Life Therapeutics Limited v Bell IXL Investments Limited

REASONS FOR JUDGMENT 1 The appellant, Life Therapeutics Limited ("LFE") is a public company whose shares are listed on the Australian Securities Exchange ("ASX"). Before the allotment of the shares in issue in this proceeding, LFE had issued 123,223,857 shares with voting rights. 2 Between 14 May and 4 June 2008 the first respondent, Bell IXL Investments Limited ("Bell IXL") acquired 9,517,734 shares in the capital of LFE. Bell IXL's shares in LFE together with those of its associate, K Pagnin Pty Limited (3,018,000 shares) ("K Pagnin"), comprise approximately 10.17% of the issued capital of LFE. 3 On 23 May 2008 Bell IXL requisitioned LFE to convene an extraordinary general meeting of shareholders to consider resolutions to remove the current board and replace it with three persons nominated by Bell IXL. On 12 June 2008 LFE convened that meeting for 23 July 2008. The meeting was subsequently adjourned as a result of a Court order. 4 On 9 June 2008 Aegis Partners Limited ("Aegis") agreed to accept a placement of 15% of LFE's issued shares at 7 cents per share. Aegis informed LFE that clients of Aegis would take 18,483,578 shares at 7 cents per share. On 16 June 2008 LFE announced to the ASX that it had agreed to issue to Aegis 18,483,578 fully paid ordinary shares (representing 15% of its total issued capital) at 7 cents per share. At a board meeting of LFE on 17 June 2008, the directors noted that a subscription application for 18,483,578 shares (to raise $1,293,850.46) had been received from Aegis on 12 June 2008 and resolved to approve that issue and placement. Under the subscription agreement between LFE and Aegis, Aegis could nominate nominees to whom the shares were to be issued. On 4 July 2008 LFE received the subscription amount for the shares and announced to the ASX that the placement to Aegis had been completed. The shares were not allotted to Aegis but rather, in accordance with instructions from Aegis, were allotted to Bell Potter who allocated them to various nominee account holders. On 10 July 2008 LFE announced to the ASX that Aegis had directed Bell Potter to place the shares directly with various beneficial owners. 5 This allotment represented approximately 13.04% of the voting shares in LFE and reduced Bell IXL's interest in LFE's capital to approximately 8.85%. 6 Bell IXL contended that the allotment of shares to Bell Potter was invalid and had been made by the directors of LFE for an ulterior improper purpose. Bell IXL filed this proceeding on 17 June 2008 challenging the allotment and seeking orders to cancel the allotted shares and to restrain the voting of the shares at the extraordinary general meeting to be held on 23 July 2008 (now adjourned pending the determination of this appeal). 7 On 22 July 2008 the primary judge found that the allotment of the shares to Bell Potter was not for a purpose of benefiting LFE but rather was for an ulterior purpose, namely to support the existing directors and keep them in office. He restrained Bell Potter from exercising the right to vote attached to the shares allotted to it until further order. The primary judge also ordered that the meeting called pursuant to the notice given by Bell IXL to consider the resolutions to remove the current directors which was scheduled for 23 July 2008 be adjourned. 8 The orders made by the primary judge were interlocutory and he has not yet made final orders. He has adjourned the further hearing of the proceeding to 26 August 2008 to enable some of the beneficial owners of the shares allotted to Bell Potter to make submissions in relation to the final orders to be made. LFE appeals, by leave, from the order of the primary judge restraining Bell Potter from exercising the right to vote that attaches to the shares allotted to it. 9 Before 20 May 2008 the directors of LFE had considered a capital raising by the company. On 20 May 2008, according to a finding by the primary judge, two of LFE's directors, Mr Bellman and Mr Milne, met with Mr Booth of Asandas, a licensed stockbroker, to discuss a capital raising by LFE. This meeting led to a chain of events which resulted in the allotment of the shares in issue on 4 July 2008. 10 Bell IXL's principal submission was that the critical findings of fact by the primary judge which led him to the conclusion that the allotment of the shares was for an ulterior purpose which was improper were not open on the evidence and that the primary judge had failed to provide any or any sufficient findings and reasons to justify his conclusion that the allotment of shares was improper. The appellant's submissions do not challenge the primary judge's findings of fact on the basis that they depend upon the credibility of witnesses and that the primary judge "has failed to use or has palpably misused his advantage or has acted on evidence which was inconsistent with facts incontrovertibly established by the evidence or which was glaringly improbable": Devries v Australian National Railways Commission (1993) 177 CLR 472 at 479 (citations omitted). Rather, the appellant has contended that either there was no evidence to support the primary judge's findings or the primary judge has failed to explain the reasoning process by which he made findings and reached his conclusion. 11 We are disposed to accept this submission. To explain why, we need to set out the background to some of the primary judge's intermediate findings of fact to demonstrate where he may have fallen into error by drawing conclusions based on intermediate findings of fact for which his Honour did not expose his reasoning. 12 The circumstances giving rise to the dispute are within a relatively confined compass. LFE is a holding company whose subsidiaries in the United States of America collect and sell blood plasma. LFE's operations became unprofitable during 2006 and 2007 and in the early part of 2008 its financial position was precarious. In or about March 2008 LFE entered into an arrangement with its largest customer, Octapharma AG, a Swiss company, whereby: · A management agreement was entered into pursuant to which Octapharma AG was appointed to manage LFE's US operations; · A loan agreement was entered into under which Octapharma AG was to provide a US$37.1 million loan facility to be used to pay LFE's existing debts and under which Octapharma AG was to lend LFE an amount equal to the operating costs of its US subsidiaries less the revenue received; · Octapharma AG was granted a put and call option which, subject to shareholder approval, gave Octapharma AG the option to purchase the shares in LFE's US subsidiaries at an exercise price of around US$47.1 million. 13 The result of the arrangement was that, before any sale of LFE's US subsidiaries to Octapharma AG, LFE would have funds to pay out its creditors leaving it with a balance of loan funds of approximately US $16 million which it could draw down. If the sale of the US subsidiaries were completed, LFE would be required to repay its loan to Octapharma AG which would leave it with a balance of the order of $17 million or $18 million in cash. However, if the sale of the US subsidiaries were not to proceed because, for example, shareholder approval were not given, then LFE would be required to repay the loan to Octapharma AG. 14 At the time this arrangement was entered into, the directors of LFE were Mr Wayne Bellman, who later became Chairman, and Mr Michael Milne. Subsequently on 1 May 2008 Ms Dale Calhoun joined the board. 15 The directors of LFE had engaged a financial adviser who brought about the arrangement with Octapharma AG. There had been earlier discussions by the directors about the need to raise finance for working capital. After the arrangement with Octapharma AG was entered into, Messrs Bellman and Milne discussed with the financial adviser the desire of LFE to raise further capital which would allow it to pursue other ventures as an investment vehicle. 16 Octapharma AG exercised its call option on 11 April 2008 which required LFE to convene a meeting of shareholders to consider whether they would approve the sale. That meeting has not yet been held. 17 Bell IXL's associate, K Pagnin first purchased shares in LFE on 23 April 2008. By 19 May 2008 it had acquired 2.16% of the shares in LFE and, by 20 May 2008, it had acquired 2.32% of the shares in LFE. 18 Bell IXL first bought shares in LFE on 14 May 2008. By 15 May 2008 it had acquired 2.97% of the shares in LFE and, by 20 May 2008, it had purchased 6.30% of the shares in LFE. 19 Critical to the primary judge's reasons for his decision were the following findings (at par [12]): "The directors (now Messrs Bellman and Milne and Ms Calhoun) discovered on 19 or 20 May 2008 that Bell IXL had acquired a substantial shareholding in LFE. They were concerned that Bell IXL might want to take control of the company. Ms Calhoun said there "was a view that [taking control] probably was Bell's intention". She also said the directors had "been caught on the hop" by Bell IXL's acquisition. The directors' suspicion about Bell IXL's motives were confirmed when on 23 May 2008 LFE received the requisition for the meeting that will consider replacing the board with Bell IXL's nominees." 20 There was a meeting of directors of LFE which the primary judge found was on 20 May 2008. As noted in par [9] above, on the same day Mr Bellman and Mr Milne met with Mr Booth of Asandas to discuss a capital raising by LFE. In relation to this meeting the primary judge said (at par [16]): "It is important to establish precisely what was said at the meeting. While three people attended only two, Mr Bellman and Mr Booth, have given evidence. I do not know why Mr Milne was not called. And Mr Booth tried to give the appearance of having only a vague recollection of the discussions." The primary judge did not otherwise comment upon, or consider, whether he should draw any inferences from, the absence of Mr Milne as a witness. 21 The primary judge noted as follows Mr Booth's evidence on affidavit of what had been said at the meeting on 20 May 2008 between Mr Bellman, Mr Milne and Mr Booth (at par [17]): "Mr Booth also remembers being told that the company had a large shareholder who held about 7 per cent of the issued stock." The primary judge found that at the same meeting (at par [26]): "…the emergence of a substantial shareholder was discussed. Mr Booth was told that someone had acquired 7 per cent of the company." The primary judge continued: "Although pressed by Mr Shaw who appeared for the plaintiffs, he was not able to give details of what was said. He was also pressed by Mr Shaw to explain why he told Mr Waller that the directors wanted to hold onto the company, that they did not want to lose the shell and that they were willing to give a board seat to the person who took a placement. But Mr Booth could not explain why he had written these things. He was adamant that he had not been told "directly" what he had written. He could not, though, explain what was said that led him to form the view that what he had written was the position taken by the directors. I am sure that Mr Booth was not guessing what the directors' motives were in seeking an investor. A broker of 24 years experience (which is how long Mr Booth has been in the industry) would not make the statements he did to a prospective investor unless he was confident they were true. I have no doubt that Mr Booth recorded what he was told or what was properly to be inferred from the comments made by Mr Bellman or Mr Milne. The impression I have of Mr Booth's evidence on this aspect is that he did not want to answer questions in a way that would harm LFE's case. I should say that if Mr Booth was at any time told that LFE did not want to spend borrowed money to meet current expenses (in fact I doubt that he was told this), that comment was made in the context of exploring an excuse for a small capital raising." This finding that Mr Booth was told that someone had acquired 7% of the issued shares in LFE was also critical to the primary judge's reasons for decision. 22 Thereafter, Mr Booth sent an email to Mr Waller of Aegis on 3 June 2008 in the following terms: "AW, 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 61 2 9363 4828 TB" 23 In relation to this email the primary judge said (at par [23]): "If the email reflects what Mr Booth was told by Messrs Bellman or Milne, the placement was not intended to benefit LFE. Its purpose was to keep the directors in office." 24 The primary judge observed that Mr Bellman said that Mr Booth "got it wrong" and that he did not tell Mr Booth that shares were to be issued so that the directors would not "lose [control of] the shell". 25 It is not possible to identify or determine the basis upon which the primary judge found that the directors of LFE discovered on 19 or 20 May 2008 that Bell IXL had acquired a substantial shareholding in LFE. Nor is it possible to identify the chain of reasoning which led his Honour to this conclusion. There was no evidence before the primary judge that showed how the directors made this discovery. 26 Further, insofar as the primary judge may have used the expression "substantial shareholding in LFE" to refer to a "substantial holding" as defined in s 9 of the Corporations Act 2001 (Cth), which means a holding of 5% or more of the voting shares in a company, there was no evidence before the primary judge to support a finding that the directors had made that discovery on 19 or 20 May 2008. By 19 May 2008 Bell IXL had only acquired 2.97% of the shares in LFE. The shares which Bell IXL purchased on 20 May 2008 which took its total holding to 6.30% of the shares in LFE were only registered on 23 May 2008 on which day Bell IXL gave LFE its first substantial shareholding notice. It is not apparent from the primary judge's reasoning whether he was taking into account the shares purchased by K Pagnin in determining the acquisition by Bell IXL of a substantial shareholding in LFE. But, even if he was, the only evidence available as to when the directors could have discovered that K Pagnin was an associate of Bell IXL was the receipt by LFE of Bell IXL's first substantial shareholding notice on 23 May 2008. 27 If the primary judge was not using the expression "substantial shareholding in LFE" to refer to a "substantial holding" as defined in s 9 of the Corporations Act 2001 (Cth), but was rather using it in a less technical sense to refer to a significant shareholding, he did not articulate what that substantial shareholding was. Although Bell IXL had acquired 2.97% of the shares in LFE by 19 May 2008 and a total of 6.30% of the shares in LFE by 20 May 2008, the only evidence before the primary judge when the directors discovered, or could have discovered, the extent of Bell IXL's shareholding in LFE, was that LFE received Bell IXL's first substantial shareholding notice on 23 May 2008. There was no evidence before the primary judge which warranted the finding or conclusion that, before 23 May 2008, the directors of LFE had discovered that Bell IXL had acquired 6.30% of the shares in LFE or even 2.97% of those shares. Nor was there any evidence before the primary judge from which he could draw an inference to that effect. 28 There was evidence as to the volumes of trading in shares in LFE before and on 19 and 20 May 2008, but there was no evidence as to what knowledge or information was available to the directors of LFE on 19 and 20 May 2008 as to the identity of the purchasers of shares in LFE purchased as part of those volumes. 29 There is a further difficulty with the primary judge's findings set out at par [19] above. It is not apparent what was the evidence, if indeed there was any evidence, that the directors were concerned that "Bell IXL might want to take control of the company". There was no evidence before the primary judge which enabled him to find that they had such concern on 19 or 20 May 2008. Ms Calhoun's statement was not expressed to be a view held either on or as at 19 or 20 May 2008. Ms Calhoun's statement that the "directors had been caught on the hop" was not expressed as indicating a view held by them on 19 or 20 May 2008 but was expressed to describe a view held at a later point of time. 30 The primary judge's finding that "the directors' suspicion about Bell IXL's motives were confirmed when on 23 May 2008 LFE received the requisition for the meeting" is also not supported by any evidence that before 23 May 2008 they harboured a suspicion about Bell IXL or its motives. 31 Put shortly, the learned primary judge did not expose his reasoning or set out the intermediate findings of fact which warranted the findings and conclusions reproduced at par [19] above. 32 The primary judge's reliance upon Mr Booth's evidence that he remembered being told on 20 May 2008 that LFE had a "large shareholder who held about 7 per cent of the issued stock" was also misplaced. On 20 May 2008 Bell IXL did not hold 7% of the shares in LFE. Bell IXL at the close of business on 20 May 2008 held 6.30% of the shares in LFE but 3.33% of those shares purchased on 20 May 2008 were not registered until 23 May 2008. It is not apparent how the directors could have known about both share purchases until 23 May 2008 at the earliest. There was no evidence to that effect, nor any evidence from which such an inference could be drawn. The primary judge imputed to the directors of LFE knowledge on 20 May 2008 of the acquisition by a large shareholder of about 7% of the issued stock. That imputation was inconsistent with the evidence and no basis for it was explained by his Honour. 33 For these reasons the primary judge erred in the conclusion that he reached and the appeal must be allowed. The question therefore becomes what consequential orders this Court should make. The appellant's primary submission was that the appeal should be allowed and the proceeding be dismissed. That submission should be rejected. Its alternative submission that there should be a retrial should be accepted. 34 As was pointed out in Waterways v Fitzgibbon (2005) 221 ALR 402 at 429, 426 and 427, and many other earlier cases, retrial is a remedy that inflicts great hardship on parties and witnesses. And as the High Court emphasised in Fox v Percy (2003) 214 CLR 118 this Court, on appeal, must perform the functions given to it by the Federal Court of Australia Act 1976 (Cth). Those functions include that of rehearing the case on the record of the proceedings below and, in doing that, this Court may draw inferences and make findings of fact (Federal Court of Australia Act 1976 (Cth), s 27). But as was also pointed out in both Fox v Percy and Waterways v Fitzgibbon there are limits to what an appellate court, proceeding on the record, can do. 35 There was evidence led at trial from which it was open to the primary judge to infer that the allotment of shares was made not to benefit LFE but to support the directors and keep them in office. That inference was not inevitable but much depended on when it was to be inferred that the directors of LFE learned of the acquisition by a large shareholder of about 7% of the issued stock and what was inferred to be the state of mind of the directors at that time. The making of those inferences depended upon a number of intermediate findings of fact, none of which was made by the primary judge but, no less importantly, none of which was rejected by the primary judge. Some of those intermediate findings of fact necessarily depended upon what assessment was made of the credibility of certain evidence given by particular witnesses and, for that matter, the credibility of the witnesses generally. They are not findings of fact which this Court can make based only on the transcript of evidence. 36 In the end, much turned upon what was to be made of an email sent by Mr Booth on 3 June 2008. The significance to be attached to what was said in that email depended, in critically important respects, upon the then state of knowledge and motives of the directors of LFE. The primary judge is shown to have had no sufficient footing in the evidence to conclude that "the directors … discovered on 19 or 20 May 2008 that Bell IXL had acquired a substantial shareholding in LFE". But it is not possible for this Court by reference only to the transcript of evidence to make its own finding about what the Board of LFE knew or intended at that or other critical times in the chronology of events leading up to the allotment. 37 What findings should be made in these respects depended upon an assessment of the oral evidence that was adduced. In this respect, whether any inference was to be drawn or fortified by reference to the absence of evidence from Mr Milne, the director of LFE who had the first and most direct contact with Mr Booth, was a matter for the primary judge, but this was a matter to which the primary judge made no reference in his reasons beyond noting that he did not know why Mr Milne had not been called. 38 In all these circumstances, the appropriate order to make, consequential upon the allowing of the appeal, is an order for a retrial. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Ryan, Goldberg & Gordon.