approval of that proposal, they each agree to use their best endeavours to deal with the Bank Option for the benefit of the Futuris Companies." The Bank Option was defined in cl 1 as "…the option to purchase the Exicom Limited facilities and securities from the Commonwealth Bank of Australia". Fogarty said in cross-examination that the promise in cl 5 reflected what had been agreed with Newman (T774). It represented his agreement to give Futuris the ERG and Simmonds' position in relation to the Bank Option (T774). Fogarty described his understanding of ERG's position as "… the right to be nominated if we did not proceed with the recapitalisation and that's what we were warranting we could provide to him". (T791) Asked if he told Newman that ERG only had a right to be nominated, not a right to exercise the Option, he said: "We didn't specifically tell him. We told his lawyers; we told his solicitor that. That's importantly reflected in all the drafts of the agreements subsequently where I have noted alongside that we cannot give the warranty that was first drafted in the document by Bennett and Co." (T792) 170 According to Fogarty, ERG did not just rely upon Gordon's advice in respect of the ability to put Futuris in ERG's position with respect to the Option. He said: "We got separate legal advice to ensure we could give that warranty. Our board was very concerned to be able to give a valid warranty." (T792) The separate legal advice appears to have been oral advice from Lee Warnick at Mallesons, who was a member of the ERG Board. This evidence by Fogarty covers discussions about the nature of ERG and Simmonds' position with respect to the Bank Option and was applicable to conversations in late November and early December. I accept that evidence and, for reasons set out below, accept that a copy of the Bank Option was in the hands of Futuris and its advisors by the last week of November. The Administrative Appeals Tribunal Gives its Decision and the Insider Trading Litigation Commences – 22 November 1995 171 On 22 November, the Administrative Appeals Tribunal decided to vary the decision of the Australian Securities Commission by bringing back the time by which the annual general meeting had to be held from 31 January 1996 to 15 December 1995 (X74). Futuris wrote to Exicom on 23 November requesting that it include in the agenda for the annual general meeting consideration of matters the subject of the Futuris requisition (X76). 172 On the day that the Administrative Appeals Tribunal gave its decision the insider trading proceedings commenced in the Supreme Court of New South Wales. A report of the first day of hearing appeared in the West Australian newspaper of 23 November (X334). Further Exchanges Between ERG and Futuris – 22 - 24 November 1995 173 Fogarty spoke to Newman at 5.30pm on 22 November at which time Newman said that if the Exicom action against Futuris were not settled by the commencement of the hearing in the New South Wales Supreme Court, which was due to begin the following day, then Exicom or ERG and Simmonds would have to pay Futuris' costs for each day from then on. Fogarty told Newman he was being unrealistic. 174 Bennett & Co sent a revised version of the settlement agreement to Fogarty on 22 November stating in the covering letter that Futuris and FIPL were prepared to execute the documents provided they were agreed by 9.30am the following day (X383). The agreement contained a far more elaborate clause relating to the Bank Option. It was defined thus: ""Bank Option" means the option to purchase the Exicom Limited facilities and securities from the Commonwealth Bank of Australia Ltd or, if during the currency of this Agreement the Bank Option is exercised, the term "Bank Option" shall mean whatever economic interests are acquired pursuant to the exercise of such Bank Option." The operative clause included a warranty by the investors that: "(i) the interest (including the entire benefit) held by them in the Bank Option is capable of assignment by the Investors in the terms of this Agreement; and (ii) the Investors shall not exercise any right pursuant to the Bank Option without the prior written consent of Futuris." 175 This was the subject of a number of discussions between Fogarty and Gordon on the one hand, and Paganin on the other. Fogarty and Gordon were at pains to explain to Paganin that ERG and Simmonds could not assign the Bank Option (T795). Fogarty was not concerned that draft agreements were referring to the Option as dated 13 October when it was the fact that the Option had been supplanted by the varied Option on 8 November. His concern was that the agreement contained words that properly reflected what ERG and Simmonds could deliver (T796). He wanted to ensure that the warranty given was a valid warranty that they could honour. Their advice was that this could be achieved by wording the definition of Bank Option to provide for an extended meaning for "assignment" (T797). I accept that he was conscious of Futuris' litigious nature and the possible exposure of ERG and Simmonds if they executed an agreement containing a warranty that did not reflect the underlying position. ERG was not a party to the Bank Option. It had, in Fogarty's opinion, a right to be nominated by Simmonds and Zilkha in their exercise of the Option. The consortium, which was initially Simmonds and Zilkha, would have exercised the option. However following the withdrawal of Zilkha, Simmonds and ERG would be nominated as the consortium (T785). 176 Fogarty and Gordon received various draft agreements from Bennett & Co in the course of 22 and 23 November. According to Fogarty the fundamentals of the agreement did not change between drafts but clauses concerning the payment of Futuris' costs and ERG/Simmonds not causing material adverse change to Exicom were inserted by Bennett & Co. A draft faxed to Gordon by Paganin at about 1.15pm on 23 November (X335) redefined the Bank Option thus: ""Bank Option" means: (a) the option dated 13 October 1995 between Commonwealth Bank of Australia Limited ("Commonwealth Bank") and Simmonds/Zilkha whereby Simmonds/Zilkha were granted the right to purchase, inter alia, the Exicom Facilities and the Exicom Securities (as those terms are defined in the Bank Option) from the Commonwealth Bank; or (b) a document granted by the Commonwealth Bank in favour of Simmonds/Zilkha or any of them in substantially the same terms in substitution of the option dated 13 October 1995; (c) if during the currency of the Agreement the Bank Option is exercised in accordance with its terms, the term "Bank Option" shall mean whatever economic interests are acquired pursuant to the exercise of such Bank Option;" Paganin who was closely involved with the preparation of the drafts on behalf of Futuris, agreed that he was aware that ERG was not a party to the Bank Option (T560). The draft, it is to be noted, defined the obligation on ERG and Simmonds in respect of the Bank Option as an obligation to "assign or otherwise transfer or make available to Futuris… all right benefit or interest held by the Investors in the Bank Option". The terms "Exicom Facilities" and "Exicom Securities" were defined terms used in the Option agreement. The draft was accompanied by a covering fax which said: "My instructions are that the Agreement must be executed within one hour of Mr Fogarty and Mr Newman's conversation of this morning." 177 Fogarty had a number of telephone conversations on 22 and 23 November with each of Newman, Fear and Clark. At midnight on 23, 24 November 1995 he considered an agreement was very close to being concluded. However, according to his statement of evidence, Clark rang him out of the blue in the early hours of 24 November and said that Newman had a fundamental problem with the agreement. He did not agree with a clause relating to costs. Fogarty told Clark it was clear a deal could never be agreed with Newman as he always wanted to improve it. He told Clark that ERG and Simmonds would not change the agreement which Newman and Paganin had told them an hour before was finalised. Fear also phoned Fogarty and told him Newman wanted to change the deal. Fogarty responded that Newman should revert to what had been discussed or there would be no deal. Newman himself rang at 2.30am on 24 November and told Fogarty the deal was off. According to Fogarty, Newman hung up. Freehills wrote to Bennett & Co that day confirming that the negotiations had broken down and that ERG was withdrawing from those negotiations. The CBA Extends the Option – 23 November 1995 178 The CBA wrote to Gordon in Sydney on 23 November advising that it was prepared to extend the expiry date of the Option from 29 February 1996 to 31 March. The extension was conditional upon the recapitalisation process of Exicom progressing on the general terms envisaged by the parties to the Option Deed and continuing agreement to that recapitalisation by Futuris (X75). The latter was a condition of which Newman was apparently unaware (T404). Bennett & Co Threaten the CBA – 24 November 1995 179 Bennett & Co wrote to the CBA on 24 November in connection with the grant of the Option. They alleged that the CBA had consistently represented to Futuris that any dealings involving the transfer of the CBA's position vis a vis Exicom from out of CBA 's control would only be done with the express agreement of the Board of Exicom. The letter went on: "We understand that an option has been granted by the Bank to a third party in respect of the Bank's position. (sic) We regard that (sic) the granting of any such option constitutes a flagrant breach of the Banks Representations ("Breach") and any extension of the option period ("Extension") could constitute a further and separate breach. We put you on notice that any further Breach or any Extension will cause further detriment to our client's investment in Exicom. Our client reserves its rights in respect of the Breach, any further Breach or any Extension. In this regard our client will rely on the content of this letter." (X338) There does not appear to have been any more foundation in law for the assertions made in that letter than there was in Clark's letter to the CBA on 7 November (X64). Newman said that the letter was written upon his instructions. He agreed it was a fairly serious step taken after due consideration and because of the importance he placed on the benefit of the Option (T406). 180 The CBA responded predictably, denying any breach and asserting, as was clearly the position: "The Bank is a secured creditor of Exicom Limited. Subject to any restrictions, of which there are none, in any relevant loan or security agreement between the Bank and Exicom Limited, the Bank is entitled to deal with the debt and the securities as it wishes. Your allegations implying or expressing otherwise are groundless. (X339) Whether and When Futuris Became Aware of the Option 181 The question arises at this stage whether, and if so when, Futuris acquired a copy of the Bank Option. In oral evidence in chief, supplementary to his written statement, Fogarty was asked whether, in discussions with representatives of Futuris in late November or early December 1995, the question of whether or not Futuris had the Bank Option was raised. According to Fogarty, Newman told him that he had the Option and had obtained it as part of the discovery process. In cross-examination, Newman said he did not think he ever saw the Bank Option. Asked if he were sure of that he said: "Not 100 per cent, but it wouldn't have been important for me to see it, to have somebody explain to me what its content was." (T408) In re-examination he said he did not think he had seen the Option before March 1996 (T503). Davies, also in cross-examination, was "adamant" that no-one at Futuris had sighted the option (T540). A file note records that he told a CBA officer, Griffiths, as much on 14 March (X191). There are, however, powerful indicators that the document was in the hands of Futuris and its advisors by the last week of November and that Newman probably saw it at about that time. 182 The definition of "Bank Option" in the draft Settlement Agreement sent to Gordon by Bennett & Co on 23 November used defined terms from the Bank Option itself, namely the terms "Exicom Facilities" and "Exicom Securities". Similarly, a draft offer to Exicom shareholders produced by Bennett & Co on 5 December (X346) made reference to the Option and used the terms "Exicom Cash Facilities" and "Exicom Non-Cash Facilities" in each case followed by the parenthetical explanation "(as that term is defined in the Bank Option)". Paganin from Bennett & Co was cross-examined about this and said: "I can't recall reviewing the bank option at that date but if you are putting to me that because there is a defined term in subparagraph (b) and we've used that for the purpose of drafting a document, then I think that you would be correct in saying that it is likely." (T554) Newman was cross-examined about the draft offer document of 5 December. He was referred to the use of defined terms from the Bank Option. It was put to him that it was quite apparent that his solicitors must have had the Bank Option at the time they prepared the offer. He accepted that that might have been the case but said he did not know (T424). 183 A document of interest in this connection was put in evidence during the cross-examination of Newman. It came from his own files. It was headed "Facsimile Transmission", was unaddressed, carried no facsimile imprint, was marked "In Confidence" and was obtained from the Futuris discovery (X340). It was, on the face of it, a printed copy or draft of a facsimile, the original of which was not in evidence. It had been discovered by Futuris, numbered 88, under a group heading "File Number 2 – A Newman". Newman did not dispute the proposition that this suggested the document had come off one of his files. 184 The document referred to Exicom's response (X368) to the ASX inquiry of 17 November (X367) about the status of the recapitalisation. It also referred to Capp's letter of 13 November to the Bank (X448) in which he had told the CBA that Exicom had no objection to the sale of the debt or the grant of an option over it to Simmonds and Zilkha. The facsimile stated that it attached Capp's letter of 13 October and the Exicom response to the ASX query. It characterised Capp's letter of 13 October as clearly stating two matters: "1. Exicom has no objection to the granting of the option, therefore is it or is it not a party to the transaction; and 2. they endorsed the granting of the option before the Simmonds/Zilkha proposal was presented to the Board or considered by the Board." It went on: "There is now (sic) doubt in anybody's mind the reason the Court case has to proceed is to ensure competition is knocked out completely to allow Simmonds/Zilkha ERG to deal with Exicom, because the alternative is that if they do not for any reason Simmonds/Zilkha can sue Exicom or the Bank." The memorandum posed the question whether economic control or leverage had passed. It observed that neither Simmonds/Zilkha or ERG yet had "the stomach" to put up the money. It then said: "Also attached is a copy of the option." The memorandum concluded thus: "Some direct questions to Exicom by the ASX such as: 1. Does the company believe, having endorsed the granting of the option, any economic benefit or leverage has passed to Simmonds/Zilkha. 2. Are there any other circumstances or conditions attached to the granting of the option such as, the granting or exercise of the option is subject to a recapitalisation of Exicom. 3. Does the Board believe that the granting of the option eliminates any other party who would wish to offer a reconstruction is (sic) prohibited because of the preferred debt status. 4. Has at any time, the optionholder or parties associated with the optionholder, threatened to exercise their rights and thereby place the company into some for of administration. (sic) 5. Do you believe that any of this information is relevant to shareholder's interests and the need for them to be kept continually informed. 6. The company made no response in relation to an offer made by Hartley Poynton to completely underwrite a rights issue. Does the company believe this offer should be put to shareholders." Newman said he had not seen the document before. He noted that it did not identify its author and did not bear any similarity to anything Futuris would generate internally. It was not addressed to anybody and the words "In Confidence" would not be used within his organisation. He recalled seeing the letter of 13 October from Capp to the CBA. It was put to him that that letter was obviously a confidential communication but he could not recall how it came to him. He agreed, however, that it may have come to him as a consequence of the discovery process in the AAT proceedings. The following exchange then occurred in cross-examination: "Mr Martin. And I suggest that as part of the same process you also obtained a copy of the option attached to this document, the memorandum, number 88. You don't disagree with that, do you? Newman. I don't disagree. I can't remember seeing it." (T409) In re-examination he was referred to the fax from Blake Dawson Waldron dated 17 November 1995 (X 366) which had attached copies of certain correspondence obtained in the insider trading litigation pursuant to a Notice to Produce. This included the letter of 13 October. However, that fax did not assist his recollection of how he had obtained a copy of the letter of 13 October (T503). 185 The purpose of the memorandum becomes clear in the light of an article written by a financial journalist, Bryan Frith, in the Business Section of the Australian Newspaper of 29 November 1995 (X341). The article was critical of Exicom agreeing to the grant of the Bank Option which it described as having been granted "six weeks ago" ie 13 November 1995. The article referred to Capp's letter of 13 October and paraphrased its terms. One of the terms to which it referred was that "…the option can be assigned if CBA and Simmonds/Zilkha both agree". It observed that "Exicom agreed to the Option before the details of Simmonds/Zilkha's recapitalisation were presented to the Board". The article criticised Exicom for agreeing to the Option and suggested questions that the ASX should put to Exicom. The questions posed in the article in the terms in which they were posed included the following: . whether the board believe the endorsement of the option passed any economic benefit or leverage to Simmonds Zilkha . whether the board believes the option eliminates other offers of reconstruction because of the preferred debt status Frith also observed that Exicom had not notified the ASX that it had received a recapitalisation proposal from Futuris which included an offer by Poynton Corporate to undertake a rights issue sub-underwritten by Futuris. 186 The article reflected the Futuris position. An element of the Futuris strategy as developed in conjunction with Poynton Corporate was the briefing of Frith by Fear (X316). The terminology used in the article at the points quoted and referred to above, indicates clearly that it was inspired in part by the points contained in the facsimile transmission document which came from Newman's files. 187 Newman was cross-examined on the Frith article. He agreed that somebody from the Futuris side was having discussions with Frith. He thought it was Fear (T411). It was put to him that the bulk of the information reported by Frith in the article was provided to him by representatives of Futuris. Newman did not agree with this (T411). It was also put to him that the article was strongly supportive of Futuris' position. He characterised it as "…biasing towards supporting our position" (T412). It was also put to him that Frith could only have obtained the detail in relation to the terms of the Bank Option and the call arrangement between Futuris and NRMA (which was also mentioned in the article) from a representative of Futuris. Newman said that was wrong. However he did not know how Frith had obtained the detail relating to the terms of the Option (T412). The details of the call agreement with the NRMA would have been embodied in a substantial shareholder notice which was public information. He did not know if the Bank Option was in the public domain. He did not know of any other source of that document available to Frith (T412). 188 In my opinion, the evidence points strongly to the conclusion that the Facsimile Transmission found on Newman's file was a copy of a briefing document prepared for and supplied to Frith, probably by Fear. As the document also makes plain a copy of Capp's letter of 13 October to the Board, Exicom's letter of 20 November to the ASX and the Bank Option was also enclosed. The Bank Option was that dated 13 October. Frith described it in his article as "..granted six weeks ago". 189 The memorandum was undated. However it must have come into existence after 20 November, which was the date of the latest document attached to it. The Frith article appeared on 29 November. The latest date for the supply to Frith of the information contained in the memorandum must have been 28 November. In my opinion, therefore, the document came into existence between 21 and 28 November and was supplied to Frith during that period. I conclude that the Bank Option was in the hands of Futuris' advisors, Poynton Corporate, and its solicitors, Bennett & Co, at about this time. It is highly improbable that Futuris itself did not have a copy of the Option. I find that it did. 190 Newman did not unequivocally deny seeing the Option at the time. He was almost certainly aware of its existence in the hands of Futuris and its advisors. He had probably seen it and, while I accept that he may not have perused its detail, he would have had the substance of it explained to him. In relation to his dealings with Exicom and ERG, he displayed such a high level of commitment to winning the contest, one way or another, that, I am prepared to accept, he may have simply forgotten or repressed what it may be inconvenient to recall. That probability is enhanced by the sheer density of communications, discussions and events occurring at this time. 191 Davies, who was cross-examined on his recollection by reference to the draft prepared by Bennett & Co on 5 December (X346), said he did not know if Bennett & Co had a copy of the Option (T541). He could not recall having taken any advice on its content or the constraints on its assignment. He said that they relied "…almost entirely I believe on Mr Fogarty's representation at the time" (T544). At all times until the morning of 14 March 1996, they fully believed that Fogarty had the power to assign his position. This level of trust in Fogarty's alleged assertions is inconsistent with the prevailing culture at Futuris. I accept that Davies may have forgotten that the Option was available to Futuris or its advisors. It is even possible that he did not personally view it or discuss its content, although I think it unlikely. However for the reasons I have already given, the documentary evidence and Fogarty's evidence of Newman's statement to him in late November or early December 1995 leads to the conclusion that the document was in the hands of Futuris and its advisors by the last week of November and that Newman probably saw it at about that time. Support for ERG from Telstra and Nortel – 27 and 28 November 1995 192 Fogarty spoke to Brian Davis of Nortel on 27 November 1995. He told Fogarty he would totally support ERG and Simmonds and would increase Nortel's business with Exicom if they became involved. According to Fogarty, Davis offered to do anything to help the recapitalisation through as soon as possible (X405). 193 On 28 November, Fogarty spoke to Harvey Parker of Telstra. He emphasised the need for written confirmation from Telstra that it had reached agreement with ERG, Simmonds and Zilkha to settle outstanding claims and enter new supply arrangements with Exicom. This would be subject to the recapitalisation succeeding (X406). Parker, he said, agreed that Telstra would provide a letter confirming agreement and supporting ERG and Simmonds' involvement. He subsequently telephoned Steve Newman who told him that the problems with the phones had been fixed. 194 Fogarty said in cross examination that he regarded the arrangement with Telstra at the time as an "in principle agreement" (T973). Federal Court Dismisses Appeal Against AAT Decision – 29 November 1995 195 Exicom lodged an appeal from the Administrative Appeals Tribunal decision varying the time for holding the Exicom annual general meeting. This appeal was dismissed by Carr J in the Federal Court on 29 November 1995. ERG/Simmonds' Recapitalisation Proposal Accepted – 29 November 1995 196 ERG and Simmonds' formal recapitalisation proposal was sent to Exicom on 29 November. The proposal was set out in a letter from Gordon at Freehills, sent to the Chairman and Board of Exicom (X1 p110). It involved the injection of $21 million of equity capital into the company by the issue to ERG and Simmonds of 84 million shares in the company at an issue price of 25 cents per share with one free option attaching to each. It was subject to all necessary approvals and a reduction of capital and consolidation and the issue of the New Shares and options occurring on or before 1 March 1996. 197 ERG and Simmonds undertook to replace the CBA debt of approximately $21 million pursuant to the agreement they had with the CBA subject to Exicom entering into a new loan agreement with them or their nominees. Terms and conditions of the new loan were attached to the letter. 198 The proposal was expressed to be subject to certain terms and conditions being satisfied prior to the recapitalisation. These included necessary approvals from the FIRB (cl 2.1) and shareholder approval (cl 2.2). In addition, the following conditions were embodied in the letter: "2.4 There being no material adverse change in the business, financial position, profitability or prospects of the Company (based on the information provided to the Investors prior to the date hereof) during the period commencing on 30 September 1995 and ending on the date on which the Investors are required to provide funds to the Company. The Investors rely upon the information provided during due diligence as the base information for this provision but acknowledge that they have received no warranty of any kind from the Company in relation thereto. … 2.6 The Bank (or such other bank acceptable to the Company and the Investors) agreeing to continue the Company's non-cash facilities and provide further cash facilities of not less than $5 million to the Company, both secured by a first ranking fixed and floating charge over all of the Company's assets on terms reasonably acceptable to the Company and the Investors. 2.7 The Company settling its outstanding dispute with Telstra and entering into a new product supply agreement for TF200 and TF400 telephones in a form reasonably acceptable to the Company and the Investors. The Investors have already had discussions with Telstra and have put a proposal to Telstra. If that proposal is accepted then the Investors intend to withdraw this condition. The parties agree that the Company will not be required to issue a notice of meeting to shareholders in relation to this Proposal unless agreements have been reached with Telstra. 2.8 Renegotiation of the terms of the lease of the premises at Villawood to a form reasonably acceptable to the Company and the Investors. In this regard the Investors have based this Proposal on annual rental for Villawood being no greater than $2.4 million. Accordingly the Proposal shall be conditional on the annual rental being reduced to not more than this amount and such other amendments as the Investors and the Company agree. This condition must be satisfied or waived by the Investors by 31 December 1995 or such later date as the Investors and the Company may agree. 2.9 Confirmation in writing from Nortel that it consents to the Investors' involvement in the Company and that it will continue its contractual arrangements with the Company." A Subscription Agreement between the company and ERG and Simmonds was to be entered into incorporating the terms and conditions set out in the letter (cl 3). The proposal was expressed to remain valid until 5pm Sydney time on 29 November and if not accepted by that time would automatically lapse. 199 The proposal was accepted and the letter countersigned by Stephen Newman, Chief Executive Officer of Exicom. In so doing, the Board of Exicom agreed to deal exclusively with ERG and Simmonds and to recommend the proposal to shareholders subject to an independent expert's review. Media releases were issued on that day and an announcement made to the ASX. In Exicom's press release (X81), and in its announcement to the ASX (X82), it was said that the involvement of ERG and Simmonds was supported by Telstra and Nortel. In the announcement to the ASX it was also said that "… the benefit of the option over the bank debt, owed by Exicom to the Commonwealth Bank of Australia, now rests with ERG and Simmonds". The Exicom press release also contained a statement that one of Exicom's major customers had advised the company that it would sever all ties with Exicom if Futuris gained control. This was a reference to Nortel. Newman agreed in cross-examination that it was Futuris' practice to obtain copies of documents lodged with the ASX in which Futuris had an interest. In all probability Futuris would have received a copy of the ASX announcement. He understood it to be the case, as set out in the announcement, that the involvement of ERG and Simmonds in the recapitalisation was supported by Telstra and Nortel (T413). He would have expected that to be the case because they had greater involvement in the telecommunications industry than Futuris. However he also believed that they would support the best recapitalisation proposal. He was referred to an article in the Sydney Morning Herald of 30 November in which Fogarty was quoted as saying that Nortel would not deal with Futuris if it were the successful party (X342). Newman agreed he would have seen the article and that he never received any advice from Nortel to the contrary. He went further in cross-examination and said he had ultimately received a letter from Nortel that Futuris was not acceptable to it (T414). 200 Fogarty telephoned Newman on 29 November to discuss the recapitalisation proposal. Newman returned his call. Newman said he was negotiable. He still believed Exicom was a good acquisition. The discussion ended in some acrimony. In Newman's opinion, Fogarty wasn't listening to anything he said. The conversation terminated, according to Newman, on the basis that they would both discuss the matter again the next day (X259 par 13). There does not appear to be any record of a conversation the following day. 201 A response to the Exicom announcement came from the owner of the Villawood premises, Industrial Property Management Limited, which advised by letter dated 30 November, that it was not prepared to entertain any negotiations in relation to the Villawood lease (X83). Fogarty's position then was that ERG would not proceed unless the Villawood landlord was willing to negotiate. If it maintained its opposition then the deal would fall over (X438 par 86). Futuris Considers the Insider Trading Litigation 202 The trial of the insider trading litigation between Exicom and Futuris in the New South Wales Supreme Court had been listed for hearing on 22 to 24, 29 and 30 November and 1 December 1995. The hearing, however, was not finished within that time and was listed for further dates in December. 203 At the end of November or the beginning of December, Newman, Davies and Bennett had a discussion with Alan Myers, senior counsel for Futuris in that litigation. The meeting may have been by way of a telephone conference (T367). Myers' advice, as Newman recalled it, was that the case had another three weeks to go and was running against Futuris (T367). The possibility was open of a finding that Futuris had breached the insider trading provisions of the Corporations Law. This was a matter of great concern to Newman. He was aware that one of the possible consequences of an adverse finding could be a criminal prosecution. He agreed that an adverse finding could be disastrous for him personally (T368). In cross-examination he said he thought Myers' advice preceded the discontinuance of his negotiations with Fogarty in November (T370). However in re-examination he said he believed the advice came after the discontinuance (T499). He denied that the need to deal with the insider trading litigation influenced him in his negotiations with Fogarty (T499). I do not accept that latter proposition. In my opinion it is inconsistent with his earlier testimony and inherently improbable. His dismissal of the insider trading litigation as a "frivolous claim" is not consistent with the advice he was given by senior counsel (T499-500). It was an attempt to avoid any suggestion that he was under pressure to settle with Fogarty as a way of getting rid of the insider trading litigation. The existence of such pressure would, to a degree, undermine his claim that he was induced to settle by Fogarty's representations. In cross-examination he resisted the proposition that this was a consideration that would affect his position on the commercial negotiations with ERG (T370-371). 204 On or about 1 December, Bennett & Co prepared draft Part A and Part C statements for an acquisition of shares in Exicom by Futuris (X345, X361, X362). Newman explained these drafts by saying that: "Consideration was being given to having all our options ready and able to be executed should I so desire". (T422) He accepted that one of the options included a takeover offer at 10 cents per share (T422). Fogarty Speaks to Nortel 205 Fogarty spoke to Brian Davis of Nortel on 1 December 1995. Davis was concerned about the statement in the Exicom press release indicating that "a major customer" of Exicom would not deal with it if Futuris became involved. His comment to Fogarty in this respect had not been intended as a public comment. He wanted to keep that quiet and, according to Fogarty, would deny having said it if asked to comment in public (X408, T979). Fogarty and Newman Re-open Negotiations – 3 – 7 December 1995 206 Fogarty spoke to Newman on 3 December. According to his evidence, he told Newman he remained willing to deal with him on a sensible basis but that if he sought to continue to change the deal, he was not willing to do so. The discussion did not progress at that time. It was resumed on the following day. Newman told Fogarty he had reviewed the position and that negotiations should resume on the basis of the previous offer. Fogarty said he would consider the position (T982). 207 Newman's witness statement referred to a conversation which took place on 5 December. He appears to have overlooked or confused it with a discussion on 4 December. He conceded in cross-examination that his statement referred to a conversation of 5 December when it meant to refer to that of 4 December (X347, T425). He, like Fogarty, made notes of the discussion of 4 December (X347). Fogarty, he said, told him that he had a buyer (who had approached him) wanting to buy 20% of the company at 12.5 cents through Baillieu. Fogarty also said he could not buy shares because ERG had "information". He said Fogarty also repeated matters which he had raised in discussions held on 13 November namely that: 1. Exicom was committed to the ERG Simmonds deal and that he had the deal "locked up" otherwise he couldn't raise the equity. 2. He had agreements with Nortel and Telstra. In particular, according to Newman, Fogarty told him he had a written agreement with Telstra and that Telstra would not support Futuris' involvement. 3. In relation to Villawood he said words to the effect that this was not a major issue, that ERG would proceed even if Villawood was not renegotiated because the dollars involved were not great but he at least wanted to paint the worst picture. Newman said that Fogarty explained that the Exicom trading position was substantially worse than had been believed. He had his own management "in the company" and they had discovered many problems the current management were not aware of. 208 Newman described as a fundamental issue in their discussion on that day, the proposition that if ERG or Simmonds were to withdraw from the recapitalisation process, Futuris should have an election to take up their position in particular the Bank Option. He said Fogarty agreed to this and that in return he indicated Futuris would agree to a "stand still". He said the most important issue outstanding after their discussions was the position of the NRMA and who was to pay it out. It was put to Newman in cross-examination that his notes contained no reference to the statements which he attributed to Fogarty about having the deal locked up, about Nortel and Telstra and about Villawood. He agreed that he had made no notes of these specific matters (T425). There were eight pages of handwritten notes. Fogarty's description of the conversation in cross-examination was thus: "What happened was, he rang me on 4 December at 11am. I very, very plainly recall the telephone call coming in because I was surprised that he rang back after the session the night before, and the gist of the conversation is what I've said in my statement occurred, that is, he was willing to go back to the negotiations where they were before. All the rest of the information in the discussion to me was extraneous. It was all positioning." (T985) 209 On 4 December Davies consulted Futuris' directors individually about their attitudes to the Exicom proposal. He reported back to Newman that nothing had changed since the Board meeting and that the directors "…were comfortable for him to go either way he chose" (T547). 210 Fogarty had a lengthy conversation with Newman from midday until 2.15pm on 5 December. He made notes of it (X410). He agreed with Newman that the Deed of Release which they had tried to negotiate in November would be the basis of discussion. Newman wanted Exicom to pay $500,000 to Futuris plus a further $100,000 to settle the court action. He also wanted a separate payment of $800,000 to Futuris for a standstill agreement under which Futuris would not acquire any more shares in Exicom. It was also to be a term of the settlement that ERG and Simmonds pay $800,000 to Futuris to compensate it for giving up the strong position it had. If ERG and Simmonds withdrew then Futuris would be looking at an Exicom which was worth substantially less, if not worthless. Newman denied having said this. His recollection was that he told Fogarty that if he withdrew then "shareholders' capital" might be worthless. This he said was a very different concept (X259, par 14). 211 In my opinion, Newman made the statements which Fogarty attributed to him. He was seeking to support his demand for $800,000 from ERG and Simmonds by reference to the loss of opportunity he would suffer by withdrawing. It is questionable whether the distinction between so called "shareholder capital" and the worth of the company had much meaning in that context in any event. Davies, it may be noted, was of the view that Exicom was worthless. He said in cross-examination: "My view was that the company was worthless. The company at that point in time had the baggage of an incompetent board and an incompetent management. My view very strongly was that if we could recapitalise it then we could put value back in the company." (T546) He also maintained however that as an opportunity the company had "a different value". 212 According to Fogarty, Newman asked him how confident he was of getting the recapitalisation proposal up and concluded. Fogarty said he believed the shareholders would support ERG and Simmonds but that the exact numbers were not known and there was always a risk. He was hopeful that the conditions precedent would be met. He told Newman that he believed they would still be able to finalise a deal with Telstra as an "in principle" agreement was in place. The parties still had to dot the "i's" and cross the "t's". He also said Nortel was supportive. 213 Newman denied that Fogarty told him he had to dot the "i's" and cross the "t's" on any agreement. According to him, Fogarty said he had all the agreements "tied up". Fogarty was cross-examined about that. It was suggested that he was putting to Newman the strength of the position that ERG and Simmonds had achieved with the recapitalisation proposal. He denied this. He pointed out that this was Newman who had reopened negotiations (T991). He took the view that because Newman had picked up the phone after the aborted discussion of 4 December "he was the one who now desperately wanted to do a deal" (T986). 214 Fogarty said he had no reason to gild the lily in respect of the strength of his position: "There was no point in me gilding the lily because, again, he'd come back to us wanting to negotiate and my personal view was that he did that because he didn't believe he was in a particularly strong position." (T993) In my opinion Fogarty's assessment of Newman's position at the time was essentially accurate. More importantly, I accept that this was probably the view he took at the time and that it is unlikely that, either on 4 or 5 December, he made the statements about having the deal "locked up" and agreements with Nortel and Telstra which Newman attributed to him. My impression of Fogarty is that he was unlikely to have made statements which were so unequivocal and inconsistent with the true position. Moreover it was unnecessary for him to do so. His notes, which I accept were made at or about that time, were consistent with his evidence. So far as the conversation of 4 December is concerned, Newman's notes of that date made no mention of the alleged representations. 215 Fogarty had said in his own statement of evidence concerning the discussions of the night of 23/24 November, that he agreed with Newman to a warranty in the proposed agreement that ERG would not take business from Exicom and effect material negative changes. This was provided such warranty did not affect ERG/Simmonds' ability to negotiate with Telstra and Villawood (X438 par 72). Newman did not dispute this evidence. Indeed in his Responsive Statement he said they discussed ERG's wish to retain the ability to negotiate with Telstra and the Villawood landlord (X259 par 11). It was put to Newman in cross-examination that he was obviously aware at that time that there were no concluded deals with Telstra or Villawood (T435). He did not answer that contention directly. He asserted that Fogarty had told him in early November that he "… had a position that he had locked up" (T435). In relation to late November and early December, Newman said: "My position was that I didn't believe necessarily that. I believed that he had the position strongly in his favour but I never believed that he was being forthright with me on the actual positions of those contracts." (T435) I find that Fogarty did not make the unequivocal statements attributed to him by Newman. And even if Newman thought that was the effect of his statements he did not rely upon them. 216 On the Villawood premises, Fogarty said he told Newman that he wasn't willing to waive the condition about renegotiation of the rental in the recapitalisation proposal. He said, however, that if it were the only condition outstanding then for the sake of a million dollars, ERG and Simmonds probably wouldn't allow that to stop the transaction. However he was not willing to waive the condition and he said that was always their position. I accept his evidence on this issue. It was consistent with his later approach to the renegotiation of the lease, albeit he was prepared to be flexible about the terms which would satisfy him. 217 Fogarty's account of discussion about the Bank Option on 5 December was that Newman said if ERG and Simmonds were to withdraw then apart from the $800,000 he was seeking from them the only other compensation Futuris would get would be to have the Bank Option made available to it. In cross-examination Fogarty said that Newman told him it was important to him that he have ERG and Simmonds' position on the Bank Option (T995). There is no real dispute about the substance of that conversation. 218 Fogarty's objective in entertaining the renewed discussions was to avoid further delay to the recapitalisation process. In his view, if the insider trading litigation continued, Exicom would go into liquidation (T992). He wanted to move the process forward "as quickly as possible" (T992). After his discussion with Newman, he spoke to Capp and to Stephen Newman. They were prepared to negotiate with Alan Newman provided Futuris shares were sold to a third party not associated with him. Fogarty suggested Baillieu's would be the most appropriate brokers to find buyers for the shares as they had previously expressed interest in trying to get shares in Exicom. 219 Newman and Fogarty spoke again on 5 December at about 4.37pm. They agreed a basis for settlement which Fogarty set out in the notes of that discussion (X411: (a) Futuris would sell its total holding in Exicom for 12.5 cents per share to a party acceptable to ERG, Simmonds and Exicom. (b) Settlement of the transaction would occur on signing of a Deed of Release. (c) Futuris would deliver signed share transfers and appoint Exicom as its attorney to complete the transaction. (d) $500,000 would be payable on settlement of the action by Exicom to Futuris and was subject to completion of the recapitalisation. (e) $100,000 would be payable to NRMA by Exicom. (f) Futuris would pay 1 Ľ cents or any additional sums agreed to NRMA to settle with them so that all obligations in respect of NRMA rested with Futuris. (g) Exicom and Futuris would enter into a standstill agreement, the consideration for which would be $800,000 payable to Futuris only if completion of the recapitalisation occurred and would require that Futuris not make any bid nor acquire any further interest in Exicom. (h) ERG and Simmonds would pay $800,000 to Futuris for it to enter into a standstill agreement and a Deed of Release subject to completion of the recapitalisation; and (i) all payments to be made two business days after the Court approval and would be conditional upon the transaction being concluded. This aspect of the second conversation of 5 December was not disputed by Newman. 220 According to Fogarty, Newman again raised the issue of the Bank debt and said it was imperative he have the right to the debt on any withdrawal by ERG and Simmonds from the recapitalisation proposal. He told Newman that if ERG and Simmonds withdrew it was highly improbable that they would have any further interest in Exicom. They would have no objection to then making the rights available to Futuris. Futuris would assume the risk that Exicom would have no value once ERG and Simmonds withdrew. Newman said that was for him to worry about. In his Responsive Statement, Newman described this as "an accurate summary of part of the total discussion". He said that he had added that he knew Fogarty was going to try to improve the recapitalisation proposal and the pricing which was what he, Newman, would have done himself (X259, par 19). I find that the conversation of 5 December held at about 4.37pm was in substance as recounted by Fogarty and accepted by Newman. 221 A further meeting occurred at about 6pm on that day at which Newman, Clark and Paganin were present along with Fogarty. They discussed the terms of settlement and went through the principles. Fogarty made brief notes then or shortly afterwards (X412). They agreed that Futuris would be responsible for whatever it cost to get NRMA "across the line" and that ERG would arrange for Exicom to pay the funds to Futuris on completion of the transaction. This was on the understanding that the payment was conditional on the recapitalisation proceeding. It was also agreed that the insider trading case would continue until all documentation was completed and signed. 222 The evidence of this discussion was not in dispute. Fogarty went on to say in his evidence that Newman expressed concern that ERG would get involved in Exicom, try to buy assets out of it, then withdraw from the transaction. This was more or less along the lines of the concerns he had expressed during their late night discussion on 23/24 November. Fogarty said he had no intention of doing that. ERG would undertake not to be involved in the management of Exicom. However it needed to be able to negotiate with Telstra, Nortel and Villawood in respect of ongoing business. This was a re-statement of the position he had enunciated in a similar context to Newman in their discussions of 23/24 November. 223 In his Responsive Statement, Newman denied that Fogarty spoke of ERG continuing to negotiate with Telstra and Nortel. He maintained that Fogarty told him the deals with Telstra and Nortel were "tied up". I have already indicated that I do not accept Newman's evidence as to these alleged representations. In any event he did not believe that to be the position on account of anything Fogarty said. 224 Bennett & Co turned out another draft takeover offer on 5 December (X346). This increased the prospective offer price from 10 cents per share to 12.5 cents per share. No decision had been made by Futuris to make such an offer. The company was still considering its options and what it might have to pay. The offer document was requested by Newman so that it could be available and ready for use if needed (T423). This was the document referred to earlier in these reasons as evidencing Futuris' access to the Bank Option document because of its use of defined terms from that document. 225 On 5 December, Bennett & Co also sent a letter to Exicom's solicitors, Corrs, foreshadowing a formal request for Exicom, under s 246(3)(b) of the Corporations Law, to provide Futuris with a list of persons entitled to receive notice of general meetings of the company (X350). The letter was by way of response to Corrs' facsimile of the same day informing Bennett & Co that they had advised the Board of Exicom that it need not act upon the purported requisition from Futuris. The basis of that advice was that under the Articles of Association the members of the company were not competent lawfully to effect the object expressed in it. 226 Newman contacted Fogarty on 6 December and told him that commercially NRMA had agreed to the proposed transaction subject to legal documentation (X412). Later in the evening of 6 December, Clark told Fogarty that if NRMA did not sign by the next night he would allow an extension. He said Futuris would sign at 6.30am and that he would be at Bennett & Co at that time (X412). Fear rang Fogarty at 7pm on 6 December and told him that everyone was ready to complete the settlement. He confirmed that Futuris representatives would be at Bennett & Co at 6.30am to sign the agreement. By 6.40am on 7 December, Exicom, ERG, Simmonds and Zilkha had all signed their parts of the documentation. Fogarty phoned Clark and Davies and informed them of that fact. Exicom made a media statement later that day announcing the settlement with Futuris (X87). Correspondence with the CBA – the Option is Extended – 7 December 1995 227 O'Brien wrote to Stephen Newman on 7 December, apparently unaware of the settlement with Futuris, expressing the Bank's ongoing concern about the destabilising effect of Futuris' shareholding. While that situation continued, the CBA was only prepared to extend its facilities to Exicom on a fourteen day basis (X85). A principal reduction of $250,000 was due for 20 December. This letter crossed a letter from Gordon advising of the settlement and seeking an extension of the Option Expiration Date in the Option Deed from 29 February 1996 to 31 March 1996. O'Brien announced to Gordon on the same day confirming that the CBA agreed to amend the definition of Option Expiration Date in the Option Deed of 8 November as requested. This was subject to conditions, none of which is relevant for present purposes (X88). 228 On the following day there was an exchange of correspondence between the ASX and Exicom concerning the adequacy of the information Exicom had provided to the Exchange concerning the creation of the Bank Option, the extent to which it had fully explained its knowledge of the creation of that document. The ASX raised the possibility that there had been breaches of the listing rules or the Corporations Law by Exicom (X369). Exicom responded by a letter from its secretary, Patterson, on 11 December (X370). He made the point that the CBA did not require the company's consent to transfer the debt and rejected the suggestion that any of the company's previous responses had been misleading or evasive in relation to its knowledge of the Option. The Settlement Agreements – 7 December 1995 229 The documents required to give effect to the settlement were: 1. A Deed of Settlement and Release between Exicom, Futuris, FIPL, NRMA and associated NRMA companies, Newman, Clark, Davies, ERG, Simmonds and Zilkha. 2. A Stand Still Agreement with Exicom. 3.. The ERG/Simmonds Agreement between Futuris, FIPL, ERG and Simmonds. 230 Under the Deed of Settlement it was agreed that the proceedings brought by Exicom against Futuris would be discontinued by consent. Futuris granted an irrevocable proxy in respect of its shares in favour of the Chairman of Exicom to vote in favour of all resolutions to be put to members of Exicom in connection with the ERG/Simmonds reconstruction proposal. With effect from court approval of the ERG/Simmonds reconstruction proposal Exicom, ERG/Simmonds, Zilkha, Futuris and Futuris Investments mutually released each other from any claims. Upon completion of the ERG/Simmonds recapitalisation proposal Exicom would pay Futuris $480,000. 231 The Stand Still Agreement provided that subject to the completion and upon completion of the reconstruction proposal, Exicom would pay Futuris $800,000. Futuris agreed that until completion of the reconstruction proposal it would not deal in any Exicom shares or securities. 232 The third agreement was that referred to in the pleadings as the ERG/Simmonds Agreement. Under that agreement as pleaded, it was provided that: (a) Subject to the completion and upon completion of the ERG/Simmonds reconstruction proposal, ERG and Simmonds would pay to such company as might be nominated by Futuris and failing such nomination FIPL, the sum of $800,000. In the event that ERG and Simmonds were to withdraw from the recapitalisation proposal or court approval for it was not obtained by five business days prior to 31 May 1996 and if Futuris elected in writing, ERG and Simmonds would forthwith and in any event within two business days assign, transfer or make available to Futuris all their right, title or interest in the Bank Option. They were to give written notice to Futuris within twenty four hours of their withdrawal or of the fact that court approval was not given. 233 The relevant clause of the agreement relating to the Bank Option was cl 5 which provided: "5. Option (a) In the event that either: (1) both of the Investors at any time withdraw from the Capital Reconstruction Investment Proposal ("the Withdrawal"); or (2) Court Approval to the Capital Reconstruction and Investment Proposal is, for any reason, not obtained by no later than either (A) 5 Business Days prior to 29 February 1996, in the event that ERG cannot procure the Commonwealth Bank to extend the Option Expiration Date (as that term is defined in the Bank Option) to expire on 31 March 1996; or (B) 5 Business Days prior to 31 March 1996, in the event that ERG can procure the Commonwealth Bank to extend the Option Expiration Date (as that term is defined in the Bank Option) to expire on 31 March 1996, then, if Futuris so elects in writing, the Investors shall forthwith and in any event within 2 Business Days of either the date of the Withdrawal or the date referred to in clause 5(a)(2)(A) or 5(a)(2)(B) (whichever is appropriate) of this Agreement (whichever is the sooner), assign or otherwise transfer or make available to Futuris (collectively referred to as "Assign" or "Assignment"), or to such company as may be nominated by Futuris or, failing such nomination, Futuris Investments, all right benefit or interest held by the Investors in the Bank Option ("Investors' Interest"). (b) In consideration for the assignment of the Investors' Interest, Futuris shall pay to the Investors, upon Assignment, the amount (if any) paid by the Investors to the Bank for the acquisition of securities pursuant to the exercise of the Bank Option. (c) The Investors shall give written notice to Futuris within 24 hours of either: (1) the Withdrawal; or (2) the fact that Court Approval is not given to the Capital Reconstruction and Investment Proposal, for any reason, in the manner and time referred to in clause 5(a)(2) of this Agreement. (d) The Investors warrant: (1) that the Investors have the legal right and power to enter into this Agreement and to procure Assignment of the Bank Option free of any encumbrance; (2) the interest (including the entire benefit) held by the Investors in the Bank Option is capable of Assignment by the Investors in accordance with the terms of this Agreement and that they will Assign their respective rights arising out of or under the Bank Option to the Futuris Companies or any of them or their nominee in the event that the Futuris Companies, pursuant to the provisions of this Agreement, become entitled to all right, benefit or interest held by the Investors in the Bank Option; and (3) prior to the Reconstruction Date the Investors shall not exercise any rights pursuant to the Bank Option without the prior written consent of Futuris, which consent shall not be unreasonably withheld; (4) as and from the date of this Agreement until the Reconstruction Date the Investors shall not implement, cause, initiate, require or procure the taking of any action or steps by Exicom (including inaction or omission to take steps) which result in a material negative impact on the assets business or contracts of Exicom and further shall not cause or require Exicom to conclude or enter into any significant new contract, in particular with Telstra, unless any such contract is subject to a condition precedent to the successful completion of the Capital Reconstruction and Investment Proposal and excepting any restructure of the Villawood lease." The term "Bank Option" was defined in cl 1 of the agreement thus: ""Bank Option" means: (a) the option dated 13 October 1995 between Commonwealth Bank of Australia Limited ("Commonwealth Bank") and Simmonds/Zilkha whereby Simmonds/Zilkha were granted the right to purchase, inter alia, the Exicom Facilities and the Exicom Securities (as those terms are defined in the Bank Option) from the Commonwealth Bank; or (b) all documents granted by the Commonwealth Bank in favour of Simmonds/Zilkha or any of them in substantially the same terms in substitution of the option dated 13 October 1995; (c) if during the currency of this Agreement the Bank Option is exercised in accordance with its terms, the term "Bank Option" shall mean whatever economic interests are acquired pursuant to the exercise of such Bank Option;" 234 As will appear below, on 23 February 1996, all resolutions necessary to approve the proposed reconstruction were put to a meeting of shareholders of Exicom and approved. The Rocky Path Towards Recapitalisation – December 1995 to 23 February 1996 235 On 11 December, Fogarty telephoned O'Brien at the CBA and thanked him for the CBA's support in relation to the recapitalisation of Exicom. He told O'Brien that he would like to review ERG's relationship with the CBA and while he would give Western Australian business to the principal banker, the National Australia Bank, he would like to talk about the CBA funding both ERG and Simmonds for about $15 million (X462, T950). SPC Warburg wrote to ERG on the same day indicating its continuing interest in underwriting a proposed rights issue for the company (X89). 236 That day also saw the production within ERG of two papers entitled "Exicom Recapitalisation" (X90) and "Exicom Strategy Paper for Exicom Recapitalisation" (X91). Either or both Fogarty and Harley may have had a hand in their preparation (T846/847). The Executive Summary in the Exicom Recapitalisation Report referred to the due diligence exercise undertaken on Exicom by ERG. It summarised the position with respect to Telstra and Nortel and identified other potential areas of revenue growth. There were financial projections attached to both documents. The projections related to earnings before interest, tax depreciation and amortisation (EBITDA). The projection called "Base Case" was identified by Fogarty as "…the one you are assuming you can deliver on" (T849). This, he said, reflected what ERG believed would be the final position if the information it had been provided was accurate. Due diligence was still continuing at the time. The ERG Strategy Paper referred to the price paid for the company as effectively valuing it at $15 million. The company could report an excellent upside opportunity for ERG if profitability could be improved. The forecast numbers indicated the ability to achieve profitability of $10 million per annum which would value the business in the region of $70 million to $100 million. This projection was, of course, based on information to hand at the time. Much more was to emerge with the passage of time. 237 A meeting of ERG directors held on 12 December discussed the recapitalisation proposal and the Exicom Recapitalisation document of 11 December. The minutes noted that "the offer was still a very conditional one with several issues still to be resolved" (X92). Fogarty observed that ERG had up until March 1996, when it had to provide funds to Exicom, to withdraw on the basis of any material adverse change in the business, financial position, profitability or prospects for Exicom from 30 September 1995. The renegotiation of the Villawood lease remained in place as well as other conditions precedent. He reported that the Telstra negotiations were proceeding well and the contract was almost in its final form. 238 On 13 December, the CBA wrote to Exicom advising that it was not prepared to waive its requirement for a principal debt reduction on 20 December. It was, however, prepared to reduce the amount from $250,000 to $150,000 and defer the date of payment to 3 January 1996 (X93). Current facilities would be extended to 31 January 1996. In the meantime preparations for the ERG rights issue continued. No major announcements would be necessary if the issue were completed prior to Exicom's shareholders' meeting. Due diligence inquiries were ongoing as appears from a Draft Due Diligence Questionnaire prepared on 13 December (X95). Fogarty had agreed with Lynton McRostie that McRostie should prepare the questionnaire and draft answers and make it his "number one priority". They had also agreed that the questionnaire should be submitted to Exicom prior to Christmas. In the event, it was submitted to Exicom in mid-December (X438 par 105). 239 Fogarty was due to travel to North America on 17 December and was to be away until 19 January. On 14 December, he sent a memorandum to McRostie about the need to develop a "comprehensive plan for turning Exicom around". He requested a strategy paper (X96). Fogarty described fourteen issues in his request as "critical to our success in turning Exicom around in the first six months". He said: "I expect you to drive the total project and also liaise with David Gordon and Steve Newman to ensure that the shareholder meeting is as early as possible." The Board would need a complete document at the end of January. Management would require it before then. 240 Before leaving for the United States, Fogarty had meetings with Harley and McRostie to work out ERG's responsibilities in advancing the Exicom recapitalisation. This would involve ERG personnel visiting Exicom's premises, reviewing its manufacturing processes and being given access to due diligence information (X438 par 104). He made notes at this time of the allocation of responsibilities for various tasks in the implementation of recapitalisation. These were: (a) An independent expert's report to be organised by Peter Patterson and Corrs Chambers Westgarth. (b) A consultancy agreement between ERG and Exicom to be prepared by McRostie in conjunction with Leigh Warnick of the firm Mallesons Stephen Jaques. (c) A loan agreement between ERG, Simmonds and Exicom to be prepared by Bill Napier of Freehill Hollingdale & Page. (d) A subscription agreement to be managed by Gordon with Koeck of Corrs. (e) A notice of extraordinary general meeting to be prepared by Patterson in conjunction with Koeck. (f) Negotiations with the landlord at the Villawood premises to be carried out by Stephen Newman in conjunction with McRostie. (g) The Telstra agreements to be negotiated by Gordon with Stephen Newman, one of Gordon's assistants and McRostie, due to be completed by 6 January 1996. (h) The Foreign Investment Review Board application to be completed by 15 December 1995 by Gordon together with personnel from Simmonds. (i) Various other agreements to be concluded in a similar timeframe. (X438 par 105) 241 Fogarty also prepared, on 15 December, a "Statement of Relationships between ERG & SCL in Respect to the Investment in Exicom" (X97). That document sought to summarise the roles that ERG and Simmonds would play in relation to the recapitalisation. In connection with the CBA debt he observed: "It was agreed that the bank debt with the CBA be satisfied by contributions of 50% from ERG and SCL and that the discount on the debt be shared in the same proportion. ERG intends funding its proportion of the $15.7 million by bank borrowing and we will either work together with SCL or separately arrange our own funding and then provide it to Exicom via a $21 million loan agreement which will be several in the sense that the obligations of SCL and ERG are separated." He planned to meet, and did meet, with O'Kell in Toronto early in January to resolve issues arising from his memorandum. On 15 December, he spoke with Stephen Wilson of Grant Samuel who was to prepare the Independent Expert Report and discussed ERG's approach to Exicom with him. 242 On 20 December, Gordon sent a letter to Stephen Newman confirming extension of the time limited by the agreement of 29 November for renegotiation of the terms of the Villawood lease, a condition precedent of the recapitalisation. That time was extended from 31 December 1995 to 31 January 1996 (X99). A draft Information Memorandum to Shareholders was prepared by Corrs and sent to Exicom on 22 December (X101). Telstra wrote to Exicom on the same day forwarding reports on a review of the TF400 telephone production process at Villawood which had been carried out by Telstra and Telstra Technologies. Approval for continued delivery of the TF200 and production for TF400 was confirmed, subject to changes related to integration of quality management into the production process. Davis from Nortel, wrote to Capp on 22 December stating his full support for the involvement of ERG and Simmonds in the recapitalisation. He confirmed that Nortel would continue to honour its obligation under the P-phone Technology and Manufacturing Deed entered into between their two companies. He assured Capp that Nortel had no intention of acting on the breach notified in his letter of 4 January 1995 (X103). 243 On 29 December, an Information Memorandum was provided to the CBA on a confidential basis for use "… in connection with the proposal and pricing of Credit Facilities for Exicom Limited" (X104). It incorporated the "ERG Strategy Paper for Exicom Recapitalisation" of 11 December 1995. ERG also sent an Information Memorandum to Westpac on 4 January (X106). Exicom's financial results for the month of December were below what had been budgeted (X490). A deficit of $14 million had accumulated for the six months to 31 December. 244 Early in January a problem arose again over the TF400 telephone. Don Wellings of Telstra sent a memo to Lindsay Lockwood, General Manager, Corporate Operations of Exicom advising of "memory loss from the one touch memory keys". The failure was said to be "a major concern to Telstra" (X105). 245 On 5 January, Stephen Belben of Ernst & Young sent to ERG a review of KPMG's due diligence report on Exicom which had been prepared for Simmonds and Zilkha in October 1995 (X42). The KPMG document produced in evidence was a draft. Fogarty was unable to recall whether ERG had received a final version of the KPMG report (T928). He agreed however that Harley may well have received it as he was heading up the ERG financial team which was involved in assessing the value of the Exicom/ERG combination, the synergies it could bring, the opportunities to which it could give rise and how these things could add value to both companies (T929). Fogarty said of this process: "Basically I was being kept up to date with very much what we would describe as a moving feast. It was very hard to pin down and get firm numbers. That's what we were trying to do. It was a relatively short period of due diligence given that we'd come in fairly late to do a complete reconstruction of a company that was in financial difficulties, so we were being very, very careful." (T929) The Ernst and Young review identified the limits of the engagement of KPMG and the limits of their report which would not necessarily disclose all significant matters or business risks about Exicom's operations. 246 While in the United States, Fogarty had further discussions with Mead about the terms of agreement with Telstra and the settlement of its dispute with Exicom (X417). Mead told him Telstra's position with respect to a long term supply agreement and the settlement of the dispute could change as a new Retail Product Group Manager was to be appointed to replace the incumbent, Parker. He suggested to Fogarty that a release could provide that damages at large would not be payable to Telstra, but that they could be capped at 15% of contract price for goods delivered in the first eighteen months of the contract. Subject to rights to terminate any agreement, Telstra could commit to ordering sufficient amounts of product to claw back its damages (X438 par 110). Following this discussion Fogarty rang Harley who sent a fax to Andrew Pike at Freehills indicating that agreement with Telstra had been reached on outstanding issues including a liability cap of 15% which was to apply for an eighteen month period from the start of the contract. Thereafter if there were a major failure the recapitalised Exicom would have to be on the same terms with Telstra as Exicom's competitor, Alcatel (X474, T929-930). 247 At this time, ERG was providing some input into the preparation of the Grant Samuel report for submission to the shareholders' meeting. ERG was in receipt of drafts of the report as Grant Samuel was trying to do it as quickly as possible. Fogarty said that all concerned were conscious that Exicom was deteriorating and that there was a need to get the report completed so court approval for the recapitalisation could be obtained (T931). 248 There was an ongoing exchange between Freehills and Mallesons, the latter acting on behalf of Telstra, in relation to the terms of the proposed Exicom Product Supply Agreement (X470). However on 12 January 1996, Exicom received a telephone call from Mead to report a major failure of the TF400 during field trials. Rectification would be crucial to the existence of the Product Supply Agreement. Mead asked that somebody at ERG or Simmonds speak to Walton at Telstra urgently (X107). Fogarty telephoned Mead who said that the problems had to be sorted out before any settlement and long term sales agreement could be reached (X438 par 111). 249 FIRB approval for the Simmonds' acquisition, with ERG, of up to 100% of Exicom shares, was given on 18 January (X475). A status report from Freehills on the progress to satisfaction of the conditions precedent indicated that most remained to be satisfied. A Revised Product Supply Agreement and Release Agreement with Telstra was expected from Mallesons by 19 January. Confirmation of arrangements with Nortel had been received. There had been no developments relevant to the no material adverse change condition at that time (X475). There was no progress on the Villawood lease renegotiation. McRostie was pressing the Villawood landlord to renegotiate the lease. Following a meeting on 17 January he wrote a letter on 18 January pointing out that if Exicom were not the beneficiary of an immediate and substantial capital injection it would be the subject of a receivership by its secured creditor or liquidation by its unsecured creditors (X109). 250 On Sunday, 21 January, Fogarty arrived back in Perth. On 22 January, his board met to review the due diligence process. He reported that the documentation to go with notice of the Exicom extraordinary general meeting was being finalised. However the timetable for completion of formalities was extended by three weeks because of processes required by s 205 of the Corporations Law. This brought it close to the maximum time available under the Futuris settlement. Due diligence responses had not at that time been signed off by the Exicom Board. Harley told the Board that money was tight at Exicom and the longer the process took, the greater the risk of Exicom not surviving (X111). Harley sent a memorandum to Stephen Newman on the same day referring to developments of concern in relation to research and development costs of the Exicom P-phone product and the purchase of $5 million of components for which payment was due in March. He also sought a reforecasting of the Exicom results to 30 June 1996 based on the actual results for the December half (X112). McRostie delivered to Fogarty a further draft of the Strategy Plan for restructuring of Exicom on 23 January. This document became known as the "Exicom Restructure Strategy Paper" and was dated 31 January 1996. 251 On 24 January, Steven Arthurs, Group Financial Controller for Exicom wrote to O'Brien at the CBA requesting waiver of the principal reduction requirement for January 1996. He mentioned two developments adversely affecting cashflow. The first was the delay in the supply of TF400 telephones resulting from a design issue. It was said to have a "cashflow effect" of approximately $2 million. The second was the reversion by Telstra Technologies to thirty-day payment terms with a cashflow effect of about $1 million (X491). 252 Gordon sent further drafts of the Independent Expert Report to ERG and Simmonds on 25 January. Printing of the report was anticipated the following day. The date proposed for the extraordinary general meeting was 23 February (X113). On 29 January 1996, an Information Memorandum was prepared for issue to shareholders of Exicom incorporating notice of the extraordinary general meeting (X114). It attached, as an enclosure, the Independent Expert's Report from Grant Samuel (X115). That report was received in evidence, but not as evidence of the truth of its contents. ERG and Simmonds were trying to resolve details of the Subscription Agreement with Exicom. Gordon was handling this issue. The Exicom Board was declining to give any warranty as to the accuracy of the information it had supplied. The company had also not signed off on the due diligence questionnaire and draft answers which had been delivered in mid-December. 253 On 30 January, the CBA wrote to Exicom rejecting its request for waiver of the principal reduction of $200,000 due on 31 January. It was, however, prepared to defer $75,000 of its required reduction until 14 February (X116). Mallesons sent to Freehills on that day drafts of the Product Supply Agreement and Deed of Release between Exicom and Telstra. They noted that Telstra had not had an opportunity to review the documents and they reserved the right to make such amendments as their client thought necessary. In particular, Mr Lindsay Yelland had recently been appointed Group Managing Director of the Retail Products Group. He had not been briefed on the arrangements at that time. On 31 January, a further extension of the condition precedent relating to the Villawood lease renegotiation was agreed between Exicom, ERG and Simmonds. The extension was to 29 February 1996 (X117). Fogarty had a conference call with Capp, Gordon and Koeck. The object of the discussion was to finalise the Subscription Agreement and, in particular, the warranty issue and the liability of Exicom's directors. Fogarty told Koeck that because of the poor information Exicom was providing and its changing nature, ERG and Simmonds had to insist on warranties. He also said that the lack of focus by Exicom's Board and management on the finalisation of the recapitalisation process was putting the deal at risk. He expressed concern that Stephen Newman, Patterson and Arthurs had been spending time in India instead of attending to the due diligence questionnaire and the Subscription Agreement. He also pointed out that management should be trying to get the Telstra issue resolved so that deliveries could commence. He warned that unless the Telstra issue was resolved within a week ERG and Simmonds would consider not proceeding (X438 par 120). 254 On the afternoon of 31 January, Fogarty flew to Sydney. On 1 February he met with Phillips Australia to explore how Phillips might work with Exicom. Phillips supplied chip components to Exicom and Fogarty was keen to continue the relationship. In company with McRostie, he also met on that day with Richard Sheppard, the Managing Director of Macquarie Bank Management Division, which was managing the Villawood premises for the landlord. Fogarty told Sheppard that ERG and Simmonds were not prepared to waive the condition precedent for the recapitalisation requiring renegotiation of the Villawood lease. He also said that if the landlord refused to negotiate ERG and Simmonds would not continue with the recapitalisation and Exicom would "go broke". They discussed proposals relating to insurance costs and rental levels. The rental at that time was $A3,300,000 per annum. ERG and Simmonds were willing to consider $A2,500,000 even though the condition precedent specified $A2,400,000. Sheppard said he would get back to Fogarty. Fogarty arranged with Freehills to have a copy of the Independent Expert's Report delivered to Sheppard (X420). 255 Fogarty and McRostie also met with a potential operations manager for Exicom, Neville Pan, who was familiar with the Exicom business (X421). On the same day, they met with Stephen Newman to discuss the status of the operations of Exicom, staff reviews and Newman's own role. They discussed Exicom's forecasts. Fogarty expressed scepticism about their reliability. They discussed directors' remuneration. Newman told Fogarty that the directors had a retirement plan under which they would get one year's pay for every three years of service. This had not previously been disclosed. Fogarty told Stephen Newman that his employment contract would be honoured if he performed. He expressed concern about some of Newman's managerial decisions and what he regarded as the rather cavalier manner in which the recapitalisation exercise had been treated by Exicom's management. He said that ERG and Simmonds would look at preparing a new employment agreement to replicate the existing agreement but spelling out more clearly the obligations of the Chief Executive. Stephen Newman then disclosed to Fogarty his new employment agreement with Exicom, made on 8 November 1995, which provided twelve months notice or salary in lieu if his services were to be terminated. Fogarty asked why ERG and Simmonds had not been told of this but received no answer. He said that ERG and Simmonds were fed up with the delay in Exicom signing off on the due diligence questionnaire. If new issues or surprises kept arising, ERG and Simmonds would be better off not proceeding (X422, X423). 256 The "Exicom Restructure Strategy Paper" dated 31 January outlined all the information that ERG had been able to gather to that stage (X253). It mentioned the problems with the TF400 telephone and their consequences for Exicom's cashflow. The revenue effect was said to be $1 million per week. There were delays in the P-phone production and temporary revenue consequences flowing from those delays (T396). A two-month postponement had been requested by Optus on the rollout of a product which Exicom was supplying to it. This would delay two months of revenue totalling $1.2 million. There was a risk to Exicom Communication Systems ("ECS") revenue because of the adverse market perception of the financial stability and integrity of the Group. The customer base had contracted due to customer concerns over the solvency of the company and its ability to complete orders. This risk, however, could be allayed once recapitalisation was completed. 257 Fogarty agreed, in evidence, that apart from having to deal with the quality problem in relation to Telstra, the other major contract issues concerning the P-phone, Optus and ECS were such that if recapitalisation proceeded Exicom could be restored to the forecast position (T937). In relation to the Villawood lease, it was still the case that ERG would insist on the performance of the renegotiation condition. The one qualification to that stance was if it were the only condition outstanding, ERG and Simmonds would probably waive it. Fogarty said he had advised both Futuris and Exicom accordingly, but had never said that ERG and Simmonds would waive it regardless (T938). In cross-examination on the Strategy Paper, he explained that it was his opinion that Exicom was underpinned by Telstra and if it couldn't get an acceptable long-term arrangement with Telstra, the company didn't have a life. It would live or die by the Telstra agreement (T939). 258 Fogarty met with Gordon on 2 February 1996 and they had a conference call with O'Kell with a view to finalising the Subscription Agreement and the proposed agreements with Telstra (X424). Before starting that review they discussed O'Kell's planned visit to Australia which was to tie in with the extraordinary general meeting of Exicom on 23 February 1996. They agreed with O'Kell that they would review the Strategy Plan developed by ERG on 21 and 22 February in Melbourne. They also agreed that Morton and McRostie would complete fresh assessments of the numbers and also review ECS and the New Zealand operations in the weeks leading up to that meeting. They sent a copy of the Strategy Plan to O'Kell. In the course of that discussion O'Kell mentioned an agreement between Exicom and Simmonds under which Simmonds could manufacture the P-phone in North America. Nothing had happened because Exicom was a year behind schedule. Either Gordon or O'Kell said that under that agreement there was some $580,000 owing by Exicom to Simmonds which was not disclosed in the Exicom accounts. Fogarty, O'Kell and Gordon also discussed the Telstra situation and agreed that it was critical to finalise with Telstra in view of its change in management. They agreed upon a schedule for review of the Exicom strategy plan over the period from 5 February 1996 up to 26 February 1996 when they anticipated meeting Yelland at Telstra and representatives of Nortel and the CBA. On 2 February, ERG sought warranties in respect of the management accounts and due diligence responses from the directors of Exicom (X118). 259 On 5 February, Gordon sent a fax to Fogarty advising of a telephone conversation with Mead and his replacement, Chris Hanson. The new Telstra Retail Products Group Managing Director, Yelland, wanted to explore the possibility of Exicom meeting its obligation to provide phones to Telstra in another way. Gordon reported that Mead had told him Telstra would not be prepared to commit to purchase minimum volumes of TF200 or TF400 (or any other phones) from Exicom. This was a reversal of the position agreed between Fogarty and Mead some weeks previously. Telstra also wanted a $4.95 million claw back to apply to a broader range of products which Exicom could provide to Telstra. This could mean that the claw back did not apply to TF400 or any other phones. This was described by Gordon as a reversal of the position agreed with Yelland's predecessor, Parker, some months before and reaffirmed by various people at Telstra over recent times. While he acknowledged that the draft document provided by Mead and Mallesons was provided subject to Yelland's comments, fundamental changes of the kind proposed had not been anticipated. He also pointed out that the Information Memorandum sent to Exicom shareholders and to the ASX was based on the previous discussions and agreement with Telstra. The changes mentioned by Mead were inconsistent with Exicom's disclosure in that memorandum. There was no opportunity to resend documents to shareholders within the required timetables. Gordon said he told Mead these were fundamental changes. 260 On 6 February, the CBA advised ERG that it would not provide debt financing to the recapitalised Exicom group. On 7 February, Westpac sent a similar response to Del Borrello at ERG. It was not prepared to enter into banking arrangements with Exicom in an industry it considered to be high risk until such time as Exicom's performance improvement became apparent (X121). Fogarty contacted Mike Leonard of the CBA and arranged to meet him in Sydney on 14 February 1996. 261 Exicom executives, Stephen Newman and Arthurs, met with officers of the CBA on 8 February to provide them with an update on the recapitalisation process and Exicom's trading performance generally. They were informed at that meeting that O'Brien was being transferred and Mr Ross Griffiths was going to be involved with their matters thereafter (X123). 262 On 9 February, Fogarty sent a memorandum to McRostie referring to "surprise omissions" from the due diligence package and the need to "….start a list of the questionable matters that have been brought to our attention" (X125). He asked McRostie to manage and co-ordinate this. Items to which he referred were the following: 1. A $2 million sum owing to Nortel under a stock repurchase arrangement which represented a material change in information provided to ERG in the accounts and should be reflected in some way or another in the accounts to 31 December. This arrangement was disclosed to Fogarty by Harley or McRostie. It had involved Nortel repurchasing components previously supplied to Exicom on the basis that Exicom would repurchase the components from Nortel by 31 March 1996. Exicom was said to have set off the amount paid by Nortel against Exicom's debt to Nortel thus making the Exicom credit position look better. 2. The retirement remuneration that the Exicom directors were seeking to pay themselves. He had alerted Gordon to this. 3. A variation to the forecast Exicom finances showing a reduction from profit of $10 million to $4 million and possibly as low as $2 million. 4. Delays in production of the TF400 and the Nortel products. 5. The agreement with Simmonds whereby Simmonds were entitled to claim from Exicom the balance of certain moneys - $580,000. In respect of Exicom's creditors, he believed it would be very difficult to deal with them after recapitalisation, It was necessary to do something over the course of the following fortnight. He suggested to McRostie that they be approached on the basis that all of the major creditors had agreed to "take a hair cut". 263 It was put to Fogarty in cross-examination that the memorandum of 9 February marked the beginning of a process of collecting a list of matters that could be raised in support of an argument that there had been a material adverse change and that would justify ERG not proceeding with the recapitalisation. Fogarty maintained that the ERG Strategy Paper which had been prepared for the Board still had holes in it because they hadn't been able to get the information they required from Exicom. He said he was becoming frustrated because ERG people undertaking the financial research were coming back to him saying that they were still not getting the information. In relation to the reference to surprise omissions from the due diligence package he said: "So what was happening is we're doing due diligence over an extended process and virtually daily or weekly we're getting some new surprise comes out of the woodwork (sic). It's the old skeleton in the closet that you hate to inherit when you look at acquiring another business. Unfortunately the rate of them falling out of the cupboard was increasing dramatically and we were becoming extremely concerned about it. That is the purpose of this memo, and so what we said is, "We need to now build a list to go back to Exicom with and say, 'Please explain all these issues. We're very concerned about them'."" (T942) Again, it was put to him that he was building a list so that he could say there was a material change in the company's position he didn't know about. In response, Fogarty said they were getting to the point where that was becoming an issue because they were concerned about increased funding required for the company if it were to survive (T943). Fogarty no doubt used the possibility of not proceeding as a negotiating tool, especially in dealing with the Villawood landlord and the Exicom management. It is also no doubt the case that he left open the possibility that ERG would not proceed with the recapitalisation if it could not do so under conditions which were acceptable to it and which were embodied in the conditions precedent of the agreement with Exicom. In my opinion, however, the scale, intensity and cost of the preparatory activities in which ERG's Board, management and advisors were engaged at this time is inconsistent with any suggestion that Fogarty and the company were not genuinely committed to trying to implement the recapitalisation. 264 It was also put to Fogarty that the approach to creditors was something of an after thought. In response he said that before 9 February ERG was proceeding on the assumption that the recapitalisation would occur and that there was no specific need to go back to creditors: "It was only once we started to understand that this company had 10 to 20 million dollars more liabilities than we'd been led to believe. (sic) It wasn't anything to do with…having forgotten about creditors. We understand creditors when we are looking at buying a company. We were well aware of the position of the creditors, but it turned out they were a lot worse than had been provided to us." (T945) He was unable to say, however, that any approach to creditors had been made as a result of his instructions to McRostie. And in any event "…the whole thing unravelled before we had that opportunity" (T946). Fogarty's responses are consistent with the view that there was a commitment to make the recapitalisation work which, as will be seen, was abandoned when it was perceived as unworkable some weeks later. That was not a sudden process but a growing realisation in the light of events which occurred. 265 On 9 February, Gordon sent a fax to Koeck at Corrs referring to Exicom's advice to ERG that it had revised its profit forecast for the year ended 30 June 1996 to project a materially reduced profit compared with the figures stated in the Independent Expert's Report. Gordon indicated to Koeck that in light of the disclosure in the Independent Expert's Report and the fact that a shareholders' meeting was to be held in two weeks, it was his view that Exicom was legally required to make an announcement of that material adverse change. He requested the opportunity to review a draft announcement before disclosure to the market (X126). 266 On 13 February, Fogarty heard from Sheppard at Macquarie Bank. Sheppard said the Villawood landlord was not willing to reduce rent at that time but that ERG and Simmonds should put a formal proposal to it in writing. He wanted them to set out the status of the recapitalisation and particularly the conditions precedent. He said that if it didn't look like other conditions would be satisfied then he didn't believe the Villawood landlord would negotiate. If rent were the only outstanding issue, he probably would. He suggested that ERG and Simmonds might put a proposal involving a rent reduction subject to an increase if Exicom performed well. Fogarty told him they had to know the Villawood landlord's position by 23 February (X426). He followed up on this discussion with a letter dated 16 February 1996 to Sheppard. He set out the relevant conditions precedent. He reasserted the importance of a reduction in the annual rental if the recapitalisation was to proceed. He reiterated his proposal for a $2.5 million per annum rental and pointed to compromises by other major creditors. ERG and Simmonds would be willing to consider the issue of options over shares in the company to the landlord to provide some compensation for the rent reduction. Alternatively, an escalation formula would be considered. He pointed out that it would be necessary to have the position clear prior to the extraordinary general meeting on Friday, 23 February (X135). James Hodgkinson, the General Manager of Industrial Property Management Limited, the Villawood landlord, responded to Fogarty on the same day. Fogarty's letter had been referred to him by Sheppard who was overseas. Hodgkinson said he would raise Fogarty's letter with his directors and would contact Fogarty by 21 February (X136). 267 Macquarie Bank was in correspondence with ERG on 13 February 1996 in another capacity, that of provider of financial services. It sent a letter to Del Borrello confirming its interest in assisting ERG with the recapitalisation (X129). Its proposal was that it be exclusively appointed by ERG to provide financial advice in respect of the recapitalisation as and when required. No question of a conflict of interest in the bank's role as manager for the Villawood landlord and as a proponent of services to ERG and Simmonds in connection with the recapitalisation was raised in the proceedings. 268 On 14 February, Fogarty met with representatives of the CBA for about 3 Ľ hours. He was asked to provide further information and was told the CBA would take three days to make a new decision. While he had thought, in November 1995, that the funding required would be $5 million cash plus $5 million non-cash facilities, he had now formed the view that this was insufficient and asked the CBA to provide $10 million by way of cash and $10 million non-cash facilities (X427). Also on that day, the CBA sent a letter to Stephen Newman at Exicom confirming the extension of Exicom's facilities and limits detailed in an attachment to the letter until 31 March 1996. The CBA was not prepared to waive the requirements for future monthly principal reductions pending finalisation of the recapitalisation process. $200,000 was required in respect of February and March, but the CBA was prepared to defer payment of those instalments and the $75,000 outstanding for January 1996 until settlement took place with ERG and Simmonds. A copy of the letter was sent to Freehills (X131). Back in Perth on 15 February 1996, Fogarty gave Del Borrello a list of requirements from the CBA. He also instructed Del Borrello to begin negotiations with the Macquarie Bank for it to provide the necessary facilities. Although Del Borrello sent the requisite information to the CBA, it still refused to provide any facilities for Exicom post recapitalisation. 269 Fogarty provided an update on progress for O'Kell on 15 February 1996. On Telstra he said: "At this stage, I have told Telstra the deal falls over or alternatively we don't pay $7.5 million if they don't commit." He asked O'Kell to confirm that the $580,000 owed by Exicom to Simmonds would not be claimed by Simmonds. He said that both ERG and Simmonds would need to confirm their ability to settle before the shareholders' meeting. He enclosed the underwriting letter from SPC Warburg and expressed the hope that the rights issue would be finalised on 26 February. He asked O'Kell to advise the status of Simmonds' fund raising (X132). 270 On 16 February, Fogarty was again in contact with Telstra. He spoke to Chris Wilkinson and made a file note of the conversation (X428). Wilkinson told him that Telstra was reviewing its requirements. The TF400 phone was to be used for first phone installation. Telstra however was required to provide a first phone free to its customers. It was lobbying in Canberra to have this requirement changed as its competitor, Optus, did not have to do so. Telstra would not purchase 2,200,000 TF400 phones. If it had to continue supplying a free first phone, it would want a cheaper $19 product referred to by Wilkinson as a "cardboard phone". Further, Telstra wanted its claim against Exicom paid in full. Fogarty told Wilkinson that an agreement "in principle" had been reached with Telstra but given the change in management ERG, Simmonds and Exicom would be willing to review Telstra's requirements. Wilkinson said Telstra needed time to consider the position. Fogarty pointed out that the Exicom extraordinary general meeting was to be held the following week. Wilkinson said he would get back to him. 271 Fogarty, Morton and McRostie met on the same day and discussed the position of ECS. Morton's report was that ECS was suffering and that it would not achieve its full year forecast. The dispute with Futuris had adversely affected market perceptions. Morton and McRostie agreed to work on a new financial analysis of Exicom based on their review of ECS. They did not feel they could rely upon figures provided by Exicom's senior management (X438 par 157). 272 David Jessop, Management Accountant with Exicom, sent a fax to Harley on 16 February advising that Exicom was working on a Base Case Balance Sheet for 30 June 1996 which would be available after review by Arthurs. Other items of financial information were provided with the fax, including summary pages containing projections for the New Zealand operation over the next six months and explanations for not meeting budget in the first half. A corporate profit and loss account showing "First Half Actuals and Second Half Forecast" was also attached (X493). A second fax from Jessop provided additional risk exposure relating to the Base Case cash flow (X494). Fogarty wrote to Jeff Shaw, Senior Manager, Risk Management with the CBA on 16 February by way of follow-up to the meeting of 14 February (X137). He enclosed with his letter information requested by the CBA which he had asked Del Borrello to assemble. This embodied a Base Case Scenario for Exicom prepared by ERG showing revenue and costs by division (X137A). A copy of the Strategy Plan for Restructuring was also attached. 273 The Base Case Scenario showed a forecast for total Exicom sales for 1995/96 of $165,887,000 which contrasted with a budgeted figure from Exicom of $220,464,000. The Base Case was described by Fogarty as "…our view of what the real position was for Exicom as opposed to the ultimate which could be a lot worse which is called the down side" (T953-954). The projected operating result, being net profit before tax, was $487,000 (T914). 274 Fogarty's evidence was, that in the days following, ERG and Simmonds received drafts of Exicom's half year results and a draft announcement of those results. He felt that Exicom's management did not have a clear idea of how critical its position was. Its half year profits were approximately $711,000. Harley wrote to Stephen Newman and Arthurs on 19 February drawing attention to a number of issues in relation to those results. He indicated, in effect, that the results were inflated because debtors were not properly accounted for, an abnormal bounty receipt was not treated as abnormal and $1.2 million of costs in relation to the P-phone project had been deferred (X139). 275 On 19 February, Paganin of Bennett & Co sent a fax to Corrs notifying that the proper party for payment of the sums of $480,000 and $800,000 under the agreements between Futuris and Exicom was FIL (X375). A similar letter was sent to Freehills directing payment of the $800,000 due from ERG and Simmonds under the ERG Agreement to FIPL. These payments were, of course, conditional under those agreements upon the reconstruction proceeding. The letter also said: "In addition, please confirm the "Bank Option" (as defined in Clause 1 of the ERG Agreement) has been extended so as not to trigger Clause 3.1 of the ERG Agreement." (X376) 276 An Updated Due Diligence Report was prepared by ERG and Simmonds on 19 February (X141). Fogarty did not recall being involved in its preparation or review (T956). The Executive Summary, however, referred to Morton and McRostie's recent activity at ECS in Melbourne and at Exicom's Villawood premises with a view to interrogating the Exicom reforecast budget which had been presented to ERG and Simmonds in the previous week. Fogarty thought the document might have been prepared by ERG's finance people as part of due diligence for the rights issue. He agreed with the statements in the Executive Summary that Morton and McRostie's report of their investigations revealed a rapid deterioration in the Exicom Group's operations which were forecast for 1995/96. This was reflected in turnover, profit, inventory levels, creditors and cash and gross margins. The working capital position was said to be critical. Production was being affected due to suppliers refusing to provide further credit and no longer supplying components. The adverse market perception of the stability of Exicom was said in the Report to be more evident in the ECS forecast results due to their large customer base. Exicom's sales forecasts, according to the Report, had been revised from $220.5 million for 1995/96 to $185.9 million as against the ERG and Simmonds Base Case forecast of $165.9 million. Exicom profit had been reforecast from a high of $6.9 million to $4.4 million, while ERG and Simmonds' Base Case forecast was $0.5 million. Forecast working capital requirements for ERG and Simmonds had increased from $28.9 million to $36.2 million. The conclusion in the Report said: "Due to the rapid deterioration in the business, ERG/SCL need to urgently reconsider the structure and method of our proposal investment in Exicom Ltd." (sic) 277 Major issues and omissions subsequent to the initial due diligence were set out at Appendix 14 to the document. They were: 1. The reforecast by Exicom of its budget for 1995/96. 2. Production delays, being delays in production of the TF400 and delays in the Nortel deliverables, together with delays in budgeted sales of export phones because of component shortages. 3. The Nortel inventory repurchase which gave rise to an obligation to Exicom to repurchase $2.5 million of Nortel stock on 31 March 1996. 4. The provision of directors' retirement benefits, the estimated benefit payable as at March 1996 being $210,000. 5. A possible liability of between $1 million to $2 million for royalty payments due under a Sale Contract involving Austmode Power Systems Pty Ltd. 6. A potential liability for decontamination by Exicom of a property at Ashfield sold by it. 7. Increase in working capital requirements. 278 On 20 February, Arthurs sent Harley copies of Exicom's 31 December Half Yearly Report to the ASX and Half Yearly Consolidated Accounts. The Consolidated Accounts for the half year ended 31 December 1995 showed accumulated losses of $98,308,000 (X142). 279 Fogarty had a conference call with Stephen Newman, Gordon and Hanson, Wilkinson and Mead from Telstra on 20 February. Yelland was unable to join the conference. The discussion focussed on resolving the long term supply agreement and terms of settlement between Telstra and Exicom. At the outset Wilkinson said that he understood that an agreement "in principle" had been reached but that the new management could not accept it and that because nothing was signed, Telstra was not bound by it. Fogarty said he was extremely disappointed at that attitude but accepted that there was no point forcing Telstra into an agreement which it would try to get out of later. Wilkinson said Telstra wanted to retain local supply of phones but would not do so if the cost was prohibitive. Exicom was behind schedule on deliveries and Telstra had been inconvenienced. Telstra could not possibly commit to buying 2,200,000 phones, the most it could commit to was one year's supply or 700,000 units. Fogarty said that ERG and Simmonds could not possibly agree to that. The forecast in numbers they had relied upon assumed Exicom would supply Telstra with 2,200,000 phones. But he also said that ERG and Simmonds could be flexible as to whether or not all phones supplied to Telstra were TF400 provided Exicom was given a reasonable minimum order for each type. Wilkinson said Telstra would still want no minimum commitment as it did not know its requirements and could not make a long term commitment (X429). Mead confirmed the substance of the conversation as recounted by Fogarty in his evidence. He said it represented a significant change in dealings between Telstra and Exicom: "Effectively, the result of this conference call was that Telstra had taken away a major plank of the settlement between Telstra and Exicom. I recall this conference call as being a significant point in the negotiations between Exicom and Telstra." (X471 par 62) Fogarty discussed the status of deliveries to Telstra with Stephen Newman following the conference call. Stephen Newman told him that all was well and that the first deliveries of the TF400 phones would start that week or the following week. Fogarty told him he was concerned at the impact of further delays. Newman responded however, that he was one hundred per cent certain that Exicom could deliver. 280 Fogarty was cross-examined on the latter statement on the basis that it went to issues of credibility related to ERG's performance of its obligations under the agreement with Futuris on 13, 14 and 15 March (T1006). He was asked whether ERG was considering, as indicated in the minutes, alternative and cheaper methods of acquiring Exicom or its business. In reply he said that from about the middle of February ERG was looking at alternative ways to complete the recapitalisation and was becoming increasingly concerned with the diminishing value of Exicom. He described the company as "self destructing". It was in this context that they had had internal discussions about approaches to the creditors. He was exploring ways of keeping the recapitalisation proposal that had been put to the market place because if there were a substantial change it would mean going back to the shareholders. As time went on it was becoming more and more critical not to have a further extension of time because the company would go into liquidation. Although at that point the meeting had not yet been held, it would not be possible to call a fresh meeting on two days' notice. If there were to be any change to the structure of the recapitalisation it had to be within the broad parameters of the recapitalisation proposal sent to shareholders and assessed by Grant Samuel (T1007). I accept Fogarty's evidence in this respect. It is consistent with the commercial realities with which he then had to deal in relation to the recapitalisation proposal. I do not consider the implied suggestion that Fogarty had some hidden agenda of allowing the recapitalisation to fail with a view to picking up the pieces of Exicom at fire sale prices as credible given the time and effort that was still being put into advancing towards recapitalisation in what were, from ERG's perspective, very difficult circumstances. The contrary hypothesis would suggest that all of this activity was just an elaborate and expensive sham. 281 On 21 February, Andrew Pike of Freehills sent to Harley a draft of an announcement that Exicom proposed to make at the time of the release of its half yearly figures. Patterson had advised that he proposed making the announcement at lunchtime, Sydney time, on 22 February. The draft announcement described the result for the half year ending 31 December 1995 as "…particularly pleasing given the difficult circumstances the Company had faced during the half year with the recapitalisation negotiations and the litigation with Futuris Corporation Limited." Capp was quoted as saying that the company had now turned the corner and was set for a profitable future. The proposed announcement also stated: "Commenting on the performance of the Divisions, Mr Capp noted that the Telecommunications Division continued to perform well and is now manufacturing the new Touchfone 400 for Telstra which is replacing the standard rental Touchfone 200. Additionally, Exicom has now signed a long term product supply agreement with Telstra and settled the dispute concerning the supply of the Touchphone 200 phones as part of the recapitalisation process. This will ensure that the Telecommunications Division continues to be a significant contributor to the bottom line." As to ECS, the draft announcement said: "Exicom Communications Systems continues to perform well, however it experienced some loss of sales during the half year as a result of the publicity surrounding the litigation with Futuris Corporation Limited. Now that this litigation has been settled the Division expects to continue its strong growth within the Australian PABX and key system telephone markets." The announcement also asserted that the results for the half year were extremely encouraging and that the Board believed that the full year would also be profitable. However, it downgraded the forecast figure for the full year EBIT of $11.2 million which had been noted in the Grant Samuel Report sent to shareholders. The last paragraph read, in part: "Finally, Mr Capp advised that should shareholders approve the recapitalisation proposals then the outgoing Board will be able to hand over a company to the new Board with a clean balance sheet and one that is now generating profit. …" (X144) 282 This was considerably at variance with what Fogarty regarded as the reality that must have been apparent to the Board and management of Exicom. Fogarty said he was "aghast at what it said. We couldn't believe it. It was a nonsense." (T1010) Counsel for Futuris asked whether his concern was that it was "too positive in essence". He said: "No, not too positive in the way you're putting it. It was totally – well, not totally, but it had very significant statements in it that were false." Fogarty raised his concerns with McRostie, Morton, O'Kell and Gordon who agreed with him. He decided to talk to Stephen Newman about the draft announcement. In the meantime there had been correspondence between ERG and Exicom about their draft half year results. McRostie sent Arthurs the forecasts on 21 February 1996 (X145). Harley sent a commentary to Arthurs on the same day on various aspects including the abnormal bounty, revenue from the P-phone contact, stock provisioning and the New Zealand operation (X430). 283 At this time Gordon at Freehills prepared a list of options in the event that the recapitalisation did not proceed. These were "informal" compromises with major creditors, the appointment of an administrator, a scheme of arrangement under s 411 of the Corporations Law, receivership and winding up. Fogarty said that they had asked Gordon to advise them of what could happen if ERG were not able to recapitalise and finish up in a shareholding position. He said: "We asked for that advice because we needed to be informed because, as we said, the company was basically collapsing around us." (T1014) Harley sent a fax to Stephen Newman on 22 February essentially reproducing the comments on the half yearly reports that he had made in his earlier fax to Arthurs. He suggested that the issues raised be properly addressed with the Board and the auditors before the release to the ASX was finalised (X148). 284 Fogarty rang Stephen Newman on 22 February to discuss the half year results and the draft announcement. Newman said he was keeping out of it and leaving it to Arthurs and Patterson to sort out. Fogarty told Newman he had better get involved. After that discussion he spoke to Capp and suggested that they meet before the Exicom extraordinary general meeting. Capp agreed. They set a time for midday on Friday, 23 February 1996. In the meantime, a redraft of the half year announcement dated 22 February 1996 was sent. The redraft deleted reference to the signing of a long term product supply agreement with Telstra. Nevertheless it still presented a picture of Exicom which seems to have been misleadingly optimistic (X149). Fogarty saw it and his handwriting appears on it, including the words "Change Conditions Precedent" but he was unable to recollect why he wrote those words (T1014). Exicom released the amended draft public announcement on that day. 285 Fogarty, O'Kell, Morton, McRostie and Gordon reviewed Exicom's financial position as they saw it on 22 February. Fogarty's major concerns were that creditors were substantially higher than he had expected, debtors were lower and recoverable debts lower still. The required cash injection would therefore be much higher than had been anticipated when ERG first agreed to the deal with Exicom. The Nortel position was far worse than he had expected. McRostie and Harley reported that Exicom owed Nortel about $10 million. In addition, McRostie had reported liabilities in mid-February 1996 previously not known to ERG and Simmonds, in particular a debt of $2 million owed by Exicom for payroll tax and sales tax. Morton believed that the forecast deliveries to Telstra were unlikely to occur. Fogarty proposed they redirect their focus as follows: (a) Exicom had to verify its true and final financial position and ERG and Simmonds to see the January and February 1996 accounts as soon as possible. (b) If the numbers were as predicted by Morton and McRostie, ERG and Simmonds needed to find an alternative way forward while keeping the recapitalisation plan on track. Fogarty said he believed that this could be done if the CBA, Telstra and Nortel agreed to accept a reduction in the amount to be paid to them. The Villawood rent also would become more critical. (c) Updated cash flows and forecasts were to be obtained from Exicom as a matter of urgency and McRostie had requested this. Fogarty believed that his estimate of $21 million working capital to be injected into Exicom by ERG and Simmonds might now not be adequate. 286 O'Kell and Fogarty agreed to put their concerns in writing to Exicom's Board before the extraordinary general meeting. Fogarty's evidence was that he felt it imperative Exicom's board did not mislead the shareholders and that it make it clear to the shareholders how difficult the recapitalisation was becoming. He and O'Kell agreed to write the letter together after the morning meeting with Newman which they had planned for the following day, Friday, 23 February. Fogarty said he wanted to proceed with the recapitalisation but the funding requirements had to be reassessed once the revised numbers were available from Exicom. O'Kell and McRostie agreed. 287 At this stage, having regard to the history of dealings with the CBA, with Telstra and with the Villawood landlord, the prospects of any movement in those directions must have seemed small. The only negotiating position apparently available to Fogarty was that the alternative was liquidation or receivership promising a worse outcome than a negotiated outcome. 288 About this time, Fogarty again spoke to Hodgkinson concerning the Villawood landlord's position. This remained unchanged. Hodgkinson told him that the landlord was not willing to negotiate lower rental. He told Hodgkinson that ERG and Simmonds were running out of time and that he would contact him again only if all other conditions had been met. The condition precedent relating to the Villawood lease remained unsatisfied. 289 On 23 February 1996, Fogarty met with Stephen Newman briefly at 8.30am. He expressed his extreme concern at the worsening position of Exicom. Stephen Newman disagreed with Fogarty's assessment and said that Telstra had received its first deliveries of TF400s. Two pallets had been shipped. Fogarty was surprised as he did not believe the testing had been signed off but Newman told him it had. They went through the figures. Fogarty pointed out the outstanding tax debt which, he said, should be an issue of serious concern to directors as they could be personally liable. He told Stephen Newman that his latest calculation was that Exicom needed a cash injection of at least $40 million. He told him the deal would have to be reorganised in order to keep the recapitalisation afloat and that the keys to this were the CBA, Telstra and Nortel. With the support of these three, ERG and Simmonds might be able to rearrange the deal and go forward with it as a sort of informal administration. Newman told him he could discuss this idea with Nortel, Telstra and the Bank. They agreed to meet again at midday. ERG's Input to Capp's Announcement – 23 February 1996 290 O'Kell, Morton, McRostie and Gordon together with Fogarty, prepared a letter addressed to Capp. In the letter, which was signed by O'Kell and Fogarty, they informed Capp of their difficulty in satisfying the conditions precedent. They referred to the non-satisfaction of the Villawood condition and the rejection by both Westpac and the CBA of their request for funding. Under the heading "Material Adverse Change" they asserted that there had been a clear material adverse change in the business profitability and prospects of Exicom and that this had been acknowledged both by the company and the press release for the company's half year result forwarded on 22 February. They reserved their right to waive or rely on any of the conditions precedent. They referred to the sales tax and payroll tax position, the creditors in excess of sixty days and the additional previously undisclosed obligation to Nortel. The letter concluded: "It is critical that the creditors not be given the false impression that shareholder approval to recapitalisation today will mean they receive payment in full of monies owing to them. Whilst we are doing everything within our power to keep the recapitalisation proposal alive it is imperative that the Board ensure that the market (both shareholders and creditors) are not given a false impression of the severity of the Company's current financial position. We will notify you immediately should our negotiations next week not prove successful and it becomes clear that we cannot proceed with our proposal." (X151) Fogarty explained in cross-examination the purpose of the letter to Capp: "There was a very clear reason for doing that and that was that the draft half year statement that had been sent to us gave the impression that everything was completed and that Exicom was in fantastic shape and trading profitably and agreements had been signed with Telstra and that wasn't the case."(T1015) The revised draft announcement had dropped the reference to signed agreements with Telstra but still gave a misleadingly optimistic view of the company's position. 291 Fogarty met with Capp, Cruickshanks and Stephen Newman at midday. O'Kell, Morton, McRostie and Gordon were also present. He gave Cruickshanks the letter. They went through the letter. Fogarty said that Exicom's shareholders had to know of the risk of the recapitalisation not proceeding due to the conditions precedent being unsatisfied. He also said that ERG remained committed to trying to proceed with the recapitalisation. O'Kell made a similar statement. They agreed they would push for revised arrangements with the main creditors in the following week. The Meeting of Exicom's Shareholders – 23 February 1996 292 The extraordinary general meeting took place on the afternoon of 23 February. Capp addressed the meeting. He pointed out that ERG and Simmonds had no obligation to proceed with their recapitalisation of Exicom unless the preconditions contained in the Subscription Agreement were met. He identified what he described as five crucial pre-conditions. One of those was the pre-condition that there was to be no material adverse change in the business profitability or prospects of Exicom from 30 September 1995 to the date of issue of the securities. He told shareholders that in this regard the Board was of the opinion that there had been a material adverse change in the prospects of the company. Events since the Board had prepared its October 1995 forecasts noted in the Grant Samuel Report had caused the Board to downgrade its forecast. These events included the adverse effects of the delay in recapitalisation, the Futuris litigation and a deferral and decline in the demand for Exicom products from major customers. Fogarty was surprised that Capp told the meeting that there had been a material adverse change in the prospects of Exicom because this contradicted what Stephen Newman had been saying to him that morning. 293 Fogarty did not think he had seen Capp's speech in advance of the meeting. He denied the suggestion that he had arranged for Gordon to prepare a draft of what they wanted Capp to say about ERG and Simmonds having no obligation to proceed with their recapitalisation. The purpose of giving Capp the letter in advance of the meeting was to ensure that shareholders were told precisely what the position was. Fogarty did not want shareholders to be led to believe falsely that the recapitalisation was absolutely certain to proceed (T1016). He had agreed with O'Kell and Morton that there needed to be urgent discussions with Telstra, with the CBA and with other creditors in the week after the extraordinary general meeting, following which a decision would be made as to whether or not the recapitalisation would proceed. They had arranged prior to the extraordinary general meeting for subsequent meetings with the CBA, Telstra and Nortel. 294 The meeting of shareholders passed the necessary resolutions for the recapitalisation to proceed. After the meeting Fogarty spoke with Stephen Newman. They discussed the extent of the material adverse change mentioned by Capp. Fogarty said to Newman that ERG and Simmonds were trying to get a real position on the figures and that they seemed to be getting vastly different information from Exicom's corporate management on the one hand, and its operational management at each divisional level on the other. And although Fogarty had no personal recollection of when the Subscription Agreement was signed, it appears that it was signed on 23 February. 295 Exicom wrote to the ASX on 23 February advising of the passage of the resolutions (X154). More Exicom Phone Failures – 26 February 1996 296 On 26 February, Fogarty met with O'Kell, Morton, McRostie and Gordon at Freehills in Sydney. Stephen Newman spoke to them by telephone and told them that the Telstra TF400 phones had failed testing. Three out of ten phones tested had failed. He did not know the full details but it would delay deliveries. This could also have implications for the TF200s because they were of similar design. He would review the testing information with Lockwood and provide further information. Morton went to Villawood so that he could find out what happened with the TF400s and report back. He rang from Villawood later on that day, in the presence of Stephen Newman and Lockwood. Fogarty and O'Kell were still with Gordon at Freehills. Lockwood said that the TF400 problem might take six to ten weeks to fix and that the problem was in the flexible layer board for the keypad and so was similar to the problem experienced in manufacturing the TF200s which had given rise to the dispute with Telstra in the first place. The problem could affect the TF200s as well. The minimum redesign time was six weeks, but likely to be longer. More time would have to be allowed thereafter for prototyping and new testing. The likely delay was ten to twelve weeks, with ten weeks being realistic. Stephen Newman said he would keep ERG and Simmonds informed. Fogarty told him it was fundamental to the deal and that ERG and Simmonds had to have an answer well before 18 March. Stephen Newman said he expected to be able to advise the actual delay impact in the following ten days. 297 Fogarty, O'Kell and Gordon met Yelland and Wilkinson from Telstra early on the afternoon of 26 February. Both told them that Telstra was losing patience with Exicom and although its preference was to keep buying from Exicom, it could quickly source product from an alternative supplier. Yelland said Telstra was primarily interested in getting paid the amount Exicom owed it and would be "very intolerant of the loss of that amount". He said Telstra was reluctant to change its position and could not see why it would or should commit to minimum volumes. Fogarty referred Wilkinson and Yelland to the Independent Expert's Report and Telstra's consent to the words in it relating to Telstra's broad "in principle" agreement. Both said, however, that Telstra would not wait any longer for Exicom to perform. Yelland said if Exicom went into receivership Telstra would be better off dealing with the receiver. Fogarty, however, told him that ERG and Simmonds had no interest in seeing Exicom in receivership. They had to know what Telstra was willing to do and whether it would negotiate to avoid receivership. Yelland said Telstra wanted to deal with local companies, but saw no reason to deal with Exicom if it did not get it $7,500,000. Neither of them mentioned the TF400 failure (X432). 298 On the same day, Fogarty, O'Kell, Morton, McRostie and Gordon met with O'Brien from the CBA. O'Brien told them the CBA wanted to see the recapitalisation of Exicom proceed. Fogarty told O'Brien that for the deal to remain on foot it might be necessary for the CBA to accept a lower payout figure than that specified in the Bank Option – 75% of the value of the cash facilities and 100% of the value of the non-cash facilities. O'Brien responded that the CBA was unlikely to agree to reducing the amount it received further unless the shareholders got nothing. The CBA however remained willing to co-operate provided a reasonable solution could be found. 299 At this point Fogarty was of the view that if Telstra would not move on signing a long term supply agreement and if that latest fault could cause a ten week delay, then the recapitalisation might fail. The principal issues for him were: (a) The CBA's stated view that it would not take a further cut in its debt repayment unless the shareholders took more of a cut. (b) The unwillingness of Telstra to stay with the original "in principle" agreement. (c) The failure of the TF400 telephones and the delay associated with that. (d) The decline in business for ECS. (e) The continued refusal of the Villawood landlord to renegotiate the lease. (f) The questionable commitment of Nortel to the manufacture of P-phones in Australia – O'Kell had told Fogarty that the North American branch of Nortel was considering moving manufacturing back to Canada because of Exicom's delays and because of unemployment issues in North America. (g) The blow-out in cash requirements. 300 Fogarty, O'Kell and Gordon also spoke with Koeck at Corrs on 26 February 1996. Fogarty said he thought ERG and Simmonds had good grounds to withdraw in view of the disastrous news from Stephen Newman about Telstra. However, he reassured Koeck that they had not asked the CBA to wind Exicom up and that they had not decided at that point to withdraw. However he had asked the CBA what it would do if they withdrew. 301 On 27 February, the Exicom Board met and ratified Fogarty's execution of the Shareholders Agreement with Simmonds in respect of the Exicom investment. That was the only resolution relevant to Exicom passed at that meeting (X163). Recapitalisation Looks Increasingly Difficult – 27 February to 29 February 1996 302 Later on 27 February, Fogarty, O'Kell and Morton met with Brian Davis and Southern, the General Manager of Nortel at Nortel's office. Fogarty told them that the prospects of the recapitalisation proceeding were declining. Davis did not want to see the deal fall over. Fogarty said ERG and Simmonds needed to try and sort out a revised position with the CBA, Telstra and possibly Nortel. He said their objective was to work closely with Nortel to try and keep the recapitalisation afloat. 303 Gordon sent a fax to Koeck at Corrs on 27 February confirming that a number of the conditions precedent remained outstanding and that there had been a material adverse change in the prospects of Exicom, the subject of another condition precedent, on which ERG and Simmonds could rely. He referred also to the deteriorating financial position of Exicom and the recent failure of the TF400 telephone. He said Fogarty confirmed that at that point ERG and Simmonds were not withdrawing from the recapitalisation but were continuing to work to satisfy the conditions precedent and were awaiting further information from Exicom as to cash flow and the new quality problem. He pointed out that the due diligence sign off had still not been received from Stephen Newman, notwithstanding that he had had the questionnaire since 19 December (X160). There was a followup telephone conversation between Fogarty, Gordon and Koeck at Corrs. Koeck asked what their intentions were. Fogarty told him that ERG stood to gain nothing if the deal fell over and that ERG and Simmonds were looking at every possible way to keep it afloat. He asked what Koeck expected ERG and Simmonds to do given that the financial information from Exicom changed daily and the news got progressively worse. Later on the same day Gordon received a letter from Stephen Newman in answer to a query about a dispute between Exicom and Ausmode Power Systems Pty Ltd arising out of Exicom's purchase of business operations of that company. It is not necessary to refer to the detail of this beyond recording that Stephen Newman said that total royalties possibly claimable by Ausmode out of the transaction could range between $1.2 million and $1.4 million. He also asserted that a cross-claim against Ausmode would be in excess of $3 million plus loss of profits (X433). On the evening of 27 February, Fogarty, O'Kell, Morton and Gordon agreed that recapitalisation could only proceed if CBA, Telstra and Nortel co-operated. To some extent that would depend on the size of the Telstra problem and further information from Exicom. 304 Corrs advised that a summons had been filed to seek court approval for the transaction in so far as it related to a capital reduction. The return date was Monday, 18 March 1996 (X162). Paganin from Bennett & Co sent a fax asking whether a date had been set for the court to confirm the capital reduction and whether all conditions precedent had been satisfied and/or waived (X161). Gordon responded on 28 February advising of the return date and the status of the conditions precedent. 305 On 28 February, the CBA wrote to Stephen Newman referring to its offer letter of 14 February in which it had indicated its willingness to provide Exicom with the facilities and limits detailed in that letter until 31 March. Exicom, having failed to confirm its written agreement to those terms and conditions, and given the recent uncertainties surrounding the recapitalisation proposal, the CBA withdrew the terms of its offer. Moreover, it was no longer prepared to defer payment of the required monthly principal reductions. It therefore required payment in cleared funds by no later than 29 February 1996 of $325,000 representing the instalment of $75,000 outstanding for January 1996 and an increased instalment of $250,000 in respect of February 1996. Bills maturing that day had been rolled over for a further fourteen days, but extension thereafter would be dependent upon payment of the principal reduction demanded and the CBA's satisfaction as to progress with the recapitalisation of Exicom. 306 Gordon, on the same day, sent Fogarty and O'Kell a faxed advice relating to the executive and non-executive directors retirement fund issue. He added that its relevance was "obviously now questionable". It was put to Fogarty in cross-examination that ERG and Simmonds had resolved by that time not to proceed with the recapitalisation. Fogarty said he didn't know why Gordon wrote what he did about the relevance of the directors' benefit. The only reason it was no longer relevant was that they discussed that they were not going to pay directors any retirement benefits and had told Capp that. Counsel for Futuris put to Fogarty that he was making that answer up. Fogarty said he was not. I accept that he probably told Capp they would not pay the retirement benefits. The quantum of the benefits was very small compared with the amounts involved in the recapitalisation process, but it was entitlement which was a late disclosure and one about which Fogarty had previously expressed doubt in light of what he regarded as the poor performance of the Exicom Board. He added that one could hardly go and ask the CBA to take a reduction in its debt recovery and then pay directors' benefits (X480). 307 It looked to Newman at this stage as though the original ERG and Simmonds' proposal was in trouble (T443). He was considering his options. Asked if the response to Bennett's letter reinforced his impression that the recapitalisation proposal was unlikely to proceed, he said that was one conclusion. However he didn't know whether Fogarty was still trying to apply leverage to get a better deal. He claimed that Fogarty kept representing to him throughout this time that he was still going ahead. 308 On 29 February, Koeck at Corrs sent a fax to Gordon advising an anticipated delay in production of the TF400 of three to four weeks (X166). In another fax on the same day, he noted that ERG and Simmonds had so far failed to sign the Subscription Agreement. In any event they had led Exicom to believe that certain of the pre-conditions would be waived if they could not be met. The sign off on the due diligence package had been protracted, it was said, due to ERG and Simmonds' actions concerning the warranties in the Subscription Agreement and the delays in receiving the Freehills and KPMG due diligence packages which had arrived at Villawood the previous Monday (X167). The CBA Sends Notice of Breach and Termination of the Option – 1 March 1996 309 On 1 March 1996, Griffiths from the CBA sent a letter to the directors of Exicom notifying the company that it was in breach of the condition set out in the letter of 7 September 1995 that at the end of each calendar month, until finalisation of all necessary approvals associated with the recapitalisation, it was to pay to the CBA an amount not less than $100,000 per month and not more than $250,000 per month. The letter said: "Exicom is in breach of this condition in that, as at the close of business on 29 February 1996, an amount of $325,000, representing $75,000 outstanding from the January 1996 instalment and the February 1996 instalment of $250,000, had not been received by the Bank. This amount remains outstanding. If payment is not effected within ten (10) business days of the date of this notification, the Bank will take whatever action it considers necessary to protect its position." A copy of this letter was sent with a letter dated 1 March 1996 to Gordon at Freehills in the following terms: "Pursuant to clause 2.3 of the Exicom Option Deed dated 8 November 1995, we enclose copy of notice of even date which has been delivered to Exicom Limited. If payment of the outstanding amount has not been effected by Exicom Limited or the Investors within the period stipulated in the notice the Bank will regard the option as having expired." (X168) 310 Gordon responded to Koeck's faxes of 29 February and 1 March. He denied that ERG and Simmonds had waived any of the conditions precedent and referred to the letter from the CBA which he asserted was a material and adverse development and if not remedied would constitute the non-satisfaction of further conditions precedent to the Subscription by the Investors (X169). Futuris Re-enters the Fray – 1 March 1996 311 Alan Newman rang Fogarty on 1 March. Fogarty had left the office early to visit his father in hospital. On the way he returned Newman's phone call. Newman asked him what the position was with Exicom in the light of press articles during the week indicating that the recapitalisation might not proceed. Fogarty told him that ERG and Simmonds were still trying to keep the recapitalisation on foot but that it was certainly not clear whether they would be proceeding. Newman put to him that they must surely know the status by now. Fogarty said that ERG and Simmonds had a number of concerns which had to be sorted out. He referred to Capp's announcement of the material adverse change in Exicom's finances and said that ERG and Simmonds were not clear as to the extent of that change. Newman said he found that hard to believe. Fogarty told him that throughout the due diligence process, ERG and Simmonds had had difficulty in getting clear information from Exicom and that currently its corporate management's view and ERG and Simmonds' view as to the financial position of Exicom were substantially at variance. Newman said that ERG and Simmonds had always known that Exicom's figures were rubbery. He expressed surprise that this was now an issue for them. Fogarty told him it was of particular concern because the cash flow implications were far worse than originally envisaged and they had now to determine whether Exicom's situation was terminal. He also told Newman that a number of conditions precedent were still outstanding and that they would be talking to the CBA, to Telstra and to Nortel during the course of the following week. Whether recapitalisation proceeded would depend on the information they were waiting on from Exicom's management. He said if ERG and Simmonds did not get satisfactory answers or if the Villawood landlord or Telstra did not move from their current positions, then there was every chance they would not proceed. Newman told him that if they didn't recapitalise he would sue. 312 Newman's evidence of the conversation was at variance in some respects with Fogarty's. He said Fogarty phoned him and told him that a press announcement would be put out by Exicom and that the announcement had been changed to record a material adverse change in the financial condition of the company. He said the announcement originally was positive. According to Newman, Fogarty said words to the effect that the major issues were not the current trading position but agreements with Telstra and Villawood. He also confirmed that Villawood was not a major issue and that ERG and Simmonds would proceed even if it were not negotiated because the dollars were not great. Telstra had had a change in management and had changed their position and this had given him the opportunity to go back and see if he could improve the contract. Newman said Fogarty told him that all the major contracts and issues were either resolved or capable of resolution and it was only a matter of how he handled the negotiations to complete them. According to his Responsive Statement, he put to Fogarty that he was driving the price down for the recapitalisation. He said Fogarty did not directly respond to this. He also said he reminded Fogarty that if he didn't go ahead he had to hand over ERG and Simmonds' position to Futuris. Newman's evidence was: "He knew what his obligations were. I said that I was waiting therefore for his notice – don't forget to inform us. I said to him words to the effect "as soon as you know that you are going to withdraw from the transaction, please let me know." Mr Fogarty said "absolutely, I understand my obligations."" 313 In cross-examination, Newman disagreed with the proposition that he was encouraging Fogarty to proceed. He said he was trying to ascertain where Fogarty was going and what he was trying to do (T441). He accepted that Exicom stood to receive just over $2 million in the event that the recapitalisation went forward. He agreed also that he discussed the prospect of a threat of litigation by Futuris against ERG and Simmonds in the event that they didn't go ahead (T442). 314 I accept Fogarty's account of what he told Newman. I do not accept that he would have said to Newman that the trading position was not a major issue, that he was trying to improve the contract with Telstra or that all major contracts and issues were resolved or capable of resolution. The position was far more uncertain than that. There was no reason for him to misrepresent the position to Newman at this time. Count Down to Abandonment of Recapitalisation – 2 – 12 March 1996 315 From 2 to 7 March, ERG continued to gather information from Exicom. ERG representatives attended follow up meetings with the CBA, with Telstra and Nortel and kept in communication with Simmonds. Fogarty spoke to Stephen Newman on 4 March 1996 and told him it was critical that ERG and Simmonds know as soon as possible of the status with the Telstra phone problem. Stephen Newman said he was awaiting a detailed response from his personnel. He expressed the hope that a solution could be found via a Taiwanese manufacturer and that in the meantime Exicom could buy replacement boards from its competitor, Alcatel. If boards could be sourced in that way, the maximum delay could be four to six weeks. Fogarty told him that ERG and Simmonds were still trying to keep the original deal alive but on the basis of a type of informal administration of the kind discussed with him on 23 February. This would only work if the CBA and Telstra and Nortel were willing to co-operate. Fogarty had been told by Wilkinson that he felt the problem with the TF400 phones was more than a minor problem and a more intensive test phase would be required than originally envisaged even if the problem were fixed. He believed Wilkinson's assessment was more likely to be correct than Stephen Newman's. He also said to Newman that ERG and Simmonds needed to know specifically what the position was with the CBA and whether Exicom was keeping the CBA informed of progress. He questioned whether Exicom should lodge a statement with the ASX concerning the problems with Telstra. They discussed the extent of the material adverse change mentioned by Capp at the extraordinary general meeting. Stephen Newman said that the position was not as bad as ERG and Simmonds and Capp were painting. He agreed to follow up with the Telstra phone problem and get back to Fogarty and to continue to provide information so that ERG and Simmonds could look at alternative ways of restructuring the recapitalisation (X434). It was Fogarty's objective at this time to try and make a final decision by mid-March 1996 on whether or not ERG would proceed. 316 Koeck at Corrs sent a fax to Gordon on the same day in response to his fax of 1 March and indicated, inter alia, that Exicom had received a copy of the letter from the CBA and would remedy the situation if possible. However its cash position was extremely limited. 317 Stephen Newman sent Fogarty, on 6 March, a list of critical suppliers for Exicom, being an extract from a thirty page listing of creditors. There were 103 critical suppliers who in total were owed just over $9 million, $6.2 million of which was older than sixty days (X496). 318 Fogarty met with Harley and Ian Allen who was taking over from Harley as ERG's Chief Financial Officer, on 6 March. Fogarty said it was becoming increasingly difficult to see how ERG and Simmonds could proceed with the recapitalisation as the numbers were looking decidedly worse than they had originally been told and the hardening of the position taken by Telstra represented a major change. His major concern was that Telstra appeared to be focussing on getting cash and not on the level of business that Exicom would have in the future. As a result, Exicom and ERG and Simmonds could be severely exposed by paying out a settlement sum to Telstra and not getting adequate business in return. The three men agreed to schedule a final review on 8 March to determine their attitude to the whole recapitalisation proposal with a view to preparing a memorandum to ERG's Board so that a decision could be made on Tuesday or Wednesday of the following week. In the meantime, Fogarty was to speak with Davis at Nortel and Wilkinson at Telstra with a view to seeing if they were willing to negotiate further. 319 On that day, Jessop at Exicom, sent a fax to Wawrzyniak at the CBA advising that at close of business on 5 March Exicom had exceeded its facility limit by $170,138.23. This was said to be only a temporary position (X458). 320 Fogarty was unable to focus completely on Exicom at the time because his father was ill and had undergone a major operation on 7 March. He was at the hospital with him on Wednesday for most of the afternoon and again on the afternoon and evening of 7 March. However he met with McRostie, Harley, Del Borrello and Geoff Nathan who was one of ERG's directors. They agreed that a note should be sent to the Board of ERG so that the Board could reach a decision by 13 March at the latest on whether to withdraw from the recapitalisation proposal. One of the alternatives that Fogarty was contemplating was that ERG submit a proposal for purchase of Exicom assets from a receiver appointed by the CBA subject to acceptance within forty eight hours. This appeared on a file note entitled "Strategy: 8/3/96" (X172). 321 On 11 March, Fogarty spoke by telephone with Wilkinson of Telstra. He made a note of the telephone call. He told Wilkinson that ERG and Simmonds were still trying to keep the original capitalisation proposal afloat but that based on their meeting of Friday, 8 March it was becoming clear that the prospects of keeping the original deal going were diminishing. Alternative avenues were being explored with the blessing of Stephen Newman. The options were: (a) The original deal. (b) A variant of it where creditors took less; or (c) A deal whereby shareholders got nothing and ERG and Simmonds acquired the assets on a "going concern" basis. Wilkinson thought the TF400 problem would take ten to twelve weeks minimum to fix. No deliveries to Telstra would occur for months on this scenario. Fogarty asked if Telstra would consider an agreement with ERG if ERG bought one hundred per cent of Exicom's assets and tried to rebuild the company. Wilkinson said whatever happened Telstra wanted its money, being $7,500,000 plus $4,950,000 on terms. Fogarty said this was too much and asked if Telstra would reconsider. H needed to know as a matter of urgency as ERG had to decide one way or the other. Wilkinson said he would discuss the matter internally in Telstra. Later that day he rang back and said Telstra did not want to change its position (X174, X175). Fogarty asked whether Telstra would commit to take 2,200,000 phones over the next three years which was the basis for the original payment proposal. Wilkinson said Telstra would take very few TF400s, but might want other varieties. It could get alternative products quickly and would be inclined to go elsewhere. Fogarty then said that ERG and Simmonds would now reconsider their position based on Telstra's new position which was substantially different from the original deal agreed "in principle" with Parker, Walton and Mead. 322 Between the two conversations with Wilkinson, Fogarty also had a conversation with Davis of Nortel. He stressed to Davis that they were still trying but were not being helped. The CBA did not want shareholders to get anything and Telstra was playing hard. Davis suggested Nortel might be interested in the ECS business itself. He and Fogarty discussed a possible joint venture, although Fogarty stressed that everything was dependent on whether or not they proceeded. If the CBA wound Exicom up it would be different issue. It was put to Fogarty in cross-examination that he had given up trying on the recapitalisation proposal notwithstanding what he wrote in his file note of the conversation with Davis. He denied this and said he would not have bothered to write it down if they had given it up. They were still trying right up to the day they decided not to proceed. He denied that this had been written because he had a view that it would be produced subsequently, potentially in litigation and he wanted to safe guard against any suggestion that he had in fact withdrawn. Fogarty said that was a nonsense. In my opinion, although the prospect of the recapitalisation proceeding was by now vanishingly small, Fogarty was doing what he could to explore all opportunities to exhaust the process. I do not accept the proposition that his file notes were constructed for the purpose of creating a false appearance. Counsel for Futuris appeared in parts of his cross-examination of Fogarty to be mounting a case that ERG's decision to withdraw from the recapitalisation was effectively made at some time prior to the decision of the Board members to that effect which, as will be seen below, was taken on 13 March. That was not consistent with the pleaded case and I did not permit counsel to pursue it further in cross-examination (T1039). In so far as it is suggested that the line of inquiry went to Fogarty's credit, I find that it gave rise to no inference adverse to his credit. 323 On 12 March, Fogarty had a telephone conversation with Griffiths of the CBA. Griffiths asked him if ERG would have any interest in the Exicom assets if Exicom were wound up. Fogarty said ERG had not yet decided on whether to proceed with the recapitalisation but he hoped to have the decision made the next day. Given the attitudes of Telstra, Nortel and the Villawood landlord, he was not sure how an asset sale would be any better than recapitalisation. Griffiths told him that the CBA had lost its patience and had taken steps to ensure it could move quickly to appoint a receiver. He also said that the CBA had taken further steps which would crystallise a larger debt on bills due for roll over in that week. 324 Fogarty spoke to Stephen Newman on 11 and 12 March and told him ERG needed urgently to receive all outstanding information about Exicom's position before the ERG Board meeting on 13 March. ERG required a clear answer to the "flexible layer board problem" affecting the operation of the TF400 phone. Stephen Newman told him that Acatel had agreed to supply replacement boards and the maximum delay would be three to four weeks. He promised to keep providing information to assist ERG and Simmonds. Fogarty sent a fax to O'Kell on 12 March to tell him ERG's Board would be considering, on the following day, whether to proceed with the recapitalisation. He sought "clear instructions" on Simmonds' position (X179). He observed that the CBA would probably appoint a receiver that week if ERG and Simmonds did not proceed. ERG Withdraws its Recapitalisation Proposal – 13 March 1996 325 Fogarty prepared an extensive memorandum for the ERG directors dated 12 March which set out the position as he saw it in relation to the conditions precedent for the recapitalisation (X180). He noted that ERG could wait until 20 March to decide whether or not to proceed with the recapitalisation and "hope" that the conditions precedent would be met. The reality was that this was highly unlikely. He said: "ERG's management view is that we should decide our position as a matter of urgency and advise Exicom and Futuris Corporation Ltd (FCL). This at least leaves the way open for FCL or some other party to put forward some alternate proposal or buy the bank debt." He recommended that ERG advise Simmonds, Exicom, Futuris and the CBA that it was going to withdraw based on the failure of at least two of the conditions precedent, ie the material adverse change condition and the Villawood lease rental condition. He asked the directors to approve management's recommendation. He asked each of them to contact him by telephone before 10am on the following day. 326 The directors agreed that ERG should withdraw. Fogarty spent a lot of the morning in consultations with Gordon and Warnick to ensure that withdrawal documents were in order so that they could be served as soon as possible. At 2.10pm Perth time, he rang Stephen Newman at Exicom and advised him of ERG's intention to withdraw (X435). Following this call, notices of the withdrawal were sent to Exicom, Futuris, the CBA and others. 327 The notice to Exicom was in the form of a letter from Freehills dated 13 March (X183). After reciting the relevant provisions of the Subscription Deed, the failure of conditions precedent to the recapitalisation and Exicom's breach of its obligations under the agreement to comply with the repayment requirements to the CBA, the letter said: "On behalf of the Investors we therefore give written notice of termination of the Subscription Deed in accordance with clauses 4.4(a) and 9. We also give notice of termination of the Letter Agreement for the reasons set out above." Copies were sent to Corrs, Fogarty and O'Kell. 328 At 6.03pm (EST), Freehills sent a fax to Clark at Futuris enclosing a notice in the following terms: "We refer to the agreement entered into between Futuris Corporation Limited, Futuris Investments Pty Limited, ERG Limited and Simmonds Capital Limited dated 7 December 1995 ("the Agreement"). Terms used in this notice have the same meaning as in the Agreement. In accordance with clause 5(c)(1) of the Agreement the Investors hereby give written notice to Futuris of the Withdrawal. As you are aware, under the provisions of the Bank Option, the option automatically expires if Exicom fails to comply with repayment obligations imposed by the Commonwealth Bank and that failure is not rectified within 10 business days of notice being given by the Commonwealth Bank to Exicom and to Simmonds/Zilkha. The term "Business Day" is relevantly defined in the Bank Option as a day on which banks are open for business in Sydney, excluding a Saturday, Sunday or public holiday. On 1 March 1996, Freehill Hollingdale & Page, on behalf of Simmonds/Zilkha received a copy of a notice served on Exicom on 1 March 1996. This notice stated that Exicom was in breach of its obligation to repay $325,000 to the Commonwealth Bank and that if payment was not effected within 10 business days of the date of notification, the Commonwealth Bank would take whatever action it considers necessary to protect its position. The Investors sought advice from Exicom as to whether or not it would rectify that default and were informed by Exicom's lawyers yesterday that Exicom does not have the funds to comply with the Commonwealth Bank's demand. Accordingly, you should contact Mr Ross Griffiths at the Bank concerning this matter. We have advised him of your rights under the Agreement and of the Withdrawal." (X184) It is common ground that there was a three hour time difference between Sydney and Perth at that time as daylight saving was in operation in New South Wales. That is to say, Eastern Standard Time (EST) was three hours ahead of Western Standard Time (WST). A copy of the notice was faxed to Bennett & Co at 3.07pm (WST) (X184). At about 3.28pm (WST) a letter was faxed to Griffiths at the CBA advising of the withdrawal of ERG and Simmonds. The letter went on: "On 7 December 1995, ERG and Simmonds entered into an agreement with Futuris Corporation Limited and Futuris Investments Pty Limited (together "Futuris") pursuant to which they agreed that in the event that they withdrew from the proposal to provide funds to Exicom and if Futuris so elected in writing, they would forthwith and in any event within 2 business days of the day of their withdrawal, make available to Futuris or to such company as may be nominated by Futuris all right benefit or interest held by them in the Bank Option." (X185, X460) ERG also issued an ASX announcement. Copies were sent by Fogarty to the CBA, Telstra and Nortel (X482, X483). 329 Gordon attempted to contact Paganin to ensure that he had received the faxed notice of withdrawal. Paganin contacted him at about 3.50pm (WST) and confirmed that he had received the fax and that he had passed it on to his client. Gordon told Paganin that it was his belief that, irrespective of whether or not the Option subsisted, the CBA would be keen to accept 75 cents in the dollar for the debt. He suggested that Paganin contact Ross Griffiths at the CBA as suggested in the notice to Futuris. Paganin acknowledged that he understood and would advise his client. This was set out in a file note made by Gordon at the time and reflected in par 233 of his Witness Statement part of which was put in evidence (X382). Gordon was not called as a witness. However, Paganin did recall the conversation in which Gordon confirmed to him that the CBA would accept 75 cents. He said it would have been in accordance with his ordinary practice to pass that information on to his client (T564). 330 Newman could not recall any conversation with Paganin between 13 and 15 March. He recalled speaking to him once, probably in December when he told him to hurry up with some task. He did not know who from Futuris was instructing Paganin. Instructions to Bennett & Co usually went through Davies and Clark. His instructions to Bennett were to see that Futuris' rights were fully protected. He probably spoke to Bennett himself about that but he could not recall when or how. He maintained that the only position conveyed to him by his executives or through Bennett & Co was that the CBA did not want to talk to or know Futuris. In my opinion, however, it is probable that Paganin did pass this important information on to somebody at Futuris. The possibility of dealing directly with the CBA to acquire the debt in substantially the same terms as were provided for in the Option was open and, in my opinion, was known to Futuris. Even without Paganin's advice it is unlikely, given the now desperate straits of Exicom, that Futuris' officers could not have worked out for themselves that a direct approach to the CBA to deal with it in relation to the debt was open as an option. 331 Paganin responded to the advice from Freehills by fax on 13 March acknowledging receipt of the Freehill's fax. He expressed concern that ERG and Simmonds purported to rely on the non-fulfilment of conditions precedent referred to in their ASX announcement particularly in view of representations made by ERG which were said to have induced Futuris to enter into the ERG and Simmonds Agreement. He queried why ERG and Simmonds had not advised either Bennett & Co or Futuris earlier of the circumstances surrounding the notice of withdrawal. Futuris reserved its rights in respect to the actions of ERG and Simmonds leading to the notice of withdrawal. He sought explanations of the circumstances surrounding the notice of withdrawal. He wanted them before 12 noon (WST) on 14 March. He made no reference to the assignment of the Bank Option save for his request that ERG and Simmonds explain their failure to notify the ASX that their respective rights under the provisions of the Bank Option would be assigned to Futuris if the conditions precedent were not satisfied (X188). Newman said the letter was sent by Bennett & Co in accordance with his "general instruction". He doubted that he would have received a copy of the letter from his solicitors or that he would have taken notice of its detail. It was put to him that there was nothing in the letter calling for the assignment of the Bank Option. He said: "I would have said the whole letter's screaming out to say, "We want our rights under our agreement."" (T454) Asked if he could offer any explanation for the absence of any request for assignment of the option in the letter, Newman said he assumed that his legal advisors were doing what they thought they should do based on how they thought they should go to protect Futuris' interests under the Option Agreement. Paganin was referred in cross-examination to the provisions of the ERG Agreement which conditioned the obligation to assign, transfer or otherwise make available the option upon an election by Futuris in writing. He could not recall whether at the time he sent the letter he had instructions to make the election in writing. He recalled discussing the matter with Mr Bennett, the principal partner of Bennett & Co, but could not recall taking specific instructions from a Futuris representative (T566). 332 I find that the letter did not constitute an election in writing by Futuris requiring ERG and Simmonds to assign, transfer or make available to Futuris their rights, benefits or interests in the Bank Option in accordance with the provisions of cl 5(a) of the ERG/Simmonds Agreement. Copies of the letter of 13 March were faxed to Fogarty and to O'Brien at the CBA. At the CBA it was received by Griffiths who made notes on it referring to the need for the Bank to consent to an assignment of the option (X460, X461). He also made a file note (X456). In it he noted that Futuris had expressed interest but had not yet defined where its interests lay and on what basis. He noted also that the CBA was constrained from acting until close of business on 14 March 1996 due to the terms of the Option Agreement. He regarded the Option as expiring, pursuant to the breach notice, on 14 March 1996. 333 At about 7.20am (WST) on 14 March, Davies contacted Griffiths. According to his file note, he told Griffiths that Futuris had not sighted the option. He advised that Futuris had a monetary interest in the Exicom situation. He was then told by Griffiths that the ten day default resolution period would finish at 2pm (WST) that day. Griffiths told him that the CBA had many other events of default to draw upon and must deal quickly. They were not in a position to provide more time. He also advised that if the Bank Option were to be assigned then the Bank's consent was required. Such consent was never requested and never given. Griffiths had only been advised of Futuris' involvement by Fogarty on Tuesday, 12 March. According to Davies' note, Griffiths advised that the CBA was having discussions with Nortel and possibly Telstra and the Villawood landlord through Exicom. He advised Futuris to go through Stephen Newman if it needed information about Exicom. He said he had received an offer for the ECS Division. Griffiths asked him about what the CBA's position would be if the $325,000 in default were paid. Griffiths said it would not be money well spent in so far as the CBA would possibly seek to use other events of default (X191). Griffiths recalled the telephone conversation with Davies but not its content. He agreed in cross-examination that it was not until very late that the CBA had become aware of the existence of an arrangement between ERG and Futuris. They had not received a copy of it so far as he could recall. If they had been given a copy of the agreement in February it was possible that the CBA would have approached Futuris to see what its intent was in the event that ERG and Simmonds withdrew from their recapitalisation. He would not have had any lack of confidence in dealing with a company of Futuris' financial standing. All he would have been looking for was someone to assure the CBA that they could complete quickly. He wasn't sure whether the CBA had actually received an offer for the ECS Division of Exicom, or whether there were discussions between Nortel and Exicom directors about that. He agreed that the CBA regarded the speedy sale of ECS as essential to maximising value if the Group were to collapse (T891-892). He accepted that there was still an issue of customer confidentiality in terms of providing information about Exicom to Davies. 334 Gordon also spoke with Griffiths about 7.35am (WST). This was only a few minutes after Griffiths' conversation with Davies. Gordon asked whether the CBA would be interested in receiving an offer of 75 cents in the dollar for their debt. He pointing out that he was not suggesting that either ERG or Simmonds was interested in doing so. Griffiths said he would be happy to receive such an offer. Gordon said he would point out to Futuris, through their lawyers, the CBA's interest in such an offer whether under the terms of the Option or otherwise. Griffiths told him he was already speaking with someone from Futuris and also with a number of parties potentially interested in Exicom's assets. The CBA would proceed with any option to maximise its position. Griffiths was waiting for offers. He said that Exicom was obtaining advice and having discussions with a potential voluntary administrator. Griffiths did not recall this conversation although he was not thereby saying it did not take place (T877). I accept that it did and that it is recorded in substance in Gordon's file note. 335 Although Griffiths told Davies that in the CBA's opinion the Option expired at 2pm (WST), Paganin had no recollection of that advice being passed on to him. His recollection was that the expiry date was Friday, 15 March (T566). Futuris Elects to Acquire Assignment of the Bank Option – 14 March 1996 336 At about 1.30pm on 14 March, Bennett & Co sent a letter by fax to the directors of ERG and Simmonds. The letter bore Bennett's reference (X193). It also bore his signature. Paganin said in evidence he assumed it was prepared by Bennett and I so find (T567). The letter was in the following terms: "We act as solicitors for Futuris Corporation Limited and Futuris Investments Pty Ltd. We write pursuant to the Agreement entered into on 7 December 1995 between our clients and ERG Limited and Simmonds Capital Limited. Pursuant to Clause 9(c) of this Agreement this letter (which constitutes notice under the Agreement) is being addressed to you at this address and facsimile number. By clause 5(a) each of ERG and Simmonds Capital Limited covenanted (as "Investors" as defined in the Agreement) that in the event that both the Investors withdrew from the Capital Reconstruction and Investment Proposal then:- "If Futuris so elects in writing, the Investors shall forthwith and any event within 2 business days… assign or otherwise transfer or make available to Futuris… all right benefit or interest held by the Investors in the Bank Option." (sic) The Bank Option as you know is defined in the Agreement to refer to the Option dated 13 October 1995 between the Commonwealth Bank of Australia Limited and Simmonds Capital Limited and Zilkha & Company where Simmonds and Zilkha were granted the right to purchase the Exicom facilities and Exicom securities from the Commonwealth Bank. The Bank Option also extends to:- "all documents granted by the Commonwealth Bank in favour of Simmonds/Zilkha or any of them in substantially the same terms in substitution of the option dated 13 October 1995." By facsimile undated but transmitted on 13 March 1996 to our clients, ERG Limited and Simmonds Capital Limited gave written notice that they withdrew from the Capital Reconstruction and Investment proposal. By this notice, Futuris elects in writing to require the assignment to Futuris Corporation Limited of all right, benefit and interest held by each of you in the Bank Option as defined in the Agreement of 7 December 1995. In accordance with the requirement that our client obtain the entire benefit held by you in the Bank Option, our client requires that you forthwith deliver up to our client (at this office):- 1. All documents whatsoever held within your power or control from the Commonwealth Bank of or relating to the Bank Option, full copies of the Bank Option including the Agreement of 13 October 1995 and all documents granted by the Commonwealth Bank in substantially the same terms in substitution for that option. 2. All other documents that relate to the Bank Option. Our client requires delivery of these forthwith. Our client will accept progressive delivery but insists on delivery of copies of the Bank Options and any document of or relating to the exercise of the Bank Option by close of business today. Our client has given notice to the Commonwealth Bank today that it has forthwith taken an assignment of the Bank Option." The letter purported to be an election in writing by Futuris for the purposes of cl 5(a) of the ERG and Simmonds Agreement. 337 At about 1.40pm (WST) Bennett sent a letter by fax to Griffiths (X195). After reciting various aspects of the ERG and Simmonds Agreement, the letter went on: "The purpose of this letter is to give you notice that our client has today exercised its rights under the Agreement of 7 December 1995 and takes an assignment of all interests (including the entire benefit) held by ERG, Simmonds and Zilkha in the Bank Option as defined in the Agreement. This assignment takes effect immediately and is being transmitted to you by facsimile. The original will be sent by overnight courier. We shall write separately to you today concerning our client's rights as the holder of the Bank Option namely the right to acquire all of your securities." A second letter from Bennett on the same day and apparently under the same fax cover, notified the CBA of Futuris' intention to promote its own scheme for the capital reconstruction of Exicom. Bennett expressed concern about the possible sale of Exicom's assets and sought urgent information from the CBA about the extent of Exicom's defaults. Bennett asserted Futuris' readiness to assist Exicom to remedy any default to the CBA. It also said: "Moreover, subject to provision of the information requested in this letter, our client stands ready to exercise the option and acquire the entirety of the facilities and securities from your bank. By this process our client would become banker to Exicom." Bennett expressed Futuris' deep concern that the CBA not take any steps prejudicial to its rights as the option holder over the CBA's securities. He sought delivery of copies of all option agreements between the CBA, Simmonds and Zilkha and any documents in substitution for them, together with a copy of the "present Option Agreement". A precise statement of the liability of Exicom under the CBA's facilities and securities was sought, together with all breaches or other acts that might be relied upon by the CBA to assert that any of the securities or facilities were in default. Details of all offers made to the CBA for the acquisition of parts of the Exicom business or assets were also sought. The letter ended with a threat that any action by the CBA resulting in the breakup of the assets and businesses of Exicom would be seen as contrary to Futuris' rights as an option holder over the CBA's securities and facilities and that Futuris would act to protect those rights. 338 A further fax was sent at about 1.43pm (WST) to the directors of Exicom, again being a letter bearing Bennett's reference. It asserted Futuris' belief that a capital reconstruction of Exicom was still possible and "…demanded in the interests of the shareholders". It advised Exicom of Futuris' exercise of its rights to take an assignment of the Bank Option and the information that it was seeking from the CBA. The purpose of the letter was not to seek Exicom's comment but to inform it that Futuris had exercised the right to take an assignment of the option. 339 Gordon responded to the Bennett & Co fax of 13 March with a fax dated 14 March which Paganin received at about 3.30pm (WST). The Gordon letter rejected the allegations made against ERG and Simmonds. It stated: "We further advise that we have today spoken to Mr Ross Griffiths of the Commonwealth Bank of Australia (CBA), who has informed us that the CBA will very favourably consider any offer from your clients to acquire the bank's position for 75 cents in the dollar. The CBA has acknowledged that the amount they would receive on a break up or sale of Exicom's assets may be significantly less than 75 cents, assuring your clients of a positive response should they wish to proceed at the option price (whether by exercising the option or in direct discussions with the CBA)." (X380) Gordon sent another fax at 7.47pm (EST). Paganin received it at about 5pm (WST). Gordon referred to Bennett's letter of 14 March to ERG and Simmonds and attached a number of documents including the original Option Deed of 13 October 1995, the Deed of Termination and the new Exicom Option Deed dated 8 November 1995. He also enclosed the Exicom Option Extension Deed dated 9 January 1996 and the letter from the CBA to the directors of Exicom, Zilkha and Simmonds dated 7 September 1995. He concluded: "If your client wishes to exercise the Bank Option, please let us know who the purchaser of the Exicom Facilities and the Exicom Securities will be so that Simmonds Capital Limited and Zilkha & Company can complete the option notice contained in Schedule 6 of the Bank Option in favour of that party (thereby providing the benefit of the option to your client)." (X194) 340 On 14 March, Mr Wawrzyniak of the CBA sent a memorandum to Ian Cambourne of the CBA's Legal Department in Sydney enclosing correspondence including Freehills advice to the CBA of the withdrawal of ERG and Simmonds and Bennett & Co's letters to Freehills and the CBA. He pointed out that the CBA had not formally or tacitly agreed to assignment of the Investors' interest to Futuris. It had no knowledge of the agreement between Futuris and ERG and Simmonds purporting to assign any interest in the Option to Futuris. The CBA had taken the stance that the breach remained capable of rectification up until 5pm (EST) on 14 March 1996. He also reported that Exicom had resolved to appoint an administrator to Exicom Limited and Exicom Australia Pty Ltd, the ultimate group holding company and the principal domestic operating entity, to be done at 8am on 15 March. Outside of that arrangement, CBA had commenced negotiations with Nortel for a sale of ECS. Wawrzyniak expressed the desire that no impediments arise to frustrate the CBA's ability to deal with Nortel. He asked Cambourne to consider whether Futuris had any standing in the matter, particularly now that the CBA regarded the Option as having lapsed (X198). Administrators are Appointed to Exicom – 15 March 1996 341 At a series of meetings of directors of Exicom companies, Alexander Robert McKay McIntosh and Thomas Alexander Riddell of KPMG were appointed as joint and several administrators of each company. The appointments were in respect of Exicom Limited, Exicom Australia Pty Ltd, Exicom Financial Services Pty Ltd, Exicom Energy Pty Ltd and Exicom Properties Pty Ltd. They were effected by resolutions of the various boards of the companies passed between 9.45am and 9.49am (X199). Futuris Identifies its Nominee for the Bank Option – 15 March 1996 342 On 15 March, Paganin sent a letter by fax to Griffiths seeking a response as a matter of urgency to the letters of 14 March. He wrote, inter alia: "… in light of your notice to Exicom dated 1 March 1996, it is imperative that our client obtains this information prior to 4.30pm Eastern Standard Time today in order that it can be in a position to exercise its right under the Bank Option." (X200) He also sent a fax to Fogarty at 12.36pm (WST) on 15 March, which began: "We refer to our letter of 14 March 1996. Further to our client's election to the assignment to Futuris Corporation Limited of all right, benefit and interest held by each of you in the Bank Option as defined in the Agreement of 7 December 1995 ("Investor's interest"), we now require that the Investor's Interest be immediately assigned to our client's nominee Futuris Administration Pty Limited ACN 052 351 621." He reiterated the request that the Futuris nominee obtain the entire benefit held by the Investors in the Bank Option. He claimed that the ten business days referred to in the CBA's notice of breach was to expire at 5pm (EST) on that day. He asked the directors of ERG and Simmonds to confirm prior to 5pm (EST) that they had assigned the Investors' interest to Futuris Administration Pty Limited (X201). At this point it may be noted that on Paganin's calculation of the expiry time for the Option, he had some 84 minutes remaining. A copy of this letter was faxed to Gordon at about the same time (X201A). However at 4.29pm (EST) Cambourne sent a fax to Bennett & Co referring to its two letters of 14 March to the CBA addressed to Ross Griffiths. He pointed out that the Bank Option contained a prohibition on assignment in cl 5.8. He stated that the CBA had not been requested to, nor had it consented to, the assignment of any rights of either Simmonds or Zilkha to Futuris. Hence there had been no effective assignment to that company. The letter concluded: "Accordingly, your client has no rights under the "Bank Option" and the Bank is under no obligation to furnish your client with any documents or information relating to Exicom Limited or any other member of the Exicom Group. Further, the Bank's duty of confidentiality to its customer would prevent the disclosure of the information you have requested." (X202) 343 Gordon sent a fax to Paganin at about 4.56pm (EST) in which he said: "We refer to your letter of today addressed to the Directors of our clients, a copy of which you forwarded to us this afternoon. As you are aware, clause 5(a) of the Agreement dated 7 December 1995 between your clients and our clients requires our clients to: "Assign or otherwise transfer or make available to Futuris…, or to such company as may be nominated by Futuris or, failing such nominee, Futuris Investments, all right, benefit or interest held by the Investors in the Bank Option." As indicated in our fax to you yesterday, our clients are ready, willing and able to make available to Futuris all of their right, benefit and interest in the Bank Option in that they agree to deal with the option as your clients' agents therefore in accordance with your clients' instructions. In particular, upon your clients' request, our clients agree to cause the option to be exercised by completing the option notice in schedule 6 of the Bank Option nominating Futuris Administration Pty Ltd (ACN 052 351 621) as the purchaser. We await your clients' request and instruction to dispatch the option notice in that form and thereby exercise the option in favour of your clients' nominee." 344 Newman became aware of the appointment of the administrators on 15 March. He said that their appointment effectively destroyed the recapitalisation opportunity by destroying Exicom's goodwill as a going concern. It was his contention that had ERG and Simmonds caused the Bank Option to be assigned to Futuris and FIPL they would have proceeded with their recapitalisation proposal. In the event of it proceeding Futuris management would have taken over management of Exicom, the Exicom business plan would have been professionally and capably implemented and the nature of Futuris' investment would have increased significantly particularly in the light of the market's increased valuation of telecommunication companies. The Administration and Liquidation of the Exicom Group 345 Alexander McIntosh and Thomas Riddell were the administrators appointed to the Exicom companies. In the weeks following their appointment McIntosh concluded that Exicom was hopelessly insolvent. In April 1996, they recommended that the companies to which they had been appointed as administrators should be wound up. They were appointed liquidators of most of the Exicom operating companies on 18 April 1996 and of ECS on 17 June 1996. 346 McIntosh gave evidence. He is a partner in KPMG's Corporate Recovery Division. He has been a partner of KPMG since January 1975. Since that time he has had numerous formal appointments as receiver, liquidator, financial advisor or scheme manager of many private and public companies. He is an Official liquidator. Upon their appointment, he and Riddell entered into negotiations with Nortel for the continued production of the telephone known as the P-phone. During the weeks that followed various creditors, claiming the benefit of retention of title clauses, lodged claims with them for possession of, or payment for, their goods. His evidence was that their investigations of Exicom's affairs and business revealed that in order for Exicom to be restructured it required: (a) The settlement of a claim for about $33 million by Telstra involving payment by Telstra of some $3 million claimed by Exicom for telephones and parts and the renegotiation and execution of a new contract for the supply of telephones and components of a sufficient volume and price to yield a profit to Exicom. (b) Renegotiation of the rent of the Villawood premises by a reduction of at least $1,200,000 per annum. (c) Renegotiation of a development and manufacturing agreement between Exicom and Nortel to make it profitable for Exicom. (d) Rationalisation of Exicom's manufacturing facilities, processes and labour contracts and the operations of most of the subsidiaries and management. (e) A compromise of the secured debt owed to the CBA and the establishment of new funding facilities; and (f) Deeds of company arrangement with all of the unsecured creditors, including those claiming retention of title. 347 A number of parties spoke to McIntosh about possibly acquiring the CBA's securities and facilities in order to effect deeds of company arrangement. However his negotiations with Telstra did not yield an outcome until January 1999 when Telstra, having paid only $1,079,000 which had to be paid to Exicom's employees, was admitted in the winding up of Exicom for a debt of $33 million. His discussions with the landlord of the Villawood premises led him to the conclusion that the landlord would make no concessions in relation to the terms of Exicom's lease and rent. He and Riddell also concluded that no deed of company arrangement would be possible and that their administration of Exicom could not end. When they came to that conclusion they recommended that the companies be wound up. 348 McIntosh discussed Exicom's business in his evidence. In 1995 its turnover was approximately $160 million per annum. Its core business was the manufacture of TF200 touchphones for Telstra. Historically it had supplied about half of Telstra's requirements for touchphones. Its manufacture of Telstra's basic telephone, theTF200, underpinned the viability of its manufacturing operations for a number of years in the 1990s. In 1995/96 Telstra had been responsible for approximately $50 million of Exicom Australia's annual turnover in the order of $87,600,000. In that financial year Telstra reduced its orders for TF200 phones from Exicom and had not approved the TF400 telephone as passing quality control requirements. The fact that problems had arisen with the TF400 telephones was not in dispute. Nor was the fact that Telstra had not signed a contract for the production of those phones. In McIntosh's opinion, it was clear by early 1996 that unless Exicom settled Telstra's damages claim and they entered into a viable agreement for the supply of telephony it would fail. Exicom's other businesses, apart from possibly ECS, contributed very little to its profits and probably large amounts to its losses. The Nortel contract to manufacture P-phones, which was entered into in about 1994, did not produce a profit for Exicom. The production of those phones had been affected by a series of design and other problems and was running about eighteen months behind schedule. The P-phone had passed the necessary field test just prior to his appointment as administrator and Exicom was gearing up for its production. However in February 1996, its production for Nortel was only 12% of budget. Full scale production had not commenced at the time of the administration and did not commence. By the end of February 1996 the telecommunications and power divisions of Exicom were $16 million behind budgeted sales. Sales to Nortel were $3,700,000 behind budget and EAPL was $4,800,000 behind profit performance. 349 On the question of Exicom's solvency, McIntosh noted that when he was appointed administrator the secured debt to the CBA including guarantee and other liabilities was in the order of $27 million. On or about 23 March 1996, the CBA exercised its power of sale under its mortgage and sold ECS's business and assets to Nortel. The CBA together with Exicom's employees had priority over other creditors and their combined priority claims totalled approximately $44 million. Ordinary unsecured creditor claims totalled about $49 million and contingent liabilities exceeded $35 million. 350 McIntosh said that in April 1996 he formed the view that: (a) After the elimination of inter-company debts and the inclusion of secured creditor debts against each company, none of the companies they had been appointed to administer would have any potential to contribute to Exicom Australia Pty Ltd and that company would have a deficiency, on book value, of approximately $86 million. (b) It was unlikely that the CBA or Exicom's employees would be paid their priority claims in full; and (c) Exicom was hopelessly insolvent. 351 Exicom's employees had been paid all outstanding wages, superannuation leave entitlements and 50% of redundancy entitlements by December 1996 but were still owed about $6,300,000. The CBA had received approximately $15,900,000 but still had a substantial debt outstanding. Other creditors included the Deputy Commissioner of Taxation for unpaid group tax and sales tax and the Chief Commissioner of Payroll Tax for unpaid payroll tax. Neither was paid in the liquidation of Exicom. 352 McIntosh was cross-examined on his evidence. He was asked why ECS had not been placed in administration. His recollection was that there were negotiations at an advanced stage for its sale to the CBA and Nortel. He agreed ECS owed millions of dollars to Exicom Australia and Exicom Limited. It was possible to keep it solvent for a short period of time by not calling in the loans (T858-859). It was on his advice and that of Riddell that ECS was not put into administration in view of the state of the negotiations with the CBA. He had had meetings with Exicom officers on the day prior to his appointment when this advice was discussed. He was not aware at the time that Futuris claimed to have exercised a right to take an assignment of the CBA's securities. Subsequently, Griffiths told him that Futuris didn't have any rights to the CBA securities at all. 353 It was put to him that there are many companies that trade with significant intangible assets, that upon insolvency can't realise the value of those assets which are carried in their balance sheets. He agreed with that general proposition but denied that Exicom fell into that category. He explained in re-examination that he wanted to make it abundantly clear that Exicom had no intangible assets that could be realised. 354 In the course of his oral evidence, McIntosh also said he had spoken with Fear in the week following his appointment. Fear told him he was representing either Alan Newman or Futuris or both. Fear said nothing to him about Futuris having an ongoing desire to put capital into Exicom or wanting to purchase any of the assets of Exicom. No approach was made from anybody on behalf of Futuris to inject capital into Exicom, to recapitalise it or to purchase any of its assets (T875). 355 The cross-examination of McIntosh did not affect the substance of his evidence-in-chief both as to the factual matters and as to the opinions which he expressed and which I accept. The Causes of Action 356 In these proceedings Futuris and Futuris Investments raise causes of action in misleading or deceptive conduct, breach of warranty and breach of contract against ERG and Simmonds. 357 The causes of action in misleading or deceptive conduct turn upon representations said to have been made by Fogarty to Newman on 5, 6 and 7 December 1995 and 1 March 1996. The representations said to have been made in the December 1995 conversations are set out in pars 11(b) to (g) of the amended statement of claim thus: "(b) Nortel would not continue to do business with Exicom if Futuris controlled Exicom. (c) ERG and Simmonds had concluded an agreement with Telstra for the resolution of the Telstra dispute and the ongoing supply of telephones by Exicom to Telstra. (d) ERG and Simmonds held the full benefit of the bank option and were able to assign the bank option to Futuris. (e) A condition of the ERG/Simmonds Reconstruction Proposal would be the renegotiation of the rental payable by Exicom for the Villawood premises. However, ERG and Simmonds would not rely upon this condition. (f) ERG and Simmonds were fully aware of the financial position of Exicom including its financial performance compared to its forecasts and Exicom's financial position was much worse than had been publicly disclosed or disclosed to Futuris. (g) By the settlement transactions proposed by ERG and Simmonds, if Futuris agreed to the proposals: (i) Futuris would receive an immediate payment of the price per share of 12.5 cents; (ii) Futuris would receive $2,100,000 upon completion of the ERG/Simmonds Recapitalisation Proposal; (iii) ERG and Simmonds upon acceptance of the proposal, would execute all necessary documents and take all necessary steps to ensure that in the event that ERG and Simmonds withdrew from the ERG/Simmonds Reconstruction Proposal, Futuris at its election would be immediately assigned the bank option." ERG denies making each of the representations (b) to (f) and does not admit that it made the representation pleaded in subpar (g). Futuris and FIPL say that they relied upon the representations and induced by them on 7 December 1995 entered into the Deed of Settlement and Release with Exicom, ERG, Simmonds, Zilkha and other parties, the Standstill Agreement with Exicom, the ERG/Simmonds Agreement and twenty Share Sale Deeds. (par 12) ERG admits that the various deeds were entered into but denies that this was in reliance upon the pleaded representations or induced thereby. 358 Futuris and FIPL say that the representations made in the December conversations with Fogarty and each of them was misleading or deceptive or likely to mislead or deceive in that: 1. Nortel would in fact have continued to do business with Exicom if Futuris controlled Exicom. ERG does not admit this. 2. No agreement had been completed by ERG and Simmonds with Telstra for the resolution of the Telstra dispute and the ongoing supply of telephones by Exicom to Telstra. ERG admits that there was no concluded agreement with Telstra resolving the Telstra dispute and that neither Exicom nor any one or more of its subsidiary companies had entered into a new product supply agreement with Telstra or any of its related companies for the supply of touchphone telephones and related equipment described as TF200 and TF400. 3. ERG and Simmonds were prohibited from assigning the benefit of the bank option without the prior written consent of the CBA, which consent they had not sought or obtained. There is no plea in the defence explicitly directed to this allegation (see par 33 of defence), however in par 29 of the statement of claim it is alleged that at all material times: (a) the bank option prohibited assignment without prior consent; (b) ERG and Simmonds at no stage sought the CBA's consent to assign rights pursuant to the bank option to Futuris; (c) specifically by facsimile dated 15 March 1996 the CBA refused to assign the bank option to Futuris. In pleading to that paragraph ERG does not admit any of the allegations contained in it and says further that if there were any prohibition on assignment contained in the bank option (which is not admitted) such a prohibition did not prevent ERG and Simmonds from entering into, and giving effect to, the ERG/Simmonds agreement. 4. ERG and Simmonds sought to rely upon the failure to renegotiate the rental for Villawood as non-satisfaction of a condition precedent to the subscription agreement. ERG says that the lessor of the Villawood premises had not agreed in writing to vary the terms of the lease. 5. The financial position of Exicom, including its financial performance compared to its forecasts, was the financial position that had been publicly disclosed or disclosed to Futuris. ERG says there had been a material adverse change in the business profitability or prospects of Exicom for the period between 30 September 1995 and 30 March 1996, the reduction of Exicom's capital, being part of the ERG/Simmonds Recapitalisation Proposal, had not been confirmed by an appropriate court and neither the CBA nor any other bank acceptable to Exicom and ERG and Simmonds had agreed to continue Exicom's non-cash facilities or to provide further cash facilities of not less than $5 million to Exicom. 6. At the time of the representation pleaded ERG and Simmonds had no intention of executing and thereafter did not execute all necessary documents and take all necessary steps to ensure that upon withdrawal of ERG and Simmonds from the ERG/Simmonds Recapitalisation Proposal, Futuris at its election would be immediately assigned the bank option. ERG does not admit this allegation. There is otherwise a general denial of the allegations falsifying the alleged representations. 359 Futuris and FIPL say that by reason of the matters referred to they have suffered loss and damage. This is particularised as follows: 1. The applicants sold their shareholding in Exicom and withdrew its recapitalisation proposal of Exicom in consideration, inter alia, for promises of payment of $2,100,000 conditional on the successful completion of the ERG/Simmonds Recapitalisation Proposal. 2. Further, the applicants seek damages for the loss of opportunity to successfully recapitalise Exicom and in that regard rely upon the Independent Expert Report forwarded to the members of Exicom on 29 January 1996, prepared by Grant Samuel & Associates Pty Ltd which assessed the value of the equity in a recapitalised Exicom as being $53,300,000 on an ungeared basis. 360 The plea of misleading or deceptive conduct in March 1996 is set out, somewhat awkwardly, in par 23 as follows: "On 1 March 1996 Fogarty by telephone orally represented to Newman that: (a) prior to the Exicom meeting of shareholders held on 23 February 1996 Exicom were to announce and had shown to ERG and Simmonds a press release which described Exicom's financial outlook in positive terms; (b) Fogarty and Simmonds had informed Exicom they were strongly opposed to such an announcement being made because Fogarty believed: (i) a number of creditor issues had arisen; (ii) the company had deteriorated significantly; (iii) there were things that Exicom did not know that Fogarty knew; (c) further, Fogarty on behalf of ERG and Simmonds, informed Exicom that if Exicom was to have a future, ERG and Simmonds required that their discussions with Telstra and the lessor of the Villawood premises proceed against the worst possible background and outlook." ERG admits that on or about that date Fogarty told Newman that: (i) before the meeting of shareholders of Exicom, which was held on 23 February 1996, Exicom had intended to announce that Exicom's financial outlook was positive; (ii) Fogarty had informed Exicom that the creditors and shareholders of Exicom should not be given a falsely optimistic impression of the financial position of Exicom; (iii) it appeared that the financial position of Exicom may have deteriorated but ERG was still awaiting confirmation of the final figures; (iv) ERG had become aware of certain liabilities of Exicom that the Board and management of Exicom had not been aware of until informed by ERG. ERG otherwise denied all of the allegations contained in par 23. The falsifying plea is made at par 41 and asserts that: (i) creditor issues in respect of Exicom had not in fact arisen; (ii) the financial position of Exicom had not deteriorated significantly; (iii) there was no fact or matter known to Fogarty about Exicom and not known to Exicom that was relevant to the announcement. Further, there was no requirement in fact for negotiations with Telstra and the lessor of the Villawood premises to proceed against the worst possible background and outlook for Exicom. All of these allegations are denied by ERG. 361 The pleaded consequence of this alleged misleading or deceptive conduct is that: (a) the Chairman of Exicom, on 23 February 1996, made an announcement to a shareholders' meeting convened on that day that there had been a material adverse change in the prospects of Exicom, albeit he did not identify nor specify the nature or extent of that material adverse change; (b) the CBA withdrew its support for Exicom prior to completion of the ERG and Simmonds Reconstruction Proposal and required repayment of Exicom's obligations; (c) two of the conditions precedent of the ERG/Simmonds Recapitalisation Proposal were not met, namely: (i) Exicom continuing to comply with its debt repayment obligations as required by the CBA; (par 42(c) and 21(j)) (ii) there being no material adverse change in the business profitability and prospects of Exicom (based on information given to ERG and Simmonds prior to 29 November 1995) during the period commencing on 30 September 1995 up to completion of the issue and allotment of shares to ERG and Simmonds (pars 42(c) and 21(k). ERG does not admit the making of the announcement and denies the other pleaded consequences of its alleged conduct. Futuris and FIPL claim to have suffered loss and damage as a result of the consequences of the conduct pleaded. The loss and damage said to have been suffered is precisely that pleaded in relation to the misleading or deceptive conduct said to have occurred in December 1995. This is denied by ERG. 362 The contract action is based on the ERG/Simmonds agreement made on 7 December 1995. It is said that in breach of that agreement ERG/Simmonds failed or refused to forthwith assign, transfer or make available to Futuris all the right, title or interest held by ERG/Simmonds in the Bank Option despite a request in writing by Futuris on 14 March 1996 (par 35A). This is denied in the defence. ERG says that by a facsimile letter of 14 March from the solicitors for ERG/Simmonds to Futuris and FIPL's solicitors they said that if Futuris wished to exercise the Bank Option its solicitors should let their solicitors know who the purchase of the facilities and securities would be so that Simmonds and Zilkha could complete the Option Notice contained in Schedule 6 of the Bank Option in favour of that party (thereby providing the benefit of the Bank Option to Futuris). It is further said that by a facsimile of 15 March 1996, Futuris and/or FIPL purported to elect to require "assignment" to Futuris of all right, benefit and interest held by each of ERG and Simmonds in the Bank Option. By a reply fax of 15 March 1996, ERG and Simmonds advised Futuris and FIPL that they were ready, willing and able to make available to Futuris and/or FIPL all their right, benefit and interest in the Bank Option in that they would agree to deal with it in accordance with Futuris and/or FIPL's instructions. In particular, on Futuris and/or FIPL's request they agreed to cause the Bank Option to be exercised by completing the Option Notice in Schedule 6. They awaited Futuris' and/or FIPL's request to dispatch the Option Notice but no response was received to the request for instructions. (35) In answer therefore to the breach of contract claim, ERG says it was ready, willing and able to make available the benefit of the Bank Option in the manner described in par 35 but at no time did Futuris or FIPL advise it that they wished notice of the exercise of the option to be given to the Bank on their behalf or on behalf of their nominee. If there were any breach of contract (which is denied) Futuris and FIPL were said to have failed to mitigate their loss by, among other things, attempting to obtain a transfer of the Bank's facilities and securities directly from the Bank. Moreover if there were any breach of contract, they suffered no loss as a consequence of it because they had no intention of exercising nor did they decide to exercise the bank option prior to its expiry on 15 March 1996 (par 35A). There was no separate plea for damages for the alleged breach of contract. 363 The warranties relied upon by Futuris and FIPL rely upon the ERG/Simmonds agreement by which it is said that ERG and Simmonds warranted to Futuris and FIPL: (a) That ERG and Simmonds had the legal right and power to enter into the agreement and procure assignment of the Bank Option free of encumbrance. (b) The interest, including the entire benefit held by ERG and Simmonds in the Bank Option was capable of assignment by them in accordance with the terms of the ERG/Simmonds agreement. (c) As and from 7 December 1995 until completion of the ERG/Simmonds Reconstruction Proposal, ERG and Simmonds would not implement, cause, initiate, require or procure the taking of any action or steps by Exicom including inaction or omission to take steps which would result in a material negative impact on the assets or the business or contracts of Exicom. The substance of the warranties as set out in the agreement is admitted by ERG (par 15). In further answer, ERG says it did not warrant that ERG and Simmonds had the legal right and power to procure assignment of the Bank Option and that the interests in the Bank Option was capable of assignment in that the terms "assign" and "assignment" are used in the agreement with a meaning different from their ordinary meaning. In that respect they rely upon the phrase "assign or otherwise transfer or make available" appearing in the agreement. And in further answer, ERG says that under cl 5(b) of the agreement it is made clear that ERG and Simmonds agreed to "assign" all right, benefit or interest held by them in the Exicom facilities and securities only after the Bank Option was exercised and payment made by ERG and Simmonds to the Bank (par 16). 364 Futuris asserts that the Bank Option prohibited assignment without prior consent, that ERG and Simmonds at no stage sought the Bank's consent to assign rights under the option to Futuris and that the Bank refused to assign the Bank Option (par 29). By reason of these matters it is said that ERG and Simmonds breached the warranties referred to in pars 16(a) and 16(b) of the statement of claim. Futuris and FIPL claim that they were thereby deprived of an opportunity to acquire the Bank Option which they assert was worth not less than $2,100,000. They seek damages for loss of opportunity. 365 ERG cross-claims an order for rectification of cl 5 of the ERG and Simmonds Agreement. It is said that during November and December 1995 in the course of discussions between Newman and Fogarty, it was orally agreed that in the event that Futuris and ERG reached an agreement resolving the issues between them and in the further event that ERG did not proceed with a proposal to participate in the recapitalisation of Exicom, ERG would put Futuris in the same position as it was in relation to an option to acquire Exicom's debt from the CBA. It is said to have been at all material times the continuing common intention of the parties to give effect to the oral agreement so described. The agreement actually executed on 7 December 1995 is said not to give effect to that continuing common intention and was executed by the parties in the common mistaken belief that it did so. Rectification is sought, on that basis, of cls 5(a), 5(b), 5(d)(1) and 5(d)(2) of the ERG and Simmonds Agreement. 366 At the commencement of the trial Simmonds, through its counsel, advised the Court that it did not intend to present any witness statements or evidence. Its position on the pleadings was that it adopted ERG's defence save that any misleading or deceptive conduct found to have been engaged in by Fogarty was said to be without the authority of Simmonds. As to the admission of evidence against it, Simmonds was content with such objections as might be made by ERG. The Causes of Action in Misleading or Deceptive Conduct 367 Futuris alleges that ERG and Simmonds each engaged in conduct in trade or commerce that was misleading or deceptive or likely to mislead or deceive. The conduct was by way of representations said to have been made by Fogarty and pleaded at pars 11 and 23 of the amended statement of claim. The cause of action sounds in damages under s 82 of the Act. It is helpful to recall the terms of the provisions: "52(1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. (2) Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of subsection (1)." "82(1) A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV, IVB or V or section 51AC may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention. (2) An action under subsection (1) may be commenced at any time within 3 years after the date on which the cause of action accrued." 368 The cause of damages for misleading or deceptive conduct requires conduct in trade or commerce that leads into error, whether by misrepresentation or otherwise, and by reason of which damage is caused. In the context of this case, the cause of action requires demonstration of the following elements: (i) A representation made in trade or commerce. (ii) Falsity of the representation. (iii) Reliance upon the representation. (iv) Loss or damage suffered as a result of the representation by reason of reliance upon it. There is no dispute that the conduct alleged against Fogarty in this case was conduct in trade or commerce. 369 In his closing submissions in writing and orally, counsel for Futuris submitted that the causes of action under the Trade Practices Act fundamentally reduced to the matters pleaded in pars 11(d) and 11(g) of the amended statement of claim. He did not address on the other representations alleged. I will, however deal with the other representations as they were not formally abandoned and were addressed by counsel for ERG. Par 11(b) – The Nortel Representation 370 It was alleged that Fogarty said that Nortel would not continue to do business with Exicom if Futuris controlled Exicom. There was no evidence of that representation being made by Fogarty in any of the conversations relied upon in the statement of claim. Newman made a note of his conversation with Fogarty on 13 November which included the statement "major customers – put up – NORTEL – TELSTRA". This was explained in cross-examination as referring to Fogarty's argument, allegedly continually put to him, that Nortel and Telstra would not deal with Futuris. There is evidence that Davis had conveyed that position to Fogarty. Fogarty was quoted in the Sydney Morning Herald article of 30 November as having made such a statement. It would seem that, so far as it represented an opinion or prediction, he had reasonable grounds for it and it conveyed no representation. In any event, Newman did not believe that Nortel would not ultimately deal with Futuris. His expressed view in cross-examination was that Nortel and Telstra would be "…commercial in the finish and would deal with the party they considered to be either the only one that was going to get up or the better one to get up" (T386). If the representation were made, he did not rely upon it. The first particular of misleading or deceptive conduct is therefore not made out. Par 11(c) – The Concluded Agreement with Telstra 371 It is alleged in par 11(c) that Fogarty told Newman in the December conversations that ERG and Simmonds had concluded an agreement with Telstra for the resolution of the Telstra dispute and the ongoing supply of telephones by Exicom to Telstra. Fogarty's view at the time was that he had an "in principle agreement" with Telstra. This arose out of discussions which he had had in Melbourne on 8 November 1995 with Mead, Nugent and Walton of Telstra. The discussion was confirmed by Gordon's letter of 10 November to Mead (X395). Fogarty denied telling Newman during the conversations they had on 9 and 13 November, and their later conversations in December, that ERG, Simmonds and Zilkha had agreements with Nortel and Telstra. As stated earlier, I am not persuaded that Fogarty would have been as unequivocal in his conversation with Newman as Newman suggested. They did not have final agreements with Nortel or Telstra, although he might have suggested, as was the fact, that they had agreed in principle about what was necessary to satisfy their requirements. In any event, Newman didn't believe what he alleged Fogarty said. He believed that Fogarty had the position "strongly in his favour". He said he never believed that Fogarty was being forthright with him in this respect (T435). He also believed that Telstra, like Nortel, "…would be commercial in the finish and would deal with the party they considered to be either the only one that was going to get up or the better one to get up". There was no misrepresentation as alleged in par 11(c) and if there were, it was not believed. Par 11(d) – The Benefit of the Bank Option 372 It is alleged in par 11(d) that Fogarty told Newman that ERG and Simmonds held the full benefit of the Bank Option and were able to assign it to Futuris. Facts found relevant to this representation are as follows: (1) On 9 November Fogarty told Newman that Simmonds and Zilkha had an enforceable option over the CBA debt. Newman didn't believe that there was an enforceable option. (2) On 13 November, Fogarty told Newman that ERG, Simmonds and Zilkha had the ability to deal with the debt. They had not taken an assignment of the debt, but had the ability to end up with it at less than face value. Fogarty told Newman that if ERG withdrew from the consortium with Simmonds and Zilkha, they would maintain the right to the CBA debt. When Newman asked Fogarty "can I have your position?" Fogarty responded "it can be done but I'm not going to tell you the structure. Take my word for it, it can be done" or words to that effect. Newman believed he had legal advice that any option granted over the debt was an illegal transaction in that the debt could not be acquired without prior approval of the shareholders. As already indicated, there seems to be little, if any, foundation for that view but Newman seems to have thought it was "…at best a fifty fifty proposition that it wasn't illegal". (3) On 17 November, Fogarty told Newman that ERG and Simmonds had a right to gain access to the CBA debt. (4) On 20 November, Fogarty told Newman that if ERG and Simmonds walked away from the recapitalisation proposal Futuris "could have his position". This was never discussed in terms of the word "assign". (5) The draft agreement of 21 November proposed between Futuris, FIPL, ERG and Simmonds, required ERG and Simmonds, upon withdrawal from a recapitalisation, to "each agree to use their best endeavours to deal with the Bank Option for the benefit of the Futuris companies". (6) On 22-24 November, Fogarty and Gordon explained to Futuris' solicitor Paganin at Bennett & Co that ERG and Simmonds could not assign the Bank Option. (7) On 4 December, Newman said to Fogarty that it was important to him that he have ERG and Simmonds' position on the Bank Option. (8) On 5 December, Newman and Fogarty agreed a basis for settlement. Fogarty told Newman that if ERG and Simmonds withdrew from the recapitalisation it was highly improbable that they would have any further interest in Exicom. They would have then no objection to making the rights in respect of the CBA debt available to Futuris. 373 On these findings Fogarty did not represent that ERG held the full benefit of the Bank Option or that it was able to assign the Bank Option to Futuris. Indeed the advice to Paganin was to the contrary. Fogarty's statements about the CBA debt amounted to the proposition that Futuris could acquire rights to the CBA debt. It did not involve a representation that Futuris could acquire the precise bundle of legal rights held by ERG because of its agreement with Simmonds and Zilkha or the immediate right to the option itself by a process of simple assignment. I am not satisfied that the representation as pleaded was made, nor am I satisfied that if made it was relied upon by Futuris given that it had access to the Bank Option. Par 11(e) – Renegotiation of the Villawood Rental 374 In this paragraph it was said that Fogarty represented that a condition of the ERG and Simmonds reconstruction proposal would be the renegotiation of the rental payable by Exicom for the Villawood premises but that ERG and Simmonds would not rely upon the condition. On 5 December, Fogarty told Newman that he wasn't willing to waive the condition about renegotiation of the Villawood rental which appeared in the recapitalisation proposal. He said, however, that if it were the only condition outstanding then for the sake of a million dollars ERG and Simmonds probably wouldn't allow that to stop the transaction. But he was not willing to waive the condition and that was always his position. As I have found already, this was consistent with his later approach to the renegotiation of the lease albeit he was prepared to be flexible about the terms which would satisfy him. The representation was not made as alleged. Moreover, what was said did represent Fogarty's intentions at the time that the statement was made. What was said was a statement of his intention and did not mislead. Par 11(f) – The Financial Position of Exicom 375 In this paragraph of the statement of claim it was alleged that Fogarty represented that ERG and Simmonds were fully aware of the financial position of Exicom including its financial performance compared to its forecasts and that its financial position was much worse than had been publicly disclosed or disclosed to Futuris. Newman said that in his discussion with Fogarty on 4 December, Fogarty explained that the Exicom trading position was substantially worse than had been believed. He had his own management "in the company" and they had discovered many problems of which the current management were unaware. This representation so far as it goes was not falsified by any evidence. I am satisfied that it was true. In any event, there is nothing to suggest that Newman relied upon it in any way. His stated view was expressed thus: "…a company can change in value dramatically, but good business doesn't change quickly in value. It only changes in perception of value. They go up or down. My view of the value of Exicom in July 95, I think it was, was very little different in July – sorry, March 96. Nothing changed much in my mind. All the negativism that was put out by all the people was equally supported by much opportunism and optimism by others and that's why I got into it, because I saw the opportunity with telephony." There is no substance in this allegation of misleading or deceptive conduct. Par 11(g) – The Effect of the Settlement Transactions 376 In this paragraph it is alleged that Fogarty represented that by the settlement transactions proposed by ERG and Simmonds, if Futuris agreed to them: (i) Futuris would receive an immediate payment of the price per share of 12.5 cents. (ii) Futuris would receive $2,100,000 upon completion of the ERG and Simmonds recapitalisation proposal. (iii) ERG and Simmonds, upon acceptance of the proposal, would execute all necessary documents and take all necessary steps to ensure that in the event that ERG and Simmonds withdrew from the ERG and Simmonds reconstruction proposal, Futuris, at its election, would be immediately assigned the Bank Option. It was accepted that the first two representations were made, they being terms of the executed agreements. As with par 11(d), there was no evidence that the final representation was made as alleged. I also accept the submission of counsel for ERG that there is no evidence that ERG and Simmonds did not intend to perform their obligations at the time of entry into the agreements with Futuris on 7 December. 377 Generally on the topic of reliance none of the representations attributed to Fogarty in par 11 of the amended statement of claim can be said to have caused Futuris or FIPL to alter its conduct in any way. There were, as is pointed out in the submission for ERG, very significant obstacles in the path of any successful recapitalisation of Exicom by Futuris and FIPL. These included the insider trading litigation which was a significant factor affecting Newman's decision to settle with ERG and Simmonds, the hostility of the Exicom Board and its preference for a rival bid, the rival bidders control of the Bank Option and the unlikelihood of shareholder support for the Futuris proposal. As I have already noted also, Newman generally was very sceptical about commercial communications. It would seem quite out of character for him to have taken on trust, in surrendering important rights or assuming important obligations, oral representations made to him by a rival whose interests would be served if Futuris were to withdraw from the recapitalisation race. 378 The alleged misrepresentation at par 23 of the amended statement of claim is obscure. The substance of it appears to be that Fogarty procured Exicom to change the terms of its press release prior to the shareholders' meeting of 23 February 1996 to describe Exicom's financial outlook in something other than positive terms. In my opinion, however, on the evidence and having regard to the disconformity between the initial draft press release and the reality of Exicom's situation, a change in the terms of the press release was essential if shareholders were not to be misled. In my opinion there is nothing in this aspect of the trade practices claim. 379 For the preceding reasons the trade practices claim fails at the threshold. In my opinion there is not, and never was, any substance to it, a conclusion fortified by the virtual abandonment of much of it in closing submissions. In the circumstances there is nothing to be gained by considering what damages might have been incurred by Futuris had the trade practices claim been made out. The Cause of Action for Breach of Contract and Breach of Warranty 380 The cause of action for breach of contract requires consideration of the obligations assumed by ERG and Simmonds under cl 5 of the agreement with Futuris and whether they acted in accordance with those obligations. The cause of action for breach of warranty requires consideration of the content of the warranties given in cl 5. The warranty case however is academic if the contractual performance case fails for if ERG and Simmonds have acted in accordance with their obligations under the contract the warranty provisions cannot expand those obligations. 381 Consideration of the breach of contract case requires interpretation of cl 5 of the agreement. The exercise of interpretation takes as its point of departure the ordinary meaning of the words in their context as part of the entire agreement. If the meaning of the relevant clause, when so read, is clear and unambiguous, the unqualified words will be given their effect – Metropolitan Gas Co v The Federated Gas Employees' Industrial Union (1925) 35 CLR 449 at 455 (Isaacs and Rich JJ). When the language of the contract is ambiguous or bears more than one possible construction, evidence of its surrounding circumstances may be relied upon to determine what is the construction which best reflects the presumed intention of the parties in the objective framework of facts within which the contract came into existence – Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 351-352 (Mason J). Antecedent negotiations may establish objective background facts known to both parties and the subject matter of the contract. They may not be relied upon to establish the actual intentions and expectations – Codelfa at 352. 382 The obligation upon ERG and Simmonds with respect to Futuris and the Bank Option was to be found in cl 5 of the ERG and Simmonds Agreement of 7 December. The obligation is triggered by events specified in the clause. The first relevant event for present purposes is where: "Both of the Investors at any time withdraw from the Capital Reconstruction Investment Proposal." ( cl 5(a)(1)) In that event there is an obligation on the Investors to give written notice to Futuris within twenty four hours (cl 5(c)). 383 The next relevant event is the making of an election in writing by Futuris (cl 5(a)(2)). The content of the written election is not specified. In context however it must be taken as an election requiring that the Investors "assign or otherwise transfer or make available….all right benefit or interest held by the Investors in the Bank Option". Given the grammatical structure of the clause and the short time provided for compliance by the Investors with the obligation triggered by the election, it will also be required to nominate the beneficiary of the assignment, transfer or availability of the Bank Option. In this respect the clause is awkwardly worded as it requires "assignment etc" to Futuris or its nominee or, failing such nominee, Futuris Investments. That is to say absent any nomination, it is not clear whether Futuris or Futuris Investments is contemplated as recipient of the "assignment". 384 The obligation triggered by the election is to "forthwith and in any event within 2 business days of …. the date of the withdrawal (whichever is the sooner), assign or otherwise transfer or make available to Futuris (collectively referred to as Assign or Assignment)… all right benefit and interest held by the Investors in the Bank Option". The time prescribed for performance is also somewhat awkwardly worded. It would seem impossible to comply if Futuris were to elect more than two business days after withdrawal. It becomes increasingly difficult to comply the closer the election is to the expiry of the two business days after withdrawal. On the facts of this case however the real difficulty arose from the pending expiration of the Bank Option pursuant to the notice of termination of the option which had been sent by the CBA to Gordon on 1 March (X168). 385 The term "assign or otherwise transfer or make available…all right benefit or interest held by the Investors in the Bank Option" has to be read against the definition of the term "Bank Option" which identifies Simmonds and Zilkha as the option holders. It was known to all that ERG was not a party to the Option and that was recognised in the definition. Given, as I have found, that Futuris had access to the Option prior to the execution of this agreement it was also known to all that the Option was not capable of assignment without the consent of the CBA. Indeed, although I do not regard it as part of the factual matrix for any constructional purpose, that requirement was effectively disclosed in the Australian Newspaper on 29 November 1995 in an article by Brian Frith based in part upon the option document itself which had been provided to him by Fear, acting on behalf of Futuris. In my opinion, however, that does not affect the construction of cl 5. 386 The obligation imposed by cl 5(a) was capable of satisfaction in a variety of ways. Legal assignment of the Bank Option was theoretically open subject to the consent of the CBA. Given the extended definition of the term "Bank Option" in the agreement legal assignment would also be applicable to the debt if the Option were exercised prior to an election by Futuris. The obligation imposed by cl 5(a) was ambulatory in character and, as a matter of language, covered a range of possible mechanisms for providing Futuris with the benefit of ERG and Simmonds' "right benefit or interest in the Bank Option". It contemplated that a range of possible rights, benefits or interests might be held by ERG and Simmonds. For although Futuris had a copy of the Option and knew that Zilkha was not part of the consortium involving ERG and Simmonds, it did not know the nature of the relationships between ERG, Simmonds and Zilkha and what might have to be done to put it in "the position" of ERG and Simmonds. 387 The Futuris case as pleaded does not go to the capacity of ERG and Simmonds to convey the benefit of the Bank Option to it. For the pleading in par 35A of the further reamended statement of claim is that: "In breach of the ERG/Simmonds Agreement on 14 March 1996 ERG/Simmonds failed or refused to forthwith assign, transfer or make available to Futuris all the right title or interest held by ERG/Simmonds in the Bank Option despite request in writing by Futuris on 14 March 1996." And although by its defence ERG has pleaded it was ready, willing and able to make available the benefits of the Bank Option, this does not elevate the Futuris case into a cause of action based on want of capacity to perform. As counsel for ERG submitted in closing, if Futuris sought to make such a case outside the pleadings, ERG would be entitled to reopen its case to bring evidence of the relationship between itself, Simmonds and Zilkha and their rights and obligations with respect to the Bank Option following Zilkha's withdrawal from the Consortium. Moreover it would be open to argue that, absent a legal right, ERG had the practical ability to obtain the benefit of the option for Futuris through a process of nomination by Simmonds and Zilkha or indeed a commitment or undertaking to nominate which would not contravene the prohibition on assignment of the Option itself as it would give rise to no right to the nominee to exercise the Option as against the CBA. The latter of course, having regard to the timeframe and the imminent expiry of the Option, would have been more than a little academic. In this respect the documents "Marked for Identification 485 and 486" will not be admitted as they are not relevant to the pleaded case. 388 The question for present purposes is what did Futuris do on 14 March, what, if anything, were ERG and Simmonds required to do and what did they do? Their requirement to act "forthwith" derives its content from the nature of the right, benefit or interest held in the Bank Option by ERG and Simmonds and what it is necessary to do in order to assign or otherwise transfer or make available the right, benefit or interest. If, for example, the Option had been exercised and, pursuant to the Memorandum of Understanding, ERG and Simmonds actually held the debt and securities a straight forward assignment might have been effected to Futuris' nominee with notice to Exicom. The content of the obligation must depend upon the practical steps necessary to give effect to it not the external circumstances or the fact of the imminent expiry of the Option. Given that the direct legal title to the Option was held jointly by Simmonds and Zilkha and given the prohibition on direct assignment of it without consent of the CBA, a process of nomination of a party (in this case a Futuris nominee) pursuant to the terms of the Option was open. The fact that it may have taken more time to implement than was left before the Option expired does not put ERG or Simmonds in breach of their contractual obligations. The expiry of the Option occurred before the occasion of a breach of their obligation could reasonably be said to have arisen. In the circumstances, they did no less than they were required to do. There was no breach of the contract. That being the case, the warranty claim falls by the wayside. The warranties in cl 5 do not of themselves expand the obligations which ERG and Simmonds had to perform under that clause. 389 It may be noted that the election by Futuris on 14 March did not specify a nominee or indicate, in default, that FIPL would take the benefit of the Option. It may be that the letter is properly construed as indicating that Futuris was its own nominee. On the following afternoon, on 15 March, with 84 minutes to go on his own calculation, Paganin sent a fax to Fogarty specifying Futuris Administration Pty Ltd as the nominee. This being Futuris' formal nomination it may be seen, in accordance with the construction of the clause to which I have already referred, as completion of its written election. If that be right, it strengthens the conclusion that there was no breach. Paganin received a response from Gordon an hour and twenty minutes later indicating a readiness to nominate Futuris Administration Pty Ltd. By that time, of course, the Option was on the brink of expiration. Damages 390 Having regard to my conclusions about the causes of action, it is strictly unnecessary to consider the question of damages. I will nevertheless express my conclusions on the claim for damages. For it is when consideration is given to that issue that an air of unreality settles on the whole proceedings. 391 Futuris pleads that by reason of the breach of contract and breach of warranty it has suffered loss and damage. One element of its claim was for $2,100,000. This was, in effect, the amount which it would have received under its agreement of 7 December had ERG and Simmonds proceeded with the recapitalisation of Exicom. That did not proceed and there is no basis for a claim for loss of opportunity in respect of the $2.1 million. The substantive submission for Futuris in relation to damages for breach of contract reduced to the contention that by reason of the failure to deliver to it effective control of the CBA debt Futuris lost the opportunity on 15 March 1996 to recapitalise Exicom. This opportunity was said to have a monetary value. The Court, it was said, should have regard to the following factors which would have influenced the probability of the opportunity succeeding 1. Futuris would have had the right to, and would have exercised the Bank Option. 2. Futuris was the only prospective bidder for Exicom. 3. Without a recapitalisation proposal it was inevitable that Exicom would go into liquidation. 4. In Futuris' view the value of Exicom had not changed. 5. Futuris did not have a fixed proposal for recapitalisation but was fluid in its approach. 6. Unless Futuris moved quickly the company would disintegrate. 392 Futuris' position in this respect is seriously undercut by its failure to take the opportunity to acquire the Exicom debt directly from the CBA. As I have found, Griffiths told Gordon early on 14 March that the CBA would be happy to receive an offer of 75 cents in the dollar for the cash facilities. Gordon informed Paganin of that fact at 3.30pm that day. Futuris by its advisors was in receipt of the information that it was in a position to acquire the debt in a far more direct and less complicated fashion than by reliance upon its agreement with ERG and Simmonds. The acquisition of the right to the Bank Option itself as distinct from the debt would have conferred little or no practical advantage as it was on the brink of expiry in any event. And in my opinion, even if Paganin had not communicated Gordon's advice to Futuris management it would not have been beyond their commercial wisdom to have seen the acquisition of the debt was a plausible possibility. Cambourne's negative reaction to Bennett & Co's letters to the CBA is perhaps not surprising having regard to their somewhat challenging tone and the assertion of what was essentially portrayed as a right as against the CBA. 393 Even if the acquisition of the debt direct from the CBA were not a practical possibility, I am unpersuaded by the evidence of Futuris' expert witness, Justin Willis, which purported to quantify the value to Futuris of the recapitalisation of Exicom. Willis based his opinion of the potential value of Exicom upon reports prepared by Invetech, KPMG and Grant Samuel. The Invetech report was a draft report prepared for Futuris entitled "Preliminary Review of Exicom Villawood Operations" and dated 1 September 1995. The KPMG report was the one prepared for Simmonds and Zilkha in October 1995. The Grant Samuel report was that prepared for ERG and Simmonds and dated 29 January 1996. 394 Willis approached his estimate of the potential future value of Futuris' equity interest in Exicom by valuing the potential future enterprise value of Exicom. This depended on assessing future maintainable earnings and capitalising them. In determining an appropriate estimate of Exicom's future maintainable earnings he gave consideration to: (a) Earnings forecasts prepared by Exicom and presented in an Information Memorandum dated 9 June 1995. (b) The likelihood that Exicom's historical financial pressures including the CBA debt facilities and the shortage in working capital, had impacted on recent historical financial performance. (c) Potential future earnings growth from investments in overseas expansion. (d) Future earnings from sale contracts to Telstra and Nortel. (e) Potential cost savings at Exicom's Villawood manufacturing facilities as identified by Invetech in its draft report. (f) The positive impact of synergistic and operational benefits which may have been brought to Exicom by Futuris. Willis justified his reliance upon Exicom forecasts by reference to KPMG's observation that: "Exicom's past history is of over optimistic budgeting and the failure to achieve budget often by spectacular margins. Nevertheless the current management team have adopted a pragmatic and conservative approach to setting the 1995/1996 budget to avoid problems." He referred to revised forecasts for Exicom for the year ended 30 June 1996 which were included in the Grant Samuel report. He made a comparison of these forecasts. He considered the forecasts in the 1995 Information Memorandum a reasonable basis for determining appropriate future levels of earnings in his capitalisation of maintainable earnings as part of the determination of the potential future enterprise value of Exicom. Willis was basing his valuation ultimately upon forecasts by third parties who were not in Court. That is to say his opinions were based upon other opinions. There is much to be said for the view that this evidence was not properly admissible. In my opinion, however, it is sufficient to say that it cannot be given any weight. 395 Another witness called in relation to the issue of loss of opportunity damages was Stephen Wilson, the author of the Grant Samuel & Associates report (X115). He verified that the report reflected his opinion. His purpose in preparing it was to evaluate whether or not the ERG and Simmonds' recapitalisation proposal was fair and reasonable from the perspective of independent shareholders in Exicom. He had concluded that if the recapitalisation did not proceed then Exicom would go into some form of insolvency administration and shareholders would receive no value for their shares. His report calculated a value for Exicom implied by the ERG and Simmonds' offer. That was a figure of $53 million (T524). He did not conduct a valuation of Exicom per se (T526). In my opinion his report was not addressed to and did not give rise to a valuation of Exicom's potential future value as at 14 or 15 March 1996. 396 A commercially realistic assessment of the presence or absence of future potential value in Exicom is reflected in the decision of ERG and Simmonds to withdraw following what was demonstrably a lengthy, expensive, detailed and exhaustive exploration of ways in which the various conditions precedent which were commercially relevant to the recapitalisation, could be satisfied and the recapitalisation made to work. The difficulties which ERG and Simmonds encountered were real. Their process of exploration was genuine right up to the point of the decision to withdraw. I do not accept the implied suggestion that at some point it became an elaborate charade never intended to be consummated by recapitalisation. A realistic assessment of the position of Exicom at the time at which administrators were appointed also emerged from the evidence of McIntosh. It may be accepted that there is a difference between a firm operating as a going concern and the value of its component parts and assets. Nevertheless even allowing for that difference, the scale of Exicom's insolvency as at March 1996 makes it inherently improbable that any recapitalisation would have saved it. This is particularly so given the problems in terms of product quality, its relationships with its major customers and suppliers and the difficulties with the Villawood premises. 397 I do not believe that in the circumstances Futuris, which foreshadowed a degree of fluidity in its possible approaches to recapitalisation at March 1996, would have fared any better. Indeed, I find it improbable that Futuris, if it had acquired the Bank Option on 14 March, would have committed itself to paying out in the short term remaining before the Option expired, the $20 million necessary to acquire Exicom's facilities and securities from the CBA. The risk of a substantial loss, given the real state of Exicom at the time, would have been too great as against the tenuous promise of future potential. 398 In my opinion, even had Futuris made out a breach of contract or warranty in this case, it would not have established any quantifiable loss of opportunity of any value. 399 For the preceding reasons, the application for Futuris and FIPL will be dismissed. Cross-Claim 400 ERG cross-claims for rectification of the agreement with Futuris. It is sufficient to say that having regard to the fairly intensive negotiation that occurred in relation to the actual terms of cl 5, I am not prepared to say that the words that were ultimately agreed were not capable of giving effect to the common intention of the parties. The cross-claim will be dismissed. I certify that the preceding four hundred (400) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French. Associate: Dated: 15 August 2001 Counsel for the Applicants: Mr ML Bennett with Ms JM Hill Solicitor for the Applicant: Bennett & Co Counsel for the First Respondent: Mr WS Martin QC with Ms EC Hensler and Mr B Dharmananda Solicitor for the First Respondent: Mallesons Stephen Jaques Counsel for the Second Respondent: Solicitor for the Second Mr RJ Price Respondent: Freehill Hollingdale & Page Date of Hearing: 20, 21, 22, 23, 24, 27, 28, 29, 30 November and 1, 4, 5, 6 and 7 December 2000 Date of Judgment: 15 August 2001 INDEX Introduction 1 - 2 Exicom Limited 1995 – A Failing Company 2 - 3 Futuris – A Prospective Acquirer 4 ERG Limited – Another Prospective Acquirer 4 - 6 Exicom and Futuris Discuss Recapitalisation – June 1995 6 - 8 Futuris Does a Limited Due Diligence – July 1995 8 Futuris Makes a Proposal – July 1995 9 - 11 Futuris Addresses the Exicom Board – August 1995 11 – 15 Futuris Acquires Exicom Shares and is Sued by Exicom - 30-31 August 1995 15 - 18 Simmonds and Zilkha Prepare to Make an Offer to Exicom – August 1995 18 - 19 Simmonds and Zilkha Make an Offer to Exicom - 1 September 1995 19 – 20 Nortel Welcomes Simmonds' Involvement – 1 September 1995 20 Futuris Writes to Exicom – 1 September 1995 20 - 21 Futuris Proposes Settlement Terms to Telstra – 1 September 1995 21 - 22 Futuris Writes to Exicom and Various Advisors - 3-5 September 1995 22 - 23 Futuris Contacts the Stock Exchange and the CBA - 6 September 1995 23- 24 Exicom and Simmonds/Zilkha Reach Agreement - 7 September 1995 25 Futuris Responds – September 1995 25 - 26 Futuris Develops its Acquisition Strategy and Prepares Takeover Documents – 13 September 1995 26 - 28 ERG Considers its Position with Respect to Exicom - 27 September 1995 28 Futuris – More Strategic Thoughts – 28 September 1995 28 - 29 Exicom's Annual Report and Financial Statements for the Year Ended 30 June 1995 29 - 30 The Bank Option is Signed – 13 October 1995 30 - 32 More Futuris Strategy Development – Mid-October 1995 32 - 33 Exicom Announces Anticipated Receipt of Simmonds And Zilkha Proposal – 16 October 1995 33 Futuris Turns Up the Heat – 17 to 19 October 1995 33 - 37 ERG Opens Dialogue with Simmonds and Zilkha - October 1995 37 - 39 The Simmonds/Zilkha Offer – 25 October 1995 39 - 40 Simmonds and Zilkha Negotiate with ERG - 27, 28 and 29 October 1995 40 Fogarty Reports to the ERG Directors – 27 October 1995 40 ERG's Directors Meet – 30 October 1995 40 - 41 Futuris has Discussions with Zilkha and the CBA - 27 October 1995 42 Futuris' Application for Leave to Appeal Dismissed - 30 October 1995 42 Exicom Obtain an Extension of Time for its Annual General Meeting – 31 October 1995 42- 43 Futuris Appeals Against the Extension of Time - 3 November 1995 43 - 44 ERG Explores Settlement with Futuris – 4 November 1995 44 - 45 ERG Enters Agreement with Simmonds/Zilkha - 6 November 1995 45 - 47 Futuris Threatens the CBA – 7 November 1995 48- 49 A New Bank Option is Executed – 7 November 1995 49 Fogarty Reaches In Principle Agreement with Telstra - 8 November 1995 49 - 50 Futuris Writes to Exicom Shareholders – 8 November 1995 50 Exicom Makes a New Employment Agreement with its Chief Executive, Stephen Newman – 8 November 1995 50 Fogarty Meets Nortel – 9 November 1995 51 Fogarty Speaks to Newman Again – 9 November 1995 51 - 52 The CBA Extends Exicom's Facilities – 10 November 1995 52 Davies' View of Exicom – 10 November 1995 52 - 53 Fogarty Speaks with Newman – 13 November 1995 53 - 56 Newman's Notes On the Conversation of 13 November 1995 56 - 58 Fogarty's Memorandum to ERG Directors – 13 November 1995 58 Exicom Writes to Fear and Fear Replies with an Offer - 13 and 15 November 1995 58 - 60 Futuris Seeks a Meeting of Exicom Shareholders - 15 November 1995 60 Telstra Puts Pressure on Exicom – 15 November 1995 60 - 61 Zilkha Withdraws from the Consortium – 16 November 1995 61 Fogarty Meets Newman Again – 17 November 1995 61 - 63 Australian Stock Exchange Seeks Information about the Bank Option – 17 November 1995 63 - 64 Futuris Receives Copies of Discovered Correspondence - 17 November 1995 64 Exicom Writes to Shareholders – 17 November 1995 64 - 65 The ERG and Simmonds' Recapitalisation Proposal is Finalised – 19 November 1995 65 Newman Puts a Proposal to Fogarty – 20 November 1995 65 - 67 Confidentiality Orders Relating to Documents in the Administrative Appeals Tribunal and the New South Wales Supreme Court – 20 November 1995 67 - 68 Draft Agreement with Futuris Sent for Execution - 21 November 1995 68 - 69 The Administrative Appeals Tribunal Gives its Decision And the Insider Trading Litigation Commences - 22 November 1995 69 Further Exchanges between ERG and Futuris – 22-24 November 69 - 72 The CBA Extends the Option – 23 November 1995 72 Bennett & Co threaten the CBA – 24 November 1995 72 - 73 Whether and When Futuris Became Aware of the Option 73 - 78 Support for ERG from Telstra and Nortel – 27 and 28 November 1995 78 - 79 Federal Court Dismisses Appeal against AAT Decision - 29 November 1995 79 ERG/Simmonds' Recapitalisation Proposal Accepted - 29 November 1995 79 - 81 Futuris Considers the Insider Trading Litigation 82 - 83 Fogarty Speaks to Nortel 83 Fogarty and Newman Re-open Negotiations - 3-7 December 1995 83 - 90 Correspondence with the CBA – the Option is Extended - 7 December 1995 90 The Settlement Agreements – 7 December 1995 90 - 93 The Rocky Path Towards Recapitalisation – December 1995 To 23 February 1996 94 – 116 ERG's Input to Capp's Announcement – 232 February 1996 116 – 117 The Meeting of Exicom's Shareholders – 23 February 1996 118 – 119 More Exicom Phone Failures – 26 February 1995 119 – 121 Recapitalisation Looks Increasingly Difficult – 27 February to 29 February 1996 121 – 123 The CBA Sends Notice of Breach and Termination of the Option – 1 March 1996 123 – 124 Futuris Re-enters the Fray – 1 March 1996 124 – 126 Count Down to Abandonment of Recapitalisation –2-12 March 1996 126 – 130 ERG Withdraws its Recapitalisation Proposal – 13 March 1996 130 - 135 Futuris Elects to Acquire Assignment of the Bank Option - 14 March 1996 136 – 139 Administrators are Appointed to Exicom – 15 March 1996 139 Futuris Identifies its Nominee for the Bank Option - 15 March 1996 140 – 141 The Administration and Liquidation of the Exicom Group 141 – 145 The Causes of Action 145 - 152 The Causes of Action in Misleading or Deceptive Conduct 152 - 153 Par 11(b) – The Nortel Representation 153 – 154 Par 11(c) – The Concluded Agreement with Telstra 154 Par 11(d) – The Benefit of the Bank Option 154 – 155 Par 11(e) – Renegotiation of the Villawood Rental 156 Par 11(f) – The Financial Position of Exicom 156 Par 11(g) – The Effect of the Settlement Transaction 157 – 158 The Cause of Action for Breach of Contract and Breach of Warranty 158 – 162 Damages 162 – 165 Cross-Claim 166