Bell IXL Investments Ltd v Life Therapeutics Ltd

Outline of Bell IXL'S case 14 In considering the material before the Court, the trier of fact must be careful to distinguish between inference and conjecture. A conjecture may be plausible, but it is effectively still a mere guess. An inference is a deduction from the evidence, and if reasonable can be treated as part of the legal proof to be considered in making a factual determination in any particular proceeding. Whilst sometimes it may be difficult to distinguish between conjecture and inference, nevertheless the distinction is an important one. In this proceeding, some contentions made by Bell IXL were mere conjecture, and were either otherwise explicable or could not be a basis for a determination in favour of finding an improper purpose. 15 Bell IXL in part relied upon a number of objective facts, circumstances, and series of events to support the allegation of improper purpose, it not being privy to the actual discussions and considerations undertaken by the directors of LFE. I have been asked to draw inferences from documentation and from the events themselves. In addition to some specific matters referred to later, the main facts, circumstances and series of events can be summarised as set out below. · On 14 March 2008 the LFE directors' meeting was attended by Messrs Bellman and Milne. They resolved to accept the half-yearly financial report and the directors' report. They further resolved that there were reasonable grounds to believe that LFE could pay its debts as and when they fell due. No minute recorded any expression of concern as to LFE funding its ongoing operations or any need for raising additional capital. · The half-yearly financial report of LFE dated 14 March 2008 at note 2(d) relevantly stated: If the company is unable to complete the above sale transactions with Octapharma AG and is unable to obtain alternative funding sources at an amount and timing necessary to meet its future operational plans and business activity the company may be unable to continue as a going concern. … As stated above the Directors believe there is no reason to doubt that the agreements with Octapharma AG will not be executed and the appropriate shareholder approval will be obtained. · On 18 March 2008 the LFE directors' meeting was attended by Messrs Bellman and Milne. It was resolved to settle with Citigroup Global Markets Australia, $1,149,283.97 to be paid by LFE upon execution of the loan facility from Octapharma. No minute recorded any expression of concern as to LFE funding its ongoing operations or any need for raising additional capital. · On 28 March 2008 the LFE directors' meeting was attended by Messrs Bellman and Milne. It was resolved to approve and execute the Octapharma documents. Again no minute recorded any expression of concern as to LFE funding its ongoing operations or any need for raising additional capital. · Between 1 April 2008 and 20 May 2008 a total of 30,180,148 shares in LFE comprising 24.49% of the shares on issue were traded. · On 31 March 2008 the LFE directors' meeting was attended by Messrs Bellman and Milne. Again no minute recorded any expression of concern as to LFE funding its ongoing operations or any need for raising additional capital. · On 10 April 2008 LFE issued a draw-down notice for the sum of US$37.1m under the Octapharma loan facility. · On 11 April 2008 Octapharma gave a Notice of Exercise of Call Option, the effect of which was that subject to LFE shareholder approval, Octapharma would purchase 100% of the shares in LFE's US subsidiaries. · On 14 April 2008 LFE announced to the ASX that: As previously announced, the Company will use the Loan Facility to fund outstanding obligations of the Company …

· On 15 April 2008 LFE drew down US$37.1 million under the loan facility agreement. · On 18 April 2008 LFE stated by ASX announcement that: The balance of US$17,441,992.35 will be invested by the Company and will also be used to fund further outstanding obligations and operational requirements prior to the decision by shareholders whether or not to approve the exercise of the call option by Octapharma AG. · On 1 May 2008 the first and second series of acquisitions of LFE shares by K Pagnin on 23 and 28 April 2008 were registered. The acquisitions give K Pagnin a total of 1.96% of the issued capital in LFE. The K Pagnin acquisitions were included in earlier registrations of share dealings in the names of the relevant brokers' nominee company. · By email of 1 May 2008 Mr Tom Bloomfield of TMF Corporate Services (Aust) Pty Ltd provided a copy of the Notice of Change of Interest of Substantial Shareholder filed by UBS Nominees Pty Ltd on 29 April 2008 showing a reduction from 8.33% to 5.81% to Mr Bellman. · By email of 1 May 2008 Mr Bloomfield provided a list of LFE top 20 shareholders as at 30 April 2008 to Messrs Bellman and Milne. · By email of 1 May 2008 Mr Bloomfield provided a complete shareholder listing as at 30 April 2008 to Messrs Bellman and Milne. · On 2 May 2008 the third on-market acquisition of LFE shares by K Pagnin occurred. · On 7 May 2008 the third acquisition of LFE shares by K Pagnin was registered. The acquisition gave K Pagnin a total of 2.03% of the issued capital in LFE. · On 14 May 2008 Bell IXL made its first two acquisitions of LFE shares. · On 15 May 2008 Bell IXL made its third acquisition of LFE shares. · On 19 May 2008 the fourth and fifth acquisition of LFE shares by K Pagnin occurred. · On 19 May 2008 the first two acquisitions of LFE shares by Bell IXL were registered. The acquisitions gave Bell IXL 0.67% of the issued capital in LFE. The Bell IXL acquisitions were included in earlier registrations of share dealings in the names of the relevant brokers' nominee company. · On 20 May 2008 the LFE directors' meeting was attended by Ms Calhoun and Messrs Bellman and Milne. No minute recorded any expression of concern as to LFE funding its ongoing operations or any need for a raising of additional capital or any proposal to meet with Mr Booth for this purpose. Item 14 of the minutes recorded a draw-down of US$1 million under the Opex agreement, primarily to pay wages. · On 20 May 2008, after the board meeting, the Company Secretary of LFE was asked to obtain a list of significant share movements between 1 April 2008 and 30 April 2008. · The Computershare Significant Movements Monthly report for LFE for 1 to 30 April 2008 was received by each of the directors at 3.16pm on 20 May 2008. It informed the directors of substantial acquisitions of shares during that month by, or on behalf of the clients of, persons such as: · UBS Wealth Management Australia Nominees Pty Ltd = 2,823,441 shares · Furzefield Pty Ltd = 1,484,464 shares · Peplon Nominees Pty Ltd = 2,125,000 shares · Fortis Clearing Nominees Pty Ltd = 2,887,914 shares. · By resolution on 20 May 2008 at 10:35am the board of LFE resolved that a top 20 shareholder report, a shareholder movement report and all notices of changes in substantial shareholders would be tabled at future monthly board meetings. · On 20 May 2008 the sixth on-market acquisition of LFE shares was made by K Pagnin. The fourth, fifth and sixth on-market acquisitions of LFE shares were made by Bell IXL. · On 21 May 2008 the third acquisition of LFE shares by Bell IXL was registered. The acquisition gave Bell IXL a total of 2.97% of the issued capital in LFE. · By email of 21 May 2008 Mr Bloomfield provided a copy Notice of Ceasing to be a Substantial Shareholder relating to MM&E Capital to Messrs Bellman and Milne and Ms Calhoun. The Notice disclosed a sale of 3,580,000 shares on 20 May 2008. · On 22 May 2008 the fourth and fifth acquisitions of LFE shares by K Pagnin were registered. The acquisition gave K Pagnin a total of 2.16% of the issued capital in LFE. · On 23 May 2008 Bell IXL lodged a Notice of Initial Substantial Shareholder with the ASX. It showed that Bell IXL together with its associate K Pagnin acquired 8.75% of the issued capital over a month. Bell IXL also requested a general meeting and gave notice of its intention to replace the directors of LFE. · On 26 May 2008 the fourth, fifth and sixth acquisitions of LFE shares by Bell IXL were registered. The acquisition gave Bell IXL a total of 6.3% of the issued capital of LFE. · On 27 May 2008 the sixth acquisition of LFE shares by K Pagnin on 20 May 2008 was registered. The acquisition gave K Pagnin a total of 2.32% of the issued capital in LFE. · By email of 3 June 2008 Mr Booth of Asandas wrote to Mr Andrew Waller of Aegis ('the Booth email') relevantly as follows: Suggest you have a look @ LFE, listing in OZ, I know the fellow well there, same situation sort of as Acclaim, Big Pile of Cash and liquids, Capped at 9 million, with 18 in cash, sitting at Stgeorge cash mgmt, The directors have few shares and want to do a placement to hold on, 15%, They have a group who has bought 7% and obviously want the shell We could do this 15%, they said board seat no problem and change of activity no problem, they don't want to lose their shell, Call me at home. · On 3 June 2008 at 9.30pm Mr Waller sent Mr Booth an email stating 'Let's do it boss'. · On 4 June 2008 Messrs Bellman and Milne met with Mr Booth at Asandas' office. There was a teleconference with Mr Waller. The prospect of Aegis engaging in further equity funding of LFE was discussed. Mr Waller then recommended taking the 15% placement in LFE to Aegis. · On 5 June 2008 Messrs Bellman and Milne met with Mr Booth at Asandas' office. · On 9 June 2008 Aegis confirmed it would take a 15% placement in LFE. · On 10 June 2008 Messrs Bellman and Milne met with Mr Booth at Asandas' office. · On 10 June 2008 LFE requested an Opex draw-down of US$1 million with a draw-down date of 27 June 2008. · On 11 June 2008 Messrs Bellman and Milne met with Mr Booth at Asandas' office. · On 12 June 2008 LFE received a signed subscription agreement from Aegis. · On 12 June 2008 LFE issued a Notice of General Meeting pursuant to requisition by Bell IXL. · On 13 June 2008 Global Proxy Solicitation Pty Limited ('GPS') wrote a letter of engagement to LFE. · On 16 June 2008 LFE announced an issue of 18,483,578 fully paid shares to Aegis. By this ASX announcement LFE stated: The placement will raise a total of A$1,293,850.46 and will be used to fund working capital, including ongoing costs in respect of investigation of the background to the Company's current situation and its financial position and for implementation of the transaction selling the Company's US subsidiaries to Octapharma AG. This raising is intended to limit the need to access the cash that is currently held in the Company's bank accounts, primarily secured from the loan made by Octapharma AG. We note that if shareholder approval is not obtained for the Octapharma transaction it will be an event of default under that loan agreement. 16 Bell IXL submitted that the above objective facts, circumstances and series of events and the contemporaneous documents overwhelmingly either directly evidenced or supported the inference that the allotment in question was for the ulterior purpose by the directors of LFE to defeat Bell IXL or some other perceived predator to enable the directors to 'hold on' and 'keep their shell'. It was submitted that the Booth email set out precisely what it was that the directors of LFE were seeking to do in making the placement. The response of 'Let's do it boss' after an interval over three hours demonstrated that the placement was not, it was submitted, simply a bona fide commercial decision by Aegis to invest in an Australian company. 17 It was further submitted that there was virtually not a single contemporaneous document relied upon by the defendants which objectively supported the defendants' case as put to this Court. An attack was then made upon the evidence of each of the directors which it was said should be rejected against the background of any contemporaneous documents which materially collaborate their version of what occurred and in the face of contradictory documents. It was particularly noted that the directors did not properly consider or document their concerns or their alleged need to seek a capital raising. Reference was made also to the failure of the directors in relation to obligations to give discovery and produce relevant documents which was said to be a compelling reason for caution being exercised when approaching the uncorroborated testimony of the directors and other witnesses called by the defendants. It was contended that the only objective contemporaneous evidence for the purpose of the allotment to the Aegis parties was the Booth email. 18 The Booth email was sent after the meeting between Messrs Bellman and Milne and Mr Booth sometime in May 2008, but it was contested as to when the meeting occurred. The importance of determining the date of the Booth meeting is that it would assist in a determination of what the directors of LFE knew or could have known at the time of the meeting, and what the content of the Booth email means or could mean having regard to the events that had occurred prior to the meeting. I will return to the Booth meeting and Booth email later. 19 Bell IXL submitted that ultimately the following propositions would apply for the determination of this case: (a) if the Booth meeting occurred in the week commencing 25 May 2008 then Bell IXL must succeed in this proceeding; or (b) if the Booth meeting occurred as early as 20 May 2008 by Messrs Bellman and Milne informing Mr Booth of their concerns about a group acquiring shares in LFE, and in view of the fact that the directors had no or few shares and of the fact that LFE had an open register, the inference was to be drawn by that stage their fears about another company in the market, Kedrion SpA, led them to ask Mr Booth to find a placement for the reasons stated in the Booth email; and (c) whether the Booth meeting occurred on 20 May 2008 or some time after 25 May 2008, it was clear on the evidence that by that time the directors had formed their improper purpose of using an allotment of shares to enable them to deal with the threats that they perceived from recent share trading (or to use to Mr Milne's expression 'stabilise the register') and Bell IXL must therefore succeed in the proceeding. 20 Before going to these and other matters it is convenient to deal with matters of legal principle.

Applicable Law 21 First, as to the question of standard of proof, the defendants submitted that the allegations that the directors acted with improper purpose were serious and that the principles in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362 apply. It was submitted the Court must be satisfied that the allegations are made out having regard to the gravity of the matters alleged and that such satisfaction must not be produced by 'inexact proofs, indefinite testimony or indirect inferences'. 22 It is undoubtedly plain as stated in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 at 450 that the principles in Briginshaw do not create any different or intermediate standard of proof between the civil standard of on a balance of probabilities and the criminal standard of proof of beyond reasonable doubt. Clearly where there is an allegation of impropriety or criminal or fraudulent conduct then a court should not lightly make a finding of a person being guilty of such conduct. However, the essential task always remains of looking at the evidence in its totality and determining whether a party has proved on the balance of probabilities the factual matters required for that party to succeed. 23 Secondly, the applicable law concerning improper purpose does not seem to be in contention. 24 In Ngurli Ltd v McCann (1953) 90 CLR 425 at 439-440, the High Court said of the power to issue shares: The power must be used bona fide for the purpose for which it was conferred, that is to say, to raise sufficient capital for the benefit of the company as a whole. It must not be used under the cloak of such a purpose for the real purpose of benefiting some shareholders or their friends at the expense of other shareholders or so that some shareholders or their friends will wrest control of the company from the other shareholders. It was submitted by Bell IXL that the expression 'under the cloak of such a purpose' was an apt description of the allegedly false reasons for the placement given by LFE's directors. 25 It is clear that the power to issue shares must be exercised for a proper purpose. In Ashburton Oil NL v Alpha Minerals NL (1971) 123 CLR 614 at 640 Gibbs J said as follows: However powers conferred on directors by the articles of association of a company must be used bona fide for the benefit of the company as a whole and not to obtain some private advantage. Directors are not entitled to use their power of issuing and allotting shares merely for the purpose of defeating the wishes of an existing majority of shareholders or maintaining their own control of the company. 26 Directors of a company cannot ordinarily exercise a fiduciary power to allot shares for the purpose of defeating the voting power of existing shareholders by creating a new majority (Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285 at 289 per Mason, Deane and Dawson JJ). 27 In Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Company NL (1968) 121 CLR 483 at 492, Barwick CJ, McTiernan and Kitto JJ said the following about the power vested in directors to issue new shares: The suggested corollary is that an exercise of the power cannot be maintained as having been bona fide in the interests of the company unless the company had at the time of the exercise an immediate need of the capital to be paid up on the new shares. In many a case this may be true as a proposition of fact; but in our opinion it is not true as a general proposition of law. 28 Further on (at 493) their Honours said as follows: The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends. An inquiry as to whether additional capital was presently required is often most relevant to the ultimate question upon which the validity or invalidity of the issue depends; but that ultimate question must always be whether in truth the issue was made honestly in the interests of the company. 29 And further on (at 493-494) their Honours said as follows: But if, in making the allotment, the directors had an actual purpose of thereby creating an advantage for themselves otherwise than as members of the general body of shareholders, as for instance by buttressing their directorships against an apprehended attack from such as Harlowe, the allotment would plainly be voidable as an abuse of the fiduciary power, unless Burmah had no notice of the facts. 30 Further, I accept that even an honest and good faith exercise of power by directors may nevertheless be improper. 31 Thirdly, I make some observations on the factual enquiry necessary in identifying the purpose for which a power may be exercised. It may be possible to conclude on a collective reason or purposes of a board comprising multiple directors, even though each statement by a director of his or her reasons or purposes may differ (see eg Langton v Forsayth Mineral Exploration NL (1975) 1 ACLR 227). This is not to say that each director's position must not be analysed separately; but I must determine the substantial purpose of the directors (if necessary the majority of directors) which is causative of the decision being made to allot the shares (see Harlowe's 121 CLR 483 and Re Southern Resources Ltd (No 2) (1989) 15 ACLR 770). Obviously, I must have regard to the circumstances surrounding the decision in question, as well as the evidence of the directors themselves. 32 Nevertheless, the court should be aware not to substitute its own commercial judgment for that of the directors. 33 In Harlowe's 121 CLR 483,in determining whether an allotment of shares had been made for an improper purpose, Barwick CJ, McTiernan and Kitto JJ said at 493: Directors in whom are vested the right and the duty of deciding where the company's interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts. 34 Similarly, in Howard Smith Ltd v Ampol Petroleum Ltd [1974] 1 NSWLR 68 at 74 the Privy Council stated that: … it would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management's decision, on such a question, if bona fide arrived at. There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at. 35 Similarly in Idameneo (No 123) Pty Ltd v Symbion Health Ltd (2007) 64 ACSR 680, at [114], Lindgren J stated: There is a well-known line of authority to the general effect that it is the province of directors, not the courts, to identify where the interests of a company lie, and that the courts do not exercise a supervisory function over the business judgments of directors: see, for example, Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 at 493; Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 832. 36 This is not to say that the court cannot examine the objective commercial justification of a course of action to assess the credibility of assertions by the directors as to their motives and purposes: see Re Southern Resources Ltd (No 2) 15 ACLR 770. 37 Ultimately, each case must turn on its facts, after an assessment of all the evidence, which includes the documentary material, but read in light of other admissible evidence which may impact upon the meaning to be given to documentary evidence and the context of such documentary evidence and the proper inferences that may be drawn. The evidence of directors must be considered and evaluated, always in the context of the other evidence before the court. In some circumstances a court may reject the evidence of directors, not because it is intentionally false, but because in the circumstances the overwhelming context is to the contrary, which leads the court to conclude that the evidence of the directors is more reconstruction than recollection.

Evidence of the directors and Mr Waller of Aegis 38 Each director and Mr Waller gave evidence and was subjected to cross-examination and an attack upon their credit. I have come to the view that I should accept the evidence of each of the directors and Mr Waller of Aegis. They all answered the questions asked of them directly and without prevarication and, in my view, honestly. For the reasons given in the course of this judgment, I do not accept that the context of the allotment of shares is overwhelmingly against the evidence given as to the purpose of the allotment. There was a commercial basis for the allotment and, in my view, it was appropriate as a matter of business judgment for the directors in view of the history of LFE and potential future activities. 39 One attack upon the credibility of the directors was based upon the lack of any proper board papers and lack of documents evidencing any real search for the placement of the shares. 40 Bell IXL's contention was that the lack of any proper board papers and the lack of documents evidencing any real search for a placement was the best evidence of the improprieties of the directors. However, as I have said, I am satisfied that it was not the practice of these directors to record in writing, whether by diary note or otherwise, the content of ongoing discussions amongst themselves or with third parties. The directors did not run LFE by recording or minuting each step of every transaction. Of course, it is not the function of the board minutes to confirm decisions, such as the decision taken on 19 May 2008 to meet with Mr Booth on 20 May 2008 to discuss the placement. The fact that the directors so acted is consistent with the circumstances of the directors assuming their defacto 'executive' roles at a critical time for LFE, where it had no staff in Australia, and where the directors were compelled to perform all the executive and non-executive functions in order to assist the management of the company. 41 It would be one thing if every other negotiation or transaction and the like conducted by the board had been meticulously recorded. In such circumstances, the absence of documents in this one transaction might be the basis of an appropriate inference. I find that the directors conducted negotiations on the telephone and habitually conferred with each other either in person or on the telephone without making notes of their negotiations or discussions between themselves. 42 Further, it is not uncommon practice for even complicated deals to be negotiated orally and then left to the lawyers to sort out the detail. This transaction had relatively simple parameters - 15% of the shares at 7 cents per share to be placed with a principal or nominee. The documentation following the agreement was fully documented. 43 Bell IXL also relied heavily on certain fees that were approved by and paid to the directors. This was done by Bell IXL in an attempt to discredit the directors, and also to demonstrate the real purpose of the allotment. The evidence from the directors is that each of them had undertaken substantial work for LFE, indeed more substantial and time-consuming that they had each appreciated before they were appointed. They were each taking on the role of executive managers to a lesser or greater degree. The work each director did was on an as needs basis and this work had significantly increased over several months. It was not a normal consultancy situation where one would expect a written consultancy agreement. There may have been good reason not to bill the company for these fees at least until mid-April, as the company did not have the funds to pay them. I do not consider there have been any double payments, nor am I prepared to accept that the amounts paid were excessive in the circumstances. Therefore, I do not regard this aspect of the attack upon the credit of the directors as being successful. 44 Bell IXL also sought to attack the credibility of the directors in view of the admittedly late production of an email (which was exhibit P9) and some other documentation. I do not regard the documents produced late as critical to the share placement, nor that their late production warrants an inference that the late production was deliberate, or in any event, should lead to the conclusion that the directors should be disbelieved on the central issue of purpose. 45 There is one other important matter to observe about the directors' evidence. Each gave evidence about their reasons for the allotment. I have considered their evidence separately as to his or her purpose for the allotment of shares. I have accepted this evidence. In giving their evidence the directors did not rely upon formulaic answers or give word by word consistent responses, but gave evidence about their own individual positions in a full and frank way. It seemed to me that there was no indication that the directors came together to give evidence which was deliberately framed for the purposes of defeating Bell IXL's application. I will return later to the commercial rationale for the allotment and the evidence of the directors in this regard. 46 It was also submitted that Mr Bellman gave false evidence about what and when he was told information concerning Aegis. He was attacked on one of his affidavits filed in the proceeding. I did not read Mr Bellman's affidavit as detailing specifically and exclusively all the information he was given on 4 June 2008 when he spoke to Mr Booth. In his affidavit, Mr Bellman set out information, some of which he said he was told on 4 June, and other material which he was given later, obviously by 27 June 2008. I accept that Mr Bellman did not receive all the information about Aegis as early as 4 June 2008, but I do not consider that his affidavit and evidence before me was misleading in this regard. 47 There were specific attacks made by Bell IXL upon the credit of Ms Calhoun. I do not consider that any of the specific matters raised against her indicate that she was giving false evidence: the fact of a failure to recall certain matters or that she made an initially incorrect answer which was corrected does not lead me to disbelieve her on the critical evidence as to her purpose. I accept that her evidence of the events at the board meeting on 20 May 2008 was likely to have occurred, and whilst some details may have differed between her evidence and that of Messrs Bellman and Milne I do not regard these differences as material. I accept that she did have discussions with the other directors outside the formal meetings, and do not find it surprising (as she indicated) that a meeting may pass a resolution with little or no discussion when the discussion had already taken place outside the formal meeting. 48 There was also specific attacks made upon the credit of Mr Milne. It was said that Mr Milne gave false evidence that the placement took place prior to 23 May 2008. He did originally say the placement took place prior to 23 May 2008 but the context of the cross-examination shows a confusion on his part. When the questioning persisted and was repeated, Mr Milne readily accepted that there was no firm or binding arrangement prior to 23 May 2008 in relation to the allotment. I do not consider that this aspect of his giving evidence, either separately or read together with his other evidence, shows that Mr Milne is not to be believed on the question of purpose. 49 It was contended by Bell IXL that I should also disbelieve the explanation given by Mr Milne for his failing to give evidence in the prior hearing. Mr Milne said that he relied upon legal advice and as a consequence of that advice did not give evidence in the prior hearing. The circumstances have changed that formed the basis of that legal advice, and there was now no impediment to him giving evidence before me. For myself, I accept this explanation and consider the explanation to be probable and consistent with an approach that would be adopted upon taking legal advice by a witness in a similar position to Mr Milne. 50 Mr Milne was also attacked on the basis of answers he gave as to the 18 April 2008 ASX release in relation to his understanding of the term 'operational requirements'. It appears that this release was drafted by lawyers retained by LFE, primarily upon the instructions of Mr Bellman. I do not regard in particular Mr Milne's explanation of what the term 'operational requirements' (or as referred to in cross-examination, 'operational expenses') meant in the release as necessarily conclusive; nor do I consider that his view of the term impacted upon his credit. He seemed to me to give an explanation based upon his own understanding, which may or may not have been the correct interpretation to be given to the release. 51 In relation to Mr Waller, he also gave evidence in a way which indicated to me that his responses to questions were honest. He answered the questions without procrastination, and candidly accepted that the method he adopted may not have been completely prudent. However, he demonstrated to me that he acted as an investor who was prepared to take some risk, although perhaps not always acting prudently. The nature of his relationship with Mr Booth and the nature of this transaction lent support to the version of events Mr Waller attested to before me. I therefore accept the evidence of Mr Waller. He has had considerable experience in business and investments. I accept that he considered an investment in LFE to have great potential if the Octapharma transaction were completed, and to be an opportunity for further investment. I do not consider that the decision for him to invest would have been too difficult to make, nor would have required too much consideration, having regard to the amount of the investment and the relatively simple nature of the investment. 52 I will return to the Booth email later, but I observe here that Mr Waller did not treat the full content of the Booth email with much seriousness, particularly as to the purpose of the directors. He did not make an immediate decision to undertake the placement, but did decide to further negotiate and consider the proposal. In this context it is not surprising that Mr Waller did not question the directors as to their purpose; he did not treat the Booth email as a basis for so questioning the directors, and no other indication was made to him to show any obvious improper purpose. 53 Finally, I accept that Mr Waller's later view about voting at the meeting convened to remove the directors was motivated by Mr Waller's dissatisfaction with the attitude of Bell IXL in seeking the injunctive relief in this proceeding, and it was not part of the implementation of some agreement with the directors entered into in May or June 2008.

Capital Raising Discussions Prior to May 2008 54 I now turn to the historical context in which the allotment of shares was made by LFE. 55 It is apparent that at least up until April 2008 LFE was in a precarious financial position. Further, there was some discussion in relation to seeking capital raising by share allotment prior to May 2008. Bell IXL says that these discussions related to finding large sums of money in the order of $5 to $20 million and not smaller amounts of capital under $5 million and that this is a critical difference. Bell IXL further says that none of the documentation is consistent with the smaller raising of less than $1.2 million raised by the private placement in issue. 56 Undoubtedly Bell IXL is correct in the focus being upon a larger amount. However, I do not think that one can dismiss the earlier discussions as to capital raising as not being a matter that is important for me to consider in the context of all the evidence that is before the Court as the purposes of the directors in later making a private placement. This historical perspective gives the Court an insight into the directors' approach to or philosophy about capital raising, and can be viewed to determine whether the allotment in issue was consistent with such a view or philosophy, or a completely new concept for the directors. In my view, whilst the amounts involved were substantially different, the earlier discussions on capital raising did have at least two important similarities with the allotment in issue: the acceptance of the desire for some capital, and the finding of a person to assist later with an injection of capital. Further, the directors did have an interest in trying to avoid the depletion of cash reserves where possible. 57 Both Messrs Bellman and Milne upon appointment to the board considered the financial restructuring of the company. I accept that soon after his appointment Mr Bellman discussed a variety of options for seeking additional capital with Mr Milne. In about March 2008, Messrs Bellman and Milne told Mr Riddell that LFE wanted to raise additional capital or equity and did want to 'burn' the lump sum of money paid by Octapharma. A two-step process was considered: a placement and then a rights issue with a prospectus. 58 The philosophy was not very different to what was ultimately agreed with Mr Waller on 4 June 2008. As Mr Waller deposed: At the time of the telephone call [on 4 June], Aegis was not interested in participating in a placement which was merely a 1-off investment of 15%, but was only interested in an investment that would result in a course of dealings with the company that involved Aegis and the company sourcing potential investments together. In my conversations with the directors described above, at least 1 of them told me that LFE wanted Aegis to invest further funds in LFE in the future to participate in such identified investments. I told the directors that that suited Aegis, or words to that effect. 59 The maximum that could be raised by placement was 15%. From the beginning of their tenure the directors wanted to avoid depleting, where possible, its cash reserves. The half-yearly accounts of 14 March 2008 showed that LFE was seeking to raise further capital relevantly stated as follows: … The [LFE Group's] ability to continue as a going concern is a dependant on the Group being able to raise sufficient capital or funding to meet its working capital needs and service its existing debt until it obtains shareholder approval to sell its existing operations and generates sufficient funds to renegotiate or repay its liabilities. … If the company is unable to complete the above sale transactions with Octapharma AG and is unable to obtain alternative funding sources at an amount and timing necessary to meet its operational plans and business activity the company may be unable to continue as a going concern. 60 I do not view the Octapharma loan and 'alternative funding' as mutually exclusive objectives. Even when LFE issued a draw-down notice for the sum of US$37.1 million under the Octapharma loan facility, Mr Bellman met with Mr Currie of Zeus Capital, a man introduced to LFE by Camino Capital and with considerable knowledge and experience in capital fundraising. 61 The need for LFE to conduct a capital raising was one of the topics Messrs Bellman and Milne first raised with Ms Calhoun when she was considering joining the LFE Board in late April 2008. On 27 and 28 April 2008 Ms Calhoun met with Messrs Bellman and Milne in Sydney. Together they discussed the parlous state of LFE and the need to raise capital. Messrs Bellman and Milne told Ms Calhoun that they were already in discussions with other parties about raising capital. 62 The ASX releases on 14 April 2008 and 18 April 2008 may demonstrate a willingness or commitment by LFE to spend the Octapharma monies but do not mean that LFE was not able to consider a placement. The ASX releases do not amount to a statement that the company was only to spend the Octapharma monies and would do so without exploring the alternative funding adverted to in the half-yearly report on 14 March 2008. 63 I do not consider that it can be said that the private placement which occurred was actually contemplated in February, March and April 2008, before Bell IXL came onto the scene. The placement was of a much smaller amount and Mr Riddell was no longer retained as a financial adviser to give continuing advice. However, in my view, the events prior to May 2008 indicate an approach of the directors consistent with the approach they say they adopted in carrying out the private placement, and as such support their version of events.

The Booth Meeting 64 As I have already said the Booth meeting set in train the events leading up to and including the allotment of shares. The following events occurred prior to the Booth meeting. In early May 2008 Mr Milne told Mr Booth that LFE was looking for investors who might provide capital to LFE. Mr Booth told Mr Milne that he might have some investors interested in taking a placement of shares in LFE. Mr Milne told Mr Booth that he would organise a meeting and that Mr Bellman would also attend. 65 I find that the Booth meeting occurred at or about 5.30 pm on 20 May 2008. I do so for the following reasons: · Mr Bellman's diary records a meeting with 'Tom Booth Asandas re placement' at 5:30pm on 20 May. Compared to Mr Booth's inexact recollections and lack of any proper diary notes, Mr Bellman seemed to keep a more meticulous diary of his own commitments. · There is the evidence of Ms Calhoun (which I accept) that on 19 May 2008 she discussed the placement with Messrs Bellman and Milne and that they informed her that a meeting with Mr Booth had been arranged for and was to take place on 20 May 2008. · There is the evidence of Messrs Bellman and Milne (which I accept) that the meeting occurred on that day. · The content of Mr Booth's 3 June email is evidence that the meeting occurred before 23 May 2008 because: (i) he refers to a group with 7%. He does not name Bell IXL. Only by 23 May 2008, had Bell IXL lodged a substantial shareholder notice; and (ii) he says he was told a group had '7%'. If, as Bell IXL contends, board control was at stake, it is inherently improbable that Mr Booth would have been told 7% if the directors knew that a group had 8.75%. · Whilst Mr Booth in his evidence did estimate that the meeting occurred in the last week of May, I do not regard his evidence as determinative on this issue of the date of the Booth meeting when weighed against the other evidence. · Whilst Mr Booth did say in cross-examination that he recollected that Bell IXL was mentioned to him in the course of the meting (which would mean the meeting would have to have been on or after 23 May 2008) this is nowhere mentioned in his contemporaneous notes or email and I think he was mistaken in giving his evidence as to the time he was told of the existence of Bell IXL. At the time he gave this particular evidence Mr Booth was in some pain, and this could have affected the giving of his evidence on this aspect. · Whilst one would have expected the follow up email of 3 June 2008 to have followed closely upon any meeting, I do not regard the gap between 20 May 2008 and the sending of the email as determinative of the date of the meeting being other than 20 May 2008.

The Booth Email 66 The email from Mr Booth to Mr Waller was an important part of Bell IXL's case. In my view, the email merely contained Mr Booth's opinion that the placement was being done to assist the directors to 'hold on' and because they did not want to 'lose their shell'. He was not told these matters by any director. The email cannot otherwise be attributed to LFE. It was not seen by the directors of LFE, nor in any way adopted by them. Mr Booth and Asandas were not agents of LFE. The recipient of the Booth email, Mr Waller, gave evidence that he did not place much store upon all that was contained in the email. 67 Further, Mr Booth said this in cross-examination: From my recollection it was conveyed that they didn't really want to touch the existing capital in the company, which was $17 million, because that was part of an existing - part of an unsettled transaction. That was - as I said, they said they'd been paid 37 previously, there was 20 odd in liabilities, there's 17 left there in cash and if the transaction is not approved then that - how that money is going to be returned, I have no idea. 68 The fact that he was told that the directors wanted to make the placement and did not want to 'touch existing capital' supports the view I have taken that I should accept Mr Booth's evidence that he merely 'inferred' that the board wanted to 'hold on'. 69 It is also of significance to note that the Booth email does not state that it would be a condition of taking a placement that Aegis would vote in favour of the current board. If the alleged improper purpose had existed, it would have been prudent for the LFE board to obtain some comfort that they were placing shares with an ally, rather than an unknown party. Subsequently, LFE was content for Aegis to place the shares to nominees without the need for LFE's consent. The subscription agreement gave Aegis the opportunity to place the shares to a nominee, without requiring LFE's prior approval. LFE therefore had no control over whether the placed shares would vote or how they would vote at the general meeting. If LFE's purpose had been to 'hold on', this critical detail would have been attended to and the recipient's voting intentions confirmed, and this would have needed to be addressed in the Booth email. 70 Whether or not Mr Booth was guessing as to the purpose of the directors, deliberately trying to entice Mr Waller into action, or making an inference he was confident was true, the Booth email, either alone or in conjunction with the other evidence in this proceeding which I have accepted as true, does not result in Bell IXL demonstrating the improper purpose relied upon by it. Whilst Mr Booth could not explain what really led him to form the view he did as expressed in the email, at best the email reflects only his impression of the position. After hearing all the evidence (including from the directors), we have proceeded well beyond the realm of impression, speculation or conjecture.

LFE'S explanation as to the purpose for the allotment 71 Bell IXL refers to a number of versions of evidence of the directors as to the purpose of the placement, and draws upon the differences within each of the director's accounts, and differences between the accounts of each director. Undoubtedly there is no exactness in the language and expression of purpose, but this is to be expected. As I have alluded to previously, I would have been more concerned if each director had adopted a formulaic response when asked about his or her purpose. 72 In my view, the important theme which is found through the evidence is that the directors were looking for future additional capital funding, not just an immediate need. It was important that the entity who made the placement would contribute further to LFE. 73 Therefore, whilst it may be that any current shortfalls between revenue and expenses could be covered without the placement, this would not indicate that the purpose of the placement was not looking to the future. 74 The fact that the monies raised by the placement were insufficient to fund the expenses, and so at best would only 'limit' the need for LFE to access cash it had as an investment, would not mean the purpose ascribed by the directors could be categorised as irrational if part of the rationale is the future needs of LFE. Similarly, the fact that the Octapharma transaction not being approved would mean that any cash raised would be pointless (as without the approval LFE would probably not survive) does not mean that the directors could not undertake the strategy of future planning in the way they envisaged. In any event, assuming that the Octapharma transaction was in all likelihood to be approved, which was the assumption of the directors, it was rational to provide for a future strategy (which included accessing a person to provide future funding) in the event that the Octopharma transaction was extended or there were issues with its immediate acceptance. These were all matters which seem to me to be matters of judgement and opinion, and necessarily relate to a director's view of the future. The recent historical precarious financial position of the company was a matter the directors could, and did, have regard to in determining the appropriate way to proceed. 75 Bell IXL put some emphasis upon Mr Milne's evidence of needing to 'stabilise the register' of LFE as supporting the allegation of improper purpose. A fair reading of this reference to stabilising the register in my view merely indicates that he was referring to the need to find a person who may be able to provide further funding in the future. 76 Mr Milne gave the following evidence which I accept: What was the purpose behind the placement of 15 per cent of the company's capital to Aegis, as you understood it? There were multiple objectives. The first was to introduce a shareholder to stabilise the register who had the ability to fund the second tranche of funding post Octapharma transaction. The second was to provide interim working capital to the holding company. And the third was to provide more funds to the company in the event that the Octopharma transaction for some reason was extended or there was an event of default, and would give the company some funds in order to negotiate during that interregnum. 77 Therefore, it seems to me that once it is accepted that the strategy of the directors is that of a two-tiered approach, the contentions made by Bell IXL have insufficient impact to enable one to conclude that the placement was in the circumstances irrational. 78 As I have said, I accept that there were differences in the evidence of each director as to the purpose of the placement, but both Messrs Bellman and Milne referred to the two-tiered approach. The more recently appointed director, Ms Calhoun, focused upon the immediate need until such time as the shareholders were in a position to decide on the Octapharma transaction, and discarded the issue of dilution. However, she discussed the matter with the other directors who, as I have decided, did have the two-tiered approach in mind. In any event, the clear purpose of the majority of the directors was with respect to the future needs of LFE and not just its present need.

The existence of predators 79 Bell IXL sought to rely upon the directors' concern of a predator other than Bell IXL prior to 20 May 2008 to support the case for an improper purpose. There was no evidence to find that the directors knew of the existence of Bell IXL prior to 23 May 2008, so in this proceeding Bell IXL could not rely upon the directors' specific knowledge of Bell IXL if the Booth meeting occurred on 20 May 2008 (as I have found). 80 I do not consider that the request for and the provision of share register information in May 2008 has any significance, or leads to the conclusion the board was concerned with predators. In my view, the board wanted to develop a standard format for the making of board minutes and the running of meetings. The April 2008 figures were requested in an attempt to develop a standard format in circumstances where there was a new Company Secretary. 81 I observe that the board did not receive the May trading results until after the 23 May 2008 Notice of Substantial Shareholding by Bell IXL. If the directors shared the concerns that Bell IXL alleged, they probably would have sought all relevant share register information available on 20 May, not information that was already 20 days old. 82 Mr Milne said that he had suspected Kedrion was the third or fourth largest shareholder on the register in February and March 2008. The evidence before me does not suggest that the nominee entities through which Kedrion may have been acquiring shares increased their holding in April 2008. There was no evidence to suggest that Kedrion wanted control of LFE and it was never suggested that Kedrion had a 7% shareholding. No tracing notices were issued in April or May 2008. If there was a real fear of a predator like Kedrion, one would have expected that the directors would make the placement earlier, check the register between 1 and 20 May 2008, and seek more urgent attention from Mr Booth to contact a potential investor. 83 As far as Kedrion was concerned, Mr Bellman said: The only time I ever thought - or the time I most definitely thought, maybe Kedrion were taking a position, was when HSBC appeared on the register. Now, sitting here and talking to you now, I can't recall the date when that became apparent. If that was late in May then that's the trigger for me. 84 HSBC only held 1.22% of the shares in LFE on 19 May 2008. There was no evidence that the directors were observing the daily register at or around that time. Mr Bellman gave evidence that directors only started checking the daily register after 23 May 2008. There is no evidence that I can find that allows me to conclude that on or prior to 23 May 2008 any of the directors (including Mr Bellman) knew HSBC appeared on the register. 85 As to the general trading movements which it is said by Bell IXL were of concern to the board, they do not represent a marked departure from what the board could have ordinarily expected. In fact, the top 20 shareholders remained largely stagnant when one compares January, February and March 2008 with the April 2008 figures. On the evidence before the Court, it does not seem to me that the board would have had any reason to be concerned over the trading movements relied upon by Bell IXL. 86 As to the board's knowledge and concern of predators, Bell IXL relied upon the Booth email and the evidence of Mr Booth. I accept that Mr Booth was an honest witness but that his recollection was not completely sound. I do think that he was in some way confused and was not aware of the actual sequence of events. As I have previously observed, whilst giving his evidence he did seem distracted by some pain which may have affected his concentration. Mr Booth must have been wrong about his reference to the 7% because there was never at any time before or after May 2008 any person or group that bought 7%. There was a reference to 8% in his contemporaneous note but that was not explained. Mr Booth was quite clear that he was never told by any director that they wanted a placement to 'hold on'. Nor was he ever told by any director that they did not want to 'lose their shell'. Mr Booth did say that the existence of Bell IXL was something mentioned at the meeting, but I think again he must have been mistaken as to this because if the meeting was as I have found on 20 May 2008, the existence of Bell IXL would not have been communicated to him nor would it have been something which he could have known about from talking to the directors.

Other matters relied upon by Bell IXL 87 A number of matters were relied upon by Bell IXL which were said to reflect upon the credibility of the evidence of the directors and Mr Waller and, more importantly, indicated and supported the submission of Bell IXL that the allotment was for an improper purpose. 88 The first fact is the retainer by LFE of GPS. GPS is an organisation that provides 'strategic shareholder communications advice and programs'. It helps a company ensure that its shareholders 'are aware and clearly informed about the merits of any proposals [put by the directors]'. It encourages shareholders to 'vote in favour of each resolution' put by the board. GPS was appointed on 13 June 2008, the day after the subscription agreement was executed. It was paid $60,000 on account of its services. I accept that GPS was appointed to assist the company in obtaining shareholder approval for the Octapharma sale. GPS seemed to be also intending to solicit shareholders to vote against the resolution to remove the board. However, I accept that this was not the purpose of the LFE directors retaining GPS. The purpose of the retainer was set out in the retainer itself, and I accept the evidence of Mr Milne that, in effect, GPS in intending to solicit shareholders to vote for the existing directors to remain was not something directed or condoned by the board. 89 Another fact relied upon by Bell IXL was that the transaction was effected quickly and without proper consideration, and reference was made to Mr Waller's acceptance within just three hours or so. The reference to 'Let's do it boss' upon receipt of the Booth email was explained by Mr Waller not as an acceptance of the deal, but an instruction to proceed. Mr Waller said (which I accept) that this reference to 'Let's do it boss' was slang for 'I will look at it'. So it is not correct to conclude that Mr Waller took only three hours to decide to take the placement. In any event, the decision was not necessarily a difficult one to make for a 'risk taker' or experienced investor like Mr Waller. For 15% of capital at $0.07 per share in a cash box of $18 million, the return on investment would be somewhere between $0.13 and $0.14 per share. The placement would not be expected to be made at a discount as the volume weighted average price for April and May averaged between $0.07 and $0.08. The placement would not have been made at a higher price, despite the projected net tangible asset backing, because Aegis could otherwise have simply bought on market. Further, Mr Waller's evidence was that the transaction was not done 'urgently or particularly quicker' than other placements in which he had been involved. Further, the transaction was not of a great magnitude compared with other transactions undertaken by Mr Waller. 90 Finally, Bell IXL relied upon the email from Mr Bellman to Mr Baguley of 9 July 2008 to support the contention that the defendants had entered into an arrangement for the directors to remain in control. 91 Mr Waller denied the existence of any arrangement with the LFE directors as to how the shares would be voted, as did the directors. I accept their evidence. 92 In my view, this wording of the email does not detract from the view that I have otherwise taken as to the events that occurred in May 2008. I am not persuaded that an improper purpose activated the share placement. By 9 July 2008 it may be that Mr Bellman was trying to assist Aegis, but I do not infer that this relates back to being a quid pro quo for the placement that was in fact made earlier. It may have been that Mr Bellman was wanting to secure a favourable vote from Bell Potter. That may have been why Mr Bellman did not want 'to risk leaving this [return of proxy] to the last minute'. Or it may have been merely that Mr Bellman, thinking the risk was in any event with Bell Potter, wanted to ensure the arrangements in relation to the proxies were in place so everything was in order. Whatever the reason, I am not persuaded that the wording of the email supports an inference of an improper purpose of the kind alleged by Bell IXL. 93 It was also submitted that I should draw an inference that this email of 9 July 2008 was part of the overall plan to consolidate the directors' control of the company, reinforced by the failure to call Mr Baguley; reliance was placed to this end upon the principle in Jones v Dunkel (1959) 101 CLR 298. Of course, the failure to call evidence may, not must, lead to an inference that the uncalled evidence would not have assisted a party's case. The application of the principles in Jones v Dunkel must be applied in the context of the evidence that is presented to a court. Assuming that the defendants were in a position to call Mr Baguley, I do not regard the email as of sufficient significance to consider Mr Baguley to be a witness expected to be called. Further, on the evidence presented by Bell IXL, I would not otherwise require an explanation of the email of 9 July 2008 in circumstances where the main issues of fact relate to the events in May 2008. In this hearing, all of the directors and Mr Waller gave evidence and were subject to cross-examination on all the issues raised for determination between the parties, including the existence of some impermissible arrangement between the defendants. 94 I am not saying the email of 9 July may not be relevant to showing (on Bell IXL's case) an overall strategy of improper purpose. However, in the end, the conclusion I have reached is that irrespective of the wording adopted in the 9 July email, the purpose in making the allotment was not that described by Bell IXL. I have reached this conclusion on the basis of all the evidence before me including the evidence of all the actual persons involved in the decision-making in May and June 2008.

Conclusion 95 In view of the above, I propose to dismiss the proceeding and make other orders upon hearing further from the parties. I certify that the preceding ninety-five (95) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.

Counsel for the Plaintiff: Mr Mark A Robins

Solicitor for the Plaintiff: Pointon Partners

Counsel for the First Defendant: Mr Noel C Hutley SC, Mr David J O'Callaghan SC & Mr Robert G Craig

Solicitor for the First Defendant: Johnson Winter & Slattery

Counsel for the Second and Third Defendants: Mr David T Forbes

Solicitor for the Second and Third Defendants: Chang, Pistilli & Simmons