King v AG Australia Holdings Limited

AND: AG AUSTRALIA HOLDINGS LIMITED (formerly GIO AUSTRALIA HOLDINGS LIMITED)

TRELSS RICHARD ADAM AND ORS [PRICEWATERHOUSECOOPERS]

Introduction 1 This judgment concerns an application by Macquarie Bank Limited ("Macquarie Bank") in relation to a cross-claim by AG Australia Holdings Limited ("GIO"). Macquarie Bank disputes that it should be involved in these proceedings as a cross respondent. It is unnecessary to detail the circumstances in which the cross-claim has, prior to this point, been before the Court and in which amendments have been made to the cross-claim. It is sufficient to note that the version of the cross-claim to which this judgment relates (a version filed in Court on 31 July 2002) is, I understand, advanced by GIO as a pleading reflecting the case against Macquarie Bank put as comprehensively as it can. That is, if Macquarie Bank establishes that no cause of action is raised by the present cross-claim, leave to replead will not be given.

The background 2 A convenient starting point in considering the issues raised about the cross-claim, is to describe the claim by the applicant in the primary proceedings ("the applicant") against GIO and the other respondents. The applicant brings the proceeding as a representative of a large number of GIO shareholders who did not sell their shares during a hostile takeover bid for GIO. It is sufficient to start with the summary of the applicant's pleadings (referable to an earlier version of the statement of claim) and the background against which the applicant commenced the proceeding which is found in King v GIO Australia Holdings Limited (2000) 100 FCR 209. As to the background, I said: "In August 1998 AMP announced a $4.75 cash offer for GIO shares with an alternative offer of two AMP shares for nine GIO shares. The directors of GIO recommended that the offer be rejected. The offer was embodied in a Part A statement dispatched on 4 December 1998 though a revision of the offer was announced on 9 December 1998 which was an offer of $5.35 per GIO share or one AMP share for four GIO shares. A media release of 9 December 1998 quoted the Chief Executive Officer of GIO, Mr Steffey (the fifth respondent) as continuing to urge shareholders to reject AMP's "inadequate bid". That day the board of GIO had resolved unanimously to reject the revised offer and had authorised the chairman of the Board, Mr David Mortimer (the third respondent) and Mr Steffey to sign the Part B statement made under s 647 and Part B of s 750 of the then Corporations Law. The Part B statement issued that day (though there is material suggesting it was not released until later in December 1998) and took the form, in substance, of two booklets. The second booklet was a report of Grant Samuel valuing GIO shares in the range $5.66 to $6.71. A summary prepared by the applicant at my direction contains the following description of the case he propounds (though edited in minor respects): 'The clear and dominant message of the Part B statement was: "The AMP bid is inadequate; it is below the value of GIO shares; it should be rejected". This dominant message is apparent on a cursory reading of the Part B statement. Its dominance is ensured by the following: a. the chairman's letter to shareholders which accompanied the Part B and which expressly advises shareholders to reject the bid; b. the advice "Reject AMP's inadequate bid" is printed in large, bold type on the cover of the Part B; c. the reasons why the bid should be rejected are set out in large, bold type on page 1 of the Part B; d. the first 24 pages of the Part B set out prominently and in relatively straight-forward language the various reasons for rejecting the bid. The presentation of the first 24 pages of the Part B is such as to give prominence to the perceived inadequacy of the bid. The balance of the first booklet of the Part B is statutory information, and a 9-page appendix which contains a financial forecast of GIO for 1999. The second booklet of the Part B is Grant Samuel's report, which is 175 pages of detailed accounting analysis, plus appendices. In the 1999 forecast (booklet one) and in the Grant Samuel report (booklet two) there is reference to various risk factors associated with the reinsurance business conducted by GIO. Those risk factors are given no prominence, and the material is presented in such a way that a reader without special expertise in the insurance industry would not know that it was of special importance. In fact, the business of GIO was critically dependent on GIO Re [the reinsurance business of GIO]. GIO Re's business was critically dependent on various risk factors. However, the circumstances were such that, if various of the risks materialized, the effect on GIO Re would be catastrophic; and the consequences for the GIO share price would be catastrophic, because of the relative significance of GIO Re in the business of GIO. Accordingly, given the financial structure and size of GIO Re, the risk factors meant that the GIO share price was capable of being profoundly, and rapidly, affected by foreseeable contingencies of the reinsurance business. In consequence, the GIO shares were an inherently risky investment, the value of which could fall dramatically and swiftly. Soon after the close of the bid, GIO Re posted increasing losses and revised provisions for losses, with the result that the share price of GIO fell to about $2.50 per share. A scheme of arrangement has since been approved which involved AMP acquiring all shares in GIO not yet owned by it for a consideration amounting to $2.75 per share. 99% of GIO shareholders were small shareholders, with fewer than 5000 shares, as appears from page 1 of the Part B. They relied on the directors for balanced advice about the bid. Balanced advice required three things: a. a clear and prominent warning that the value of the GIO shares could fall dramatically; b. a valuation of GIO shares which, by its range of possible values, clearly reflected the true risk associated with GIO shares; c. a clear and prominent warning that shareholders should, when deciding whether or not to accept the offer, take into account the real possibility that the value of GIO shares could fall dramatically if one or more of the risks materialized. Grant Samuel, the directors and the company all represented the GIO shares as having a value which, on any reasonable view of the foreseeable future, was greater than the offer price. They valued the shares at between $5.66 and $6.71. Because of the inherent instability of the value of GIO shares, that was false. The lowest value in the range of values attributed to the shares should have been considerably lower than $5.66 to take account of the risk factors. The Applicant and the group members relied on the Respondents to give them accurate and balanced advice. They accepted and relied on the very clear advice given, and thereby lost the opportunity to sell their shares for $5.35 each. The scheme of arrangement means that their loss per share has crystallized.'" 3 In the earlier judgment I went on to summarise the case pleaded by the applicant: "The pleadings contain, in summary, the following contentions about the conduct of the respondents: (i) That GIO and the directors and Grant Samuel engaged in misleading and deceptive conduct by impliedly representing that the Part B statement was accurate, balanced and reasonable and contained all material matters to be taken into account when deciding whether to accept or reject the varied takeover offer. (ii) That GIO and the directors and Grant Samuel engaged in misleadingand deceptive conduct as to a future matter by impliedly representing that the valuation of GIO shares contained in the Part B statement was accurate and reliable and that the profit forecast for GIO for the financial year ending 30 June 1999 contained in the Part B statement was accurate and reliable. (iii) Each of the respondents engaged in misleading and deceptive conduct by failing to inform the members of the group adequately or at all about the risk factors in circumstances where it was appropriate to inform them as each owed a duty to the members to exercise reasonable skill, care and diligence. (iv) GIO, each director and Grant Samuel each breached a duty of care owed to the applicant and each group member by failing to give adequate advice, failing to ensure that the Part B statement was not misleading or deceptive, failing to ensure that the Part B statement was balanced by appropriate discussion of the risk factors and failing to inform the applicant and the group members of the existence and materiality of the risk factors. (v) GIO, Grant Samuel and each director engaged in conduct in contravention of s 52 (though depending on the meaning of financial services in s 12BA of the Australian Securities and Investments Commission Act 1989 (Cth) ("ASIC Act"), contravention of s 12DA of that Act and s 42 of the Fair Trading Act 1987 (NSW) ("FT Act")) by publishing the Part B statement, making the representations earlier referred to and failing to inform adequately or at all about the risk factors and, as to Grant Samuel, publishing its report, and, as to each of the directors, causing the Part B statement to be sent to the applicant and group members. (vi) Grant Samuel was by operation of s 75B of the TP Act, s 79 of the Corporations Lawand s 61 of the FT Act involved in the relevant contraventions by GIO by aiding, abetting, counselling or procuring those contraventions, inducing those contraventions or by being directly or indirectly knowingly concerned in or party to them. (vii) Each of the directors was likewise involved in an accessorial role in the GIO contraventions. (viii) Each of the directors, Grant Samuel and GIO breached s 995 (2) of the Corporations Law." 4 Against this background it is necessary to refer in a little more detail to some aspects of the applicant's case which Macquarie Bank relies on in impugning GIO's cross-claim.

The applicant's case in more detail 5 The way the applicant has pleaded his case (most recently in the seventh further amended statement of claim) in so far as the Part B statement is concerned, is as follows. It is firstly alleged (paragraph 17) that certain representations were made by, relevantly, GIO about the strength of GIO and its business (which might be characterised in a summary way as representations which were positive in character) and representations about AMP and its offer (which were negative in character). In particulars provided by the applicant to GIO concerning an earlier version of the statement of claim (in which the representations were described in a slightly different way), the applicant alleged that the majority of the representations were made in the first 18 pages of the Part B statement (though some of them were made elsewhere as well) and in a covering letter. The significance of this, for present purposes, is that GIO alleges that Macquarie Bank was retained to draft and did draft these first 18 pages and the covering letter. 6 It is then alleged in the statement of claim (paragraph 25) that, relevantly, GIO did not adequately inform the applicant (and group members) that risk factors might occur which might adversely affect the financial forecasts and the valuation of shares in GIO in the Part B statement; if the risk factors did occur, that the value of GIO shares was likely to decline (perhaps significantly); and those two matters should be taken into account by the applicant and group members when considering whether to accept the takeover offer. 7 Paragraph 26 is, for present purposes, important. It is alleged that by making the representations in, inter alia, paragraph 17 and by not giving any or adequate information about the matters referred to in paragraph 25, GIO impliedly represented to the applicant and group members four things. First, that there were no material matters (other than those disclosed in the Part B statement) that had to be taken into account when making decisions about the takeover offer; secondly, GIO and Grant Samuel had undertaken all necessary and reasonable investigations and had satisfied themselves that the Part B statement was accurate, balanced, reasonable and not misleading or deceptive; thirdly, there were no matters reasonably supportive of arguments in favour of acceptance of the takeover offer; and fourthly, the risk factors did not exist or were insignificant and they could safely be ignored. 8 The risk factors were set out in a schedule to the statement of claim which reads: "SCHEDULE OF RISK FACTORS 1 Risk regarding Inadequate Outstanding Claims Reserve GIO Re sought to set reserves to properly reflect claims cost already incurred from past events ('Outstanding Claims Reserve' including Incurred but not Reported Reserve ['IBNR']) At the time the Part B Statement was given to shareholders there was a real risk that GIO Re's Outstanding Claims Reserve was inadequate. GIO Re's profitability in the financial year ended 30 June 1999 ('FY1999') would be substantially reduced by the increasing of the Reserve to address the inadequacy. 2 Risk regarding Inadequate Unearned Premium Reserve/Unexpired Risk Reserve GIO Re sought to set reserves to properly reflect the pro-rated portion of the premium applicable to the unearned period of the policies relating to claims from future insured loss events which may occur ('Unearned Premium Reserve'). To the extent that the Unearned Premium Reserve was insufficient to meet these estimated future claims, an Unexpired Risk Reserve was required to cover the shortfall. At the time the Part B Statement was given to shareholders there was a real risk that GIO Re's Unearned Premium Reserve and Unexpired Risk Reserve was inadequate. GIO Re's profitability in FY1999 would be substantially reduced by the increasing of the Reserves to address the inadequacy. 3 Risk regarding Inadequate Outwards Retrocession GIO Re's outwards retrocession program was a series of transactions in which other reinsurers agreed, in exchange for payment of a premium by GIO Re, to indemnify GIO Re against all or part of the loss that GIO Re may sustain under its policies of insurance and reinsurance. GIO Re sought to obtain adequate outwards retrocession cover for insurance and reinsurance that it underwrote so as to avoid incurring excessive net (after retrocession) losses on such insurance and reinsurance, and to properly reflect the limits on aggregate exposure to loss set by the Board of Directors of GIO. At the time the Part B Statement was given to shareholders there was a real risk that GIO Re's outwards retrocession cover was inadequate. GIO Re's profitability in FY1999 would be substantially reduced by claims being brought in FY1999 which exceeded the retrocessional protection put in place for reinsurance underwritten in the underwriting year ended 31 December 1998 ('UY1998') and in earlier years. 4 Risk regarding Poor Management and Control of Underwriters and Underwriting At the time the Part B Statement was given to shareholders there was a real risk that GIO Re had underwritten a significant volume of reinsurance in at least UY1996, UY1997 and UY1998 on terms, conditions, and premiums that were likely to be unprofitable because GIO Re had poorly managed and controlled its underwriters and underwriting. GIO Re's profitability in FY1999 would be substantially reduced as a result of meeting claims on such reinsurance. 5 Risk regarding Reduced Profit from Reinsurance Incepting on 1 January 1999 At the time the Part B Statement was given to shareholders there was a real risk that the reinsurance incepting on 1 January 1999 (which had either been underwritten by the date of the Part B Statement or which would be underwritten after that date), would not be profitable for GIO Re in FY1999, or at least would be significantly less profitable for GIO Re than forecast in the '1999 Forecast' in the Part B Statement ('the FY1999 Forecast') (Booklet 1 p25). 6 Risk regarding Substantial Loss if Major Catastrophe Occurred At the time the Part B Statement was given to shareholders there was a real risk that if a major catastrophe occurred, which GIO Re defined as a loss event with an insured market loss in excess of US$10B, then GIO Re would suffer such major losses that it would require substantial re-capitalisation or be placed into run off in FY1999, or in FY2000 as a result of loss events occurring in and prior to FY1999, because its aggregate exposure to loss was excessive. 7 Risk regarding Substantial Losses and Run Off At the time the Part B Statement was given to shareholders there was a real risk that GIO Re may go into run-off in FY1999, or in FY2000 as a result of loss events occurring in and prior to FY1999. Any decision to go into run off would further undermine the value of the shares because future profitability would be eliminated. 8 Risk regarding Assumptions of Reduction in Premium Income At the time the Part B Statement was given to shareholders, there was a real risk that: (a) the assumption that gross written premiums would decrease by 15% in FY1999 (Booklet 1 p27) would prove to be significantly incorrect; and (b) the assumption that gross written premiums would decrease by 20% in FY1999 (Booklet 2 p93) would prove to be significantly incorrect. GIO Re's profitability in FY1999 and its ability to achieve the profit forecast in the FY1999 Forecast and in the Grant Samuel Earnings Performance forecast (Booklet 2 p93) in the Part B Statement would be substantially reduced by the occurrence of this risk. 9 Risk regarding Assumption of No Further Significant Catastrophe Portfolio Losses At the time the Part B Statement was given to shareholders, there was a real risk that the assumption that GIO Re's Catastrophe portfolio would incur no further significant losses in FY1999 (Booklet 1 p27) would prove to be significantly incorrect. GIO Re's profitability in FY1999 and its ability to achieve the profit forecast in the FY1999 Forecast in the Part B Statement would be substantially reduced by the occurrence of this risk. 10 Risk regarding Assumption of Improvement in Loss Ratio At the time the Part B Statement was given to shareholders, there was a real risk that: (a) the assumption that GIO Re's loss ratio would improve by 66 percentage points after adjustment for changes in accounting policy (Booklet 1 p27) would prove to be significantly incorrect; and/or (b) the implicit assumption that GIO Re's loss ratio would improve by 109.5 percentage points without adjustment for the changes in accounting policy (Booklet 2 p93) would prove to be significantly incorrect. GIO Re's profitability in FY1999 and its ability to achieve the profit forecast in the FY1999 Forecast and in the Gant Samuel Earnings Performance forecast in the Part B Statement would be substantially reduced by the occurrence of this risk. 11 Risk regarding Assumption of No Claims Exceeding GIO's Retrocession Program At the time the Part B Statement was given to shareholders, there was a real risk that the assumption that there would be no claims from major catastrophes, natural disasters or other events which exceeded GIO's reinsurance protections (Booklet 1 p26) would prove to be significantly incorrect. GIO Re's profitability in FY1999 and its ability to achieve the profit forecast in the FY1999 Forecast in the Part B Statement would be substantially reduced by the occurrence of this risk. 12 Risk regarding Assumptions of Offset of Hurricane Georges' Losses by Favourable or Better Than Expected Performance in Other Classes At the time the Part B Statement was given to shareholders, there was a real risk that: (a) the assumption that adverse experience caused by Hurricane Georges had been offset to a large extent by favourable experience in other classes in the year to date (Booklet 1 p27) would prove to be significantly incorrect; and (b) the assumption that a deterioration in GIO Re's Catastrophe portfolio as a result of the impact of Hurricane Georges would be offset by better than expected performance in other classes of reinsurance (Booklet 2 p93) would prove to be significantly incorrect. GIO Re's profitability in FY1999 and its ability to achieve the profit forecast in the FY1999 Forecast and in the Grant Samuel Earnings Performance forecast in the Part B Statement would be substantially reduced by the occurrence of this risk." 9 It can be seen that the risk factors might generally be described in one of two ways, though some simplification is involved. Either a possible existing state of affairs is described and a claim made that there was a risk that, in the future, certain adverse consequences might flow from it or, alternatively, a state of affairs is described that might arise in the future with certain adverse consequences. 10 This is, relevantly for present purposes, the substance of the case of the applicant against GIO.

The cross-claim 11 The GIO's cross-claim against Macquarie Bank is based on breach of both contract and a duty of care. In the cross-claim GIO repeats the allegations against it and then pleads the relationship between it and Macquarie Bank. GIO alleges in paragraph 7 that Macquarie Bank was retained by it as its principal financial adviser in relation to the takeover offer and, specifically, this included the preparation for, and drafting of, the Part B statement for distribution to shareholders. It is alleged the retainer is evidenced partly in writing and partly by conduct. Paragraph 8 then alleges what work Macquarie Bank was requested to perform and did perform. That paragraph provides (particulars omitted): "8. In purported performance of the retainer in paragraph 7 above, Macquarie was requested to perform, and did perform the following - (a) advising GIO as to the conduct of GIO's defence in relation to the Takeover Bid; (b) reporting to GIO as to what actions should be taken by GIO in preparation for the Takeover Bid and in preparation for the defence of the Takeover Bid; (c) reporting to GIO as to what steps and inquiries should be taken by GIO immediately following the announcement of the Takeover Bid; (d) preparing the agenda for meetings of the GIO sub-committee formed to respond to the Takeover Bid; (e) advising GIO as to the contents of GIO's Part B Statement for distribution to shareholders of GIO ('GIO's Part B Statement'); (f) advising GIO as to the form of GIO's Part B Statement; (g) advising GIO as to whether GIO's financial performance in the months July, August, September and October 1999 should be released early so as to be included in GIO's Part B Statement; (h) drafting the document which was distributed to shareholders of GIO as pages 1 to 18 of Booklet One of GIO's Part B Statement, together with a covering letter by the Chairman and the Chief Executive Officer of GIO and the cover and inside cover of Booklet One of GIO's Part B Statement; (i) advising GIO as to whether any reports from any third-party ought to be commissioned by GIO, or ought to be commissioned by Macquarie, in relation to the Takeover Bid; (j) retaining Grant Samuel & Associates Pty Ltd ('Grant Samuel') in relation to the Takeover Bid; (k) receiving drafts of the Grant Samuel Report (the final version of which report was dated 8 December 1998) prepared by Grant Samuel in relation to GIO's Part B Statement, and for Macquarie to comment on the factual accuracy of the information contained in the drafts of the Grant Samuel Report; (l) seeking to ensure that the Grant Samuel Report prepared by Grant Samuel in relation to GIO's Part B Statement, complied with Australian Securities and Investment Commission Policy Statement 75; (m) consulting with Chase Securities Australia Limited ('Chase') in relation to the Takeover Bid; (n) consulting with PriceWaterhouseCoopers and PriceWaterhouseCoopers Securities Limited in relation to the Takeover Bid; (o) approaching other companies involved in the businesses of insurance, reinsurance or insurance and reinsurance, for the purpose of GIO selling GIO's reinsurance business or GIO's business generally, to those other companies, or for the purpose of GIO establishing, together with those other companies, a joint venture or new entity from which to operate the business conducted by GIO or the reinsurance business conducted by GIO; (p) analysing and preparing merger and takeover options for the GIO, which analyses were known by the names 'Project Jungle', 'Project Smartie' and 'Project Ingrid'; (q) drafting press releases, and advising as to the contents of press releases, for issue by GIO in relation to the Takeover Bid; (r) drafting a letter to shareholders of GIO, in December 1998, seeking to 'pre-empt' the issue by AMPIIH of its Part A Statement to the shareholders of GIO; (s) drafting a letter to shareholders of GIO announcing a special dividend of 50 cents per GIO share in December 1998; (t) undertaking responsibility to GIO for the verification of all verifiable statements in GIO's Part B Statement, verifiable statements identified by the solicitors engaged by GIO to advise in relation to due diligence in relation to the Takeover Bid and GIO's response thereto and any new verifiable material which had been included in GIO's Part B Statement since those statements were identified by those solicitors; (u) participating in the Due Diligence Committee formed by the GIO in relation to the Takeover Bid; (v) commenting on the draft 'Checklist for Completion of the Part B Statement' that had been prepared by the solicitors engaged by GIO to advise in relation to due diligence in relation to the Takeover Bid and GIO's response thereto; (w) attending meetings of the GIO board of directors and presenting reports in relation to the Takeover Bid; (x) preparing the report entitled 'Discussion Materials Regarding Reinsurance' dated 25 September 1998; (y) meeting with and interviewing GIO management including Greg Schneider and Ken Wright." 12 It is then pleaded (paragraph 9) that it was an implied term of the retainer that Macquarie Bank would exercise reasonable care, skill and diligence (put in two ways) including when advising GIO concerning the form and content of the Part B statement. Content is given to the obligation to exercise reasonable care, skill and diligence by paragraph 10. In that paragraph it is alleged that Macquarie Bank would, amongst other things, obtain information and carry out investigations to be satisfied that the Part B statement was accurate, reliable and not misleading or deceptive, and specific reference is made to disclosing risk factors and giving GIO advice about their identification and prominence in the statement. Paragraph 10 reads: "In the circumstances in paragraphs 6 to 9 above, the exercise of the care, skill and diligence expected of a company of Macquarie's standing holding itself out as having special skills and expertise in handling takeover bids and target-company responses thereto and the exercise of reasonable care, skill and diligence, required Macquarie: (a) to obtain such information and explanations as were reasonably necessary to enable it to be satisfied that GIO's Part B Statement contained advice and information that was accurate, reliable and not misleading or deceptive; (b) to carry out such investigations as were necessary to enable it to be reasonably satisfied that GIO's Part B Statement contained advice and information that was accurate, reliable and not misleading or deceptive; (c) to advise and report to GIO as to whether in its reasonable opinion GIO's Part B Statement contained advice and information that was accurate, reliable and not misleading or deceptive; (d) to identify the material matters which should be included in GIO's Part B Statement in order to ensure as far as was reasonably possible that GIO's Part B Statement contained advice and information that was accurate, reliable and not misleading or deceptive; (e) to report to GIO the existence of any material matters which were required to be included in GIO's Part B Statement in order to ensure as far as was reasonably possible that GIO's Part B Statement contained advice and information that was accurate, reliable and not misleading or deceptive; and (f) when drafting GIO's Part B Statement, to make sufficient reference in that Statement to any material matters to which reference was necessary to ensure as far as was reasonably possible that it was accurate, reliable and not misleading and deceptive. (g) to seek to ensure that the contents of GIO's Part B Statement gave a full and fair disclosure of information, including risk factors, material to the making of a decision by a GIO shareholder in relation to the Takeover Bid; (h) further or in the alternative, advising GIO concerning the identification of risk factors in GIO's Part B Statement such that information material to the making of the decision by a GIO shareholder in relation to the Takeover Bid was properly and sufficiently identified; (i) further or in the alternative, advising GIO concerning the contents of GIO's Part B Statement including whether GIO's Part B Statement was fairly balanced, whether risk factors were sufficiently identified and with sufficient prominence." It is then alleged Macquarie Bank was obliged to but did not do these things (paragraphs 11, 12 and 13). Paragraph 13, in particular, alleges Macquarie Bank did not report to or advise GIO about the existence of the risk factors, nor that the Part B statement should be amended to include specific reference to them. 13 The cross-claim then addresses, in paragraph 14, Macquarie Bank's knowledge of the risk factors. It provides: 14. If (which is not admitted) the risk factors particularised in schedule 1 to the Seventh Further Amended Statement of Claim were in existence by 9 December 1998 and were material matters in relation to the Part B Statement, then in planning for, preparing for and conducting the work in paragraph 8 above, Macquarie ought to have become aware of the existence of the said risk factors. Particulars The following facts and matters are relied upon in support of the allegation that Macquarie ought to have become aware of those factors: (i) Macquarie's special skills and expertise in handling takeover bids and target-company responses thereto; (ii) the nature and extent of Macquarie's retainer; (iii) Macquarie's independence from GIO and Macquarie's ability to apply, in relation to GIO's Part B Statement, the preparation for GIO's Part B Statement and GIO's profit and performance forecasts, a perspective not enjoyed by GIO; (iv) the extensive discussions and correspondence that Macquarie had with third-parties and advisers such as Chase, Grant Samuel, Atanaskovic Hartnell, PriceWaterhouseCoopers and PriceWaterhouseCoopers Securities Limited; (v) the opportunities that Macquarie had to advise GIO whether GIO should retain additional sources of third-party and expert advice; (vi) the opportunities that 'Project Jungle', Project Smartie' and 'Project Ingrid' afforded Macquarie to analyse the performance of GIO's reinsurance operations and matters affecting or likely to affect the performance of those reinsurance operations; (vii) the opportunities that Macquarie's approaches to other insurance and reinsurance companies, for the purpose of selling or merging parts of GIO's operations with other insurance and reinsurance companies afforded Macquarie to analyse the performance of GIO's reinsurance operations and matters affecting or likely to affect the performance of GIO's reinsurance operations; (viii) the opportunities that Macquarie had and availed itself of to interview GIO management. 14 GIO then pleads the breach of the retainer and duty of care. This is addressed in paragraph 15 which provides: 15. In the circumstances described in paragraphs 13 and 14 above, in planning and preparing for and conducting the work described in paragraph 8 above, and in breach of the terms of the retainer in paragraph 9 above and in breach of the duty in paragraph 11 above, Macquarie: (a) failed to obtain any or any sufficient relevant and reliable information in relation to GIO's reinsurance operations and reinsurance market conditions to draw conclusions therefrom as to the existence and/or nature of and/or extent of the risk factors particularised in Schedule 1 to the Seventh Further Amended Statement of Claim filed in these proceedings (and admitted for the purposes of this cross-claim only); (b) failed to make any proper investigation into or consideration of or evaluation of the nature and/or extent of the risk factors particularised in Schedule 1 to the Seventh Further Amended Statement of Claim filed in these proceedings; (c) failed to report to GIO the existence of the risk factors as material matters which should be included in or referred to in the Part B Statement; (d) drafted a Part B statement which (if the applicant's allegations which are denied are nevertheless made out) was misleading and deceptive and not accurate or reliable because it failed to refer to the risk factors adequately or at all. Particulars a) Having identified potential issues in relation to GIO's reinsurance business ('GIO Re') which are described in the 'Discussion Materials Regarding Reinsurance' dated 25 September 1998 prepared by Macquarie and Chase, Macquarie failed to make: (i) any enquiries so as to determine and form a view as to whether continued pricing pressure by reason of a soft global reinsurance market constituted a risk factor in relation to GIO Re; (ii) any enquiries including by way of discussions with senior management as to whether 'drastic changes in the culture of GIO Re occurring over a short period of time' and a (previously) 'unsettled management situation' at GIO Re constituted a risk factor for GIO Re; (iii) any enquries of GIO Re's management (including senior actuaries) so as to determine and form a view as to whether 'the implementation of greater technical disciplines', the working of the peer review system and the effectiveness of the claims and cash management systems constituted a risk factor to GIO Re; (iv) any enquiries so as to determine and form a view as to whether it was too early to properly assess the impact on GIO Re's future profits of 'recent strategic efforts' undertaken by GIO Re and to determine whether any inability to properly assess this matter constituted a risk factor to GIO Re; (v) any enquiries including by way of discussions with Chase so as to determine whether negative views held by participants in the reinsurance market of firstly, the Sydney reinsurance market and, secondly, GIO Re's past underwriting practices constituted a risk factor to GIO Re; and (vi) any enquiries so as to determine and form a view as to whether the adequacy of GIO Re's reserves constituted a risk factor to GIO Re. b) Having been provided with copies of PricewaterhouseCoopers draft forecast review letter dated 23 October 1998 and draft 'financial forecast' and 'risk factors' sections of the Part B Statement circulated to the takeover response team (which included Macquarie) on or about 23 October 1998, the 12 November 1998 PricewaterhouseCoopers draft review of GIO Re's financial information addressed to the Due Diligence Committee, the paper dated 22 November 1998 prepared by Geoff Vines for the Due Diligence Committee, and having been present at the time of reports to the Due Diligence Committee in relation to the development of claims lodged with GIO Re in respect of Hurricane Georges, Macquarie failed to make any enquiries of PricewaterhouseCoopers or GIO Re's management (including senior actuaries) so as to determine and form a view as to whether claims in respect of Hurricane Georges constituted a risk factor to GIO Re. c) Macquarie failed to consider whether the contents of GIO's Part B Statement were fairly balanced and whether risk factors were sufficiently identified and given sufficient prominence. d) Macquarie advised GIO to issue GIO's Part B Statement, together with a covering letter from the Chairman and Chief Executive Officer of GIO and the cover and inside cover of Booklet One of the Part B Statement, in the form in which that material was issued to the shareholders of GIO. e) Macquarie did not advise GIO that, by issuing GIO's Part B Statement containing information in that form, the Part B Statement would not be fairly balanced and would not sufficiently identify risk factors and with sufficient prominence so as to render GIO's Part B Statement as likely to be misleading or deceptive. f) Macquarie, as part of its role in advising in relation to valuation issues and the appointment of independent experts and, in considering the suitability of, and in recommending the retainer of Grant Samuel, should have advised GIO that Grant Samuel should engage an actuary with experience in the reinsurance industry to assist with the preparation of the independent expert report, and in particular to: (i) value GIO Re; (ii) prepare or review the future cash flow assumptions used in the valuation of GIO Re by Grant Samuel; and (iii) prepare or review the discount rate used by Grant Samuel in the valuation of GIO Re." 15 The cross-claim goes on to plead causation and damage as well as a count based on s 52 of the Trade Practices Act 1974 (Cth) and analogous provisions.

The contentions of Macquarie Bank in outline 16 There were three limbs to the arguments of counsel for Macquarie Bank. The first was that paragraph 15 pleads a breach of a legal obligation but the cross-claim does not plead the obligation. That is, paragraph 15 alleges that Macquarie Bank failed to do certain work but there is no prior allegation that Macquarie Bank was obliged to do that work. As would have already been apparent from the terms of that paragraph, the work allegedly not done concerned investigating, reporting on and considering the risk factors and the contents of the Part B statement. Counsel for Macquarie Bank points out that this allegation is made in circumstances where (which is said to be apparent from the Part B statement and correspondence) experts, Grant Samuel & Associates Pty Ltd ("Grant Samuel") and PricewaterhouseCoopers Securities Ltd ("PricewaterhouseCoopers") were retained to investigate and advise whether the takeover offer was fair and reasonable (Grant Samuel) and review a GIO profit forecast for the year ending 30 June 1999 prepared by GIO (PricewaterhouseCoopers). Moreover the work required to be done and done as pleaded in paragraph 8, does not include the work referred to in paragraph 15. 17 The second limb of Macquarie Bank's argument concerns paragraph 14. Two points are made. The first is that it is a conclusion and the second is that the factual foundation for the conclusion is not articulated. The third limb is that in paragraph 15, it is alleged Macquarie Bank drafted a Part B statement which was misleading and deceptive and not accurate or reliable because it failed to refer to the risk factors adequately or at all (subparagraph (d)). The complaint is made that GIO does not identify which risk factors were not referred to at all and which were not referred to adequately.

Consideration of the issues 18 A convenient recent summary of the applicable principles is found in the judgment of French J in Johnson Tiles Pty Ltd v Esso Australia Ltd [2000] FCA 1572 at [49]-[50]: Where a pleading "discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading" or "has a tendency to cause prejudice embarrassment or delay in the proceeding" or "is otherwise an abuse of the process of the court" the Court may order that the whole or any part of the pleading be struck out (Order 11 rule 16). A pleading will disclose no reasonable cause of action if it is "so clearly untenable that it cannot succeed" - General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129. The determination whether a statement of claim discloses a reasonable cause of action will be made on the assumption that the facts alleged are true - Empire Shipping Co Inc v Owners of the Ship "Shin Kobe Maru" (1991) 32 FCR 78. The Court exercises a degree of restraint in responding to the contention that the pleading is so fatally flawed that it should not see the light of day at a trial of the action. It is not enough that the pleaded case is weak or has a low prospect of success - Coe v Commonwealth of Australia (1979) 53 ALJR 403. The Court should not shrink from striking out an untenable pleading because it thinks that argument is necessary to demonstrate its deficiencies - General Steel at 130 (Barwick CJ). On the other hand an application to strike-out which involves prolonged and serious argument should only be entertained if the judge not only harbours doubt about the soundness of the pleading but also is satisfied that striking out will avoid the need for a trial or substantially reduce the burden of its preparation - Williams & Humbert Ltd v W & H Trademarks (Jersey) Ltd [1986] 1 AC 368 at 436 (Lord Templeman), applied in Sun Earth Homes Pty Ltd v Australian Broadcasting Corporation (1990) 45 FCR 265. 19 I turn to consider the first limb of Macquarie Bank's argument. Counsel for Macquarie Bank tendered the Part B statement and referred to it in detail with a view to illustrating the nature of the work undertaken by Grant Samuel and PricewaterhouseCoopers and how they, as experts (particularly Grant Samuel), had cause to consider and report upon some matters which in turn involved consideration of at least a number of the risk factors. Also tendered was correspondence between Macquarie Bank and Grant Samuel and also PricewaterhouseCoopers concerning the terms of their retainer in giving advice about the takeover, which also addressed the nature of their expertise. However whether the pleaded case in the cross-claim is deficient in the way contended must ultimately substantially depend on the pleading itself. 20 It is alleged in the cross-claim that Macquarie Bank was retained by GIO to prepare and draft the Part B statement (paragraph 7). It is also alleged that Macquarie Bank advised on the contents of the Part B statement (paragraph 8(e)), its form (paragraph 8(f)) and drafted pages 1 to 18 and a covering letter (paragraph 8(h)). It is also alleged that Macquarie Bank retained Grant Samuel (paragraph 8(j)) and received drafts of the Grant Samuel's report and commented on the factual accuracy of the information in the drafts (paragraph 8(k)). It is in this context that the allegation is pleaded in paragraph 10 that an incident of the implied term of the retainer to exercise care, skill and diligence was to obtain information and explanations, carry out investigations and advise on the Part B statement and ensure that it was accurate and not misleading or deceptive. Paragraph 15, as I read it, describes the conduct Macquarie Bank should have but did not engage in, to comply with the implied duty given substance by paragraph 10. 21 Having regard to particulars provided to GIO by the applicant which have also been provided to Macquarie Bank by GIO, the applicant's case (the correctness of which is assumed (but denied) and repeated in the cross-claim) is based in substantial part on deficiencies in the covering letter and the first 18 pages of the Part B statement (and, of a lesser order (at least in terms of frequency), deficiencies in other parts of the statement). In my opinion, if the applicant makes good its case then the case pleaded by GIO, and particularly the allegation in paragraph 15, may also be made good. 22 Plainly enough, GIO's cross-claim depends on the applicant making good his assertion about deficiencies in pages 1 to 18 of the Part B statement and the covering letter. However if and when that occurs it would raise, on the cross-claim as pleaded, a question about Macquarie Bank's liability as the author of those pages for the contents both in terms of what they say and what they do not say. Perhaps Macquarie Bank will be able to say in any trial of the cross-claim, having regard to findings of fact made about its retainer and circumstances in which it drafted pages 1 to 18 of the Part B statement and covering letter, it had no duty to investigate or report. It may ultimately be that Macquarie Bank's liability will depend on whether it was entitled to rely on the expertise of PricewaterhouseCoopers and/or Grant Samuel when undertaking the drafting and associated tasks which GIO alleges it was required to do and did. However even if it is demonstrated that it did rely on their expertise, and was entitled to so, that does not, in my opinion, preclude GIO from maintaining the cross-claim in the terms it does. Whether it is able to make good the various allegations is, of course, another matter. However, I do not accept that GIO's cross-claim is deficient in the first way Macquarie Bank contends. 23 This leads to a consideration of the second limb of Macquarie Bank's argument. It is argued that paragraph 14 is deficient in two respects which are really related. The first is that what is pleaded is a conclusion and, secondly, the factual foundation of the conclusion is not set out. I do not consider the first criticism to be one of substance. Viewed as a whole (as to which see Beach Petroleum NL v Johnson (1991) 105 ALR 456 at 466), paragraph 14 pleads that Macquarie Bank ought to have become aware of the risk factors. It is common to find an allegation that a person "knew or ought to have known" of identified matters which involves an allegation of a state of mind and circumstances where, a person in the position of the person about whom the allegation is made would, acting reasonably or appropriately (or some similar formulation depending on the context in which the allegation is made), have reached that state of mind. If the allegation were simply that a person "ought to known" it would involve a contention of the type discussed in the latter part of the preceding sentence. While, in one sense, it is a conclusion, it can also be viewed as an allegation concerning the status or position of the person against whom the allegation is made in the context of surrounding circumstances which might indicate what the state of mind of the person was or should have been: see Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 122 ALR 531 at 540. 24 The question of whether material facts are pleaded supporting the allegation that Macquarie Bank ought to have known of the risk factors or, as the pleader puts it, ought to have become aware of them, is less straightforward. A not dissimilar issue appears to have arisen in relation to the litigation in the Supreme Court of Victoria following the collapse of the Pyramid Building Society ("the Society"): see Pyramid Building Society (in liquidation) and others v Russell and others (Supreme Court of Victoria, 8 May 1996, unreported). In that matter, Price Waterhouse had prepared several reports as a result of its investigations into the Society. It was sued in a third party action by a defendant in the proceedings, Coopers and Lybrand, who was the administrator of the Society (for convenience, I am simplifying the description of the parties). Coopers and Lybrand alleged that Price Waterhouse knew or ought to have known about certain matters concerning the financial position of the Society. Price Waterhouse challenged the formulation of the claim against it. Byrne J concluded that Coopers and Lybrand had to set out the matters which came to light in the investigation which gave rise to the knowledge of Price Waterhouse (and had failed to do so). His Honour also criticised particulars concerning the allegation about Price Waterhouse's state of knowledge as being particulars of matters which might lead to the conclusion that Price Waterhouse had the knowledge in question, not of the basis of the knowledge. It is not entirely clear to me the precise distinction his Honour was drawing (unfortunately the relevant particulars and pleading are not fully set out in the judgment) but it probably concerned the level of generality of the particulars and the degree or directness of their connection with the knowledge alleged. 25 It appears that over a year later there continued to be a dispute between Coopers and Lybrand and Price Waterhouse about the pleading: see Pyramid Building Society (in liquidation) and others v Russell and others (Supreme Court of Victoria, 4 July 1997, unreported). Coopers and Lybrand continued to allege that Price Waterhouse failed to disclose matters which, inter alia, it ought to have known. Byrne J accepted that this was tantamount to saying Price Waterhouse failed to carry out its investigations or assessment of the Society with due care, which was not pleaded. His Honour struck out the allegation concerning matters Price Waterhouse ought to have known; see also Johnson Tile Pty Ltd v Esso Australia Ltd (No 2) 97 FCR 175 at [21]. 26 Counsel for Macquarie Bank referred to two authorities which also concern a pleading in which an allegation was made that a person "knew or ought to have known" of certain matters: see Cadoroll Pty Ltd v Allegra Corporation (Federal Court of Australia, 17 January 1994, unreported) and Sereika v Cardinal Financial Securities Ltd [2001] FCA 1715. In the first matter, Neaves J struck out a pleading including an allegation of "knew or ought to have known" which was deficient because (as his Honour said) "the matters relied on (were not) specifically pleaded so that the respondents (would) be able to formulate a defence in relation to that allegation". In the second matter, a pleading was struck out because, inter alia, it did not specify or identify material facts supporting an allegation of knowledge. 27 In the present matter, GIO sets out, under the heading of particulars, a range of facts and matters which it contends support or justify the allegation that Macquarie Bank ought to have been aware of the existence of the risk factors. While Macquarie Bank may well, at some stage be entitled to further and better particulars of those facts and matters, they constitute, in my opinion, an adequate pleading of the allegation that Macquarie Bank should have been aware of the existence of the risk factors which identifies the factual foundation for the allegation. Those facts and matters include an allegation that Macquarie Bank had extensive discussions with Grant Samuel, interviewed GIO management and had the opportunity to analyse the performance of GIO's reinsurance operations and matters affecting or likely to affect the performance of those operations in its involvement with three projects which, elsewhere in the pleading, are identified as analysis and preparation for merger and takeover options for GIO. Having regard to the submissions made by Macquarie Bank by reference to the pleading as it presently stands, a case has not been made out for striking out the cross-claim on the basis (which I apprehend is accepted by GIO) that paragraph 14 is critical to the entire cross-claim. 28 The third limb of Macquarie Bank's argument was effectively answered by GIO pointing to particulars the applicant had provided concerning which risk factors were not referred to at all and which were not referred to adequately and, I infer, are particulars which will be provided to Macquarie Bank. 29 While Macquarie Bank has ultimately failed to satisfy me that the cross-claim, in its present form, is deficient in the way it contends, it is fairly clear an earlier version was deficient. I propose to dismiss Macquarie Bank's application to strike out or dismiss the cross-claim, though there should be no order as to costs given the partial success of each of the protagonists. I certify that the preceding twenty nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.

Counsel for the Cross Claimant to Cross Claim 1C: Mr A J Meagher With Mr I M Jackman and Mr M R Tyson

Solicitor for the Cross Claimant to Cross Claim 1C: Ebsworth & Ebsworth

Counsel for the Cross-Respondent to Cross Claim 1C: Mr R M Smith SC With Mr M Steele

Solicitor for the Cross-Respondent to Cross Claim 1C: Clayton Utz

Date of Hearing: 31 July 2002

Date of Judgment: 16 August 2002