Issue 5 - The Five Alleged Breaches of Duty
369 ASIC alleges five separate breaches of fiduciary duty by Citigroup. These claims fail because I have come to the view that Citigroup was not in a fiduciary relationship with Toll. Nevertheless, I will address each of the five alleged conflicts because there are other reasons why those claims would fail even if Citigroup did owe fiduciary duties to Toll.
370 I will deal with the five "conflicts" in the order in which they were pleaded. All of them are said to be conflicts of interest and duty.
The First Conflict
371 The first conflict is said to have arisen once Citigroup acquired its own interest in Patrick shares on 19 August 2005. Citigroup is then said to have had a fiduciary duty to disclose to Toll, as its adviser, all relevant knowledge in relation to decisions to be made by Toll about the bid. The duty is said to be based on the decision of the High Court in Daly, in particular the reasons of Brennan J at 385.
372 The duty of disclosure pleaded in the first conflict is said to be a duty to furnish Toll with all relevant knowledge possessed by Mr Bartels which may reasonably be regarded as relevant to the making of Toll's decision as to whether the premium for the bid should be marketed by reference to the closing price of Patrick shares on Friday, 19 August 2005 or the closing price on Thursday, 18 August 2005: see Further Amended Statement of Claim [59].
373 It is then said that it was relevant for Toll, when making a decision as to how to market the bid, to know that the market activity in Patrick shares on 19 August 2005 "had been materially contributed to by Citigroup's own actions" in acquiring its stake in Patrick for the purpose of making profits for itself: see Further Amended Statement of Claim [60].
374 Citigroup is said to have preferred its own interests in maintaining its relationship with Toll, free from a perception by Toll that Citigroup's Chinese walls had failed, to its duty to inform Toll of its purchase of Patrick shares on 19 August 2005; "such information being relevant to Toll's decision as to how to market the bid in light of the market activity on Friday 19 August 2005": see Further Amended Statement of Claim [62].
375 There is force in Citigroup's submission that Australian law does not recognise a fiduciary duty to make full disclosure. The strong weight of judicial authority is that fiduciary duties are proscriptive rather than prescriptive; accordingly, a fiduciary does not have a positive duty to disclose information: see Breen v Williams at 113 per Gaudron and McHugh JJ, 137-138 per Gummow J; Pilmer at [74] per McHugh, Gummow, Hayne and Callinan JJ; Aequitas at [283] - [287] per Austin J; Dresna Pty Limited v Linknarf Management Services Pty Limited (In Liq) [2006] FCAFC 193 at [132] per Gyles J; P & V Industries Pty Limited v Porto (No 2) [2007] VSC 64 at [29] per Hollingworth J.
376 It may follow that Brennan J's observations in Daly are to be confined in the manner discussed by Austin J in Aequitas at [287]. ASIC asserted that Daly was referred to by the High Court in Pilmer without disapproval at [70]; but I do not consider that their Honours' remarks amounted to a clear acceptance of the reasoning of Brennan J. However I do not need to consider this question because in my view the claim fails at a factual level.
377 The principal reason for this is that ASIC has not established that it was relevant to Toll when making a decision as to how to market the bid that the market activity in Patrick shares on 19 August 2006 had been materially contributed to by Citigroup proprietary trading: see Further Amended Statement of Claim [60].
378 In fact, Mr Chatfield's evidence was that "nothing really turned on the Patrick price at 19 August", that there was no difference between trading in Patrick shares by Citigroup or anyone else in the market, and that even if Citigroup had been trading in Patrick shares, it had no obligation to tell Toll it had done so, and it would not have made any difference to Toll's decisions on the day. The pertinent parts of Mr Chatfield's evidence are set out at [227] - [232] above.
The Second Conflict
379 The second conflict, as with the first, also raises the question of whether Australian law recognises the positive duty to furnish information consistently with that stated in Daly.
380 The second conflict is said to arise from the following knowledge, as at about 7pm on 19 August 2005, on the part of Messrs Roberts, Sinclair, Monaci and Scott:
- that Mr Dempsey and the private side employees of Citigroup in the IBD who were assisting him, were advising Toll on the bid;
- that Citigroup had acquired a substantial shareholding in Patrick on its own account on 19 August 2005;
- that they were concerned about how the acquisition of Citigroup's stake would be perceived by Toll and by the market;
- that there was a perception that Toll and the market might infer that Citigroup's Chinese walls had failed.
381 Citigroup is then said to have had a duty (through Messrs Roberts, Sinclair, Monaci and Scott) to inform Toll that it had engaged in substantial trading in Patrick shares on 19 August 2005. Thus Citigroup is said to have had a conflict of interest and duty: see Further Amended Statement of Claim [66], [70].
382 The case, as pleaded, is confined by the particulars. The relevance of the information about Citigroup's trading in Patrick shares is said to be so that Toll could give consideration as to whether:
- it wished to terminate Citigroup's retainer;
- to seek independent legal advice as to its rights against Citigroup;
- to seek to renegotiate Citigroup's fees in light of its trading.
383 In my view this claim fails on the facts. This is demonstrated most clearly by ASIC's failure to prove that the information had any relevance to the persons to whom the information was said to be relevant, namely Mr Chatfield and Mr Little.
384 ASIC called Mr Chatfield to give evidence but it chose not to lead any evidence from him on the relevance of the information. I can therefore infer that Mr Chatfield's evidence would not have assisted: see Commercial Union Assurance Company of Australia Limited v Ferrcom Pty Limited (1991) 22 NSWLR 389 at 418-419 per Handley JA.
385 The other person identified in the particulars, Mr Little, was not called by ASIC to give evidence. The plain inference is that his evidence would not have assisted.
The Third Conflict
386 The third conflict is said to have arisen because it was likely that the fact that Citigroup had acquired "such a substantial body of shares" would come to the notice of private side employees providing corporate advisory services, namely Mr Dempsey and his team, or to those providing investment banking services, namely Mr Bartels and his team, or their superiors, Mr Roberts and Mr Sinclair, or the Compliance department and in-house lawyers: see Further Amended Statement of Claim [75].
387 ASIC contends that if that occurred, there was a real risk that the private side employees would have "a real concern" that the acquisition of the Patrick shares might create a perception in Toll that Citigroup's Chinese walls had failed: see Further Amended Statement of Claim [76].
388 ASIC goes on to allege that the possibility of this perception "created a real and substantial risk" that the duty of Citigroup's private side employees to provide disinterested advice to Toll might conflict with the desire of those employees to ensure that Toll did not think that Citigroup's Chinese walls had failed: see Further Amended Statement of Claim [77].
389 This conflict, although pleaded only as a potential one, is said by ASIC to have been real and substantial. ASIC submits that this is demonstrated by the fact that it became an actual conflict in the form of the first and second conflicts. However, I have found that those two conflicts are not made out.
390 Moreover, there is force in Citigroup's submission that the alleged conflict of interest is too remote. There must be "a conflict or a real or substantial possibility of a conflict": see Hospital Products at 103 per Mason J. In fact , Mason J went even further at 104, quoting the statement of Judge Learned Hand in Phelan v Middle States Oil Corporation (1955) 220 F (2d) 593 at 602-603 that the conflict rule does not apply:
"… not only when the putative interest, though in itself strong enough to be an inducement, was too remote, but also when, though not too remote, it was too feeble an inducement to be a determining motive".