Registry: Victoria

Sub-area: Corporations and Corporate Insolvency

Number of paragraphs: 2455 Date of hearing: 6 to 10, 13 to 16, 20 to 24, 28 February 2023, 1 to 3, 6 to 7 March 2023, 27 July 2023, 25 to 27, 30 to 31 October 2023

Counsel for the Applicant: Mr I Waller KC (until 27 July 2023), Ms R. Doyle SC (after 27 July 2023), Mr P Annabell, Mr A Cameron and Ms S Hogan

Solicitor for the Applicant: Keypoint Law

Counsel for the 1st, 3rd, 4th, and 5th Respondents: Mr P Santamaria KC and Mr R Peters

Solicitor for the 1st, 3rd, 4th, and 5th Respondents: Colin Biggers & Paisley

Counsel for the 2nd Respondent: Mr C Caleo KC and Mr N Walter

Solicitor for the 2nd Respondent: SBA Law

Counsel for Pacific Current Group Limited (current management - confidentiality only) Mr P Solomon KC and Ms A Martyn

Solicitor for Pacific Current Group Limited (current management - confidentiality only) Herbert Smith Freehills

BETWEEN: PACIFIC CURRENT GROUP LIMITED (ACN 006 708 792) Applicant MICHAEL CLIFFORD FITZPATRICK First Respondent AND: ANDREW STUART MCGILL Second Respondent PETER ROBERT KENNEDY (and others named in the schedule) Third Respondent

order made by: BEACH J DATE OF ORDER: 18 DECEMBER 2024

THE COURT ORDERS THAT:

1. The applicant's proceeding against the first and third to fifth respondents be dismissed.
2. The applicant pay the first and third to fifth respondents' costs of and incidental to this proceeding concerning the applicant's claims against those parties.
3. There be a stay on the operation of order 2 until further order.
4. Any period stipulated under the Federal Court Rules 2011 (Cth) for the filing and service of any notice of appeal from orders 1 and 2 be suspended until further order.
5. A case management hearing be fixed at 9.30 am on 7 February 2025 to determine the procedure under which any outstanding issues concerning, inter-alia, any of these orders, the case against the second respondent, any cross-claim between the respondents or any other costs question are to be resolved.
6. To the extent necessary, any prior confidentiality orders made in this proceeding or proceeding VID 608 of 2019 are varied so as to allow public access to and public dissemination of the reasons of the Court published today.
7. Liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT BEACH J:
8. This proceeding concerns a merger that was completed on 25 November 2014 between Pacific Current Group Ltd (PAC) and Northern Lights Capital Partners LLC (Northern Lights). As part of the merger, each of PAC and Northern Lights transferred substantially all of their assets to a unit trust known as the Aurora Trust in exchange for units.
9. PAC has brought the present proceeding against the then directors of PAC who approved the merger asserting that those directors breached their various statutory and other duties as directors.
10. Now by way of background, in the decade leading up to 2014, the business of PAC involved making investments by taking minority shareholdings in fund managers who were not aligned with major institutions. In these reasons I will refer to these fund managers as boutiques.
11. By 2012, PAC's boutiques were regarded as too Australian-centric as most were located in Australia and specialised in Australian asset classes. Further, PAC's income and consequently its ability to pay dividends to its own shareholders largely depended on two mature boutiques. The board of directors recognised that PAC needed to diversify its boutiques including by geography and by asset class.
12. From 2012 to late 2013, PAC endeavoured to diversify, including by merging with or taking over one of its competitors being Pinnacle Investment Management Ltd. This was without success as I will detail later when I discuss the sequence of discussions with representatives of its holding company, Wilson HTM Investment Group Limited (WIG).
13. Now Northern Lights and its related entities had for several years prior to 2014 conducted a similar business to PAC's business but predominantly in the United States.
14. It was perceived to be advantageous to both PAC and Northern Lights to merge their businesses. And as I have identified, in November 2014 PAC and Northern Lights merged their businesses. PAC and Northern Lights transferred their respective interests in various boutique fund managers to a new, unlisted Australian company, being Aurora Investment Management Pty Limited (the Aurora trustee) in exchange for units in the Aurora Trust.
15. As part of the merger, PAC held approximately 61% of the units in the Aurora Trust and Northern Lights including the interest of BNP Paribas Asset Management Inc held approximately 39% of the units in the Aurora Trust.
16. Now in the proceeding before me PAC asserts that the then directors of PAC who approved the merger breached s 180 of the Corporations Act 2001 (Cth) and various other cognate duties at four key decision points. The relevant directors at the time are respondents to the present proceeding.
17. The four key decision points identified by PAC are the following. First, on 24 February 2014 the board of directors resolved that it execute a terms sheet to formalise negotiations for the merger. Second, on 16 April 2014 the board resolved that PAC sign a revised terms sheet. Third, on 23 July 2014 the board resolved that the merger be approved. And fourth, on 16 November 2014 the board signed a circular resolution to proceed with completion of the merger.
18. PAC says that at each of these four key decision points, and particularly on 23 July 2014 when the board resolved that the merger be approved, the directors failed to exercise their powers and discharge their duties with the degree of care and diligence required under the general law and s 180 of the Act.
19. Further, it is said that the directors failed to seek and obtain the approval of PAC's shareholders to the merger as required by PAC's constitution and listing rule 11.2 of the ASX listing rules.
20. Let me at this point say something more about the respondents to the proceeding.
21. Mr Michael Fitzpatrick was a director of PAC between 5 October 2004 and 1 March 2019, and the chairman of PAC's board and a member of PAC's audit committee at the relevant time.
22. Mr Andrew McGill was the managing director and chief executive officer of PAC between 30 August 2013 and 28 August 2015.
23. Mr Peter Kennedy at the time of trial was a director of PAC and had been from 4 June 2003. He was also the chairman of PAC's audit committee during the relevant period.
24. Ms Melda Donnelly was a non-executive director and member of PAC's audit committee from 28 March 2012 to the time of trial.
25. Mr Reubert Hayes was a director of PAC between 22 February 2007 and 31 March 2015, and a member of PAC's audit committee at the relevant time.
26. Now generally speaking, Mr McGill and Mr Fitzpatrick were largely responsible for effecting the merger. The other non-executive directors, Mr Kennedy, Ms Donnelly and Mr Hayes, were less involved in the proposed merger. I should also note that Mr Hayes was overseas for some of the period in which the key decisions concerning the merger occurred.
27. Before proceeding further and given the wholesale attack made by PAC against the then directors, let me make various observations concerning how the board of PAC operated around the time of the merger and its management practices based upon the voluminous witness and documentary evidence led before me.
28. First, members of the board had both the necessary and sufficient complementary commercial backgrounds, motivations, personalities and skill sets. The productive yield of this was an operative and direct intellectual diversity as between the individuals, which by several orders of magnitude trumped any superficial ex facie diversity or irrelevant self-referential identification. This advantageously reflected itself in the decision-making processes of the board and the debates which took place.
29. Second, given that the time frame of the decision-making processes under consideration was over ten years ago, there was little in the way of meretricious mission statements and correlative performative processes that one normally associates with public companies these days.
30. Third, the board operated a relatively lean management structure where shareholders' funds were efficiently managed and spent for proper purposes. This was all quite refreshing when one compares this to many boards of public companies today that even go so far as to pride themselves on allocating shareholders' funds to social causes of the directors for which they have an affinity or affection, with such expenditure or donation of others' money purportedly justified by little more than humbug and adding no real economic value to the company and its shareholders.
31. Fourth, meta-themes concerning social licence theory can be put to one side. They are a superfluous add-on to the legislative regime applying to directors and companies. It is not necessary to cite Milton Friedman to state the obvious. Any so-called social licence granted on incorporation has its boundaries and content provided by the company's constitution and the detailed legislative regime, albeit ultimately built upon social policy. Nothing more, nothing less.
32. In summary, and notwithstanding the litany of complaints made by PAC against the then directors, in my view the board of PAC and the management of PAC appears to have been well run, generally speaking.
33. Now each of the directors gave evidence and was cross-examined at trial. Further, I directed that Mr Fitzpatrick be recalled for further cross-examination to address some matters that arose during Mr McGill's cross-examination. I will say something more about their evidence later.
34. Now in its third further amended statement of claim, PAC alleges that by voting in favour of specific resolutions in relation to the merger in 2014, each of the directors breached his or her statutory duty under s 180 of the Act and their common law and equitable duties to PAC to exercise reasonable care, thereby causing it loss. For the moment I will not distinguish these duties by characterisation but merely refer to their characterisation in the singular. The directors have denied such breaches.
35. The first claim of breach of duty concerns the decision to vote in favour of the resolution passed at the board meeting on 24 February 2014 that PAC enter into a non-binding terms sheet with Northern Lights in the form contained in the board papers for that meeting.
36. The second claim of breach of duty concerns the decision to vote in favour of the resolution passed at the board meeting on 16 April 2014 that PAC sign a revised terms sheet with Northern Lights in the form put before the board.
37. The third claim of breach of duty concerns the decision to vote in favour of the resolution passed at the board meeting on 23 July 2014 that approved the merger subject to various conditions being satisfied or waived. I will refer to this as the transaction documents execution resolution.
38. The fourth claim of breach of duty concerns the signing by each of the directors on or prior to 16 November 2014 of the circular resolution to proceed to complete the merger and to authorise execution of the documents necessary to achieve completion.
39. The fifth claim of breach of duty concerns the decision to vote in favour of the transaction documents execution resolution and the signing of the circular resolution without first causing PAC to seek or obtain approval of the merger from PAC's shareholders in an extraordinary general meeting as allegedly required by PAC's constitution and rule 11.2 of the listing rules of the ASX. A related claim involves PAC seeking restitution of the value of PAC's assets allegedly dissipated as a result of the contraventions. PAC alleges that by failing to obtain shareholder approval, the transaction documents execution resolution and the circular resolution were ultra vires. Further, it is alleged that by failing to obtain shareholder approval, the directors breached their duty in equity to exercise care and diligence to ensure that PAC's assets were applied in accordance with PAC's constitution.
40. Now I should at this point note various allegations which are no longer pressed by PAC.
41. First, it is no longer pressed that the directors breached their duties of care and diligence by voting in favour of the merger in the absence of any analysis of the broader US funds management market including regulatory risk.
42. Second, it is no longer said that the directors breached their duties in failing to seek shareholder approval, even in circumstances where, on an alternative scenario to PAC's principal case, such approval may not have been required by the listing rules or PAC's constitution.
43. Now in addition to the claims against all directors, PAC has made separate allegations against Mr McGill claiming that he breached his duties in the following respects. First, it is said that he failed to give the non-executive directors the Deloitte due diligence report. Second, it is said that he failed to bring to the non-executive directors' attention two versions of the financial model prepared by Gresham Advisory Partners Limited (Gresham) and information concerning risks as to whether WHV Investment Management Inc (WHV) would make a distribution to Northern Lights. WHV was formerly known as Wentworth, Hauser and Violich, Inc.
44. Mr McGill has also filed a cross-claim against Mr Fitzpatrick in respect of the alleged failures concerning WHV and the financial modelling of WHV's value in the merged business and the alleged failures to bring matters to the attention of the other board members prior to them resolving to enter into the merger.
45. Now the present trial has focused on the principal liability issues, with issues such as relief and specific statutory questions including potentially under s 1317S or s 1318 postponed to a second stage to the extent necessary.
46. In summary and for the reasons that follow, in my view PAC's claims against Mr Fitzpatrick, Mr Kennedy, Ms Donnelly and Mr Hayes have not been made out. PAC's case against them will be dismissed.
47. And as to PAC's case against Mr McGill, in my view the only part of its case that it has made out against Mr McGill concerns various issues relating to the WHV dividend and appreciation rights agreement and the question of the potential dividends and distributions. I will hear further from Mr McGill and PAC concerning any outstanding questions including as to relief.
48. Now before proceeding further, I should deal with one other matter by way of background. On 20 February 2020, orders were made by Moshinsky J in proceeding VID 608/2019 pursuant to s 237 of the Act granting leave to Mr Michael de Tocqueville and ASI Mutual Pty Ltd, two shareholders of PAC, to bring proceedings on behalf of PAC against certain of its directors and former directors. Pursuant to those orders, those shareholders commenced the present proceeding before me on behalf of PAC.
49. Now in terms of my detailed reasons, it has been convenient to divide my discussion into the following topics:
50. Some relevant background - ([43] to [148]).
51. Relevant witnesses and evidentiary questions - ([149] to [222]).
52. General principles: directors' duties - ([223] to [302]).
53. The sequence of events - ([303] to [754]).
54. The alleged breaches of directors' duties - ([755] to [1253]).
55. The question of shareholder approval - listing rule 11.2 - ([1254] to [1422]).
56. General principles concerning listing rule 11 - ([1423] to [1509]).
57. The ultra vires question - ([1510] to [1628]).
58. Relevant facts concerning WHV - ([1629] to [1858]).
59. The various issues concerning WHV - ([1859] to [2193]).
60. The terms of the implementation deed - ([2194] to [2257]).
61. Voting in favour of the circular resolution - ([2258] to [2265]).
62. Causation - ([2266] to [2304]).
63. Some aspects of potential loss and damage - Pinnacle and WIG - ([2305] to [2446]).
64. Sections 1317S and 1318 potential application - ([2447] to [2453]).
65. Conclusion - ([2454] to [2455]).

Some relevant background

1. Prior to the merger, PAC was an ASX-listed investment and financial services business based in Australia.
2. PAC, which was until 18 October 2015 known as Treasury Group Limited, was at all material times engaged in the business of investing in fund managers. Its business model involved investing capital in and providing support services to fund managers or boutiques. In these reasons and for convenience I will simply refer to PAC.
3. As at 12 November 2013, PAC's business insofar as it involved investing in fund managers comprised holding interests in the following boutique fund managers being Investors Mutual Ltd (IML), Orion Asset Management Ltd, RARE Infrastructure Ltd (RARE), Celeste Funds Management Ltd, Aubrey Capital Management Ltd, Evergreen Capital Partners Ltd, Octis Asset Management Pte Ltd, Treasury Asia Asset Management Ltd, Global Value Investors Limited and AR Capital Management Pty Ltd.
4. As at 21 February 2014, approximately 60 per cent of PAC's forecast financial year 2014 earnings were generated from its 40 per cent ownership of RARE, and approximately 30 per cent of PAC's forecast financial year 2014 earnings were generated from its ownership of IML.
5. If the owners of the remaining 60 per cent of RARE put it up for sale, PAC had a right of first refusal to purchase the 60 per cent it did not own. If it did not exercise its right to purchase the remaining 60 per cent, it could be obliged to sell its 40 per cent interest to the purchasers of the 60 per cent interest.
6. At around this time, there was an increasing possibility of RARE being divested within the next 12 months. If RARE was divested, PAC's earnings before interest, taxes, depreciation and amortisation (EBITDA) would fall by approximately 85 per cent. PAC's net profits after tax (NPAT) might fall by a lesser amount depending upon whether or not the RARE divestment proceeds were returned to shareholders. If the divestment proceeds were retained, interest income would have become the largest component of NPAT until there were significant new investments completed.
7. Now I note that there was an inherent risk in investing in boutiques and of PAC's own expertise in selecting investments in boutiques. So, between 2003 and 2014, PAC made 10 investments that failed or meandered until being sold for no profit, during which period PAC made 3 investments which were successful. This experience of investing in boutiques in a volatile industry is significant to some of my later discussion. What PAC alleges were "red flags" were regarded by the directors for the most part as matters which needed to be considered when making a decision to merge.

PAC before the merger

1. In early 2014 PAC was a small but profitable company in ASX terms. It had a small paid-up capital, a small number of shareholders, a five-member board including the CEO, a small number of executives, a small number of employees and an office which was part of one floor of a building in Martin Place, Sydney.
2. In the financial year (FY) ended 30 June 2014, PAC had issued capital of 23,697,498 $0.50 shares. PAC's top 20 shareholders consistently held over 50% of PAC's shares. PAC's NPAT for FY14 was $13.06 million.
3. In 2014 PAC had a workforce of 16, being 3 executives, 6 managers and 7 other employees.
4. In 2014, board meetings usually occurred in PAC's Sydney office, but the board regularly held meetings where some or all directors participated by telephone.
5. Mr Fitzpatrick ran board meetings in a collegiate manner. The board papers were delivered a few days ahead of a board meeting. Mr Fitzpatrick would take agenda items in the order that suited the board or executives or advisers attending the meeting. On any given agenda item he asked each of the other directors what he or she thought and he encouraged dialogue. After every director, including him, had had a say, he would summarise what the board decision was to ensure it reflected the discussion. He was careful about formal board resolutions and often discussed the wording with the directors slowly until they all agreed upon it.
6. There were various board committees. In 2014, and as I have said, each of the non-executive directors was a member of PAC's audit committee.

A little about boutiques

1. A boutique obtains funds from sources including institutional investors such as industry superannuation funds and life insurance companies, employers on behalf of employees and retail investors including high wealth individuals and people who manage their own superannuation funds.
2. A boutique typically invests the funds in a particular asset class or classes such as Australian or international equities, bonds and infrastructure assets according to the boutique's investment strategy.
3. The boutique makes its money by charging the investors a fee for managing the funds. Ordinarily, a substantial part of the fee is calculated as a percentage of the funds under management. In addition, performance fees may be charged if the boutique outperforms industry benchmarks.
4. A boutique is usually founded by one or two people with investment or industry experience. Most founders have worked for some years as an investment manager or merchant banker for an institutional investor and have an established record and reputation as an investor or advisor.
5. When a boutique commences, one of the challenges to its business is finding the money to pay expenses until the boutique generates sufficient income to break even. PAC provided to boutiques those funds by investment or loan.
6. Further, back-office management issues such as regulatory compliance needed to be solved. Until a boutique became mature and able to employ the necessary staff, a boutique would solve these issues by outsourcing them to a service provider which was paid for performing the back-office functions. PAC provided such services for a fee to boutiques in which it invested.
7. Now another aspect of the varying skills of the founders of a boutique was their ability to attract funds under management.
8. In the funds management industry the process of obtaining institutional or retail funds to manage is called distribution or sales. A start-up boutique would need assistance with distribution and it usually did this by hiring a distribution team or by paying third parties for distribution services.
9. Now once a boutique started to generate income it took time for it to break even. For each boutique there is a funds under management figure at which it breaks even and covers its expenses.
10. It can take up to 3 years for boutiques to break even. The challenge facing the boutique is financing its operations up to the break-even point. So, it can take a long time for a start-up boutique to impact on PAC's profitability.
11. Once the boutique starts operating and is receiving investment funds, performance is very important. Institutional investors will move their money from one fund manager to another if the manager's investment strategy is not producing returns at the level predicted, and will move it even quicker if performance is below the average return of fund managers generally.
12. The problem of funds under management outflows is not so great with retail funds because retail investors tend not to change investments so often and so quickly, which is why money from retail investors is termed sticky money by fund managers.
13. Poor performance comes about either because the boutique is invested in the wrong market sector, for example, in Australian equites at a time when equities in the United States outperformed Australian equities, or the boutique simply makes poor choices.
14. Poor performance ultimately leads to more distribution problems. As the funds under management shrinks, it is harder for a distributor to persuade an institutional investor to invest funds in what the market may perceive as a sinking ship.
15. Boutiques do not have shareholders with the resources of institutional fund managers and so stagnating or outflowing funds under management for a few years often leads to closure.
16. On the other hand, if the boutique exceeds estimated returns or the market average rates of return or wins an industry award, funds under management inflows occur and can do so rapidly. This can make the boutique very profitable relatively quickly because once the boutique reaches a level of funds under management that allows it to break even or reach the funds under management threshold for performance fees to be payable, the expenses do not proportionally increase. Rather, the same investment team just makes larger investments without the boutique employing extra investment personnel.
17. After a boutique reaches a break-even, it takes about a further 1 or 2 years before it can be said with confidence that the boutique will be successful, bounce along breaking even or fail. It can take longer. Events like the global financial crisis make it more difficult to determine whether a boutique will fail because funds under management disappear for all fund managers.
18. By FY14 PAC's business had been investing in boutiques and providing distribution, regulatory compliance and other services to boutiques for a fee via PAC's subsidiary Treasury Group Investment Services Ltd.
19. PAC usually invested by taking a minority shareholding in a boutique, but PAC also provided seed capital by making loans to boutiques until they broke even. PAC was not itself a fund manager. It did not receive funds from institutions or others to invest on their behalf.
20. PAC monitored the boutique by usually having one of PAC's directors or executives sit on the board of the boutique. The boutiques reported to PAC regularly about their performance.
21. Because PAC was not taking a controlling interest in a boutique in which it invested, there was always a shareholders' agreement which provided a mechanism for PAC to buy out the founders and vice versa if certain events occurred. A typical triggering event was a proposed sale by either the founders or by PAC of their shareholding in a boutique. If either wanted to sell, the other could acquire the shareholding. If founders wanted to sell their shareholding, PAC's policy has always been to sell its shareholding to the purchaser.
22. Now valuing a boutique, particularly in its start-up phase, is difficult for several reasons.
23. First, most of the market sectors in which boutiques operate are volatile, which means funds under management can move to or from a boutique quickly if the market changes or changes relative to other sectors. So an investor in a boutique is making assumptions about the sustainability or viability of the boutiques' chosen investment sector.
24. Second, the value of the boutique depends on its ability to attract and retain funds under management. This largely depends on the founders' skills. They have to obtain mandates and have a good investment performance. This in turn depends upon the founders staying with the business and keeping the investment team together. Boutiques are really about the founders. An investor is making a judgment about the founders' ability to do these things. A lot depends on experience and reputation of the founders prior to them wanting to start a boutique, and the only way to assess these sorts of matters is to meet the founders and discuss strategies, performance and expectations.
25. Until the merger, the role of the CEO and his executive team was to identify and evaluate a potential boutique investment. Sometimes the founders would approach PAC because of PAC's model, but usually PAC's management learned that a well-known institutional investment executive was thinking of starting a boutique and PAC approached the executive. After due diligence, PAC management would advise the board about an investment if one was potentially advantageous to PAC. PAC's executives and some of its employees were skilled at providing an assessment of the calibre and potential of founders and their boutiques.
26. The progress with respect to potential investments was reported on regularly by the CEO. By 2013 a regular document in the papers for a board meeting was a deal pipeline memorandum which listed management's progress with potential investments in boutiques.
27. A recommendation to invest in a boutique was usually contained in a separate paper to the board. PAC had a rigorous approach to assessing potential boutiques and PAC ended up investing in very few of them. The papers took different forms but contained much the same detail.
28. Now investing in boutiques is inherently risky as I have indicated. From 2003 to 2014 PAC's investments showed mixed results.
29. PAC's investment in IML in 2003 was very successful. PAC's stake in IML varied to up to 50% over the years. IML specialised in long only investing in Australian equities. IML was based in Sydney.
30. IML's funds under management at 30 June 2014 were $4.9 billion.
31. PAC sold its 40% stake in IML in FY18 for $120 million. PAC made more than 30 times the value of its original investment in IML.
32. PAC acquired 40% of RARE in 2007. After a slow start RARE's funds under management increased extremely rapidly from 2009 and it became one of PAC's best investments.
33. RARE specialised in the investment and management of securities in the global listed infrastructure sector, including airports, gas, electricity, water and roads. RARE had product offerings in Europe, North America and Australia.
34. RARE's funds under management at 30 June 2014 were $9.1 billion.
35. In FY16, PAC sold 75% of its interest in RARE, retaining 25%. So after the sale, PAC held 10% of RARE. PAC received $112 million up front with the right to further payments up to $42 million depending on RARE's performance. Coupled with the dividends and trust distributions from RARE, the return on the sale of the 30% stake in RARE meant a cash return of 33 times PAC's investment. PAC sold its remaining 10% stake in FY19 for $21.5 million plus dividends.
36. ROC Partners Pty Ltd was based in Sydney and specialised in investing in Asia Pacific markets. PAC invested in ROC in FY14 and had an initial holding in ROC of 15% which it increased to 30%. ROC's funds under management at 30 June 2015 were $5.3 billion.
37. Let me say something about investments that succeeded at first and then failed.
38. Orion Asset Management Ltd was an example of a boutique which had been very successful for about 10 years and paid good returns to PAC, which fell out of favour with institutions very quickly after poor investment returns and reputational damage as a result of one of its employees being charged with and being later convicted of insider trading.
39. PAC originally invested in Orion in FY02 and increased its holding in Orion from the original 19% to 42% by FY06. Orion specialised in investing in Australian equities. Orion was based in Sydney. Orion closed its fund management operations in FY14.
40. Further, many of PAC's investments failed or were not successful usually due to a failure to attract sufficient funds under management.
41. Confluence Asset Management Ltd, in which PAC invested in FY04, specialised in investing in ASX listed companies that had a small capitalisation. Confluence was based in Melbourne. By FY06 Confluence's funds under management were $233m and in FY07 they were $376m. Confluence was not sustainable at those levels of funds under management and its operations were wound down in FY08. PAC lost its investment.
42. Global Value Investors Ltd, in which PAC invested in FY05, was a Melbourne based boutique. GVI specialised in investing in global equities.
43. Treasury Asia Asset Management Ltd, in which PAC invested in FY06, was based in Sydney and also had offices in Singapore. TAAM specialised in investing in Asian and Pacific equities. TAAM failed because of deteriorating investment performance. PAC sold its stake in TAAM in FY14 at a price that recovered PAC's capital outlays without any profit.
44. Cannae Capital Partners Ltd, in which PAC invested in FY08, was based in Sydney. Cannae failed and was merged with IML in FY10. Mr Hugh Giddy, Cannae's founder, went to work for IML. PAC wrote off its investment in Cannae in FY10.
45. AR Capital Management Ltd, in which PAC invested in FY10, was Melbourne based and specialised in investing in Australian equities. AR Capital never attracted sufficient funds under management to survive and once its founders left in FY12 it was doomed. AR Capital ceased trading in FY14 and was wound up in FY15.
46. Celeste Funds Management Ltd, in which PAC invested in FY10, was based in Sydney and invested in Australian equities. PAC sold its investment in Celeste in 2018 for $1.6 million.
47. Aubrey Capital Management Ltd, in which PAC invested in FY10, was based in Edinburgh and specialised in investing in global equities. Aubrey never attracted sufficient funds under management to break even.
48. Evergreen Capital Partners Ltd, in which PAC invested in FY12, was based in Melbourne and specialised in investing in Australian equities. Evergreen was another boutique that did not attract enough funds under management to survive. In FY14 Evergreen merged with a property fund manager, Freehold Investment Management Ltd, and PAC obtained an interest in Freehold. PAC sold its interest in Freehold in October 2019 for book value.
49. Octis Asset Management Pty Ltd, in which PAC invested in FY13, specialised in investing in Asian equities. Octis was based in Singapore. Octis was not able to attract sufficient funds under management to continue. PAC's 20% interest in Octis was sold in FY16 with PAC's outlaid capital being recovered but with no profit.

General

1. PAC's share price and its ability to pay dividends to PAC's shareholders depended on the dividends, distributions and interest that it received from its boutiques and to a lesser extent on the fees it received for PAC's services.
2. PAC's dividends paid for FY13 and FY14 were $0.40 and $0.50 per share respectively.
3. There was a significant increase in the dividends paid by PAC over the period from FY09 to FY14 due to the performance of IML and RARE and the dividends and distributions they paid PAC.
4. The challenge with PAC's investment model was that PAC had to continue to find and make boutique investments with the aim that one of them would succeed and replace the income that would be lost if one of PAC's mature successful boutiques was sold or collapsed like Orion.
5. If PAC could not make a series of new boutique investments, PAC risked a mature boutique like IML or RARE being sold. Whilst such a sale might produce a one-off significant taxable capital gain for PAC in one FY, as it ultimately did with IML and RARE, going forward PAC would lose the revenue it had been receiving from that boutique. Consequently PAC's share price would suffer as its ability to pay dividends would diminish.
6. Now in July 2011 the board had recognised that PAC's investments were too Australian focused, both in terms of the locations of its boutiques and in terms of investment sectors. Because the majority of PAC's boutiques specialised in Australian equities, PAC risked funds under management stagnating or shrinking if other sectors outperformed Australian equities.
7. The board had already started to address the problem of PAC being too focused on Australia before Mr McGill became CEO in July 2011 with the acquisition of Aubrey in FY10. However, being located in Australia made it difficult for PAC to form the relationships with northern hemisphere founders that might lead to an investment in a boutique.
8. Let me at this point say something about Northern Lights and its boutiques.

Northern Lights

1. Northern Lights was founded in 2006 and headquartered in Seattle, USA. At all material times, Northern Lights was a private limited liability company incorporated under the laws of Delaware, and carried on the business of funds management and investing in fund managers, including in the USA and UK until 25 November 2014. Its assets which were illiquid were investments in private boutique fund managers.
2. First, prior to the merger there were holdings in several boutique fund managers, including Seizert Capital Partners LLC (Seizert), Alphashares LLC (Alpha), del Rey Global Investors LLC, Elessar Investment Management LLC, Tamro Capital Partners LLC (Tamro), and Aether Investment Partners LLC (Aether).
3. Second, there were a number of investments in immature and alternative boutique fund managers including Blackcrane Capital LLC (Blackcrane), EAM Global Investors LLC (EAM), Goodhart Partners LLP (Goodhart), Nereus Holdings LP (Nereus), Northern Lights Alternative Advisors LLP, and Raven Capital Management LLC (Raven).
4. Third, I should say something about WHV. Northern Lights had no equity interest in WHV, only certain contractual rights pursuant to a dividend and appreciation rights agreement. I will return to discuss this in more detail later.

Implementation of the merger

1. Between July and November 2014, PAC and Northern Lights and the Aurora trustee entered into a series of agreements to implement the merger. Those agreements included the following: a deed of amendment to the Aurora Trust; a replacement constitution of the Trustee; an implementation deed between PAC and Northern Lights and an implementation agreement and restatement deed between PAC and Northern Lights; PAC's implementation deed - disclosure letter and Northern Lights' implementation disclosure letter; a securities sale agreement between PAC and the Trustee; a PAC other assets contribution deed and PAC other assets services deed; an exchange deed between PAC, Northern Lights and Class B parties; a unitholders deed between PAC, Northern Lights, NL Sub Y LLC (NL Sub Y), BNP Paribas Asset Management Inc (BNP Paribas), various key employees and the Trustee; a partnership allocation deed between PAC, Northern Lights, NL Sub Y, BNP Paribas and the Trustee; a securities sale deed between PAC and Treasury RARE Holdings Pty Ltd; a contribution agreement between Northern Lights and Northern Lights Midco LLC (Northern Lights Midco) and first amendment to contribution agreement; an amended and restated limited liability company agreement of Northern Lights Midco; a subscription agreement between NL Sub Y, LLC and the Trustee; a contribution and assignment agreement between Northern Lights, NL Sub Y and NL Sub LLC (NL Sub); a first amendment to dividend and appreciation rights agreement; a securities sale agreement between Northern Lights and the Trustee; a Medley committed loan notice; an Aether purchase agreement; an Aether securities purchase agreement; an Aether third amended and restated limited liability company arrangement; and a Seizert promissory note.
2. The key agreements and deeds were executed on or around 4 August 2014 and between 21 and 24 November 2014. I will analyse aspects of these instruments later.
3. As part of the merger, PAC and Northern Lights created the Aurora Trust and the Aurora trustee. And PAC and Northern Lights transferred substantially all of their boutiques to the Aurora Trust in exchange for units. Let me set out some of the detail concerning the merger.
4. PAC was given consideration in the form of units in the Aurora Trust of $255,624,260 for the transfer of its net assets to the Aurora Trust.
5. Northern Lights was given consideration in the form of units in the Aurora Trust of $161,925,984 for the transfer of its net assets to Northern Lights Midco which became a wholly owned subsidiary of the Aurora Trust.
6. Northern Lights and BNP Paribas were issued 32,771,555 and 9,228,445 class X redeemable preference units respectively in the Aurora Trust with an aggregate issue price of USD 42 million (XRPUs).
7. NL Sub Y, a company owned 99% by Northern Lights and 1% by NL Sub, and BNP Paribas were issued 11,704,127 and 3,295,873 class Y redeemable preference units respectively in the Aurora Trust with an aggregate issue price of USD 15 million (YRPUs).
8. A debt of USD 45.6 million was drawn down by Northern Lights Midco to fund cash payable in relation to additional equity in Seizert and Aether.
9. The Aurora Trust issued debt notes with an aggregate value of USD 17.5 million on completion of the acquisition of Seizert.
10. Now at the completion of the merger the following was the position.
11. PAC was issued 23,837,479 class A units in the Aurora Trust representing 61.22% of all the units in the Aurora Trust and 2,065,000 class A-1 units in the Aurora Trust.
12. Northern Lights and BNP Paribas were issued 11,782,095 and 3,317,830 class B units in the Aurora Trust, representing 38.78% of all the units in the Aurora Trust, and 2,140,503 and 235,194 Class B-1 units in the Aurora Trust.
13. Further, as part of the merger, the following transactions also took place.
14. First, let me say something about the Aether transaction. Northern Lights Midco and a further Northern Lights subsidiary, Northern Lights Earn Out Co LLC (Earn-Out Co) acquired the remaining equity in Aether for consideration of USD 40 million plus additional earn-out payments and further cash consideration of USD 3.7 million. And the Aether company management agreement was amended so that Northern Lights Midco, which was the manager of Aether, and Earn-Out Co had rights to certain income distributions.
15. Second, let me say something about the Seizert transaction. Northern Lights Midco acquired the remaining equity in Seizert in exchange for Seizert debt notes, being notes with an aggregate value of USD 17.5 million, and upfront cash consideration of USD 21 million, and deferred cash consideration of USD 7 million (USD 6 million to be paid by PAC and USD 1 million by Northern Lights). Further units were issued to the Seizert employees.
16. Now as part of the merger, the Aurora trustee assumed debts of approximately AUD 131,191,729, comprising the following.
17. First, on 24 November 2014, Northern Lights entered into a debt facility of USD 47 million with Medley Capital Corporation (the Medley loan). The facility was entered into to fund the acquisition of additional equity in Seizert and Aether. The Medley loan was repaid by the Aurora Trust on 4 January 2016 for USD 45.85 million.
18. Second, the Aurora Trust issued debt notes amounting to USD 17.5 million to the former owners of Seizert as part of the consideration for the acquisition by Northern Lights Midco of the equity interest in Seizert. The Seizert debt notes were paid in 2018 and 2020.
19. Third, as I have indicated, 42 million XRPUs were issued to Northern Lights and BNP Paribas. The repayment obligations were contingent on the performance of certain boutiques contributed to the Aurora Trust. At the merger date, the XRPUs had a value of USD 35 million.
20. Fourth, as I have indicated, 15 million YRPUs were issued to NL Sub Y and BNP Paribas with a total redemption price of USD 15 million.

Events subsequent to the merger

1. The first meeting of the Aurora trustee's board saw a report from Mr McGill, who was its CEO, dated 3 December 2014 which indicated, inter-alia, the following matters.
2. First, following the merger, group liquidity was very low.
3. Second, critical cash inflow assumptions for December and January included, as a top priority, the WHV dividend of USD 2 million in December 2014.
4. Third, if actual cash receipts were lower than the inflow assumptions then this could potentially have significant liquidity consequences for Aurora.
5. No WHV dividend was declared or distribution paid in 2014.
6. By 30 June 2015, the Aurora Trust's interest in WHV was written off.
7. Following the merger, PAC's interest in the Aurora Trust was increased. On or around 13 April 2015, PAC's interest in the Aurora Trust increased to 64.03%. And on or around 7 September 2015, PAC's interest in the Aurora Trust increased to 65.15%.
8. On 13 April 2017, the Aurora Trust became wholly owned by PAC.
9. In the period between the merger closing on 24 November 2014 to 30 June 2017, the Trustee wrote down the carrying value of the former Northern Lights boutiques by approximately AUD 218,340,159.
10. This is reflected in the following table: Impairments (AUD) Boutique Period to 30.6.15 Year to 30.6.16 Year to 30.6.17 Nereus 8,878,967 11,212,884 7,647,988 WHV 16,806,616 Raven 9,659,917 417,705 Alpha 3,030,325 TAMRO 1,713,430 Seizert 85,307,202 15,860,138 Aether 51,318,027 Blackcrane 3,699,459 Goodhart 14,564 NL Alternative 368,815 2,404,122 Annual Total 25,685,583 111,292,573 81,362,003 Total to 30 June 2017 218,340,159

1. In the year ending 30 June 2016, PAC reported a net loss of AUD 48.2 million.
2. I will return later to discuss the specific and relevant sequence of events.

Relevant witnesses and evidentiary questions

1. Let me say something about the respondent directors.

Evidence of the directors

1. As at 2014 Mr Kennedy had been the longest serving of the directors having been appointed a director on 4 June 2003. At the time of trial he still remained a director. He had extensive experience in commercial law and had been a director of other public and private companies.
2. Mr Kennedy was careful in his evidence during cross-examination. He answered questions directly, although he was a little feisty at times in response to some of my gentle queries. Nevertheless he was an impressive and reliable witness.
3. Mr Fitzpatrick was a director of PAC from 5 October 2004 until 1 March 2019 and its chairman for most of that period. Through his companies in 2014 he owned about 11.45% of PAC's shares. Mr Fitzpatrick had had extensive experience in the funds management sector. He had also had considerable experience as a company director.
4. Mr Fitzpatrick made numerous concessions in cross-examination, particularly where he accepted his inability to recall discussions and events from 2013 and 2014. Mr Fitzpatrick's evidence was thoughtful and reliable.
5. Mr Hayes was a director from 22 February 2007 to 26 November 2012. He had been the founder of Ausbil Dexia Ltd, a boutique, and part of Barclays Bank's Australian investment operations. Mr Hayes had an extensive knowledge and understanding of boutiques and investment operations generally.
6. Mr Hayes was the first to acknowledge that there were limitations on his ability to give detailed evidence due to his failing memory. Mr Hayes was 80 at the time of giving evidence. Despite these difficulties, Mr Hayes' high level evidence on factors that caused him to vote in favour of the merger was generally reliable.
7. Ms Donnelly joined the board on 28 March 2012. Her background was in accounting and tax and then funds management. She held management positions at Australia New Zealand Banking Group Limited and Queensland Investment Corporation.
8. Since finishing as CEO at QIC, she had established, and then sold, her own company which educated investment executives in the superannuation and funds management industry world-wide.
9. She has held numerous directorships on the boards of public and private fund managers and has held positions on the investment committees of government and private investment bodies and industry superannuation funds.
10. Ms Donnelly, although she was prepared to make concessions, was firm in what she recalled. She gave short and sharp reliable answers. I accept Ms Donnelly's evidence unequivocally.
11. Mr McGill was PAC's chief executive officer. He had been employed as CEO by PAC in July 2011. He was appointed as a director of PAC in August 2013. He ceased to be a director on 28 August 2015.
12. Mr McGill had an impressive employment history with decades of experience in investment banking before coming to PAC. His experience included being a strategy consultant at LEK Partnership, holding senior roles in Macquarie Bank's corporate finance and direct investments teams and then being the founding partner at Crescent Capital, which was an independent specific purpose private equity firm, and where he worked from 2000 to 2010.
13. Most of Mr McGill's evidence was honestly given, although there were some problematic aspects which I will discuss in more detail later concerning the reliability of his evidence on the WHV question.
14. It is necessary at this point to identify some other individuals and entities who are relevant to the events.

PAC executives and employees

1. Mr Joe Ferragina was PAC's chief financial officer and had extensive business qualifications. By 2014 Mr Ferragina had been PAC's CFO for about 10 years. Before that he had extensive experience in finance roles at large organisations.
2. Mr Ferragina's responsibilities included all of the financial aspects of PAC's business such as the preparation of financial statements. He was also involved in analysing potential investments that PAC may make in a boutique.
3. Mr Ferragina's regular reports to the board included reports about PAC's finances. His reports were incorporated into Mr McGill's CEO reports to the board.
4. Based on his work the board considered Mr Ferragina to be a very capable financial officer with a good knowledge of funds management. He sat on the boards of some of PAC's boutiques.
5. Mr Andrew Howard was PAC's chief investment officer. He started at PAC in August 2013.
6. Mr Howard had qualifications in business and in finance before working for PAC. Mr Howard was chief investment officer for the Asia Pacific region at Mercer (Australia) Pty Ltd, part of an international firm specialising in investment consulting, wealth management and associated professional financial services. He had 15 years' experience in assessing fund managers' performance.
7. Mr Howard's role at PAC was to assist in identifying and assessing boutiques which PAC might invest in. Mr Howard developed PAC's portfolio of investment products and identified and reported on new boutique investment opportunities.
8. Ms Ramswarup was PAC's company secretary before and during 2014. Her involvement in the merger was peripheral in that she took board minutes, circulated some emails about board meetings and undertook general administrative functions for, and at the request of, the board.
9. Ms Batoon had an accounting qualification. In 2014 she was PAC's finance manager. She reported to Mr Ferragina. She had previously worked and had experience in accounting for, and integrating finance activities relating to, mergers and acquisitions, minority interests and various types of financial instruments.

Northern Lights' executives

1. Mr Paul Greenwood was a managing director of Northern Lights.
2. Mr Jack Swift was a managing director of Northern Lights and the sales and distribution manager of WHV.
3. Mr Timothy Carver was an executive director and co-founder of Northern Lights and a director of WHV from around the beginning of 2013.
4. Mr Trent Erickson was the chief financial officer of Northern Lights.
5. Mr David Griswold was the general counsel and chief compliance officer of Northern Lights.
6. Mr Jeff Vincent was a non-executive director of Northern Lights. He was also the CEO of Laird Norton Investment Management, Inc., which was a major shareholder in Northern Lights and the sole shareholder of WHV. Mr Vincent was also a director of WHV.
7. Mr Andy Turner was a non-executive director of Northern Lights and one of the original founding partners of Northern Lights. He was a significant shareholder, owning approximately 25% at about May 2014. However his direct involvement with Northern Lights was relevantly through the running of WHV as CEO since the beginning of 2013 and as a board member of Northern Lights.

Gresham

1. Gresham was a typical merchant bank type advisor and was highly regarded in its field.
2. PAC had retained Gresham between 2011 and 2013 with respect to the proposed acquisition of Pinnacle Investment Management Ltd and so the directors were familiar with the quality of Gresham's analysis and work product. In particular, Gresham had valued both Pinnacle and WIG, which owned about 83% of Pinnacle, in 2012 and 2013, respectively.
3. The project name given to the merger and which was used by Gresham and others was Project Bondi. The Gresham executives advising PAC with respect to Project Bondi were Mr Charles Graham (managing director), Mr Alistair Pollock (associate director), Mr Darren MacGregor (executive director) and Mr Timothee Moulin (executive).

Herbert Smith Freehills

1. HSF was PAC's legal advisor in respect of the merger. Like Gresham, HSF had advised PAC with respect to Pinnacle and WIG in 2012 and 2013.
2. The responsible partner at HSF was Mr Peter Dunne and the senior associate assisting Mr Dunne was Ms Shing Lo.

Deloitte

1. There are several entities with the name "Deloitte" involved in the merger to various extents and for different parties.
2. First, Deloitte Touche Tohmatsu (Deloitte Australia) were PAC's auditor and assisted PAC in accounting aspects of the merger. Mr Stuart Alexander, Mr Stephen Connors and Mr Jack Lee were responsible for coordinating with their US counterpart and advising PAC management on accounting issues with the merger.
3. Second, Mr Mark Goldsmith of Deloitte Tax Services Pty Ltd (Deloitte Tax Australia) advised PAC on the tax aspects of the merger. Deloitte Tax Australia's role is of marginal relevance to the proceeding.
4. Third, Deloitte Tax Australia co-ordinated tax issues with its US counterpart (Deloitte Tax USA) which was acting for Northern Lights. Deloitte Tax USA's involvement is of no relevance.
5. Fourth, Deloitte & Touche LLP (Deloitte USA) was also involved. The role of Deloitte USA developed into a significant part of PAC's case as the trial proceeded. Deloitte USA provided the following.
6. It provided a quality of earnings (QoE) data book to Northern Lights which was subsequently provided to PAC management and Gresham on 14 May 2014.
7. Further, it provided the Deloitte due diligence report provided to PAC management on 18 June 2014.
8. Mr Alan Warner, Mr Bruce Gibbens, Mr Masaki Noda and Ms Erika Mitchell of Deloitte USA were primarily responsible for advising Northern Lights. They were also in frequent contact with PAC management.

William Blair

1. William Blair were the financial advisors to Northern Lights, providing Northern Lights with valuations of boutiques, assistance with the due diligence and managing the debt raising aspects of the merger, for example, obtaining loans to acquire majority interests in Seizert and Aether.

Expert witnesses

1. I should say something briefly at this point concerning the expert witnesses.
2. Mr Graham Bradley was an expert called by PAC. As a professional company director and chairman since 2003, he was called to give an expert view as to how reasonable directors in the position of PAC's directors ought to have acted concerning various aspect of the merger.
3. Now according to the respondents, Mr Bradley allowed himself to become effectively an adviser on how PAC's claim should be formulated which tainted his evidence.
4. The respondents point to the fact that on at least four occasions Mr Bradley's report used words strikingly similar to PAC's particulars. Apparently Mr Bradley had assisted to formulate those particulars. According to the respondents, Mr Bradley's evidence understandably adopted pleadings which he assisted in formulating.
5. Further, the respondents say that on numerous occasions where Mr Bradley selected quotes from the Howard assessment, which I will discuss later, he did so in a manner that distorted the original text of document. Mr Bradley agreed that he had used incomplete sentences and accepted that he should have quoted full sentences.
6. Further, the respondents say that Mr Bradley was prepared to rely upon supposedly damaging examples of accounting outcomes from the Deloitte due diligence report which, when explained to him, he accepted were incorrect.
7. But I agree with PAC that these criticisms are somewhat over-stated.
8. Mr Bradley's evidence was that he had a discussion with PAC's solicitors, where he communicated his views about the documents he had reviewed. PAC then subsequently drafted its particulars in a way that was consistent with the views communicated by Mr Bradley. Mr Bradley otherwise did not have any involvement in drafting the particulars. There is nothing untoward about this approach.
9. First, in some cases where the reverse occurs, namely if the documentary trail reveals that an expert has revised and tailored their expert opinion so as to match the pleadings on which the party retaining that expert relies, it may be possible to impugn the independence of the expert. The sequence of events here was the other way around.
10. Second, there is nothing unusual about discussing issues with an expert, including the questions to be formulated for their report to address.
11. As to the criticism concerning whether Mr Bradley distorted the original text of the Howard assessment, Mr Bradley explained in his evidence that the purpose of the passages that he identified was to highlight red flags that the directors should have taken seriously. Although counsel for Mr McGill may have put to Mr Bradley other aspects of the text that provided a favourable picture of certain boutiques, Mr Bradley's purpose was to identify statements that he considered should have put the directors on further enquiry. Now I accept that explanation. But of course there were many parts of the Howard assessment that supported the respondent directors' case.
12. In my view, Mr Bradley was a competent and straight-forward expert, but his evidence did have its limitations. He seemed not to be clear about PAC's business. PAC was not a funds manager but rather an investor in funds managers, usually with a minority interest. Further, he had little if any experience in running or investing in boutique managers. More generally he collapsed the distinction from time to time between the business of investing in boutiques and the business of funds management. Further, he was not aware of documents dealing with weekly meetings between PAC, Gresham personnel and others.
13. In my view, on the substance, there were significant limitations in the use and therefore the weight that I could place on his evidence.
14. I will address aspects of his evidence in more detail later.
15. Mr Barry Lewin was an expert relied upon by the respondents. He had a background as a lawyer and professional director. He covered the same topics as Mr Bradley.
16. In my view Mr Lewin was also a competent and straight-forward expert. But like Mr Bradley, his evidence also had its limitations. Moreover, he did not have direct expertise in the type of business PAC was conducting, with perhaps one exception.
17. I will discuss some aspects of his evidence in more detail later.

The quantum/valuation experts

1. There were two such experts which I will say something more about later concerning valuation questions dealing with WHV.

Jones v Dunkel, adverse inferences and other matters

1. The unexplained failure by a party to call a witness or tender a document may, in appropriate circumstances, support an inference that the uncalled evidence would not have assisted that party's case. The principle in Jones v Dunkel (1959) 101 CLR 298 is one of common sense. But by itself the inference is frequently somewhat barren, for knowing that the evidence of a witness would not have assisted tells one nothing about what the witness's evidence affirmatively would have been.
2. Now PAC has largely conducted a documentary case, which is explicable partly because this is a derivative proceeding. That context justifies me in not drawing the usual Jones v Dunkel inferences because there is not the same control or capacity to adduce evidence from former PAC executives or consultants in a co-operative fashion.
3. Let me address one specific matter. Now the directors assert that I am entitled to draw an inference that evidence given by Mr Dunne, a partner of HSF, would not have assisted PAC's case. But no Jones v Dunkel inference of the type adverted to by the directors is available in the circumstances of this case.
4. Three conditions must be satisfied for the principle in Jones v Dunkel to apply, namely, that the missing witness would be expected to be called by one party rather than the other, the witness' evidence would elucidate a particular matter, and the witness' absence is unexplained. But even if all three conditions are satisfied, I am not required to conclude that the uncalled evidence would not have assisted the party's case
5. Now care is required in assessing the degree to which any particular witness can be said to be in the camp of a party. In the present case there can be no realistic suggestion that PAC was the party expected to call Mr Dunne or that Mr Dunne's knowledge is to be regarded as the knowledge of PAC or that Mr Dunne is in PAC's "camp".
6. The directors' submission ignores the reality of this proceeding. The proceeding is a derivative one, brought with leave of the Court, which was resisted by PAC, and where PAC acting in a different capacity instructed Mr Dunne's firm to represent PAC separately in the proceeding. The directors include current directors of PAC.
7. As I observed during the trial, PAC has largely had to reconstruct events from the documentary record, whilst the relevant corporate knowledge was within the heads of the directors. And as I also observed, there is no reason why the directors could not have approached HSF directly. A common sense assessment of the circumstances of the case does not suggest that PAC could be regarded as the party expected to call Mr Dunne.
8. Let me deal with one other matter concerning the question of the content of board minutes.
9. The requirements for the content of minutes include that a minute of a directors' meeting is not meant to be a report. They must be as concise as circumstances permit. Further, speeches, disagreements and reasons for resolutions are not normally to be recorded.
10. I reject PAC's assertion that to the extent that the non-executive directors say that they considered matters not recorded in the board minutes, their contention should not succeed because the absence of any record of any discussion of important matters tends to show that they were not, or at the best scantly, discussed.
11. Such an assertion misconceives the purpose of minutes being to concisely record key outcomes of discussions. Moreover, the absence of reference to a specific matter being discussed is little if any positive evidence in and of itself that the matter was not discussed. One must consider the omission in its proper context.

General principles: directors' duties

1. Section 180 of the Act provides: Care and diligence - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation's circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer. Business judgment rule (2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they: (a) make the judgment in good faith for a proper purpose; and (b) do not have a material personal interest in the subject matter of the judgment; and (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and (d) rationally believe that the judgment is in the best interests of the corporation. The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. (3) In this section: business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.
2. Section 180(1) is normative and cast in mandatory terms. The section imposes an obligation to meet a statutory standard of care and diligence applicable to the exercise of all of the powers and the discharge of all of the duties of a director or officer, whatever the source. If the required degree of care and diligence is not met, then the section will have been contravened.
3. Section 180(1) creates an objective test, as I said in Australian Securities and Investments Commission v Mitchell (No 2) (2020) 382 ALR 425 at [1397]. The "reasonable person" is an ordinary person who possesses the knowledge and experience of the relevant director.
4. The core duty of the director is to take reasonable steps to place themselves in a position to guide and monitor the management of the company. The directors must become familiar with the fundamentals of the business in which the corporation is engaged and are under a continuing obligation to keep informed about the activities of the corporation. Directorial management requires a general monitoring of corporate affairs and policies. The directors should maintain familiarity with the financial position of the corporation.
5. The duty mandates, at its core, that a director's involvement in the company's management requires ordinary competence or reasonable ability. Equivalently, the duty of diligence requires directors to take reasonable steps to place themselves in a position to guide and monitor the company's management.
6. The purpose of s 180(1) is not to punish the making of mistakes or errors of judgment. Directors and officers are expected to take calculated commercial risks. However, they must exercise care and diligence in the assessment of risk and reward.
7. As stated by Robson J in Australian Securities and Investments Commission v Lindberg (2012) 91 ACSR 640 at [72]: Section 180(1) does not seek to punish the mere making of mistakes or errors of judgment. Making mistakes does not by itself demonstrate lack of due care and diligence. The business judgment rule in s 180(2) also recognises that business judgments made in good faith and on a proper basis do not fall within s 180(1). Directors and officers of corporations are expected to take calculated commercial risks. A company run on [the] basis that no risks were ever taken would be unlikely to be successful. The proper taking of risk in making business decisions is entirely consistent with exercising care and diligence. The proper assessment of the risks and potential rewards is a matter that demands the exercise of care and diligence. The two concepts complement each other in the management of corporations.
8. Now in order for an act or omission of the director to be capable of constituting a contravention of s 180(1) there must be reasonably foreseeable harm to the interests of the company caused thereby.
9. In Australian Securities and Investments Commission v Mariner Corporation Ltd (2015) 241 FCR 502, I said (at [447] to [452]): It is wrong to assert that if a director causes a company to contravene a provision of the Act, then necessarily the director has contravened s 180. No contravention of s 180 would flow from such circumstances unless there was actual damage caused to the company by reason of that other contravention or it was reasonably foreseeable that the relevant conduct might harm the interests of the company, its shareholders and its creditors (if the company was in a precarious financial position) (see ASIC v Maxwell at [99]-[110] and Australian Securities and Investments Commission v Macdonald (No 11) (2009) 230 FLR 1; 256 ALR 199 at [236]). In order for an act or omission of the director to be capable of constituting a contravention of s 180 there must be reasonably foreseeable harm to the interests of the company caused thereby. Further, relevant to the question of breach of duty is the balance between, on the one hand, the foreseeable risk of harm to the company flowing from the contravention and, on the other hand, the potential benefits that could reasonably be expected to have accrued to the company from that conduct. Not only must the Court consider the nature and magnitude of the foreseeable risk of harm and degree of probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action, but the Court must balance the foreseeable risk of harm against the potential benefits that could reasonably be expected to accrue from the conduct in question. After all, one expects management including the directors to take calculated risks. The very nature of commercial activity necessarily involves uncertainty and risk taking. The pursuit of an activity that might entail a foreseeable risk of harm does not of itself establish a contravention of s 180. Moreover, a failed activity pursued by the directors which causes loss to the company does not of itself establish a contravention of s 180.
10. Observations resonating with these themes were made by Edelman J in Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209 at [675] where he said that the Court must balance "the foreseeable risk of harm to any of the interests" of the company against "the magnitude of that harm, together with the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question, and any burdens of further alleviating action".
11. Further, as Thawley J observed, the balancing exercise is not confined to balancing competing commercial considerations or their varying financial consequences, but extends to considering "all of the interests of the corporation, including its continued existence and its interest in pursuing lawful activity" (Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533 at [459]). I should say for completeness that State intermediate appellate courts have applied Cassimatis; see DSHE Holdings Ltd (Receivers and Managers) (in liq) v Potts (2022) 163 ACSR 23 at [112] to [115] per Leeming and Kirk JJA and Basten AJA.
12. In Mariner Corporation I also said (at [440] and [441]): It is not in doubt that the circumstances of the particular company concerned inform the content of the duty. These include the size and type of the company, the size and nature of the business it carries on, the terms of its constitution, and the composition of the board of directors. It is also not in doubt that in considering the acts or omissions of a particular director, one looks at factors including the director's position and responsibilities, the director's experience and skills, the terms and conditions on which he has undertaken to act as a director, how the responsibility for the company's business has been distributed between the directors and the company's employees, the informational flows and systems in place and the reporting systems and requirements within the company.
13. Further, it may be necessary, when examining the corporation's circumstances for the purposes of s 180(1)(a), to have regard to whether the company is listed or unlisted (Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1 at [7201] per Austin J).
14. Now the responsibilities referred to in 180(1)(b) include the responsibilities that the director has within the corporation, regardless of how those responsibilities came to be imposed on that director. As such, it is not the case that "responsibilities" refer only to specific tasks delegated to the relevant director.
15. Let me say something about the position of chairman as it is relevant to Mr Fitzpatrick's position.
16. I outlined the specific role and responsibilities of the chairman in Australian Securities and Investments Commission v Mitchell (No 2) at [1398] to [1426] in which I identified the usual powers and responsibilities, including having the power, authority and responsibility where relevant to manage board meetings, to ensure that the board has before it sufficient information, to ensure that sufficient time is allowed for the discussion of complex or contentious matters and to ensure that there is appropriate communication with and taking into account the interests of members of the company. It is worth setting out again with necessary modification what I said at [1398] to [1426].
17. The Act does not make any express reference to the roles or functions of a chairman of the board, although there are legislative rules able to be displaced or modified by a company's constitution (s 135 and also Chapter 2G) concerning formalities or procedural matters involving the chairing of directors' meetings or shareholders' meetings.
18. Further, there was regulatory guidance around the relevant time in the form of the ASX's Corporate Governance Principles and Recommendations. Recommendation 2.5 (3rd edition, 2014) provided that the chairman of a listed entity should be an independent director, and should not be the same person as the CEO. The commentary to Recommendation 2.5 (3rd edition, 2014) described the responsibilities of the chairman: The chair of the board is responsible for leading the board, facilitating the effective contribution of all directors and promoting constructive and respectful relations between directors and between the board and management. The chair is also responsible for setting the board's agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues.
19. The prior version (2nd edition, 2007 with 2010 amendments) had a similarly worded but differently numbered Recommendation 2.2. The commentary to it provided: The chair is responsible for leadership of the board and for the efficient organisation and conduct of the board's functioning. The chair should facilitate the effective contribution of all directors and promote constructive and respectful relations between directors and between board and management. Where the chair is not an independent director, it may be beneficial to consider the appointment of a lead independent director. The role of chair is demanding, requiring a significant time commitment. The chair's other positions should not be such that they are likely to hinder effective performance in the role.
20. In AWA Ltd v Daniels (t/as Deloitte Haskins & Sells) (1992) 7 ACSR 759, Rogers J said at 867: The chairman is responsible to a greater extent than any other director for the performance of the board as a whole and each member of it. The chairman has the primary responsibility of selecting matters and documents to be brought to the board's attention, for formulating the policy of the board and promoting the position of the company. In discharging his or her responsibilities the chairman will cooperate with the managing director if the two positions are separate or otherwise with senior management.
21. This judgment was appealed, but the Court of Appeal did not question these observations (see Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995) 37 NSWLR 438).
22. In Woolworths Ltd v Kelly (1991) 22 NSWLR 189 at 225, Mahoney JA said: …a person who is a chairman of the board of directors has additional rights and duties and additional opportunities. Ordinarily it is the function of a chairman to settle the agenda of the meetings of the board: at least he exercises a significant influence upon it. He is in a position, in the sense here relevant, to ensure that proposals are brought forward for consideration by the directors at their meetings. And this, in a particular case, may affect the content of fiduciary duties which he owes to his company.
23. Let me delve a little deeper into the position of the chairman of the board.
24. Clearly, he has no power or authority to manage the corporation. His primary function is to preside at board meetings and accordingly to exercise procedural control. But save for that, and his power to exercise a casting vote (if applicable), he has no greater authority than an ordinary director. He is not some sort of directorial overlord. But he does have the power and authority to manage board meetings and to that extent he may have greater responsibility for the performance of the board as a whole.
25. But the chairman does have the power, authority and responsibility for setting the agenda items for board meetings, although these may be added to by the agreement of other directors. He can also discharge that responsibility in consultation with the CEO.
26. He also has the power, authority and responsibility to ensure that the board has before it sufficient information, whether presented in written or oral form, such as to be able to meaningfully consider, discuss and decide on the agenda items before the board at the relevant meeting taking into account the context of the decision required or consideration necessary by the board at that meeting. Of course, he may discharge such a responsibility in consultation with the CEO.
27. The chairman also has the power, authority and responsibility to manage the board to ensure that sufficient time is allowed for the discussion of complex or contentious matters; for this purpose it may be necessary to arrange meetings outside board meetings so that board members are thoroughly prepared.
28. Further, the chairman is there to ensure that the board members work effectively together and to ensure that their skill sets and personalities complement each other. Moreover, he should endeavour to facilitate the effective contribution of each director.
29. Further, the chairman is there to ensure workable and harmonious relations between the executive and non-executive directors, and more generally to ensure workable and harmonious relations between the board on the one hand and the executive management on the other hand, particularly the CEO. It should go without saying that the relationship between the chairman and the CEO needs to be productive and harmonious; the chairman should facilitate this.
30. Further, the chairman may have greater responsibility for defining and ensuring that the board sets and implements the corporate culture of the organisation in the neutral sense referred to in s 12.3(6) of the Criminal Code (Cth) meaning "an attitude, policy, rule, course of conduct or practice existing within the body corporate generally". So, in one sense, such culture may be described as the organisation's set of shared values and assumptions. For present purposes it is not necessary to elaborate on such themes, let alone seek to infuse them with any discussion of contemporary community expectations or standards if it was ever possible to distil their essence at any particular time.
31. Further, the chairman may have greater responsibility for defining and ensuring that the board sets and implements the appropriate corporate governance structure within the organisation. I use corporate governance here in the sense described in the ASX's publications that I have referred to above adopting what was said by Justice Neville Owen in the HIH Royal Commission report, being the framework of rules, relationships, systems and mechanisms under which authority is exercised and controlled within the corporation and under which it is accountable.
32. Further, there are other responsibilities of the chairman including assisting to identify new directors, dealing with the induction of new directors and ensuring continuing education and development of each director. More generally, he is responsible for monitoring the performance of the board, board members and board committees.
33. Further, the chairman is there to ensure that there is appropriate communication with and the taking into consideration of the interests and concerns of members.
34. Finally, the chairman may have a public relations role in representing the board and the organisation to outside parties.
35. Let me now shift the focus slightly and say something about the chairman's role in the context of corporate practices. In this context, one has to look at what I would describe as two types of corporate practices relevant to an organisation.
36. The first type is descriptive corporate practices. In other words, what were the types of actual corporate practices within the organisation? What was actually done in terms of the division of corporate structure and responsibilities? In that context, one might then identify what the organisation expected of the chairman, and then compare it with what the chairman actually did.
37. The second type is normative corporate practices. In other words, what should have been the corporate practices within the organisation? These may differ from the actual practices. Further, such a normative question may only be able to be answered by looking at actual corporate practices both within and outside the organisation. Now these may identify what could be described as the "usual practices". But even identifying such usual practices does not necessarily identify what should have been the practices. Normative corporate practices and "usual" corporate practices are not one and the same thing.
38. Let me deal with another dimension. What did the chairman undertake to do or represent that he would undertake to do? The latter question may inform or be part of the foundation to assess expectation. But of course expectation may travel beyond and be informed by matters broader than the latter question.
39. Further, the chairman's represented personal qualities and skills may affect the question of expectation. There is no reason why a chairman's represented special qualifications and experience ought not be considered in this context. Indeed, they may have formed part of what the chairman represented as demonstrating his suitability for the position in the first place, which may inform expectation.
40. So position, responsibilities and represented personal qualities all feed into the question of expectation.
41. Let me make some other observations.
42. With respect to the "office", although the duty is the same for executive and non-executive directors, it has been said that non-executive directors are not subject to the same higher standard as executive directors (Rich at [7196]). The role of non-executive directors is to guide and monitor the management of the corporation rather than to be involved at an operational level.
43. Further, the "responsibilities" referred to in s 180(1)(b) are not confined to statutory responsibilities; they include all responsibilities held by the officer within the corporation, irrespective of the manner or reasons by which those responsibilities came to be imposed on that officer.
44. Consequently, in considering the acts or omissions of a particular director, one looks at factors including the director's position and responsibilities, the director's experience and skills, the terms and conditions on which he or she has undertaken to act as a director, how the responsibility for the corporation's business has been distributed between the directors and the corporation's employees, the informational flows and systems in place and the reporting systems and requirements within the corporation.
45. Further, although s 180(2) contains a statutory form of "business judgment" rule, s 180(1) itself contains a tolerance or margin of appreciation for the business judgment of directors in relation to a particular act or omission, including a decision to act or not to act, such that so to act or not act may not constitute a breach of s 180(1).
46. Further, as I have already indicated, the statutory duty of care recognises a distinction, which must be kept firmly in mind, between negligence and mere mistakes, with liability arising for the former but not for the latter. The standard is reasonable care and skill, not perfection. In this regard Austin J said in Rich (at [7242]): … The statute requires the court to apply a standard defined in terms of the degree of care and diligence that a reasonable person would exercise, taking into account the corporation's circumstances, the offices occupied by the defendants and their responsibilities within the corporation. That requires the defendants' conduct to be assessed with close regard to the circumstances existing at the relevant time, without the benefit of hindsight, and with the distinction between negligence and mistakes or errors of judgment firmly in mind. If the impugned conduct is found to be a mere error of judgment, then the statutory standard under s 180(1) is not contravened and it is unnecessary to advert to the special business judgment rule in s 180(2). …
47. Now in relation to decisions made in expectation of events that might happen in the future, courts are conscious that forecasting is a difficult and uncertain process, with much room for mistakes and errors of judgment, and for differences of opinion. As Austin J said (at [7241]): In [Vines], I held that the quoted passages from McLelland CJ in Eq's judgment were applicable to people in the position of officers of a corporation, such as the defendants in that case. They are also relevant to the present case. In [Vines] the facts concerned forecasting in a reinsurance business, whereas in the present case the facts concern, amongst other things, financial forecasting in a telecommunications company. In both situations, forecasting is a difficult and uncertain process, with much room for mistakes and errors of judgment, and for differences of opinion.
48. Further, directors are entitled to rely upon others unless they know, or by the exercise of ordinary care should know, facts that deny reliance. The degree of a director's permissible reliance on others will turn on similar considerations as those that determine the overall standard of care for an individual director. They focus particularly on the characteristics of the corporation, the skills and experience of the director concerned and the delegate, and the reasonably anticipated risks entailed in so doing. What is expected is a level of scrutiny as befits supervision, not the detailed direct involvement that is associated with operational responsibility. Where there is no cause for suspicion or circumstances demanding critical and detailed attention, it is reasonable for an officer to rely on advice without independently verifying the information or scrutinising the data or circumstances upon which that advice is based.
49. Further, a non-executive director may rely on management and other officers to a greater extent than an executive director.
50. Further, if its requirements are satisfied, s 189 deems reliance by a director to have been reasonable unless proven otherwise. Section 189 provides: If: (a) a director relies on information, or professional or expert advice, given or prepared by: (i) an employee of the corporation whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned; or (ii) a professional adviser or expert in relation to matters that the director believes on reasonable grounds to be within the person's professional or expert competence; or (iii) another director or officer in relation to matters within the director's or officer's authority; or (iv) a committee of directors on which the director did not serve in relation to matters within the committee's authority; and (b) the reliance was made: (i) in good faith; and (ii) after making an independent assessment of the information or advice, having regard to the director's knowledge of the corporation and the complexity of the structure and operations of the corporation; and (c) the reasonableness of the director's reliance on the information or advice arises in proceedings brought to determine whether a director has performed a duty under this Part or an equivalent general law duty; the director's reliance on the information or advice is taken to be reasonable unless the contrary is proved.
51. Further, the duty under s 180(1) is in addition to the common law and equitable duties owed by directors to their corporations; see s 185.

Section 180(2) - business judgment rule

1. An officer relying upon s 180(2) bears the onus of proving its elements.
2. In Mariner Corporation, I said (at [484] to [490]): The concept "business judgment" is defined in s 180(3) to mean "any decision to take or not take action in respect of a matter relevant to the business operations of the corporation". Mr Olney-Fraser bears the onus of proving each element of the rule (Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364 at [197]). The first requirement of the rule is that there must be a "business judgment". To be a business judgment there must be a decision to take or not to take action in respect of matters relevant to the business operations of the corporation. In the present context, the relevant "business judgment" was the decision to initiate a takeover bid for Austock, the necessary starting point for which was the making of the 25 June announcement. Having regard to the nature of Mariner's business and the evidence concerning the potential benefits to Mariner of attaining control of Austock, the decision to commence the takeover and make the 25 June announcement was a business judgment. ASIC's characterisation of the directors' decision as a judgment not to comply with the Act and its reliance upon ASIC v Fortescue Metals Group Ltd at [197]-[198] (set aside on other grounds), is a misconceived analysis of the judgment made by Mr Olney-Fraser. No decision was made not to comply with the Act, indeed the converse. … The second requirement is that the judgment be made in good faith for a proper purpose. This requirement is satisfied. Mr Olney-Fraser decided to support the takeover and make the 25 June announcement because of the potential for Mariner to make a significant profit, and where he believed that the decision to make the announcement and pursue a takeover bid for Austock was in the best interests of Mariner. As to the third requirement, that there be no material personal interest in the subject matter of the judgment, this was satisfied. As to the fourth requirement, to "inform themselves of the subject matter of the judgment to the extent they reasonably believe to be appropriate", in ASIC v Rich at [7283] and [7284], Austin J stated: The element of the business judgment rule set out in s 180(2)(c) is that the director or officer must inform themselves about the subject matter of the judgment to the extent that they reasonably believe to be appropriate. I agree with ASIC's submission (APS [2096(e)]) that the reasonableness of the belief should be assessed by reference to: • the importance of the business judgment to be made; • the time available for obtaining information; • the costs related to obtaining information; • the director or officer's confidence in those exploring the matter; • the state of the company's business at that time and the nature of competing demands on the board's attention (referring to the ALI Principles at 178); and • whether or not material information is reasonably available to the director (citing Smith v Van Gorkom 488 A.2d 858 at 872 (Sup Ct Del, 1985)). ASIC submitted (APS [2096(f)]) that the requirement that the director or officer inform themselves "to the extent they reasonably believe to be appropriate" reflects the view that regard must be had not only to what the director or officer actually knew, but what he or she should have known (citing People's Department Store Inc v Wise [2004] 3 SCR 461 at [67]). In my view that submission distorts the statutory language, for it would deny protection unless the director were able to show previous compliance with the duty of care and diligence on another issue, namely to keep informed of material matters affecting the exercise of the powers and the discharge of the duties office. The statutory language relates to the decision-making occasion, rather than the general state of knowledge of the director. It requires the director to become informed about the subject matter of the decision prior to making it, since the business judgment rule should not protect decisions taken in disregard of material information readily available. The qualifying words, "to the extent they reasonably believe to be appropriate", convey the idea that protection may be available even if the director was not aware of available information material to the decision, if he reasonably believed he had taken appropriate steps on the decision-making occasion to inform himself about the subject matter.
3. For the business judgment rule to apply, the facts must show that the director has made an identifiable business judgment. The definition of "business judgment" is expansive. The words "in respect of a matter relevant to" show that the matter concerned need not itself be a business operational matter. Business judgments include matters that are preparatory to the making of a business decision, including planning, budgeting and forecasting activities.
4. So, for example, a decision to make a takeover bid was a decision about "business operations" in the particular circumstances in Mariner Corporation.
5. The characterisation test is whether the decision has any effect, and was intended to have any effect, on any aspect of the corporation's existing or potential business operations or a matter relevant to such operations.
6. Further, s 180(2) is not engaged where the director fails to turn his or her mind to a particular issue. In that circumstance the requirements of s 180(2)(c) and (d) could not be satisfied.
7. Further, with respect to the requirement in s 180(2)(a) that the judgment be made in good faith for a proper purpose, this is satisfied if the Court accepts evidence from the director that he or she saw the transaction as beneficial to the corporation and he or she believed it was in the best interests of the corporation.
8. Further, where the decision is made in order to promote the director's personal interest, by making or pursuing personal gain where there was a real possibility of a conflict of interest, the decision will not have been made in good faith.
9. Further, with respect to the requirement in s 180(2)(b) that the director not have a material personal interest in the subject matter of judgment, the words "material personal interest" appear in many sections of the Act such as ss 191, 195 and 237.
10. Further, in relation to the requirement in section 180(2)(c) that the director informs himself to the extent he reasonably believes to be appropriate, the reasonableness of the belief should be assessed by reference to:
11. the importance of the business judgment to be made;
12. the time available for obtaining information and the costs related to obtaining information;
13. the director or officer's confidence in those exploring the matter;
14. the state of the company's business at that time and the nature of competing demands on the board's attention; and
15. whether or not material information is reasonably available to the director.
16. Further, in relation to the requirement in s 180(2)(d) of a rational belief that the business judgment is in the best interests of the corporation, the director's belief will be rational if it was based on reason or reasoning, whether or not the reasoning was convincing and therefore reasonable in an objective sense, but it would not be a rational belief if there was no arguable reasoning process to support it.
17. Austin J put it this way in Rich (at [7290] and [7291]): On this view, which I favour, subpara (d) is satisfied if the evidence shows that the defendant believed that his or her judgment was in the best interests of the corporation, and that belief was supported by a reasoning process sufficient to warrant describing it as a rational belief, as defined, whether or not the reasoning process is objectively a convincing one. Consequently the Australian position on this matter is very close to the US position and s 180(2) has some protective work to do in cases where in its absence, there would or would arguably be a contravention of s 180(1). The director or officer's belief about the best interests of the corporation is to be formed, and its rationality assessed, on the basis of the information obtained through compliance with subpara (c). It is not to be assumed, for the purpose of applying subpara (d), that the director or officer knew everything that he or she ought to have known, but only the things that he or she reasonably believed to be appropriate to find out.

Fiduciary duty

1. I will not dwell on questions concerning the position of a director as a fiduciary at this stage other than to make some brief points.
2. First, I am concerned here only with s 180(1) and analogue equitable duties that a director might have. So, accepting that a director is a fiduciary, a director may also have an equitable but non-fiduciary duty to exercise skill and care in discharging his functions as a director. Such a prescriptive duty is by its very formulation neither of the two usual proscriptive fiduciary duties that in the present context are of no relevance. I am not concerned at all with ss 181 to 183 or with associated or analogue fiduciary duties that a director is subject to, being not to obtain an unauthorised benefit for himself or for others from his position qua director and not to act or to place himself in a position of conflict between his duties as a director and any other duty or interest extraneous to that office. And I will pass by the question of whether implicit or inherent in the two usual proscriptive duties are correlative but debatable prescriptive duties such as the duty to disclose or the duty to account, unless one just treats the fact of failure to disclose or the fact of failure to account as part of the breach of one of the proscriptive duties.
3. Second, the equitable duty to exercise skill and care for present purposes can be treated, in terms of the liability phase of the trial, as being co-extensive with the statutory duty under s 180(1). At the least, none of the parties before me suggested any different boundaries or content. I am here not concerned with remedies flowing from any breach of duty where the source of the duty may dictate the available potential remedies, whether against the wrongdoing director or third parties tainted by or implicated in the director's conduct or its consequences. Further, it is not in doubt that although a director has sometimes been said to be in a position akin to or as if he were a trustee vis-à-vis the company because of his individual or collective control with others (as the case may be) over the company's assets, the equitable duty of care here or at least its context or application is not analogous to a trustee's duty of care. A director is expected to take calculated and commercial risks in deploying and growing a company's capital. Contrastingly, a trustee's concern is one of conservatism and conservation concerning the trust's capital.
4. It is both unnecessary and unwise to ruminate further on these topics as others have done so with much more skill and flair; see the Honourable William Gummow KC's article, The equitable duties of company directors (2013) 87 ALJ 753.
5. It is unnecessary because in the circumstances before me the factual analysis is one and the same, and in terms of findings of breach, there will be either breaches of both the statutory and the equitable duties or breaches of neither.
6. It is unwise because I may unwittingly trespass into heresy and unintentionally excite equity scholars, which would be a distraction given that this case rises or falls on facts that I have mined from the coal face of forensic inquiry, rather than nice distinctions which in the present context are of theoretical interest only and may only lead to shilly-shallied intellectualisation.
7. Finally, I do not need to say anything concerning analogies with negligence at common law.

The board's charter

1. Let me address one other matter.
2. I was provided with a document titled "Board of Directors Charter" issued in March 2011 and a further version which was re-issued in October 2014. The board of PAC had from to time resolved to comply with this charter.
3. The charter dealt with the role of the board and its procedures, including the role of the chairman and the managing director. Apart from the plain vanilla provisions in clauses 3.1 to 3.3, other specific provisions should be noted.
4. The charter provided in clause 3.4: 3.4 Chairman and Deputy Chairman 3.4.1 Each year the Board will appoint from among the Members a Chairman and Deputy Chairman. 3.4.2 Both the Chairman and Deputy Chairman will be non-executive Members (Unless otherwise determined). The Deputy Chairman will deputise for the Chairman in his or her absence or at his or her request. 3.4.3 The Chairman is responsible for representing the Board to Shareholders. 3.4.4 The Chairman is responsible for ensuring the integrity and effectiveness of the governance process of the Board as set out in this Part 3. 3.4.5 The Chairman is responsible for maintaining regular dialogue with the MD over all operational matters and will consult with the remainder of the Board promptly over any matter that gives him or her cause for major concern. 3.4.6 The Chairman will act as facilitator at meetings of the Board to ensure that no member, whether executive or non-executive, dominates discussion, that appropriate discussion takes place and that relevant opinion among Members is forthcoming. The Chairman will ensure that discussions result in logical and understandable outcomes.
5. Further, clause 3.5.4 concerning the audit committee stated: 3.5.4 The board has three standing committees, namely the audit, remuneration and nomination committees. Other committees are formed for specific purposes and disbanded as required. The purposes and membership of the standing committees are as follows: The Audit Committee consists of two Members all of whom, whenever possible, must be non-executive. The committee provides a forum for the effective communication between the Board and the external and internal auditors. The committee review the annual and half-yearly financial statements prior to their approval by the Board, the effectiveness of management information systems and systems of internal control, and the efficiency and effectiveness of the external and internal audit functions.
6. Further, in terms of the position of the managing director, clause 4.1 stated: 4.1 Position of MD 4.1.1 The Board will link the Company's governance and management functions through the MD. 4.1.2 All Board authority conferred on management is delegated through the MD so that the authority and accountability of Management is considered to be the authority and accountability of the MD so far as the Board is concerned. The Board must agree to the levels of sub-delegation immediately below the MD. 4.1.3 The Board will agree with the MD to achieve specific results directed toward the Company Goals. This will usually take the form of an annual performance contract under which the MD is authorised to make any decision and take any action within the Management Limitations, directed at achieving the Company Goals. 4.1.4 Between Board meetings the Chairman maintains an informal link between the Board and the MD, the Chairman expects to be kept informed by the MD on all important matters, and is available to the MD to provide counsel and advice where appropriate. 4.1.5 Only decisions of the Board acting as a body are binding on the MD. Decisions or instructions of individual members, officers or committees are not binding except in those instances where specific authorisation is given by the Board.
7. Further, clause 4.2 in terms of the accountability of the managing director to the board stated: 4.2 Accountability of MD to Board 4.2.1 The MD, in association with the Chairman, is accountable to the Board for the achievement of the Company Goals and the MD is accountable for the observance of the Management Limitations. 4.2.2 At each of its normal monthly meetings the Board should expect to receive from or through its MD:

• the operational and other reports and proposals referred to in paragraph 3.3.6; and
• such assurances as the Board considers necessary to confirm that the Management Limitations are being observed.

1. Further, clause 4.3 dealing with management limitations provided: 4.3 Management Limitations 4.3.1 The MD is expected to act within all specific authorities delegated to him or her by the Board. 4.3.2 The MD is expected to not cause or permit any practice, activity or decision that is contrary to commonly accepted good business practice or professional ethics. 4.3.3 In allocating the capital and resources of the Company the MD is expected to adhere to the Company Goals. 4.3.4 The MD is expected to not cause or permit any action without taking into account the health, safety, environmental and political consequences and their effect on long-term shareholder value. 4.3.5 In financing the Company the MD is expected to not cause or permit any action that is likely to result in the Company becoming financially embarrassed. 4.3.6 The assets of the Company are expected to be adequately maintained and protected, and not unnecessarily placed at risk. In particular, the Company must be operated with a comprehensive system of internal control, and assets or funds must not be received, processed or disbursed without controls that, as a minimum, are sufficient to meet standards acceptable to the Company's external auditors. One of the tools used as a framework is an asset management plan for both on and off balance sheet assets. In managing the risks of the Company, the MD is expected to not cause or permit anyone to substitute their own risk preferences for those of the Shareholders as a whole. 4.3.7 The MD is expected to not permit employees and other parties working for the Company to be subjected to treatment or conditions that are undignified, inequitable, unfair or unsafe. 4.3.8 The MD is expected to not cause or permit payments to be made or rewards given unless that are in return for contributions towards the purposes of the Business and are proportional to the extent that the contribution in question has furthered such purposes.
2. Further and for completeness, the "Company Goals" (see clause 1.1 definition) were set out in clause 2.1 in the following terms: 2.1 General 2.1.1 The purpose of the Company is to maximize shareholder returns through the provision of funds management services. 2.1.2 The capital and resources of the Company will be allocated to those assets and activities which will enable it to achieve the Company Goals in a manner best serving the interests of the Shareholders as a whole.
3. I have taken the contents of this charter into account in considering the powers, duties and responsibilities of Mr Fitzpatrick, Mr McGill and the other directors and any relevant differences between them insofar as they impact on the scope or application of s 180(1).

The sequence of events

1. In October 2013, Mr McGill entered into discussions with Mr Carver, the managing director of Northern Lights, regarding opportunities for PAC and Northern Lights to work together on a potential merger. The potential opportunity gave both firms an international presence and greater diversity of earnings. This project ultimately became known as Project Bondi.
2. In the early part of their communications there had been some email and telephone contact between Mr McGill and Mr Carver which was later followed up by personal meetings in Australia between them in Sydney and between Mr Fitzpatrick and Mr Carver in Victoria in late 2013.
3. From 1 November 2013 PAC and Northern Lights exchanged information pursuant to a mutual evaluation and non-disclosure agreement.
4. On 6 November 2013 a PAC board meeting was held.
5. Prior to the board meeting, board papers were circulated which included Mr McGill's 30 October 2013 report which reported on an investment in a boutique to be established by Macquarie Bank's private equity team, which subsequently became one of PAC's boutiques in May 2014, and on Northern Lights.
6. Mr McGill described Northern Lights' corporate profile and his view that there was potentially strategic merit for both firms to explore some form of relationship, potentially a merger.
7. The minutes for the meeting record that early stage discussions with Northern Lights had commenced concerning a potential merger.
8. On 7 November 2013, the PAC annual general meeting took place. At that meeting, Mr Fitzpatrick addressed the shareholders and spoke by reference to a slide presentation.
9. Mr Fitzpatrick told the meeting that PAC had been unsuccessful in its attempt to acquire 20% of shares in WIG, that WIG's shareholders had an unrealistic view of WIG's share price and that the board had decided not to proceed further with acquiring WIG shares. He said that PAC had reviewed 73 investment opportunities since July 2012 which had led to one investment. And he said that PAC's strategy continued to include pursuing merger and acquisition opportunities at a corporate level.
10. Mr McGill also addressed the AGM and spoke of the need for expansion and diversification of investment opportunities to facilitate PAC's growth strategy.
11. Now in relation to any merger with Northern Lights, from the outset it was understood by Mr McGill and PAC management that the deal had to be earnings per share (EPS) accretive for PAC shareholders.
12. On 28 November 2013 PAC retained Deloitte Tax Australia to advise PAC about taxation issues relating to the proposed merger.
13. After PAC retained Deloitte Tax Australia to assist in coming to grips with taxation aspects of the proposal, there were direct discussions between Mr Goldsmith and Mr Erickson of Northern Lights. Deloitte Tax Australia also consulted with Deloitte Tax USA. Work on the tax structure continued throughout December 2013.
14. On 28 November 2013, Mr Carver sent via email to Mr McGill and others a terms sheet timeline and what was described as an "NL Valuation Model".
15. The model included projections for future revenue growth in respect of Northern Lights' boutiques. Total revenue for all of Northern Lights' boutiques was expected to increase from USD 83.2 million to USD 222.3 million between FY13 and FY20. The document also included a discounted cash flow analysis prepared by Mr Carver, which produced a net present value of $255.4 million for Northern Lights' boutiques.
16. Concerns over the robustness of the valuation model were raised by PAC's chief financial officer, Mr Ferragina, with Mr McGill, at the time.
17. Mr McGill had concerns over the reliability of Northern Lights' forecasts at the time and considered that they were aggressive and optimistic in the context of negotiations.
18. Mr Ferragina prepared a model which produced valuations and an EPS analysis into which could be fed information such as Northern Lights' annual projections for its boutiques on a seven year forward estimate basis which were provided to PAC on 28 November 2013. Northern Lights valued itself at USD 255.4 million.
19. By the end of November 2013 Mr McGill and Mr Ferragina continued discussions directly with Mr Carver and other Northern Lights executives about matters such as the assumptions for terminal value in the net present value and forecasting. Further, Mr Ferragina was providing regular updates, particularly as to valuation, to Mr McGill and Mr Fitzpatrick.
20. On 2 December 2013 Mr Howard provided Mr McGill and Mr Ferragina with his preliminary comments and queries about Northern Lights's managers. Mr McGill then requested a comprehensive list of follow up questions to ask Northern Lights. Mr Howard provided them later in the day.
21. Further, on 2 December 2013 Mr McGill sent Mr Ferragina an updated but incomplete financial model for the merger. Mr McGill had made amendments to the model. Mr McGill provided a slightly more developed version of the model to Mr Howard on 5 December 2013.
22. Later on 2 December 2013, Mr McGill wrote to Mr Carver setting out issues to work through, particularly as to valuation and the importance of the transaction being EPS accretive for PAC and suggesting a meeting.
23. Subsequently, Mr Ferragina met with Mr Goldsmith of Deloitte Tax Australia to discuss various options for the structuring of the transaction.
24. On 4 December 2013, the potential merger was discussed at a PAC board meeting.
25. Prior to the 4 December 2013 board meeting, board papers were circulated which included Mr McGill's 27 November 2013 report and Northern Lights' data presentation.
26. In his report to the PAC board dated 27 November 2013, Mr McGill noted that discussions with Northern Lights had continued. He provided a presentation to the PAC board, which contained information about Northern Lights and its boutiques. The report relevantly noted that: …

• The investment structures are complex as evidenced by the number and type of boxes on the group structure charts; …
• Aggregate portfolio company revenue in 2013 (note, NL is December year end) was USD$90.0m which compares to [PAC]'s aggregate boutique revenue of $84.3m in FY13 making both portfolios similar in scale. However, [PAC]'s portfolio is more profitable - aggregate boutique PBT in FY13 was $47.9m compared to NL's aggregate EBITDA of $20.0m
• NL achieved a significantly higher level of cash distribution (USD$11.5m) from its portfolio in FY13 than in prior years however a large amount of this was a capital return and non-recurring. We understand that the recurring cash distribution was around USD$6.0m. Also, we have been told that the FY14 forecast is USD$10.0m.
• We do not yet properly understand the structure of each of NL's investments. At this stage, we believe that the cash distributions to NL from its portfolio are received on a pre-tax basis. This is in contrast to [PAC]'s situation where 51% of our FY14 forecast cashflow from associates will be received as fully franked dividends post tax; …

1. Mr McGill's CEO report relevantly addressed two important topics, being retaining Berkshire Capital Securities LLC and providing an update about the potential transaction with Northern Lights.
2. First, insofar as Berkshire was concerned, Mr McGill informed the directors that in the absence of a deal like Northern Lights, PAC needed an international search for a global equities boutique. He informed them that Berkshire was his and Mr Howard's preferred adviser to conduct the search which should occur in parallel with the Northern Lights deal. He informed them that Berkshire's fee proposal was $75,000 per month for the first three months, then $15,000 per month and a success fee of $750,000 for a search which may extend into 2014. He recommended retaining Berkshire as an international search was fundamental to PAC's future.
3. Now as the later Berkshire retainer letter demonstrated, PAC was looking to invest in a mature boutique, with the investment being up to $50 million. As Mr Fitzpatrick explained, a lot of thought had been given to the possibility of the sale of RARE. Replacing the investment in RARE with a similar investment in a mature US boutique was being investigated.
4. Berkshire was retained on a partial success fee basis. The need to hire Berkshire arose because, although Mr McGill and Mr Howard had good contacts in Australia and PAC had a good reputation as an investor in start-up boutiques in Australia, PAC did not have the same relationship with potential founders or with start-up boutiques anywhere else in the world.
5. PAC wanted access to the capital markets in the northern hemisphere, particularly the USA, because the funds under management there dwarfed the funds under management in Australia.
6. The minutes for the board meeting on 4 December 2013 record the board's resolution to appoint Berkshire.
7. Second, with respect to Northern Lights, in summary Mr McGill informed the non-executive directors that there had been further management discussions and PAC management wanted to progress commercial discussions but needed Northern Lights financial information in order to undertake valuations of Northern Lights' investments.
8. Mr McGill gave the board his comments upon some of the information Northern Lights had provided which he attached, including that PAC management did not have sufficient information to understand Northern Lights' complex structure at that time.
9. He informed them that the next step was to obtain Northern Lights' model and mutually appoint Deloitte Tax Australia and Deloitte US to advise on the transaction. And he gave a warning that tax issues were looming as so significant that they may prevent the deal occurring.
10. Now the merger started with a different structure from the one that eventuated in that originally only mature boutiques were to be merged. Moreover, from the beginning it was anticipated that the deal would be complex because of tax considerations.
11. It was apparent from Mr McGill's report that the next step in the possible merger process was for PAC to assess Northern Lights' financial model and for both PAC and Northern Lights to obtain tax advice.

• NL responsible for $20m cash payment to Seizert
• dual listed structure (Rio style). Common board with 5 [PAC] directors and 4 NL directors. Technically not stapled but cross pref share holdings, agreements etc = should trade largely in sync. Deloitte briefed and working on this.
• Tim, Paul + other NL exec to receive approx 80% of their carried int entitlement as script which will be subject to trading restrictions for some years. Might have missed something. Mike briefed and supportive. Snap shot of today's whiteboard attached. Next step = me to produce term sheet tomorrow.

1. An email was later circulated by Mr McGill to Mr Howard and Mr Ferragina, where Mr McGill summarised significant changes in negotiation with Northern Lights, being primarily that the split in the Aurora Trust was to be 60/40 and all boutiques were now to be included in return for PAC making a cash payment of $60 million.
2. On 14 February 2014, Mr McGill emailed Mr Carver a revised terms sheet consequent upon the whiteboard meeting together with an indicative value calculation of all boutiques. Over the next few days this terms sheet was the focus of consideration within PAC management and with Northern Lights.
3. On 19 February 2014, an email from Mr McGill to Mr Howard stated: … Eva tells me that Mike was wandering around the [PAC] office yesterday after the Audit Comm meeting. He commented to Eva that "the NL deal is too expensive for us"...
4. Also, on 23 February 2014, in an email about Northern Lights sent to Mr McGill, Mr Fitzpatrick stated: … One issue in the term sheet is the restriction on other corporate activity, we may find that too limiting. Otherwise I am supportive, tho still concerned about valuation. The Seizert deal makes me want to buy out the rest of IML to restore the equilibrium. As it is they appear to be getting the same multiple as us, but with pretax earnings. It is a little illusory given the debt deal, but that is complex and needs some explaining.
5. Now prior to the 24 February 2014 board meeting, Mr Fitzpatrick had expressed concern about the pricing of the merger.
6. Mr Fitzpatrick's evidence in respect of the 60/40 split was that the fact that the 60/40 split survived to the end was accidental. He said that the "60/40 split" was a stake in the ground.
7. And he said that the Gresham financial model 245 did not support the 60/40 allocation as between PAC and Northern Lights in terms of units in the Aurora Trust.
8. Let me say something about the board meeting on 24 February 2014 and the documents prepared for it.
9. There were three relevant board papers for the 24 February 2014 board meeting, being Mr McGill's 17 February 2014 CEO report, Mr McGill's and Mr Howard's 21 February 2014 memorandum, and Mr McGill's misdated 22 March 2014 memorandum, which I will refer to as the 22 February 2014 memorandum.
10. The 17 February 2014 memorandum informed the non-executive directors that Berkshire was progressing slowly, with six boutiques identified for further investigation from 50 already reviewed. It said that discussions with Northern Lights had been ongoing and most of the key commercial terms for a merger had been agreed at management level.
11. It said that Mr Fitzpatrick and PAC management had been involved in the discussions with Mr Carver. It said that the merger involved each party placing all of its boutiques, both mature and those in start-up phase, in an Australian trust in which PAC would hold 60% of the units and Northern Lights would have 40%.
12. It said that strategically, the merger would be compelling. The merged group would have international deal flow, distribution and capital raising capabilities on top of strong cashflows from a diverse portfolio of 17 boutiques. It said that from a valuation perspective, the deal structure that management was pushing towards was one that would deliver an EPS and value enhancing outcome for PAC. It said that the merger would involve a complex structure and further explanation and careful thought would be required.

• 2H14 basic eps increases by 5.0% (or 14.2% before impact of transaction costs)
• FY15 basic eps increases 12.7% relative to [PAC's] expected stand-alone FY15 eps
• Fully diluted FY15 eps increases by only 3.6% ...
• NL's 40% equity share of trust implied a multiple of 10.7x forecast FY14 PBT [profit before tax]. …

1. At the board meeting it was resolved that PAC enter into a non-binding terms sheet with Northern Lights on terms not materially different to the document titled "Memorandum of Terms for a merger between Treasury Group Ltd and Northern Lights Capital Partners".
2. The minutes of the board meeting record that: The Board noted the report from Messrs McGill and Howard dated 21 February 2014 regarding a merger between [PAC] and Northern Lights Capital Group. Mr McGill spoke to the report, taking the Board through the documentation in detail, discussing:

• the strategic rationale for the deal;
• the specifics of the proposal;
• the valuation logic; and
• Northern Lights boutiques After a comprehensive discussion on this matter the Board requested and a sensitivity analysis on the financial impact of AU-US dollar FX movements and AGREED that it is supportive of the transaction at this stage. IT WAS RESOLVED that Treasury Group enter into a non-binding term sheet with Northern Lights on terms not materially different to Appendix 1 to the report.

1. The terms sheet provided to the PAC board at this time provided the following key terms.
2. First, PAC and Northern Lights would each contribute all of their existing and new investment portfolios into an Australian trust.
3. Second, PAC would be issued with Class A units entitling it to an approximately 60 per cent interest in the economics of this trust.
4. Third, Northern Lights would be issued with Class B units entitling it to an approximately 40 per cent interest in the economics of this trust.
5. Fourth, the proposed trust ownership would be based upon the value of assets to be sold into the trust by PAC and Northern Lights respectively, which was to be estimated using a multiple of earnings based upon estimated cash earnings for the year ended 30 June 2014. The expected cash earnings for the year ended 30 June 2014 for Northern Lights were AUD 14.4 million and for PAC were AUD 19.6 million.
6. Fifth, at completion, the sum of USD 61 million would be borrowed with cash being paid to Northern Lights and the owners of Seizert.
7. Sixth, it was non-binding except for the clauses concerning, amongst others, "Exclusivity & Availability".
8. Seventh, the purpose of the terms sheet was to allow due diligence to occur. The introduction provided that: This memorandum of terms ('Memorandum of Terms'') is intended to provide for the basis of understanding between the parties as to key terms of a transaction (the "Transaction''). If the parties are in agreement on the terms herein, as evidenced by their signatures hereon, it is their intent to proceed to a formal due diligence process and drafting of binding legal documentation. It is understood that any such binding legal documentation must be approved by each parties' [sic] governing bodies, and may be subject to certain regulatory approvals …
9. Eighth, the 60:40 split was subject to a maximum adjustment of 5% depending upon respective earnings.
10. Ninth, the Trust would borrow USD 61 million at completion.
11. Tenth, there were numerous and important conditions precedent.
12. Eleventh, after completion PAC and Northern Lights would have common boards of nine directors, with PAC nominating five including the chairman.
13. Clearly, the parties intended to proceed to a formal due diligence process and drafting of binding legal documentation.
14. Now at this stage of the process, the board appears to have been aware that the 60/40 split was not based upon any independent valuation of the respective assets of PAC and Northern Lights, but was merely a stake in the ground.
15. Now as I have indicated, at the February 2014 board meeting, Mr McGill presented his valuation methodology used to value Northern Lights' assets and to make some assessment of the proportion of units in the Aurora Trust that PAC and Northern Lights would each be allocated.
16. The valuation of each company's boutiques was based upon multiples of FY14 earnings.

March and April 2014

1. The terms sheet continued to be negotiated and updated as between PAC and Northern Lights between February and April 2014.
2. Gresham commenced work on the merger in early March 2014, although it was not formally retained until early April 2014. Mr McGill accepted that Gresham was not formally retained until 2 April 2014 but said that he was "on the phone to Gresham before they were formally retained" and "was having discussions with Charlie [Graham] … and Gresham … before their formal appointment". Mr McGill's evidence is confirmed by the contemporaneous emails.
3. On 5 March 2014 Mr McGill emailed to Mr Graham of Gresham a draft structure deed for the transaction. Mr McGill's recollection was that this was the first time that he had contacted Gresham about the Northern Lights transaction, being a month before the formal retainer letter was signed.
4. On 6 March 2014 Mr Graham sent an email to Mr Ferragina (copied to Mr McGill) which stated: … could you please send over the NL forecasts and structure model so we can start our valuation analysis.
5. On 7 March 2014 Mr McGill sent a copy of PAC's model to Mr Graham.
6. On 7 and 8 March 2014 Mr Ferragina and Mr Erickson exchanged emails which included a discussion about a QoE report and the professional advisor to be appointed for that work. In the exchange Mr Erickson asked Mr Ferragina to confirm whether Deloitte was conflicted from doing a QoE and suggested PwC as the next option. Mr Erickson stated: … Quality of Earnings report - I am starting conversations with folks at a couple accounting firms to talk about the QoE - the timing, the report, the cost, etc.. Ultimately, I suspect it will be one report that takes the information and moves it both into a combined $AU and a combined $US currency, as well as reflecting all of the information on a US GAAP basis and a IFRS basis. Feels like an awful lot but I think that is what we are both going to need to satisfy the [PAC] shareholders, the AU market, and the U.S. lenders in the transaction. …
7. Mr Ferragina replied: … The corporate finance guys at deloitte are going to suggest a couple of people to contact. This would be to do the independent accountants report which will opine on any forecast data if required in the EM I think Tim is after aggregated financial information for the upcoming discussions with lenders. This may be a separate exercise to the investigating accountants report. We probably need to understand and establish what information a US bank will want to see …
8. There were subsequent emails about the QoE report leading up to Mr Ferragina meeting Deloitte US in the US later in March 2014.
9. The Northern Lights' management team, Mr Greenwood, Mr Swift, Mr Erickson and Mr Griswold, arrived in Australia to conduct its due diligence on PAC on 9 March 2014.
10. On 11 March 2014 they met the board at Bottega Restaurant in Bourke Street, Melbourne.
11. Apart from meeting with PAC's management, the Northern Lights team conducted its own due diligence by meeting the founders or senior officers of some of PAC's boutiques.
12. On 16 March 2014, Mr Hayes circulated a list of queries to Mr Howard and others concerning Project Bondi. Mr Howard responded on 17 March 2014 saying that the aspects he had raised particularly concerning Seizert and Tamro would be explored.
13. On or about 17 March 2014, PAC's management consisting of Mr McGill, Mr Howard and Mr Ferragina travelled to the US and United Kingdom to conduct due diligence meetings and inquiries with Northern Lights and its boutiques.
14. On 17 March 2014 they met with representatives of WHV it would seem in San Francisco, on 18 March 2014 with representatives of Laird Norton and Aether in Seattle, and on 19 March 2014, still in Seattle, met with representatives of Raven, Tamro, Seizert, Nereus and NLAA.
15. These meetings enabled Mr McGill to get a sense of the various boutiques and the individuals operating them, particularly whether they were suitable commercial partners to merge with. Mr Howard made detailed notes of discussions at these meetings.
16. What was noted concerning WHV was the following: … WHV (meetings arranged in San Francisco)

• Outline structure of relationship; rights of each party, objective, governance, decision making
• Business strategy for WHV
• $10 - $30 million flagged - is this WHV's commitment?
• Is there an expectation that NL will also help fund new teams?
• How will teams that are jointly funded by WHV and NL be structured?
• Does NL have co-investment rights and right of first refusal?
• How do you manage the competing requirements/expectations between BNP and WHV?
• WHV have indicated they are looking to attract 1-2 new teams a year - are they completely reliant on NL to identify these new teams?
• What areas are WHV specifically targeting (noting that they recently wound up their fixed income business)
• Outline NL's obligations to WHV
• Outline profit share agreement
• Under the agreement what are the exit clauses?
• Outline distribution agreement between NL and WHV
• Overview of WHV's distribution capability including access to mutual fund market
• Meet with Richard Hirayama to present on International equity fund
• Are the performance issues impacting on net flows?
• Outline WHV's current client base
• Is there the potential for conflicts of interest, if so, what protocols have been established to manage for this? …

1. During the visit PAC management also met with Northern Lights' executives and Northern Lights' advisers and had detailed discussions about structuring and other matters.
2. On 19 March 2014, Mr Ferragina had a conference call with Northern Lights, Northern Lights' financial adviser William Blair and Mr Alan Warner of Deloitte US with the subject line "QoE". The joint consultative work between the professional advisers of PAC and Northern Lights was beginning to emerge.
3. By this date PAC had decided to use the Deloitte US material on QoE, who was to prepare QoE material on both PAC's and Northern Lights' boutiques for the purposes of the merged entity borrowing funds to acquire the 70% of Seizert, for PAC's purposes. This was discussed between Mr McGill and Mr Ferragina with Mr Carver and Mr Erickson.
4. Ms Donnelly saw no problem with PAC relying upon Deloitte US' work as the debt raising was for both PAC's and Northern Lights' benefit as part of the merger process and she did not contemplate that Deloitte US would do anything but a professional job.
5. Now I should also note that by 24 March 2014, and despite HSF's retainer not being reduced to writing until July 2014, HSF was already advising PAC and performing legal due diligence.
6. Further, on 24 March 2014 Gresham, as manager of the due diligence process, provided a due diligence list.
7. On 26 March 2014 there was a board meeting at which all board members participated.
8. The board papers for the meeting included Mr McGill's CEO report dated 14 March 2014 which informed the board of the following matters. First, commercial due diligence had commenced since the February board meeting. Second, the retainers of Gresham, HSF and Deloitte Australia had not been finalized, but their costs of the transaction were expected to be $1 to 2 million. Third, the transaction structure proposed by Deloitte Tax Australia had changed such that PAC and Northern Lights were now to retain ownership of their respective boutiques but to have a profit sharing arrangement. Fourth, the commercial terms of the transaction had not materially changed, and the terms sheet had yet to be signed.
9. Mr McGill, Mr Howard and Mr Ferragina attended the board meeting via teleconference as they were then conducting due diligence on Northern Lights' boutiques in the US. I note that Mr Kennedy also attended by teleconference. Mr McGill discussed the structure of the transaction. Mr Howard provided the board with his assessment of each of Northern Lights' boutiques.
10. It was anticipated that the terms sheet would be signed in April 2014. It was noted that the terms sheet had yet to be signed as it "require[d] updating and it [was] anticipated that it [would] be signed in April 2014."
11. On 27 March 2014, Mr Alastair Pollock of Gresham sent an email to Mr Ferragina and Mr McGill about "leverag[ing] the work Deloitte is undertaking on QoE for the Tama Explanatory Memorandum". At this stage, with shareholder approval still presumed necessary, Gresham was proposing to utilise Deloitte US' QoE work in that process.

• Prepare a financial model for the transaction and undertake sensitivity analysis, including in relation to forecast financial performance, foreign exchange, dividend policy and credit analysis;
• Provide corporate finance advice in relation to valuation, corporate structure and capital structure;
• Manage the due diligence, Q&A process and data room in relation to Treasury Group's business, as well as manage the due diligence process and Q&A to be undertaken on Northern Light Capital Group's business; …
• In relation to the explanatory memorandum, assist in the drafting and the management of other advisers;
• In relation to the independent expert report, brief and manage the independent expert in their preparation of the report; …

1. Self-evidently, as of that date, Gresham proceeded on the basis that another corporate adviser would be retained by PAC to prepare the independent expert report needed for shareholder approval.
2. The fee structure in Gresham's retainer was partly fixed and also included a discretionary success fee element capped at 1% of the equity value of the business acquired.
3. Gresham was to coordinate meetings of the Project Bondi group comprising Gresham, HSF, Deloitte Tax Australia and PAC management to progress due diligence work in anticipation of the board's consideration of the merger proposal.
4. There were regular weekly meetings between PAC's representatives, particularly Mr McGill and Mr Ferragina, and Gresham representatives. These regular meetings were usually by way of dial in telephone conferences. Moreover, there was usually a printed agenda which set out the matters to be discussed concerning Project Bondi. Sometimes the meetings were by way of video conference or face to face meetings.
5. The first meeting was held on 7 April 2014. Gresham prepared the agendas for these meetings and the principal topics concerned the status of the due diligence work on Northern Lights (Narrabeen) and PAC (Tama).
6. The renegotiations continued and Mr Carver came to Australia and met with Mr McGill and Mr Howard over a few days. With the renegotiation, modelling continued.
7. By 11 April 2014 the model was significantly developed by Gresham.
8. On 11 April 2014 Mr McGill sent a detailed email to Mr Fitzpatrick. In that email Mr McGill referred to the continued negotiation by himself and Mr Howard on amended commercial terms for the deal with Northern Lights. His email stated that "We now have something that we are comfortable recommending to the PAC board as a variation to the in-principal terms that the board previously approved. In summary the amended deal is as follows: …". Mr McGill summarised the structure of the new proposal in eight points. He also provided Mr Fitzpatrick with the updated model.
9. On 14 April 2014, Mr Fitzpatrick sent a list of queries to Mr McGill, copied to Mr Howard, concerning the relevant model. These queries were answered by Mr McGill on the same day and incorporated Mr Howard's input.
10. Over the next four days further negotiations between Mr McGill and Mr Carver occurred about the draft revised terms sheet, including taking advice from Gresham and HSF about it, and further revisions of the model were made.
11. Let me turn to consider the 16 April 2014 board meeting and the lead up to it.
12. The board papers comprised Mr McGill's 15 April 2014 email to the non-executive directors, Mr McGill's and Mr Ferragina's 15 April 2014 memorandum entitled "Project Bondi - Further Background & Clarification in relation to some aspects" and the draft revised terms sheet.
13. Mr McGill's 15 April 2014 email informed the directors of the following matters. First, Mr McGill had disclosed to Northern Lights the possible sale of RARE. Second, there were changes to the deal since February 2014, such as the inclusion in the deal of ROC Capital on the PAC side and the inclusion of the extra 75% of Aether on the Northern Lights side. Third, there were new comparative earnings of PAC and Northern Lights. Fourth, the post-acquisition adjustment to the 60:40 split of up to 5% remained for PAC (but not Northern Lights). Fifth, there was a special bonus to Northern Lights' founders if the merged entity was able to make an investment in a new boutique of Mr Rajiv Jain. Sixth, the proposed merger was EPS accretive. Seventh, the revised terms sheet remained non-binding and conditional as due diligence was not complete and there needed to be various board and shareholder sign-offs.

• US side data book to be completed by 30 April, with full report for the US only assets due by 1st week May …
• Narra have agreed to share US Deloitte outputs with Tama side when available.

1. The email confirms the agreement about PAC being able to use the Deloitte US QoE material.
2. Prior to 28 April 2014 Northern Lights provided to Gresham what was described as "NLCP Portfolio Company Valuations" as of 31 December 2013 valuing the interests in the various boutiques in Northern Lights' portfolio. Notably, there was nothing for WHV, although of course Northern Lights did not have an equity interest in WHV. Further, in relation to these valuations for the other boutiques it was stated on the front cover of the report: The materials herein represent estimated projections of potential outcomes. NLCG presents the information herein as estimates, which does not accurately represent actual data or returns information. This information is for discussion purposes only, and not intended for, nor may it be used for any investment decisions.
3. Further, the report contained a table setting out a total carrying value for all of the boutiques as at 31 December 2013 of USD 106.2 million. And as I have said, there was no reference to WHV as it was not an equity investment.
4. On 28 April 2014, Mr Timothy Moulin of Gresham sent an email to Mr McGill and Mr Ferragina which included this material. The email stated: … Please find attached two documents that have been uploaded today in the Project Three data room: NLCP Valuations (includes valuations of the two boutiques as well as financial forecasts) and Revenue by Geography. When comparing (see attached Narra P&L Reconciliation) the numbers received in November 2013 with the numbers received today (31 December 2013 valuation report), key observations are as follows:

• Overall, updated forecast earnings are down ~25% FY15 - FY17, but catch up by FY20 (although remain overall down materially on a cumulative basis)
• Seizert accounts for the large majority of the downward revision in the period to FY17, with roughly a ~35% decline in proportionate EBITDA over the forecast period relative to November numbers, due to a significant increase in expenses (footnote suggests this does not relate to revenue share)
• Aether - we didn't have forecasts for Aether until only recently so a consistent comparison is more difficult. That said, these numbers appear consistent in the early years (FY14-FY15) but materially higher in the outer years (FY17 onwards) relative to the numbers provided to us by Andrew 2 weeks ago. We note the valuation report does not include Nereus, WHV, Blackcrane, NLAA or EAM. The updated forecasts open up a number of questions that we will add to the data room. We're also keen to confirm you're comfortable with Gresham updating the model to use these forecasts in place of the November 2013 numbers. …

1. On 30 April 2014, Mr Erickson of Northern Lights sent through to Mr Ferragina an attachment described as "Project Three Preliminary Data Book" in an excel spreadsheet.

May 2014

1. On 2 May 2014, the non-executive directors received an email from Mr McGill enclosing Gresham's 2 May 2014 process update.
2. Gresham's 2 May 2014 process update informed the board of the following matters.
3. First, it informed about due diligence, including that "Quality of Earnings analysis on historical NLCP financials is being prepared by Deloitte for the debt process…".
4. Second, it informed about "financial Model/Valuation", including that "Gresham is currently undertaking a detailed modelling exercise, including boutique level valuation analysis …". The board was to be invited to a Gresham presentation in mid-May.
5. Third, it informed in the QoE milestone that PAC would first receive a QoE draft data book and later a final long form QoE analysis.
6. Fourth, it informed in the board approval milestone that there would be a "Board financial model & valuation session".
7. At the time Mr Kennedy thought that Deloitte Australia was preparing the QoE analysis and whilst he did not expect to see it, he did expect Gresham to use it as Gresham saw fit. Further, he understood that Gresham was preparing the model, including EPS analysis and boutique valuations, which the board was to rely upon when making its decision about the merger and was to give the board a workshop about the model.
8. Mr Fitzpatrick at the time understood that Gresham was undertaking a detailed modelling exercise which included a boutique level valuation analysis and he understood that Gresham was incorporating values for the boutiques in their financial model. Mr Fitzpatrick maintained that evidence under cross-examination.
9. Ms Donnelly's evidence at the time was that she thought Deloitte US was preparing the QoE analysis because US banks would want to see a US firm doing it. She did not expect to see the QoE analysis herself but expected that the QoE analysis would be taken into account in the valuation and EPS analysis process undertaken by Gresham. Ms Donnelly maintained that evidence in cross-examination.
10. On 14 May 2014 Mr Ferragina forwarded to Gresham an "updated data book" sent by Deloitte US to Mr Erickson. The attachment was the Deloitte US QoE data book. The Deloitte US QoE data book appears to contain the figures from the Deloitte due diligence report, but there are no qualitative comments or figures on a boutique-by-boutique basis. It includes the combined income statement for 31 December 2012, 31 December 2013 and the last twelve months to March 2014 for each of NLCP, Seizert and Aether - consistent with the format contained in the Deloitte report.
11. On 14 May 2014 Mr Erickson sent an email to Mr McGill and Mr Ferragina which stated: … Attached is a breakdown of the EBITDA to distributions for 2013. Apologies for the delay in sending along. We will also get this in the dataroom for Gresham's perspective. Happy to chat more as helpful.
12. On 14 May 2014 Gresham sent model v213 to Mr Fitzpatrick, Mr McGill, Mr Ferragina and Mr Howard. Model v213 did not update the data for WHV. The email stated that Gresham over the next few days would "[u]pdate the model to reflect information in the QoE and distributions material received today on Narra boutiques".
13. On the same day Mr McGill attended a meeting with Gresham to discuss Gresham's model but he had no independent recollection of what was discussed.
14. According to Mr McGill's understanding at the time, development of the model was managed by Gresham and inputs to the model included data from Northern Lights and PAC as well as input from Gresham, Deloitte, Mr Howard and Mr Ferragina. The inputs were also assessed by Gresham personnel. By then, the model was quite advanced and Gresham had consolidated all of the information available to produce financial forecasts for the merged PAC/Northern Lights business.
15. Mr McGill said that the information resulted from the due diligence process conducted over several months including input from PAC's advisers and answers from Northern Lights to the due diligence questions. Northern Lights' answers and data were "vetted" by PAC and Gresham personnel and in some cases adjusted.
16. Mr McGill said that they and their advisers undertook extensive due diligence to confirm that Northern Lights' earnings and likely forecasts were as they had been represented to be.
17. Between 14 and 20 May 2014 Mr Pollock communicated with Mr Erickson to obtain further financial information for use in the model.
18. On 16 May 2014, Gresham sent the directors an email enclosing a note covering forex sensitivities related to the merger. Gresham's analysis was extracted from the draft financial model and focused on the impact of different exchange rates.
19. On 19 May 2014, Gresham sent an email to the board attaching model v245 and its financial model presentation material dated 19 May 2014.
20. This Gresham presentation explained how the model worked and analysed the EPS of the merged entity under four scenarios, with all being EPS accretive after FY15. There were extracted figures from the "EPS Impact" sheet in model v245, and there was provided the results of the DCF valuation of Northern Lights' boutiques from the model and this was compared with a DCF valuation of PAC's boutiques. The results were displayed in a pie chart with the split being 45:55.
21. Insofar as WHV was concerned, in model v245, the following may be noted.
22. First, the "NLCP Valuation Summary" showed that WHV was valued using a DCF methodology at $7.6 million using a discount rate of 14%. That valuation was made on the basis that Northern Lights had a 30% entitlement to distributions from WHV.
23. Second, the "11.WHV" tab did not include any information on WHV's forecast financial performance. A flat EBITDA was included of $5 million in FY14 and FY15 and $2.5 million in FY16 to FY21 with the note "Implied from April 14 Merger Model - Waiting for distribution reconciliations".
24. On 21 May 2014 there was a meeting between the directors and Gresham representatives at which the Gresham presentation was given. It is convenient at this point to elaborate on some of the evidence concerning this.
25. Mr Kennedy said that he did not look at model v245. He remembered reading the 19 May Gresham presentation and noting the information above.
26. Mr Kennedy did not remember much about the Gresham presentation in PAC's boardroom.
27. He remembered being given an updated financial model presentation. The structure of the presentation was that Gresham showed the board something, gave an explanation and then fielded questions. The board had a lot of questions about the Gresham model. He remembered Ms Donnelly in particular asking questions about tax and forex variables. The meeting was long, a few hours.
28. During the meeting he read the updated Gresham presentation to see whether it had different conclusions to those in the 19 May Gresham presentation. He could find no material differences.
29. He remembered that the outcome of the presentation was that the board decided to keep proceeding with the merger.
30. Mr Fitzpatrick said that he could not remember much about the presentation other than it lasted several hours, the board grilled Gresham about the content and outcomes of the Gresham model, Gresham's responses satisfied the board and the board was of the view that PAC should continue to pursue the merger.
31. Mr McGill's evidence was that at the meeting the directors had the opportunity to ask questions, and request the input of various assumptions into the model. One of the attendees was Mr Pollock with his laptop set up and a projector showing the Gresham model and Gresham delivering its presentation and providing a walk-through of the model, including an explanation of how the model worked. There was also the opportunity for directors to ask for changes to various assumptions and observe the impact on outcomes. For example, in real time, directors could see the effect of various changes to assumptions, for example, assuming losing of funds under management.
32. So, each of the non-executive directors, who were experienced in investing in boutiques, met over several hours with the Gresham representatives and directly questioned them about the model and its outputs.
33. Now Mr Bradley criticised the Gresham presentation because it did not indicate that any independent analysis was performed by Gresham or any other party on the future forecasts upon which the DCF values had been calculated. That criticism of the presentation itself is partly correct.
34. But generally, in this long presentation, outcomes, especially EPS and valuation outcomes that were favourable to PAC, were discussed and explored. The board decided to continue with the merger work.
35. On 22 May 2014 Mr MacGregor sent an email to Mr McGill and Mr Ferragina in which he suggested that a requested distribution reconciliation was being sent through by Mr Erickson at that time. He stated: … the sensitivity analysis Tim sent through tonight shows that the real Armageddon scenario for Tama is if Seizert earnings materially decline over the forecast period … Given the above, I think there is merit in one last look at the numbers for these two entities to be sure we are all comfortable. One valuable input to this will be the updated Nara forecast model and distributions reconciliation that Trent is sending through now.
36. On 22 May 2014 Mr Ferragina forwarded to Gresham a 5-year business plan for WHV received from Mr Erickson. The figures from the WHV 5 year business plan were incorporated by Gresham into later versions of its model, but only the FY13 actual financials. Gresham's forecasts extrapolated from the FY13 actual figures using growth assumptions on a different tab in the Gresham model.
37. On 23 May 2014 the non-executive directors were given a sensitivity analysis adopting three 80/20 scenarios, requested by the non-executive directors at the 21 May presentation which gave visibility of potential outperformance or underperformance of the combined boutiques.
38. Also on 23 May Mr Ferragina provided Northern Lights' modelling of boutiques to Gresham.
39. On 23 May 2014 Mr Erickson sent an email to Mr Ferragina which stated: … Good morning. Hope this finds you well. As discussed with Gresham yesterday, attached are our excel models for the portco's, including Blackcrane and EAM. I will send WHV along in short order. Reiterating the discussion yesterday, we prepared these models using December 31, 2013 actual information and the December 31, 2014 budgets prepared by the respective portfolio companies. … …
40. In relation to WHV, the attachment entitled "NL Valuation Model - 2013 as used for Audit Valuations.xlsx" at row 59 on the summary page showed a flat $4 million distribution from WHV for FY14 to FY19 and then $31.4 in FY20.
41. On 25 May 2014 Mr Howard prepared and sent Gresham two presentations about Blackcrane and EAM, which were both Northern Lights' boutiques, and his questions for Northern Lights concerning them.
42. On 25 and 26 May 2014 Ms Donnelly was sent emails concerning the topic of taxation, which she had raised. Ms Donnelly was aware of the importance of getting taxation matters right so as to avoid the prospective double taxation of earnings.
43. On 27 May 2014 there was a due diligence conference call between PAC management, Gresham, HSF, and Deloitte. Gresham circulated an updated version of its board presentation.
44. On 28 May 2014 the non-executive directors were provided with what I have previously identified as the Howard assessment, being Mr Howard's "Northern Lights Due Diligence - Manager Assessment" document which Mr McGill had asked Mr Howard to prepare. Ms Donnelly gave evidence that she knew Mr Howard from his previous job at Mercer and that he was experienced in assessing US fund managers.
45. The Howard assessment itself was broken into two analyses, being of Northern Lights itself and then of its individual boutiques. Mr Howard's analysis was critical, in the sense that he sugar-coated nothing and drew attention to "red flags" in the Northern Lights portfolio, including the following.
46. First, he referred to the forthcoming restructure of WHV, which he referred to as a "broken business". Mr Howard devoted more attention to WHV than perhaps any other individual Northern Lights' boutique, highlighting its past 18 months of poor performance and consequential outflow of funds under management.
47. Second, he referred to Northern Lights having written off three investments since inception.
48. Third, he referred to key man risk issues associated with Seizert and its founder, Mr Gerry Seizert.
49. Fourth, he referred to Aether's offering being unlikely to resonate strongly in the Australian market, but the important point was that it was gaining strong traction in the US market.
50. Mr Bradley's criticisms of the Howard assessment were that it was little more than a summary of what was told to Mr Howard by the people he interviewed regarding the history, management style, past performance and future prospects of their respective funds, together with qualitative observations from Mr Howard. And it did not include any third-party or independent analysis.
51. Further, Mr Bradley said the report raised "red flags", which Mr Bradley described as key risk issues that should have been of grave concern to PAC directors.
52. Ms Donnelly gave evidence about having read the Howard assessment. She disagreed with PAC's criticisms of the board about the "red flags" in the assessment, saying that they represent a reading of the document by someone who does not understand the risks inherent in investing in boutiques and because the allegations select only small parts of the assessment on any one of Northern Lights' boutiques.
53. It was put to Ms Donnelly that as the minutes for the 2 June 2014 board meeting did not refer to the Howard assessment she was mistaken when she said it was discussed. Ms Donnelly rejected that assertion, adding that not to have discussed the Howard assessment was not the board's style. She said that any data that came to the non-executive directors between board meetings was always updated and discussed, and Mr McGill's style was always to incorporate what had transpired in the interim. Ms Donnelly confirmed that Mr Howard was present at the 2 June 2014 board meeting and the preparation of his due diligence summary explained his presence at the meeting. Ms Donnelly explained why the contents of the Howard assessment gave her comfort.
54. Mr Kennedy gave extensive evidence about what he obtained from reading the Howard assessment. He regarded Mr Howard's analysis as being thorough and comprehensive. He said that the Howard report was precisely the type of report he expected to receive because it highlighted risks and the strengths and weaknesses of different Northern Lights' boutiques.
55. Mr Fitzpatrick read the Howard assessment. He gave evidence about his perception of its content.
56. He said that the assessment sought to analyse Northern Lights' boutiques drawing attention to the relative strengths and weaknesses of a boutique on their own and in comparison with other Northern Lights' boutiques. Further, he said that the fact that there were or may have been boutiques which performed better than others within a portfolio of boutiques was unremarkable. The same observation could validly be made of a number of the PAC boutiques, at that time specifically, Orion, Aubrey and Octis. Indeed, he said that that was precisely the observation which might have been made in May 2013 when reviewing the performance of PAC's boutiques in 2013/14. He recalls in the early 2000s that he was keen to offload RARE as he believed it was an underperformer at the time. He was dissuaded from pressing that view by Mr Hayes and Mr Kennedy who said that RARE should be given more time. To the extent that the assessment put board members on notice of matters that were relevant to the value that should be attributed to Northern Lights' boutiques, he believed that such matters would be communicated to Gresham by management which was involved, unlike board members, in the process of valuing Northern Lights and its boutiques.
57. He believed he had also had informal chats with Mr Howard about it.
58. He said in relation to the alleged "red flags" identified by Mr Howard, that with most transactions, one would be very lucky if one got to the stage where every red flag would be satisfactorily addressed. He said that with most transactions, there is going to be a few red flags outstanding so that one was just going to have to deal with them.
59. Mr Fitzpatrick said that there was an effort to address the red flags and that was at management level, and that they just worked their way through them, at least those ones that could be resolved.
60. It was put to Mr Fitzpatrick that Gresham had informed the board that the due diligence process was completed by 31 May 2014, but that the Howard assessment was provided only three days earlier on 28 May 2014, so that there was no ability to deal with red flags going forward. But Mr Fitzpatrick rejected that hypothesis. He said that if a red flag issue arose thereafter, there remained scope to continue to work on it as part of any due diligence inquiry.
61. In cross-examination Mr Fitzpatrick's attention was drawn to several of the red flags identified by Mr Howard and there was the following focus on WHV: MR WALLER: By way of example, the due diligence assessment of Mr Howard noted on page 2, in respect of Northern Lights generally, that they had written off three investments since inception, you would regard that as a red flag? MR FITZPATRICK: I would regard that as a red flag, but we were about the same, so I would have seen it as being not uncommon in the industry. Q: And then in relation to WHV, it was said on page 3 of the report that: This business is one of the more appealing pieces within the L structure despite its main strategy clearly struggling with performance. That statement would have been a red flag? A: I would have thought a green flag. Q: A green flag? Even though it does say - A: A green flag. To say it's the most appealing and it was at the time very appealing. Q: And why was it so appealing? A: It's appealing because it provided distribution into the - what we would call the retail market in Australia, and retail investors are notoriously sticky; poor performance has to, sort of, run for several years before they withdraw their money, and WHV had that as part of their armory. Q: WHV was particularly attractive, wasn't it, also because it had this $4 million distribution year-on-year that you expected to receive? A: That's right. Q: And, to be clear, you understood that that distribution arose under a contractual arrangement in circumstances where, if the company declared a dividend, it also had to make a distribution to Northern Lights? A: That's right. Q: And any dividend that WHV would declare would be declared prior to the end of its calendar year, 31 December; is that right? A: That's right. Q: Yes. The Mr Howard assessment also said in relation to WHV, on page 5: Currently the main strategy within the WHV stable is the international equity fund run by Richard Hirayama - A: Yes. Q: - formally an employee of WHV but split out to form his own boutique a number of years ago but still sits within the WHV office. FUM for this strategy is US$10.5 billion out of US$12 billion that WHV manages within its platform. This has fallen by $1.5 billion in the past 18 months on the back of poor performance. That would be a red flag? A: A red flag. Q: And in relation to WHV it went on to say on page 6: The reality is that more outflows are expected with projections of up to 25 per cent for 2014. Again, another red flag? A: A red flag.
62. Further, Mr Hayes rejected PAC's criticisms of the report. He also regarded WHV as more of a green flag rather than a red flag. Now the Howard assessment had identified elements of WHV's recent underperformance. Mr Hayes knew from the report that WHV had its difficulties and the board saw it as an opportunity to turn it around. Asked whether WHV's recent underperformance would have raised concerns with him in terms of entering into the merger, Mr Hayes said: MS HOGAN: That didn't at the time raise concerns with you in terms of entering into this transaction with Northern Lights? MR HAYES: No, it was a company that - that had great potential with the transition, it needed fixing, and they had the assets, they had the infrastructure, they needed their people and their processes to be rejigged and get it back on track, and I'm sure that that was the reason we got it, because it was a significant group that had got into trouble and we had the ability - I believed we had the ability to turn it around and make it - they needed something to happen because it - you know, they had obviously - they got themselves in a hole and needed to be pointed in the right direction, and I think this transaction and the reason we looked at it was that we had the ability to turn it around.
63. I will return to the topic of WHV in more detail later as it warrants a more detailed discussion.
64. Mr Lewin's evidence was consistent with that of the non-executive directors. He disagreed with Mr Bradley, saying that the Howard assessment was a relevant and informative commercial assessment of Northern Lights' boutiques.

June 2014

1. Let me now turn to the 2 June 2014 board meeting.
2. The board papers for this meeting relating to the merger were Mr McGill's CEO report dated 28 May 2014, the Gresham 2 June 2014 Project Bondi board presentation, the accounting issues report by Ms Batoon dated 28 May 2014 and the Deloitte Australia tax memorandum dated 30 May 2014.
3. Further, the board had also recently received the Howard assessment which was discussed at the meeting.
4. The minutes of the meeting show that it lasted over four hours and was attended by Gresham, Deloitte Australia and Deloitte Australia Tax. This allowed the non-executive directors to raise any questions about Gresham's model and issues relating to the merger.
5. The minutes of the meeting record the following: The Board noted the Presentation documentation from Gresham dated 2 June 2014. Mr Graham took the Board through the presentation discussing where Project Bondi stands and what has changed since Gresham's last presentation to the Board. The Board noted that:

• due diligence has been substantially completed;
• a detailed financial model/valuation regarding the transaction was presented to the Board on 21 May 2014;
• a legal framework has been established that allows [PAC] and Northern Lights to operate as a single economic entity with a common Board of Directors:
• work on tax structure continues;
• debt financing is in progress and is being managed by Northern Lights;
• ASX waiver has been received whereby shareholder approval is not required for this transaction;
• the process of obtaining consents from the boutiques for the transaction will commence next week; and
• accounting treatment of the transaction is complex and ongoing, Gresham is working with Deloitte on the necessary documentation. Mr McGill confirmed that Project Bondi is still in the negotiation phase and no binding agreement has been entered into. …

1. Mr McGill's CEO report informed the non-executive directors in detail about the work that had been undertaken by management since the February 2014 board meeting.
2. Mr McGill's memorandum to the board stated: … Since then, significant effort and cost has been expended on the required workstreams for execution of binding documentation (scheduled for 30 June). Gresham will present to the June board meeting. As we move through the details of legal, tax, accounting and other matters, it is important to remember that, based on all of our work to date, we believe this transaction is expected to deliver significant earnings (eps 15-25% higher than current), scale, diversification and strategic benefits to [PAC] and its shareholders. It would be a transformational event in the history of the company. …
3. Mr McGill described Gresham's work. He said that Gresham were coordinating the transaction for PAC. They also prepared a detailed financial model which includes forecasts for each of the PAC and Northern Lights' boutiques, the outcomes of the transaction structure proposed by Deloitte, the accounting outcomes for PAC under relevant standards based on advice from Deloitte accounting, details of sources and uses of funds including assumptions in relation to proposed funding of earn-outs. The model outputs include the aggregated P&L for the Trust together with PAC's P&L, balance sheet and eps outcomes.
4. Ms Donnelly gave evidence that she thought that the due diligence steps that had been taken were standard and that Mr McGill's statement that nothing untoward had been revealed through due diligence gave her comfort.
5. Mr McGill's CEO report also informed the directors that at the time he understood Berkshire was getting nowhere with finding a mature boutique in which PAC could invest, so much so that PAC had widened Berkshire's search parameters.
6. In terms of the 2 June 2014 Gresham presentation, it noted that: … Quality of Earnings

• For the benefit of the merger debt process being managed by NLCP's advisers in the US, Deloitte has prepared a quality of earnings analysis on NLCP's historical earnings
• This information has been provided to [PAC] and incorporated into the transaction financial model

1. The Gresham presentation also set out the valuations ascribed by Gresham to the various Northern Lights' boutiques. WHV was valued at AUD 20.8 million. No explanation was provided as to why the value attributed to WHV had increased from $7.59m which appeared in model v 245.
2. The Gresham presentation also noted that Northern Lights would borrow USD 46 million to fund its acquisition of Seizert and Aether, which would be guaranteed by the Aurora Trust.
3. Gresham's presentation informed the board about due diligence. In particular, the non-executive directors were informed that information from the QoE data book had been incorporated into Gresham's model. They were informed that the DCF valuations were still showing a split favourable to PAC, being 49:51. And they were informed that the merger was still expected to be EPS accretive, especially under the two most likely modelled scenarios.
4. Mr Kennedy said of Gresham's presentation that he read it and that it was an update on Gresham's previous documents. Mr Kennedy thought that the due diligence key findings were very favourable for the merger. He thought that the due diligence process appeared to have been thorough with site visits, data rooms and questions. He thought that Gresham's updated comparative valuations of PAC and Northern Lights' boutiques still favoured PAC much better than 60:40 and Gresham's updated EPS analysis still showed that the merger would be EPS accretive for PAC shareholders in the first two years after the merger.
5. Mr Fitzpatrick gave evidence about Gresham's presentation. He was asked whether he was aware by 2 June 2014 that Deloitte had prepared a QoE analysis on historical Northern Lights financials. He was aware of its existence but he did not call for it. He knew Gresham had referred to the QoE in its board presentation for 2 June 2014. He believed that the QoE would be integrated into Gresham's model. Now because the QoE had been prepared for the debt process, Mr Fitzpatrick believed that it would be a little more conservative than otherwise.
6. Ms Donnelly read in Gresham's presentation that Gresham had incorporated Deloitte US' QoE analysis into its model, which she said gave her comfort that the model was as accurate a model as it could be. It was put to Ms Donnelly that Gresham had not assessed the reasonableness of the forecasts provided by Northern Lights on its boutiques. She said that in addition to Gresham incorporating Deloitte's QoE report and the financial data and commentary, Gresham also incorporated PAC management's own due diligence on the Northern Lights' boutiques.
7. Gresham's presentation included a table from the "NLCP Valuation Summary" tab of their model v 266 which showed WHV valued at $20.8 million still based on a 30% entitlement and a reduced 13% discount factor. Footnote 3 identified that "discount rates and forecast assumptions have been varied for some NLCP boutiques, in consultation with PAC management".
8. Between 10 June and 18 June 2014 there were various communications concerning the position of WHV. I will set these out later when I come to specifically discussing this question.

July 2014

1. On 1 July 2014 Gresham sent an email to Mr Ferragina which attached a spreadsheet detailing Northern Lights' forecast profit and loss by boutique for FY14. WHV had a projected $3 million profit.
2. On 2 July 2014, Gresham sent an email to Mr Ferragina stating it was still making adjustments based on the proforma adjustment detailed in the QoE, including the WHV dividend run rate adjustment. Gresham said "We expect FY14PF to change further as we work through the 30 June 2014 LTM process with Trent". This was forwarded to Mr McGill on the same day.
3. On 15 July 2014 Mr Carver sent an email to Mr McGill in which Mr Carver listed key points discussed in a telephone call and identified "8.Whv agreements will be extended. Will send to you in next two days."
4. On 20 July 2014, Mr Fitzpatrick sent an email to Mr McGill regarding the July board papers and stated in relation to WHV: … The Press release has some issues. The release could be enhanced by: … WHV needs explanation, unfortunately. It is too big, and the lack of equity ownership begs the question as to why it is counted. …
5. The reference to WHV in Mr Fitzpatrick's email is a reference to what was said in the draft ASX announcement, which formed part of the July board papers.
6. The draft ASX announcement showed WHV's funds under management at $11.6 billion, more than double Seizert being the next largest at $5.2 billion, but also noted that there was no equity ownership in WHV.
7. As is evident from the email exchanges later in July 2014 it was explained that Northern Lights had typically reported WHV's funds under management so as not to confuse shareholders regarding the overall performance of the boutiques in its stable.
8. On 21 July 2014, Mr McGill sent an email in response to Mr Fitzpatrick and stated that he had asked Gresham to send him the latest model.
9. On 21 July 2014 Gresham sent an email to Mr Fitzpatrick attaching Gresham's model v341.
10. Now it is necessary to pause the chronology at this point and say something more about the Gresham modelling concerning WHV.
11. Insofar as WHV was concerned, in model v266, the "NLCP Valuation Summary" showed that WHV was valued using a DCF methodology at $20.84 million using a discount rate of 13%. That valuation was made on the basis that Northern Lights had a 30% entitlement to earnings from WHV. Further, the "11.WHV" tab included information on WHV's forecast financial performance and calculated distributions based on 30% of WHV's forecast NPAT. Further, Gresham had incorporated into the model WHV's corporate 5-year forecasts which it had received from Mr Ferragina.
12. In model v 341, the "NLCP Valuation Summary" showed that WHV was valued using a DCF methodology at $43.53 million using a discount rate of 13%. That valuation was made on the basis that Northern Lights had a 100% entitlement to distributions made by WHV in accordance with the dividend tranches from the relevant WHV agreement, using the "NL Valuation Model" case. The "11.WHV" tab now included information about distributions, including the dividend tranches and percentages set out in the relevant WHV agreement. The information also included the WHV cash available for distributions and that "$7 million was required for operating reserves" as stated in the Deloitte report. The "11.WHV" tab showed 0% equity.
13. Now the "NL Valuation Model Case" was the case used in cell F19, which applied a flat $4 million distribution, and not the "Corporate Forecasts". It initially assumed only a 30 per cent distribution entitlement from WHV but this was ultimately changed to a 100 per cent entitlement to the percentages based on the relevant WHV agreement.
14. Now although there was a significant increase in Gresham's "valuation" of WHV between models v266 and v341, the 30% to 100% correction made to the model partly explains it.
15. Let me return to the chronology.
16. On 23 July 2014 at 6.44am, Ms Donnelly sent an email to Mr Fitzpatrick in relation to the taking of minutes ahead of the board meeting. Ms Donnelly stated: Can we discuss two issues at the outset before we get into the detail of the meeting and specifically Project Bondi, namely
17. Minute recording with respect to project Bondi. What do we want to be recorded to reflect our decision making? What should be recorded? Should we review minutes to date off this purpose. My reasoning
18. In the event we were/ are questioned in the future, how do the minutes evidence our decision making …to protect us appropriately as well as satisfy the language the various laws require of us.
19. Recording present discussions so we can track what follow up is required...eg. Amongst many other concerns / comments -you and I raised the cash flow issues / concerns with Debt Co.

• I asked for confirmation that the sign off from Deloittes would be a global sign-off
• When board members have been asked by you whether to proceed with the transaction there have been conditions some of us have articulated…the capacity to understand how we operate our ongoing business and it's strategies going forward… The above haven't been recorded to date.

1. Our strategy with this merger and our ongoing strategy post merger. I have worked on the basis that our strategy is to enhance post tax earnings for [PAC] shareholders…hence this is our criteria for decision making. Post merger we will still be pursuing the same strategy. We will continue to buy and sell boutiques through the trust. What are the implications for the proposed structure in executing our ongoing strategy…eg If the boutiques are in different tax jurisdictions? I believe it is important to reinforce and minute something with respect to our strategy and our proposition with Bondi. Hopefully this will set the criteria for clarity of decision making. …
2. Now as is apparent from Mr McGill's December 2014 board paper, the WHV dividend was an important forecast inflow for the debt company and its operating cashflow.
3. In cross-examination, Mr Fitzpatrick was asked about the cashflow issues which Ms Donnelly was referring to in her email and the following exchange occurred: MR WALLER: Now, pausing there, what were the cashflow issues that you and Ms Donnelly had previously raised? MR FITZPATRICK: Well, one would have been relating to WHV, obviously. Q: And were there others as well? A: At the time - I can't - I can't be sure. I thought that was the main issue.
4. Ms Donnelly was not asked about what she meant in her email by cash flow issues/concerns with the debt company.
5. Let me turn to the board meeting on 23 July 2014 at which the transaction documents execution resolution was passed.
6. Now at the board meeting it was resolved by the directors that PAC approve the merger between PAC and Northern Lights, subject to satisfaction or waiver of the conditions precedent to the completion of the merger included in the transaction documents, as recorded in the minutes of the meeting.
7. The minutes of the board meeting record that the meeting commenced at 10.00am and concluded at 3.45pm. Mr Hayes' evidence was that he had been overseas between April and October 2014. For the 23 July 2014 board meeting he was in Maui, Hawaii.
8. The board papers concerning the merger were Mr McGill's 16 July 2014 CEO report, HSF's legal documents step paper dated 16 July 2014, a draft ASX announcement, Deloitte's tax sign-off report which was provided separately, and Gresham's 23 July 2014 board presentation.
9. Mr McGill's CEO report informed the non-executive directors of the following matters.
10. First, Berkshire had not identified any worthwhile opportunities available for PAC to pursue during its 7-month investigation.
11. Second, PAC management was expecting final drafts of key legal documents to be completed and a tax sign-off from Deloitte Tax Australia.
12. Third, representatives from Gresham, HSF and Deloitte Tax Australia would be available at the meeting to address questions from the board.
13. Fourth, an updated draft tax sign-off from Deloitte Tax Australia would be distributed prior to the meeting but that the final tax sign off would be given by Deloitte Tax Australia at completion and PAC would be able to walk away from the merger if not satisfied with the form of that final sign-off.

The minutes

1. The minutes recorded all of the advisers who were present at the meeting and that the meeting lasted 5.75 hours. The minutes were prepared with HSF's assistance and recorded the following matters.
2. First, the board went through the Gresham presentation and discussed financial information and key risks.
3. Second, in respect of financial information, Mr Pollock took the board through the consolidated profit and loss statement, transaction metrics, earnings per share analysis, dividend per share assumptions and balance sheets.
4. Third, in respect of key risks, it was noted that: Mr Graham spoke to this matter and the Board discussed in depth the key risks of the proposed merger, including:

• the financial performance of the NCLP boutiques;
• debt financing;
• tax;
• market reception; and
• the ability to recover the redeemable preference unit repayment obligation. Having considered the key risks the Board was of the opinion that the merger should proceed.

1. The minutes record the resolutions to execute what was referred to as the implementation deed and related documents. The transaction documents execution resolution was in the following form: IT WAS RESOLVED to approve the merger between [PAC] and NLCP subject to satisfaction (or waiver) of the conditions precedent to completion of the merger included in the transaction documents, which conditions were summarised on pages 16-18 of the Gresham presentation and which include:

• receipt by [PAC] of a signed final Australian tax opinion in respect of the merger from Deloitte for the benefit of [PAC] which confirms outcomes for [PAC] not materially worse than the draft Deloitte tax opinion dated 30 May 2014;
• receipt by [PAC] of consents to transfers of its securities in certain of its boutiques, and receipt by NLCP of consents from clients of its boutiques based on a revenue test;
• receipt by NL of approval of the merger by a two-thirds vote of its Series A Preferred Unitholders;
• receipt of applicable regulatory approvals being, in relation to NL, FINRA approval, and in relation to [PAC], HSR Act and FCA approval;
• satisfaction of conditions precedent to draw down of the loan facilities including that no material adverse change occur in respect of NLCP or the Debt Co, no material adverse change occur in respect of Aether or Seizert and their relevant funds, the information and projections provided to Medley being complete and correct, conditions related to the finalisation of transaction documentation, and legal opinion and solvency conditions; and
• satisfaction of all conditions precedent to completion of the Seizert and Aether transactions, which include debt financing conditions, fund and advisory conditions, regulatory conditions and transaction related conditions; and also subject to:
• finalisation of all necessary transaction documentation in form not materially worse for [PAC] than has been summarised to the board in the Gresham presentation; and
• the Managing Director being satisfied that all other outstanding matters associated with this transaction being finalised. IT WAS RESOLVED that:
• the form, terms and provisions of and the performance of the obligations of [PAC] under the Implementation Deed (and any documents or instruments incidental or related to the Implementation Deed (Incidental Documents)) are approved; and
• the Managing Director and Company Secretary are authorised to sign the Implementation Deed and the Incidental Documents on behalf of [PAC] and make the necessary disclosures to the ASX. IT WAS RESOLVED that the Managing Director on behalf of [PAC] is authorised to take any action including, but not limited to, certification, execution and delivery of documents, necessary or advisable to do under, in accordance with or incidental to any of the above resolutions.

1. Now at this point it is also necessary to say something about a belatedly produced file note concerning the meeting and its relevance to the question of whether the topic of WHV was discussed.
2. A file note of the meeting was made by Ms Lo of HSF which provides evidence of some of the matters discussed by the directors and PAC's advisers including WHV, although the directors' written and oral evidence on the topic was vague to say the least.
3. I will return to discuss Ms Lo's file note in a separate section of my reasons when I discuss the WHV question in more detail.

Post 23 July 2014 events

1. On 23 July 2014, Mr McGill sent an email to Mr Carver which stated: … forgot to ask about WHV dividends which is something that Mike just left me a voicemail about. You previously mentioned the possibility that you/we may get some more comfort from WHV about the payment of future dividends. …
2. Mr Fitzpatrick was asked in cross-examination what caused him to call Mr McGill after the July board meeting and he said "I think I was just chasing the cash, that dividend". Apparently this related to an issue concerning the MidCo cashflow which I will return to later.
3. On 25 July 2014, Mr Carver replied to Mr McGill stating: We won't have anything more definitive than what is in the contracts, but my expectation is that WHV will likely make some dividend payment this year … They currently have $24m of cash on the balance sheet …
4. By email dated 25 July 2014 Clayton Utz circulated the then current draft of the implementation deed amongst the parties and their advisers.
5. Clause 3.1(k) was now drafted but contained an important footnote: Diligence: [PAC] and NL have completed their due diligence of the structure of the Transactions to their reasonable satisfaction; and1
6. Footnote 1 said: Side letter to provide that this condition is satisfied upon delivery of tax opinion in form previously provided to [PAC].
7. On 26 July 2014 Mr Howard sent an email to Mr McGill in which Mr Howard commented about WHV's funds under management and performance and suggested that the WHV funds under management be included in the draft ASX announcement. Mr Howard was told by Northern Lights that Northern Lights, as I have already said, typically included WHV's funds under management when reporting to its shareholders because it would otherwise get confusing if they only reported a percentage share of the company funds under management.
8. On 28 July 2014, Mr McGill sent an email to Mr Fitzpatrick and the other directors stating: In spite of working late across the weekend, as I write this drafting of the transaction documents is not yet finalised. There are no substantive commercial issues outstanding and the work is merely technical drafting with lawyers for both sides being careful to ensure that the final drafting works for their respective clients. At this stage, my best guess on timing is that the deal will be signed on Tuesday afternoon/evening and announced Wednesday morning. The ASX Disclosure documents have been amended over the weekend. I will send final versions to the board prior to announcement. However, there is one important statement that I wanted to alert directors to immediately. I would like to include the statement that "The transaction is expected to be dividend accretive for [PAC] shareholders". I think it is very important that we say this given the gearing, vendor finance and earn-outs within the capital structure. Investors will rightly wonder what the implications are for [PAC]'s dividend and, as we know, [PAC]'s share price depends significantly upon our dividend yield. I believe the statement proposed should address any such concerns. Could you please let me know whether or not you are comfortable with the proposed statement about dividends.
9. Mr Fitzpatrick responded that afternoon: … As the modelling reflects the statement, I am happy. We rely on the accuracy of the model-are there any reservations about any of the assumptions?
10. Mr McGill then responded: No, I'm comfortable with all assumptions.
11. Ms Donnelly also responded: I'm satisfied that we have supporting data for accretive earnings per share post tax. How are you extrapolating this data to dividend accretive, given some of the cash constraints that may exist.
12. Later that day, Gresham sent to Mr McGill a dividend accretion analysis.
13. Further, later that day Mr McGill sent the following email to the directors: Attached is a summary of the dps output from the base case model. I asked Gresham to prepare this in response to the board's questions earlier today about model support to justify the proposed disclosure that "… the transaction is expected to be dividend accretive for [PAC] shareholders…" The attached shows that the dps forecast is higher than the status quo position and therefore the statement is supported. Note that the model assumption is 100% payout ratio. This is high and in reality the board may choose to payout a lower ratio. A lower payout ratio is possible whilst still confirming the "dividend accretive" disclosure and therefore the disclosure remains supported. As background, Directors may also recall that [PAC]'s payout ratio in 2011 and 2012 did in fact approach 100% before dropping back a bit in 2013.
14. Later it was decided to not make a firm dividend per share accretive statement.
15. On 28 July 2014, Mr McGill sent an email to Gresham which stated: … the [PAC] board may also need to consider the various debt refinancing assumptions that we've made. Those too are important assumptions to support the dividend accretion outcome.
16. On 28 July 2014, Mr Fitzpatrick replied to Mr McGill and stated: … As the modelling reflects the statement, I am happy. We rely on the accuracy of the model-are there any reservations about any of the assumptions?
17. Mr McGill responded to Mr Fitzpatrick's email and said "No, I'm comfortable with all assumptions."
18. On 28 July 2014, Mr McGill sent an email to Mr Pollock which reminded him to send the dividend accretion analysis from the model "so that I can provide to the [PAC] board." Mr Pollock replied attaching a copy of the dividend accretion analysis.
19. On 29 July 2014 at 11.51pm, although the precise AEST timing might be uncertain based on Mr McGill's reply and the different time zones of sender and recipient, Mr Fitzpatrick sent an email to Mr McGill indicating that he was uncomfortable with saying that the deal would be dividend accretive and said that he would call Mr McGill "at about 2pm your time".
20. On 29 July 2014, Mr McGill sent an email to Mr Carver at 2.32pm. The email described his discussion with Mr Fitzpatrick about the WHV dividend. I will return to the detail of this later.
21. On 29 July 2014, Mr McGill also emailed Gresham and said that the board required further commitment from Laird Norton/WHV/Mr Vincent in relation to payment of WHV dividends before having the necessary confidence to make the disclosure that the deal was dividend accretive. Mr McGill also sent a further email at 8.14pm asking Mr Carver if it would be easier for Mr Vincent to give comfort in his capacity as CEO of Laird Norton.
22. On 30 July 2014, Gresham sent an email to Mr Ferragina in which Gresham commented on the WHV economics spreadsheet that was sent in June. Gresham stated that the spreadsheet showed: … the US$4m of dividends is achievable from an NPAT of $12m and that the $20m cash available on the balance sheet is used to reach this number in the first years. …
23. On 31 July 2014, Gresham emailed the board and stated that the comment in relation to the transaction being dividend accretive had been removed.
24. On 1 August 2014, Goodwin Procter sent an email to HSF, copied to Clayton Utz, Mr McGill and Northern Lights, amongst others, which attached an amended version of the tax opinion side letter that had been prepared by HSF.
25. On 2 August 2014, Mr Fitzpatrick sent an email to Mr Pollock in which he commented on the ASX release becoming "hideously complicated" and about WHV being included in the funds under management, which he said "looks better with it in". Mr McGill responded and said he was going to leave the WHV funds under management in, consistent with the position communicated by Mr Howard.
26. On 3 August 2014, HSF sent an email to Goodwin Procter and Clayton Utz which attached final versions of the documents to be signed. The email attached, amongst other things, a copy of the tax opinion side letter.
27. On 4 August 2014 Mr McGill executed the implementation deed. Mr McGill then informed the board that: … [PAC] has executed the Project Bondi documents … The ASX announcements will be lodged before market opening tomorrow morning.
28. On 5 August 2014, PAC made a market announcement on the ASX concerning the merger. The announcement stated as one of the highlights that the merger was "[e]xpected to be materially EPS accretive to [PAC] shareholders from completion".
29. Part of the announcement stated: Group Strategy - Partnering with Outstanding Asset Management Professionals Worldwide The strategy of the combined group will be an extension of [PAC]'s existing strategies, leveraging the enhanced capabilities delivered by the merger and will include a number of elements: Continued expansion and diversification of portfolio via value enhancing new investments The merger will result in a strengthened management and investment team with executives well positioned to access deal flow within international markets. In addition to partnering with early stage asset management businesses, the combined group will have scale and financial capacity to invest in established businesses. Over the past 5 years, Northern Lights and [PAC] have completed a combined 14 investments. Leverage distribution capabilities to increase asset base The merged business will have 14 sales executives across offices in the US, Australia and the UK focussed on the sale of boutique investment products to institutional investors, superannuation and pension funds, family offices and other classes of investors. It will also provide [PAC] with access to an additional 8 US based retail sales executives with 181 selling agreements in place across broker / dealers and RIAs via the relationship with WHV. This is expected to provide opportunities for increased distribution of [PAC]'s boutiques into the US market, as well as providing access for Northern Light's boutiques into the Australian market (subject to compliance with all regulatory requirements). The combined Northern Lights and [PAC] distribution teams have raised over A$8bn in FUM for boutiques partners over the past 5 years. Second listing on a global exchange within 3 years It is intended that the merged group will seek a second listing on a global exchange within 3 years, which is expected to deliver benefits for shareholders including enhanced access to capital for growth. The second listing will provide liquidity for Northern Lights shareholders. Efficient capital structure The merged group will seek to drive return on equity via efficient investment structures and capital structure. Leverage Northern Lights strategic relationships BNP Paribas and Laird Norton are cornerstone shareholders of Northern Lights. Both organisations will continue to hold equity in the merged group and will be represented on the Board.
30. The announcement also stated: Impact on [PAC] As illustrated in Schedule 1, on a pro forma FY14 basis underlying [PAC] NPAT attributable to [PAC] shareholders increases from a forecast A$14.0m to a post transaction NPAT of A$14.7m. As such, the transaction is marginally accretive on a pro-forma FY14F basis. However, from close the transaction is expected to be materially EPS accretive. Northern Lights' businesses are expected to deliver pro forma FY14 revenue and NPAT of A$37.4m and A$15.7m respectively. [PAC] will retain all existing franking credits. [PAC] expects to be able to continue to pay franked dividends to its shareholders in the future. Final FY14 dividend On 5 August 2014, the [PAC] Board declared a final dividend for FY14 of 27.0 cents per share fully franked. The record date is 28 August 2014 and the payment date is 25 September 2014. Process and Completion Timetable The merger remains subject to the following conditions precedent:

• Satisfaction of all conditions required for draw down of debt funding including no material adverse change in relation to Northern Lights and satisfaction of all conditions to acquire additional equity interests in two Northern Lights boutiques;
• Northern Lights receiving minimum level of consents from clients of its boutiques (based on a revenue test);
• Finalisation of merger structure;
• Regulatory approvals in the US and UK; and
• Completion of shareholder agreement processes in relation to some [PAC] boutiques. It is expected that all conditions will be satisfied in order for completion to occur by the end of October 2014. [PAC] has received confirmation from the ASX that approval of the merger transaction by shareholders is not required under Listing Rule 11. [PAC] was advised by Gresham Partners, Herbert Smith Freehills and Deloitte.

1. Schedule 3 to the announcement was the following table: Schedule 3 - Northern Lights Boutique Portfolio Location Investment Date FUM (AUD) Strategy Aether US October 2008 $1.0bn Private equity fund of funds focused in the real assets sector Alphashares US February 2008 $376m Provider of a range of Chinese equity ETFs Blackcrane US March 2014 $3m Concentrated international/global equity strategies (all cap) Del Rey US July 2010 $833m International equity value manager EAM US May 2014 $1.1bn Small cap and micro-cap firm. US, International, Global and emerging market strategies Elessar US December 2007 $112m US small cap specialist Goodhart UK April 2009 $427m Specialist multi-product asset manager - Japanese equity and Emerging market equities, UCITS structure capability Nereus India January 2011 - Private equity boutique focused on renewable energy infrastructure NLAA UK April 2014 $268m Hedge funds seeding vehicle Raven US May 2010 $254m Private equity firm focused on asset-based lending Seizert US December 2008 $5.7bn US equities specialist (core and value) - small cap, mid cap and large cap products Tamro US June 2007 $2.2bn US small cap core equities WHV7 US January 2013 $11.9bn Intermediary investment platform, access to US mutual fund structures, in house and external manager strategies

7 Profit share agreement

1. Clearly, the position of WHV concerning funds under management, being 49% of the Northern Lights total, was significant. But the footnote concerning WHV as a "profit share agreement" was incomplete if not misleading.
2. The slide pack prepared by Gresham for the market presentation contained similar material, including the same description for the WHV arrangements.
3. After execution of the documents on 4 August 2014, HSF later sent an email to Mr McGill which attached the final version of the implementation deed together with "all the final documents". This included the tax opinion side letter. There is not in evidence a signed copy of the tax opinion side letter.
4. The tax opinion side letter provided: … In particular, we refer to the condition precedent in clause [3.1(k)] of the Deed (Relevant CP). [PAC] acknowledges and agrees that the Relevant CP shall be satisfied upon receipt by [PAC] from its Tax Advisors of a tax opinion in relation the Transaction that: (1) is consistent with the taxation implications outlined in the draft Australian and US Tax structuring Report dated 21 June 2014; and (2) does not set forth any material adverse tax consequences for [PAC] that are reasonably likely to occur as consequence of the implementation of the Transaction. NL acknowledges and agrees that the Relevant CP shall be satisfied upon receipt by NL from its Tax Advisors of a tax opinion (which opinion may be "short-form" or "New York-style" opinion to be followed by the delivery of a supporting memorandum as soon as reasonably practicable) in relation to the Transaction …" .
5. On 24 September 2014 the board met. Mr Ferragina also attended. Mr Howard attended for the deals pipeline report only. The minutes of the meeting record that Mr McGill spoke to his CEO report dated 17 September 2014 about the investment performance of WHV. They record: … investment performance for the Northern Lights boutiques - Aether and Tamro were behind benchmark for the June quarter but ahead on 1, 2 and 5 year figures. WHV was ahead for the June quarter but behind on its 3 year numbers; …
6. On 8 and 9 October 2014, Mr McGill and Mr Fitzpatrick exchanged emails about the potential impact of the Medley cashflow sweep on the [PAC] dividend. Mr Fitzpatrick responded to Mr McGill's email and stated "big issue is WHV".
7. Mr McGill then responded to Mr Fitzpatrick and said: … I think we need to present a merged cashflow forecast to the board at Torrey Pines highlighting these issues. Would be good for Jeff Vincent to buy in to a solution.
8. Mr McGill's reference to Torrey Pines was to a meeting with prospective directors and managers of PAC and Northern Lights, amongst others from WHV, at a resort complex in or near San Diego which would take place on 21 to 24 October 2014.
9. Mr Fitzpatrick replied and stated "Absolutely, We are on the same page - locking up that dividend has to be our no. 1 objective."
10. On 10 October 2014, Mr McGill sent an email to Mr Fitzpatrick which attached the Trust forecast cashflow projections prepared by Gresham. Mr McGill provided some comments and said: … Bottom line - except for outstanding Transaction Costs (listed in rows 53-57), we would be ok. But the transaction costs are real and so we've got a problem given that we expect that we will owe around $9.7m of transaction costs at completion. We have given some serious thought as to how to fund these. My recommendation on this is as follows:
11. Negotiate deferred terms from the relevant service providers to spread the $9.7m over the next 6+ months;
12. Launch a dividend reinvestment plan for [PAC] (and NL);
13. Underwrite the 1H15 DRP … …
14. On 13 October 2014 there was a board meeting. Item 7 of the Agenda was cashflow projections and Mr McGill's 10 October 2014 email to Mr Fitzpatrick formed part of the board papers for that topic. The minutes record: … The Board went through the cash flow report in detail, paying particular attention to the Company's future cash position.
15. During the period 21 to 24 October 2014, the board attended meetings with Northern Lights at Torrey Pines. Mr Vincent, Mr Turner and Mr Swift, all of WHV, also attended the meetings. As becomes apparent from Mr McGill's email to Mr Carver on 10 November 2014 there was discussion about restructuring the dividend agreement to "require declaration of a dividend on Midco's entitlement".
16. On 24 October 2014 at Torrey Pines, Mr Tim Lange of Northern Lights sent an email to Mr McGill and Mr Ferragina, amongst others, which attached a draft of the tactics plan for supporting goals and the group's brainstorming on potential leads for each tactic. Item 3 of the attachment identified Mr Carver as the lead and stated: …
17. Maximise distributions from existing affiliates

• WHV dividends …

1. On 27 October 2014, Gresham sent an email to Mr McGill which forwarded an email Gresham had received from William Blair with their updated model. Mr Mark Birkett of William Blair noted in his cover email to Gresham that: Attached is the model with proposed covenant levels. Updates from the prior version include: …

• Added [$3m] WHV distribution in Dec-14. …

1. On the same day, Gresham sent an email to Mr McGill and Mr Ferragina which attached a summary of its analysis on the financial covenants in William Blair's model. The attachment provided the following: The only change made to NLCP earnings since the last version of the WB debt model (July 2014) is the timing of the dividends received from WHV.

• Was previously $1m per quarter and now $3m every December quarter and $1m every September quarter (yearly total remains the same). …

1. On 29 October 2014 the following email exchange occurred.
2. Mr Kennedy emailed Mr Fitzpatrick, Ms Donnelly, Mr Hayes and Mr McGill and stated: I refer to the retreat and in particular to the Nereus proposal. I spoke after the conclusion of the retreat in some detail to Dave Griswold [a corporate lawyer, Northern Lights] regarding the $25M/6 year guarantee. Dave confirmed that he had several discussions with Jonathan and that in fact the above summary was not correct. The guarantee is indeed for $35M which would be payable forthwith in the event of default. Regrettably it did not emerge from the material that we were shown the real nature of the guarantee obligation, that we were being asked to undertake. In our discussion, Dave 'welcomed' [PAC]'s involvement, saying that he had told the Northern Lights operatives that there was going to be much more rigour around deals. Dave I think believes that not enough rigour or examination had occurred with proposed investments. He believes that the 'marketers' seemed to be ruling the day!! I have been thinking about the issue of 'selective' information since my return. What if on each 'proposal' we have Yes/No teams who are charged with the task of presenting us with their cases. That way maybe we can make informed decisions, with all relevant facts before us. I am reliably informed that BHP implemented this approach (successfully) after numbers of disastrous acquisitions, where BHP wrote off billions of dollars of shareholders funds. I do not think we can afford these types of stuff ups, in the new world. Overall, I loved Torrey Pines and thought the retreat was enormously successful. Your views please. …
3. Mr Fitzpatrick replied to Mr Kennedy, Ms Donnelly, Mr Hayes and Mr McGill and stated: I got wind of this issue of the uncapped guarantee near the end of the meeting. The NL execs have been asked to clarify this, and several other issues, before it will be approved. I thought I made it clear that uncapped would not be acceptable. Let's see what they come back with.
4. Mr McGill replied to Mr Fitzpatrick, Mr Kennedy, Ms Donnelly and Mr Hayes and stated: You make good points Peter. The idea of yes/no teams is good in theory. But I would like to think about it some more in practice and find ways to prevent it from being a source of division amongst the management team. However, irrespective of this I don't think it's acceptable for selective (misleading) information to be presented to the board in the first place. It seems to me that is the basic point you are making and I totally agree with it. In relation to follow-up, my recollection of the meeting is that there were a number of matters. Mike has asked for minutes to be prepared and Howie is coordinating this now. Apart from clarifying the quantum of the guarantee required, the other points that I recall are:

• Presentation of base cashflows for Nereus including how the Hareon proposal impacts them;
• Confirmation of whether or not NL/[PAC] would book a placement fee if the Nereus/Hareon proposal proceeded (maybe $0.5m);
• Tim was to seek to renegotiate terms with Nereus to improve outcomes for NL/[PAC] versus the 50/50 deal referred to during the meeting;
• A draft of the ASX announcement is to be prepared - how would [PAC] describe the nature of this commitment to the market Please let me know if there were other points that any of the directors wanted the team to follow up.

1. On 5 November 2014, Gresham sent an email to Mr Ferragina and Mr McGill which attached a spreadsheet entitled draft trust cash flow projections. The attached spreadsheet identified that a $2 million dividend was to be received from WHV in December 2014. In the email Gresham stated: Ahead of our discussion at 6pm tonight … Key outstanding points we need clarified from Trent to form a view on this analysis include:

• What is MidCo's opening / November cash position? (significant impact) …
• What transaction costs have already been paid, and what remains to be paid (understand NL has already paid some amounts)? Keen to walk through the assumptions we have made in relation to the DPP and equity raising with you tonight.

1. On 6 November 2014, Mr Erickson sent an email to Gresham responding to questions regarding projected cashflows for Medley. He stated: … The $2 million of cash flow in the December cash flow is actually the dividend number projected out of WHV. That number could be $3 million based on our best information to-date but that dividend has yet to be declared. If you change the number to $3 million for the WHV dividend, we should reduce the $1 million payment in June by the same so we stay at a net $3 million. Joe has promised to wrestle Andy Turner to get more out of WHV. More to come on that front!"
2. On 10 November 2014, Mr McGill sent an email to Mr Carver expressing concerns in relation to the WHV dividend but in the context of the Trust and MidCo cashflows and full year FY14 earnings. He stated: … Based on what Tim said just now, I'm quite worried about WHV. Tim mentioned that the WHV board met last week but that no dividend declaration was made and that neither Jeff nor the Laird Norton family representative really pushed the issue. Previously we'd assumed that the $2m dividend would be declared and paid in December whereas now we know for sure that it won't which gives pause for thought about our assumptions for future WHV dividends. Cashflow You and Joe are closer to this than I am, but I think we had $2m of cashflow in the forecast from WHV in December. I think we now need to update our cashflow forecasts for this change which will impact both Aurora and Midco cashflows. … Earnings The other implication from this is in relation to the full year FY14 earnings (and first half FY14 earnings in particular). The WHV contribution in the first 2 months was a high proportion of our total earnings. … A solution to the earnings issue would be if WHV agreed to a restructure of the Dividends Agreement to require declaration of a dividend on Midco's entitlement every 6 months. … I mentioned this idea to both Jeff and Andy at Torrey Pines but haven't yet followed up on it. … I hope I'm worrying too much about this but I know that it's a sensitive issue for the [PAC] board, particularly Mike! …
3. On 11 November 2014 at 6.12pm, Gresham sent an email to Northern Lights, which was copied to Mr Ferragina, attaching an updated monthly cashflow spreadsheet. Gresham stated: … As you can see in cell C65, these forecasts have MidCo going into negative cash in November 2014. Is this assumption correct? Appreciate in our discussion last week you mentioned $2m of inflows may offset this amount, should we include these in November?
4. On 12 November 2014, Mr Carver sent an email to Mr McGill responding to his 11 November 2014 email raising concerns about the WHV dividend being paid. Mr Carver stated: … I just want to quickly respond to make sure that I didn't mis-communicate when I called you earlier. If anything, I view the situation with WHV more positive than when we were together in Torrey Pines. Andy recommitted to his willingness to work with us on our need for a dividend… …
5. On 12 November 2014 there was a PAC board meeting although there was nothing formally resolved at the meeting itself concerning the merger.

• Negotiation of deferred payment terms for transaction service providers. …

1. The minutes of the meeting record: Mr McGill spoke to his report advising the following: …

• progress continues with the Northern Lights merger with the UK regulatory approval being received so there is now only the finalisation of Medley financing documentation to be completed before the merger can proceed; …
• it is anticipated that the completion process will commence on 18 November 2014; …
• cashflow is being closely monitored and it is anticipated that the Company will continue to have positive cash balances after payment of dividends.

1. On 12 November 2014 Mr Fitzpatrick and Mr Hayes signed the circular resolution. Mr Kennedy signed the circular resolution on 13 November 2014. Ms Donnelly signed the circular resolution on 16 November 2014.
2. There were various sets of resolutions including in the following form:
3. On 18 November 2014, Mr McGill sent an email to Mr Erickson and Mr Pollock in relation to the combined cashflow forecasts and its likely effect in paying the existing transaction costs. Mr McGill stated: …

• … The problem arises that the combined cashflow forecast tells us that there is insufficient free cash to pay all costs upfront and therefore the forecast was developed on the assumption that 50% of outstanding costs would be paid at completion and 50% after the 1H15 dividend. … Whilst not a costs matter as such, I'm concerned that the $2m dividend receipt from WHV which was assumed for December is now at risk following the failure of the WHV board to declare a dividend last month. … this implies a short term $4.6m hole in the cashflow forecast prepared by management. …

1. So at this time, one concern in relation to the WHV dividend was related to a shortfall in operating cashflows in the short-term following the merger.
2. On 18 and 19 November 2014 there was another email exchange between Gresham and Mr Erickson regarding "Monthly Cash Flow Forecasting". Gresham's initial email stated: As discussed this morning, please see updated monthly numbers with the following assumptions: …

• Assumption that cashflow shortfalls on MidCo side (including payment of US$1M to Seizert at 30 Nov) are funded by [PAC] side. …
• WHV dividend assumed to come in December 2014. …

1. On 19 November 2014, Mr Erickson sent an email to Mr Pollock, copied to Mr Carver, Mr McGill and Mr Ferragina amongst others, which responded to questions in relation to cashflow. He stated: I just confirmed with William Blair that we can fund NLCP transaction costs (post- close) out of Midco. Attached is an updated model that has all transaction costs paid by Midco for the NLCP remaining costs, while still providing $3.3 million of free cash flow to [PAC] for a March dividend. …
2. On 19 and 20 November 2014 there was an email chain between Northern Lights, Mr McGill and Gresham commencing with an email from Mr Pollock to Mr Erickson and ending with an email from Mr Erickson to Mr McGill on 20 November 2014.
3. The email chain continued the cashflow discussion from Mr Erickson's email on 19 November 2014 and set out the outstanding transaction costs, which were stated by Mr Erickson to be AUD 5.7M. Mr Erickson attached an updated cashflow model and stated: Thanks for your help with all of the cash flows. I think we are taking productive steps to get this wrapped-up. … …
4. On 20 November 2014 Mr McGill sent an email to the non-executive directors which stated: … … I'm comforted that our work this week has confirmed that we will still be able to fund the 1H15 dividend to [PAC] shareholders even if the $2m expected from WHV in December fails to occur.
5. Mr Fitzpatrick gave evidence that he was most interested in the WHV dividend and maintaining PAC's dividend and that Mr McGill's email gave him comfort that Mr McGill was addressing all outstanding issues in order to complete the merger.
6. On 20 and 21 November 2014 the following email exchange occurred.
7. Mr Pollock sent an email to Mr Erickson, Mr Carver, Mr Lange, Mr McGill, Mr Ferragina, Mr Patel, and Mr Moulin which stated: Please find attached an updated cash flow model assuming the following:

• No equity raising
• NL side transaction costs funded by MidCo
• Regulatory cash remains in place
• [PAC] contribution to settlement funding of US$1.645m
• NL US$1m payment to Seizert at 30 Nov removed from the cash flow (assumed to be offset by US$600k Seizert receivable and funded by NL outside of the Trust / MidCo)
• $2m from WHV comes into MidCo in December, $500k of receivables deliver cash in December 2014 (this $500k relates to the $1.2m less the Seizert receivable offset in the point above)
• We have moved the payment of NL transaction costs to be further out to make the cash flow work better Can you please help us by answering the below questions to ensure we are not missing anything in the attached cashflow forecasts:
• In the version of the cashflow you sent back this morning, the NL side transaction costs were paid in Dec / Jan / Feb. Is there scope to push these out further? The cashflows don't appear to work with these amounts being paid in these months.
• Will the transaction costs paid by MidCo be captured by Medley in the adjusted EBITDA used in covenant tests? What is the NL / WB view on the implications of decreasing MidCo EBITDA by ~$5m in relation to covenants and other Medley debt considerations?
• Are we correct in excluding from the MidCo / [PAC] / Trust cashflow the $1m NL payment at 30 November to Seizert? (ie this will be fully funded outside the Trust cashflows?)
• What is the required cash payment from [PAC] to NL for settlement to be fully funded?

1. Mr Pollock also sent an email to Mr Erickson, Mr Carver, Mr Lange, Mr McGill, Mr Ferragina and Mr Patel stating: Please find attached the updated monthly cash flows including an extra US$818k paid by [PAC] to the US at close. [PAC] regulatory cash is now forecast to breach by $70k in November 2014.
2. On 21 November 2014 Mr McGill sent an email to Mr Erickson, Mr Carver and others with the subject line "cashflow modelling'. It provided: … [PAC] will fund the shortfall to allow completion to occur. We will have no margin for error with our cashflow going forward and I may need to ask for assistance to manage MidCo cashflow over the next couple of months. We desperately need the $2.0m from WHV in December!
3. The issue of WHV's dividend was again raised in the context of MidCo's short term cashflows.
4. On 25 November 2014, PAC announced to the ASX that the merger had completed with an effective date of 25 November 2014. PAC also announced that the transactions to acquire additional interests in Northern Lights boutiques' Seizert and Aether completed at the same time.
5. On 10 December 2014, there was a board meeting. In Mr McGill's CEO report dated 3 December 2014 he stated: … Following the merger, group liquidity is very low. Let me be clear - at this point in time, we remain solvent and in compliance with minimum cash requirements for licenses. However, management of cashflow is the highest priority for us at the moment and Midco will depend heavily upon receiving dividends and distributions that are forecast over the next few months. Transaction costs of approximately AUD6.8m remain to be paid … …

• … At completion, Midco had approximately zero cash and will not be in a position to make any payments until inflows are received.
• Critical Midco forecast inflows:
• WHV dividend of USD2.0m in Dec; … … … Given the current cash position of the business and apparent risks around forecast collections in the short term, I recommend that the boards of Aurora and Treasury Group act immediately to raise additional capital. …

1. On 12 December 2014, PAC completed a capital raising in the amount of AUD 30 million. That capital raising was supported by the market and resolved the liquidity problem caused by WHV failing to make the pre-31 December 2014 distribution.
2. Just jumping forward a little in the chronology, although I will return to this later, in the accounts for the Aurora Trust for the year ending 30 June 2015, the investment in WHV was entirely written off.
3. The impairment expense for WHV shown in these accounts was $16,806,616.
4. So, about seven months after the completion of the merger, the so-called contractual investment in WHV was considered to be worthless.
5. Let me now turn to PAC's case against the directors and discuss the claims, the directors' responses and my analysis.
6. In this next section I will not analyse in detail the shareholder approval question under listing rule 11.2 of the ASX Listing Rules or the WHV question. Those topics have been dealt with in later separate sections.

The alleged breaches of directors' duties

1. PAC says that there were four key decision points which gave effect to the merger and that the then directors breached their duties in various ways at each of these points.
2. It is said that the first decision point was on 24 February 2014 when the board resolved that PAC execute a non-binding terms sheet to formalise negotiations for the merger.
3. It is said that the second decision point was on 16 April 2014 when the board resolved that PAC sign a memorandum of terms.
4. It is said that the third decision point was on 23 July 2014 when the board resolved that the merger be approved.
5. It is said that the fourth decision point was on or about 16 November 2014 when each member of the board signed a circular resolution to proceed with completion of the merger.
6. PAC's case is that at each of those key decision points, no director of PAC acting with an ordinary degree of prudence ought to have taken those decisions.
7. PAC says that the merger exposed PAC to significant risks and that those risks were not adequately considered and evaluated by the PAC board in reaching its decision to approve the merger.
8. It is said that the merger was complex and the risks involved were high. The merger involved PAC giving up all of its assets, which were assessed to be worth in excess of AUD 250 million, in exchange for units in the Aurora Trust. And it is said that the merger exposed PAC to the significant risk of future underperformance of Northern Lights' assets, and being particularly exposed to the underperformance of Seizert, Aether and WHV. It is also said that those risks were exacerbated because of the nature of the industry.
9. PAC says that the steps that were required for an adequate consideration of the merger were not unduly onerous or expensive given the scale of the overall transaction and the risks involved. It is said that they involved commissioning an independent valuation, conducting a proper due diligence process, and reviewing the draft due diligence report that was available.
10. PAC says that at each of the four key decision points, and particularly on 23 July 2014 when the board resolved that the merger be approved, a director of PAC acting with reasonable care and diligence ought not to have exercised their powers to vote in favour of the proposed merger. And it is said that it was reasonably foreseeable that a breach of duty might expose the company to significant harm.
11. Let me summarise some subject-matter specific complaints of PAC before turning to the four decision points.

Due diligence committee

1. PAC complains that no due diligence committee had been formally commissioned to report to the PAC board on the merger. Further, PAC says that the absence of a due diligence committee is not merely a process point. It goes to the fundamental issue of the value of Northern Lights and the risks that PAC was exposed to as a result of the proposed transaction. Further, PAC says that the due diligence process was unstructured for a transaction of this magnitude. And instead of a due diligence committee, it is said that the evidence demonstrated a largely ad hoc reporting of due diligence issues to PAC's board which resulted in key matters being missed.
2. First, there was the lack of provision and analysis of the Deloitte due diligence report.
3. Second, there was the lack of understanding and proper analysis of the issues and risks associated with WHV.
4. Third, there was the failure to circulate and properly assess the Gresham models such as model v 341 and model v 368 and to be informed of the risks associated with the values assigned to certain boutiques, such as the increasing value of WHV in the models despite the risks associated with WHV.
5. It is convenient to say at this point that in summary I have rejected PAC's criticisms concerning the absence of a formal due diligence committee.

Analysis of quality of earnings

1. Further, PAC says that there was no independent analysis of Northern Lights' quality of earnings and forecast data, which was an input into the Gresham model.
2. In this context it is said that Mr McGill was aware, prior to receiving a copy of the Deloitte due diligence report, that the QoE analysis undertaken by Deloitte was undertaken for lenders of Northern Lights, and that he first became aware of it when he learned that Northern Lights would need to raise debt finance from US financiers to enter into the merger.
3. Further, it is said that at trial the non-executive directors acknowledged and accepted as follows.
4. Mr Fitzpatrick conceded that it was important to obtain a QoE analysis as part of the assessment of the merits of the merger, and accepted that there was a difference between sell-side and buy-side and that one would have needed to have assessed the reasonableness of any projected future earnings of Northern Lights.
5. Mr Kennedy accepted that a QoE report is a standard part of due diligence in any M&A transaction and that such a report would thoroughly and objectively evaluate a company's financial statements to present accurate historical earnings and assets.
6. Mr Hayes gave evidence that a director would want to have a QoE analysis done.
7. Ms Donnelly accepted that a QoE analysis is a routine step in the due diligence process for consideration in a merger. Further, she did not see the long-form QoE analysis from Deloitte or the databook. However, Ms Donnelly went on to say that she believed that Gresham was incorporating a QoE analysis and doing analytics of the valuations. Ms Donnelly went further to suggest that it was clear to her that Gresham and others were carrying out a QoE analysis, but then also accepted that PAC did not actually commission a QoE analysis on Northern Lights.
8. Further, it is said that Gresham was not tasked with providing such an assessment. This is despite the assertion by Mr Fitzpatrick and some of the other directors that, at the time they approved the terms sheet and the memorandum of terms, they believed that an independent verification would be provided.
9. Further, although PAC accepted that there was some limited analysis of future earnings performed by Mr Howard and sent to Mr McGill and Mr Ferragina in May 2014, it was said that this was not a suitable basis on which the PAC board could assess QoE, including sustainability of funds under management, inflows and fund performance.
10. Further, it is said that both Mr McGill and Mr Fitzpatrick were aware that there were specific issues with respect to future earnings in relation to WHV.
11. As a consequence of this lack of analysis of quality of earnings, PAC says that any discounted cash flow (DCF) calculation performed by Gresham was unreliable, and the board could not be reasonably satisfied that the merger would be earnings per share accretive and/or value enhancing.
12. It is convenient to say at this point that in summary I have rejected PAC's criticisms in this context save and except aspects concerning WHV which I will return to later.

Earnings per share accretive

1. Further, PAC says that there was no reliable and independently verifiable evidence before the PAC board that the merger would be earnings per share accretive and/or value enhancing.
2. It is said that no such analysis was undertaken to compare the merger with other investment opportunities present and available at the time.
3. Further, it is said that if the underlying forecast earnings of Northern Lights had been properly analysed, then the PAC board would not have had a proper basis to conclude that the merger would be earnings per share accretive and/or value enhancing in light of the concerns with some of the underlying forecast earnings for Northern Lights' boutiques.
4. Now Mr Fitzpatrick accepted at trial that whether a deal is earnings per share accretive depends on a number of matters, including the forecast earnings of the target entity. He accepted that the key consideration for the merger with Northern Lights was that it was to be EPS accretive.
5. Further, Mr McGill's evidence was that in February 2014, Northern Lights' forecast earnings were aggressive and optimistic. He accepted Mr Carver's point of view at the time that there was uncertainty surrounding those forecasts. Further, Mr McGill accepted that as PAC was a publicly listed company, it needed to be shown to shareholders that the merger was earnings per share accretive in the short term.
6. Further, Mr McGill said that he could not recall whether any analysis was undertaken as to whether the proposed merger with Northern Lights would be EPS accretive in light of the concerns held by at least Mr McGill and Mr Fitzpatrick about WHV.
7. But PAC says that there was no evidence to support such analysis having been undertaken.
8. Again, it is convenient to say at this point that I have rejected PAC's case save and except aspects concerning WHV which I will return to later.

No analysis of the sale of RARE

1. Further, PAC says that there was no analysis of the impact or opportunities arising from the likely divestment of the fund manager, RARE.
2. Now Mr Kennedy under cross-examination conceded that as at July 2014 and up until November 2014 when the circular resolution was passed, there was no analysis presented to the PAC board with respect to the likely divestment of RARE and how the merger would impact on that likely divestment.
3. Further, Mr McGill's evidence at trial was that he and Mr Fitzpatrick had high level conversations about possible alternative investments to the proposed merger and what use might have been made of the money if RARE was divested, but gave no evidence as to the figure or range or the possible alternatives.
4. I note that ultimately, the proceeds of RARE were used to pay down the Medley loan which had been used to assist Northern Lights to acquire interests in Seizert and Aether.
5. In summary, I should say at this point that I have rejected PAC's criticisms concerning RARE.

Separate allegations against Mr McGill

1. Further, there are additional dimensions to PAC's case against Mr McGill as compared with its case against the other directors.
2. First, it is said that Mr McGill failed to bring information regarding WHV to the attention of PAC's board at the time that they voted in favour of the transaction documents execution resolution at the 23 July 2014 board meeting, when he signed the implementation deed and when each of the non-executive directors signed the circular resolution on or about 16 November 2014.
3. I have largely accepted PAC's case on this aspect and will return to the detail of this later.
4. Second, it is said that Mr McGill failed to ensure that each of Mr Kennedy, Ms Donnelly and Mr Hayes were provided with model v 341, which significantly increased the value ascribed to WHV, prior to voting in favour of the transaction documents execution resolution at the 23 July 2014 board meeting. Further, it is said that he signed the implementation deed in circumstances where there was concern about WHV and he had not ensured that each of Mr Kennedy, Ms Donnelly and Mr Hayes had received model v 341.
5. I have largely accepted PAC's case on this aspect and will return to the detail of this later.
6. Third, it is said that Mr McGill failed to ensure that each of Mr Kennedy, Ms Donnelly and Mr Hayes were provided with model v 368, which further increased the value ascribed to WHV, prior to the time the non-executive directors signed the circular resolution on or about 16 November 2014.
7. I have rejected PAC's case on this aspect because I have found that it has not been shown that Mr McGill received a copy of model v 368.
8. Fourth, it is said that Mr McGill failed to provide to the non-executive directors the Deloitte due diligence report prior to each of the non-executive directors voting in favour of the transaction documents execution resolution at the July 2014 board meeting and subsequently signing the circular resolution.
9. Now as a matter of fact this allegation is correct. But in the circumstances this failure did not in and of itself amount to a breach of duty by Mr McGill.
10. Now as I explained in Mariner Corporation, it is not in doubt that the circumstances of the particular company concerned inform the content of the duty. These include the size and type of the company, the size and nature of the business it carries on, the terms of its constitution, and the composition of the board of directors.
11. And as I also said, it is also not in doubt that in considering the acts or omissions of a particular director, one looks at factors including the director's position and responsibilities, the director's experience and skills, the terms and conditions on which he has undertaken to act as a director, how the responsibility for the company's business has been distributed between the directors and the company's employees, the informational flows and systems in place and the reporting systems and requirements within the company.
12. It is appropriate to take into account Mr McGill's role as managing director and chief executive officer of PAC in determining whether he has exercised reasonable care and diligence.
13. I will return to some other discrete topics later. But let me now turn to each of the so-called decision points identified by PAC and discuss some specific matters concerning specific decision points.

Voting in favour of the February resolution at the 24 February 2014 board meeting

1. PAC alleges that the non-executive directors breached their duties by voting on 24 February 2014 in favour of the resolution that PAC execute the draft terms sheet attached to the board papers for the 24 February 2014 board meeting. But in my view there was no such breach.
2. First, the terms sheet was non-binding. So, there was no relevant risk of harm at that point.
3. Second, PAC's case is largely founded on the premise that the non-executive directors did not properly analyse what PAC management said in the February board papers. But the non-executive directors were aware in February 2014 that it was early days and that due diligence was yet to occur.
4. Third, Mr Lewin's evidence, which I accept, is that it was market practice to execute a terms sheet before due diligence. Otherwise, the costs of experts could be wasted if the parties did not reach non-binding commercial terms.
5. Let me deal with some more specific topics relating to this particular decision point.

The non-binding nature of the terms sheet

1. The premise underlying PAC's case in relation to this first decision point is that the provisions of the terms sheet set PAC on a course that would or was likely to result in losses.
2. Now one of the elements which PAC must establish for there to be a breach of duty is that the directors' action in passing the resolution caused reasonably foreseeable harm to PAC. But one must balance the foreseeable risk of harm to PAC from the resolution, taking into account matters such as the degree of probability of its occurrence, and the potential benefits that could reasonably be expected to have accrued to PAC from the vote.
3. Now because the terms sheet was non-binding, in February 2014 the harm which PAC alleges, being losses from the merger due to the overvaluation of Northern Lights' boutiques and the 60:40 split being unfavourable to PAC, was not a reasonably foreseeable consequence of the February resolution.
4. Moreover, the action of the directors in February 2014 was not voting on whether to merge.
5. The draft terms sheet was, apart from the clauses identified as binding such as those relating to confidentiality, non-binding.
6. Now Mr Lewin explained that the purpose of a terms sheet was to identify a set of parameters about key commercial terms, the next steps in the transaction such as due diligence requirements and a timetable that the parties then agreed to progress through to a binding transaction.
7. Mr Kennedy explained that at the February board meeting the board was considering a plan that he would describe as preliminary and non-binding. The board thought that the merger looked like a good transaction and that PAC would have to make further inquiries and investigations to see if it still looked as good. So, the February board meeting was a preliminary meeting. He did not think that PAC was committed and thought that PAC would do further due diligence. Mr Kennedy rejected the suggestion that the terms sheet put PAC on a course of merging with Northern Lights.
8. Mr Fitzpatrick gave evidence that in his experience, without the execution of a non-binding terms sheet or non-binding indicative offer a business such as PAC could not obtain access to the financial information necessary to make an informed decision or valuation of a potential merger or acquisition.
9. Mr Fitzpatrick said that the purpose of a non-binding indicative offer was to allow the investigation of initial valuations. Mr Fitzpatrick rejected the proposition that deals remained the same once a non-binding indicative offer was executed. He also rejected the proposition that PAC could have obtained all the information it needed under the confidentiality agreement, being the mutual evaluation and non-disclosure agreement that had been entered into between PAC and Northern Lights on 1 November 2013.
10. Further, Ms Donnelly gave evidence that the reason she considered that the information provided in the three February 2014 memoranda was satisfactory for the decision she had to make was that the terms sheet was non-binding.
11. Further, Mr McGill made the point that at this time the 60:40 split was not set. Indeed, both the split could vary and what the parties were contributing to the merged entity could also vary. Mr McGill did not consider himself to be constrained by the terms sheet or the later revised term sheet from renegotiating the 60:40 split, which had a 10% variance built into it regardless.
12. Now PAC asserts that the effect of a non-binding terms sheet tended to fix the key terms of such a transaction and made it hard for the acquiring company's management to renegotiate elements such as price and risk allocation. But parties usually diverge from the key terms in a terms sheet through the due diligence process. Further, the directors were clearly aware of what management had informed them, such as the high-level indicative nature of the non-binding terms sheet.
13. Further, as stated in the terms sheet, a purpose of the terms sheet was to allow due diligence to occur.
14. Further, as at February 2014 there was no prospect of the harm PAC alleges coming to fruition unless it be accepted that after the 24 February 2014 board meeting the board was likely to jettison the need for matters such as due diligence and the valuations of boutiques.
15. Now it seems fairly clear that as at the February 2014 meeting, the board would follow the processes for the merger, and would walk away from the non-binding provisions of the terms sheet unless later due diligence and valuation advice confirmed the 60:40 split. And that being the case, there was no reasonably foreseeable risk of harm of the type PAC alleges as at the first decision point.
16. Now notwithstanding what I have just said, which is sufficient to dispose of PAC's case concerning the first decision point, let me deal with some other topics as they relate to this particular decision point and later decision points.
17. Now PAC alleges a breach of duty because the non-executive directors participated in making the resolution to execute the February terms sheet in the absence of a due diligence committee or any analysis. But I reject this part of PAC's case.

No due diligence committee

1. Now it is plain from the evidence that there was no formal due diligence committee appointed by the board. But in my view none of this has the significance contended for by PAC.
2. Mr Kennedy gave evidence that as at February 2014, forming a due diligence committee of the kind alleged was artificial for a company the size of PAC. PAC had five directors and, excluding Mr McGill, a few senior executives like Mr Howard and Mr Ferragina.
3. He said that a committee of the type alleged would have resulted in the board reporting to the board or management reporting to the board, which is what was to occur and did occur.
4. He gave evidence that he knew that it would be PAC management who would undertake due diligence and that Mr Fitzpatrick would effectively oversee that process. Indeed, PAC's business was assessing boutiques for investment, and so he did not find this odd.
5. Mr Kennedy explained that he thought that there was a de facto committee comprising PAC management with Mr Fitzpatrick being consulted and kept informed. He emphasised that PAC management had the skill sets to undertake due diligence because it was their job.
6. And as for the suggestion that PAC management did not have experience with US boutiques, Mr Kennedy said: … boutiques are boutiques … You know, there's - it's a different regulatory environment. It's a different country, but they're still boutiques. So we've looked at boutiques in Edinburgh, in Asia. I mean, we hadn't had experience in the States, I accept that, but there's certain likeness of the boutiques across the world.
7. Mr Fitzpatrick said that the establishment of a formal due diligence committee to consider the merger, whether before or after the 24 February board meeting, was unrealistic and unnecessary considering the size of PAC. PAC only had 5 directors and a limited number of management staff. He made the decision not to formally put together a due diligence committee given the size of the board and that due diligence was undertaken by Mr McGill's informal committee, with all of PAC's advisers. Further, Mr Fitzpatrick said that it did not make much sense to have a due diligence committee when there were only four non-executive directors.
8. Mr Hayes gave similar evidence to that of Mr Kennedy and Mr Fitzpatrick, namely that there was a de facto committee, with two of its members being Mr Ferragina and Mr Howard. He said that whether the committee was formal or de facto made no difference to decision making. What mattered was that the due diligence was done.
9. Mr McGill gave evidence that PAC management was operating in a sense as a due diligence committee.
10. Now Mr Bradley expressed the view that the PAC directors did not put in place the formally structured and managed due diligence process necessary to assess the merits of the Northern Lights merger so as to comply with their duty of care and diligence.
11. I asked some questions of Mr Bradley about his evidence and in that regard the following exchange occurred: HIS HONOUR: But just so that I'm clear though. If the people actually doing the real work for due diligence are PACs CEO, the CFO and also then the CIO, the chief investment officer, and those three individuals regularly attend board meetings and can answer questions, why isn't that a sort of a gold-rated due diligence process as distinct from somehow creating some other committee or subcommittee and having people remote? I mean, you've got the three top executives in the company who are carrying out the work, travelled to the United States and they're also giving reports to the board and are answerable to the board directly, so why isn't that in the de facto sense all you could ever reasonably want for a company of this particular size? MR BRADLEY: Your Honour, so far as accountability for the work goes and reporting to the board, that would be right, but a due diligence process would go - would also be outlining what the directors expected to be done by management during the course of that investigation work, who they would employ to assist them, where they would seek their information, and in this case in particular what information they would seek from parties that could give them a sense of what the - knowledge of what the market value of the businesses they were looking at was. It wouldn't reside simply in management making up what it should report to the board, but the board, you know, outlining what they expected to receive and what they expected to be investigated and how. Q: But you're suggesting some formal top-down structure for this due diligence, and I suppose what I'm saying to you is, you've got the three top executives, they're reporting to the board, they're doing memoranda which are in the board papers and the like and you've got Howard's analysis - I will describe that as a bottom-up approach for the moment - but why is that not an appropriate due diligence process for this company with the sorts of assets that they're looking to acquire from Northern Lights? A: Were it a much smaller transaction, your Honour, I would be inclined to say yes, but this was a very transformational, large and, in my view, having looked at all the evidence, a fairly high risk transaction and in that regard I would have thought the board should have been clearer about what it expected management to do and where it might have expected management to seek external advice given that in these situations management is often the promoter of the transaction and, while they can provide the reports and so on, they might not have the objectivity that the board should be seeking in the due diligence process. Is that helpful? Q: Yes. And I suppose another dimension to this is that you've got the directors, the non-executive directors and the chairman and they are also themselves, most of them, fairly experienced in the type of, you know, funds management and that sort of thing. So it's not as if you've got somebody who's a scientist who's just brought on there as an independent mind or a retired professor of history or something, or somebody who's, you know, got a sporting background or something? A: Yes. Q: You've got the management actually reporting to directors who themselves have considerable and very detailed and deep experience in these very questions. So why isn't the combination of - that the management, the bottom-up approach with the skill set of the directors in combination an adequate approach to due diligence in the circumstances of this company and the nature of the transaction or the acquisition? A: Again I would say to your Honour that, you know, for a smaller transaction that would be an acceptable approach. This was a large and complex transaction in foreign jurisdiction and so on, all the matters I lay out in my opinion, and those experienced directors would have had a view - should have had a view as to what risks they wanted investigated, the kind of information they wanted management to come back with, the kind of external benchmarking of the value of the funds that they were expecting to see, the external ratings of these funds, more information about their history and so on, that they could have specified and, in my view, should have specified as part of that due diligence approach rather than simply relying on management to come back with their reports without that guidance.
12. In my view, Mr Bradley did not properly consider the expertise and experience of the board members, what the board knew, what views it had about risks and its ability to ask for information if not satisfied with the reports being presented to it.
13. Further, Mr Lewin gave evidence that in his experience a board was not usually involved in a due diligence committee as due diligence was a matter for management as advised by external advisers.
14. I accept the directors' evidence that given the size of PAC's board and executive team, establishing a formal due diligence committee would have served no significant advantageous purpose.
15. Moreover, the directors knew from the February 2012 memoranda and from their other general experience that PAC management, which had the requisite skill set because PAC's business was investing in boutiques, would undertake a lot of the due diligence work, that experienced external advisers were to be engaged, and knew what the risks were of the merger. The board did not need a formal due diligence committee to inform it of such things.
16. In my view, the directors did not breach their duties by voting to execute the February terms sheet in the absence of a due diligence committee.
17. Now before I move on to the next decision point concerning the board meeting on 16 April 2014, it is appropriate to deal with a number of other discrete topics.

The allegation of no independent or proper analysis of earnings

1. Now it is said that the non-executive directors breached their duties in February 2014 because they voted in favour of the resolution in the absence of an independent analysis of Northern Lights' historical QoE and forecast earnings.
2. PAC says that such an analysis required a detailed examination of Northern Lights' data and assumptions concerning the reasonableness, nature and amount of its historical and forecast earnings. Further, such an analysis had to be undertaken by an appropriately qualified and experienced external expert retained by PAC, separate from management, and whose remuneration was not linked to the merger occurring.
3. Now clearly as at the February 2014 board meeting there was no such analysis of the type alleged by PAC before the board at that time. But let me address three matters that may be relevant to the later decision points. One matter concerns the independence of an external adviser. Another matter concerns the question of timing and the available information.
4. Let me begin with the question of independence. PAC's reference to independence embraced someone that was separate from PAC management and whose remuneration was not linked to the merger. In other words, what was being referred to was an expert commissioned independently from PAC management who was free from any conflict of interest arising from any existing relationships with the parties or any financial interest or remuneration dependent upon whether the proposed merger did or did not proceed.
5. Now I reject PAC's counsel of perfection approach.
6. Gresham's retainer in respect of Pinnacle and Berkshire's retainer were both success fee based. Ms Donnelly explained the benefit of success fees. PAC would either pay a high hourly rate or a lower hourly rate with a success fee. For small companies like PAC, the success fee model was advantageous when transactions are not completed, as with Pinnacle, WIG and Berkshire.
7. Further, Mr Fitzpatrick gave evidence that an expert who failed to avoid a conflict of interest by giving an opinion to obtain a success fee would have a problematic reputation.
8. Further, Mr Fitzpatrick wanted an expert who worked with management. And Mr Bradley accepted that an expert would still be independent if the expert worked in conjunction with management.
9. In my view there was no necessity for any valuation, report or analysis to be undertaken by an expert who satisfied PAC's definition of independence.
10. Let me move to another topic. Now clearly, as at the time of the February 2014 board meeting it was premature to have carried out an analysis of historical QoE and forecast earnings. As to the question of timing and available information, how was PAC to obtain by February 2014 the information which would have been necessary to obtain the reports and analyses which PAC's counsel of perfection demanded?
11. Now Mr Bradley said that in his experience companies contemplating a merger will often exchange confidential information about their businesses under confidentiality agreements before formal terms sheets are signed. And that may be so. And that may be appropriate where a company in Northern Lights' position operated its own business. But Northern Lights' business was owning interests in other operating boutiques.
12. Now Mr Bradley explained that he had assumed that PAC could have obtained all necessary information about Northern Lights' boutiques from Northern Lights under the confidentiality agreement. And part of his assumption was that PAC could have directly approached Northern Lights' boutiques and the clients of those boutiques to obtain information.
13. But Mr Lewin's evidence was that prior to executing a terms sheet, targets do not release the corporate information necessary to perform due diligence and a valuation because they are advised not to do so. Further, from December 2013 Northern Lights had been pushing for a terms sheet.
14. In my view, in February 2014 there was little prospect of PAC being given further information about and access to the personnel of Northern Lights' boutiques unless a terms sheet was executed. I agree with the directors that absent any executed terms sheet it is unrealistic to suggest that PAC could have successfully approached Northern Lights' boutiques and their clients directly, and that they would have co-operated.
15. Further, it was reasonable for the directors to make the February resolution subject to due diligence because that was market practice. It would have been uncommercial to incur the significant costs of due diligence and a valuation unless commercial terms were already agreed and exclusivity was obtained.
16. Further, a QoE analysis was not necessary for the directors to vote on the February resolution. It was early on in the transaction, and due diligence was yet to occur and could not occur without the resolution.
17. Let me now turn to another criticism made by PAC concerning this decision point and later decision points.

The allegation of no assessment of earnings per share and value enhancing

1. Now PAC says that the directors breached their duties because in February 2014 they voted in the absence of a reliable and verified assessment that the merger would be EPS and value enhancing for PAC shareholders.
2. PAC has said that if the underlying forecast earnings of Northern Lights had been properly analysed, then the board would not have had a proper basis to conclude that the merger would be EPS accretive and/or value enhancing in light of the concerns with some of the underlying forecast earnings for the Northern Lights boutiques.
3. Now Mr Bradley based his opinion about the inadequacy of the EPS and value enhancing information in the February 2014 memoranda on two matters. First, Mr Bradley pointed to the fact that the memoranda used as a guide price/earnings (PE) multiples for US listed fund managers derived from a Goldman Sachs publication. Mr Bradley's criticism was that the publication had not been prepared specifically for Northern Lights. Second, Mr Bradley criticised the memoranda because of the metrics they used.
4. But in cross-examination Mr Bradley accepted that the directors were experienced directors and they could clearly have understood what was put before them in writing, including that due diligence had yet to occur and that the terms sheet expressed matters that might evolve and change.
5. Further, Mr Kennedy said that he knew that Northern Lights' forecasts had not been verified, but said that this was very early in the conversation and it was the first step. Mr Kennedy said that he saw nothing wrong with the metrics used as the February memoranda explained the choice of metrics.
6. Mr Fitzpatrick had no difficulty in understanding the different metrics. He gave detailed evidence about why the information in the memoranda was rough and ready but satisfactory to him.
7. Ms Donnelly equally understood the different metrics. She too understood differences related to the fact that Northern Lights' figures were before tax. She also understood that the Goldman Sachs numbers were a benchmark not prepared for PAC.
8. In my view, the analysis suggested by PAC was not necessary for the directors to vote on the February resolution. The directors understood that it was early on in the transaction, understood that the forecasts had come from Northern Lights and understood the supposed shortcomings in the 2014 February memoranda.
9. Further, it was obvious to the directors that any approximate calculations would be reviewed during due diligence, which could not occur without the resolution.
10. There is another dimension to PAC's criticisms.
11. PAC has said that any EPS assessment should have compared the merger with other investment opportunities. But Mr Kennedy made the point that PAC had no investment opportunities at that time against which the merger could be compared. So too did Mr Fitzpatrick.
12. Now Mr Bradley said that Mr McGill's February memoranda should have tested the merits of the Northern Lights transaction against other investment opportunities. But he did not identify what those opportunities were in February 2014.
13. Further, Mr Lewin agreed that apart from a return of capital to shareholders, which would have made PAC a smaller company, the merger was the only potential transaction because PAC could not find suitable investment opportunities despite reviewing many.
14. Now PAC's underlying premise is that there were other investment opportunities against which to compare EPS outcomes with the Northern Lights transaction. But in my view there were not. I will deal further with the alternative investments issue in another context later when I deal with the question of causation.
15. In my view, the directors did not breach their duties by not having a comparative assessment with other investment opportunities because they knew there were little. They knew that PAC management had found one opportunity from its review of 73 opportunities in the last two years and only identified what became ROC Capital. And they knew that PAC had retained Berkshire which was yet to identify a mature boutique in which PAC could invest.

No assessment of the merger against the sale of RARE

1. Now PAC has said that the directors breached their duties because they voted in favour of the resolution in the absence of quantification of the position that PAC shareholders would have been in if the merger did not take place, including considering the impact of the divestment of RARE.
2. PAC said that in February 2014 the prospect of RARE being sold was very high and that the board knew that PAC was going to shortly receive more than $100 million from the proceeds of the sale of RARE.
3. PAC said that what should have been presented were proper due diligence investigations put in place as to what might be made of the RARE proceeds, as opposed to going down the Northern Lights merger route. Further, it is said that there should have been an analysis of the impact or opportunities arising from the likely divestment of RARE on the basis that the likely sale price could have been estimated.
4. Now it is not in doubt that the board did not have before it any quantification or analysis of the type alleged. But the directors did not need an analysis about the sale of RARE.
5. They knew that until RARE was sold, PAC's shareholders would have remained in much the same position as they were. They would have continued to receive dividends based upon revenue PAC was receiving largely from RARE. They knew that there was little possibility of replacing RARE in the short term because none of PAC's other boutiques were mature enough. They also knew that if RARE was sold, PAC would have to pay tax on any capital gain it made. Further, PAC would have after tax funds to invest, but the process of finding appropriate boutiques in which to make investments could be protracted. And PAC's dividends would significantly reduce in quantum.
6. Further, Mr Fitzpatrick said that in February 2014 it was his belief that there was an increasing possibility but not an inevitability that the 60% owners of RARE would seek a sale of their interest before 30 June 2015, that is, in the financial year following. Mr Fitzpatrick explained that consideration had been given to what to do with the proceeds, such as listing IML and otherwise collapsing PAC with a capital distribution to shareholders.
7. Mr Kennedy said that as at February 2014 the sale of RARE was just a possibility. He had heard that the founders might sell, but he never knew whether they would. He said at the time that RARE would have been worth about $100 million.
8. I should also say for completeness that I did not find the debate on these topics between Mr Bradley and Mr Lewin to be of any assistance.
9. In my view, the directors did not breach their duties by not having an analysis about the sale of RARE. They knew that the sale of RARE was an increasing possibility, but there was no certainty on timing. They knew roughly what RARE was worth. They knew that PAC management had found one opportunity from its review of 73 opportunities. They knew that PAC had retained Berkshire which was yet to identify a mature boutique in which PAC could invest. And they knew that the consequences of a sale of RARE were a large tax bill and a substantial amount of cash to either invest or to return to shareholders. Moreover, the latter course would result in a significantly reduced dividend and share price.

Inflation of Northern Lights's 40% entitlement

1. Now PAC has said that the information and methodology available to the directors which was used to value Northern Lights' assets as at February 2014 inflated Northern Lights' proportion of units in the Aurora Trust. It was said that Northern Lights' FY14 performance was not representative. Consequently, PAC alleged that the directors should not have voted in the absence of a reliable forecast of Northern Lights' earnings. Particular criticism was made of the Seizert figures.
2. Now Mr Kennedy was taken to the increase in profit and PAC management's comments that Seizert's funds under management figures looked optimistic, and he agreed that these raised questions.
3. When the figures were put to Mr Fitzpatrick he explained them, saying that Seizert had picked up momentum and he was not worried about the FY11 and FY12 figures.
4. Ms Donnelly said that she was not concerned about the increase from USD 800,000 because it was very early stages, PAC had yet to receive full year FY13 accounts for Seizert, due diligence was yet to occur and she expected PAC management and an expert to look at these matters.
5. But this was all early in the process. No criticism could be made concerning passing the February resolution at this time. The directors knew that the figures were estimates and forecasts that had to be checked.
6. PAC has also said that the information and methodology available to the directors which was used to value Northern Lights' assets at February 2014 inflated Northern Lights' proportion of units in the Aurora Trust.
7. This was said to be because Northern Lights' earnings were based upon Northern Lights owning 100% of Seizert. But since Northern Lights only owned 30%, this should have been reduced by 70%.
8. Further, a value was ascribed to WHV even though Northern Lights had no investment in WHV, but only a contractual right to a distribution.
9. Consequently PAC alleges that the directors should not have voted in the absence of a reliable forecast of Northern Lights' earnings.
10. But PAC management and subsequently the board had been told that Northern Lights would acquire 100% of Seizert irrespective of the merger proceeding. So it was appropriate for PAC management to provide a value in the February 2014 memoranda for that 100%.
11. The merger involved Northern Lights contributing its boutique interests to the Aurora Trust. If the interest in Seizert was to be 100%, PAC should have valued 100% when working out the split. Moreover, PAC was not going to proceed with a 60:40 split if 100% of Seizert was not going to be contributed.
12. Further, whilst who incurred the debt to acquire the 70% of Seizert that Northern Lights did not own was not central to PAC's allegation, the responsibility for that debt, for example, the Aurora Trust guaranteeing what was Northern Lights' primary responsibility, was an integer that could be taken into account when agreeing a 60:40 split.
13. And as to WHV, Northern Lights had a contractual income stream. PAC could value that income stream for the purposes of the potential merger. I will discuss the WHV question in a separate section of my reasons later.
14. Further, PAC has said that the information and methodology available to the directors which was used to value Northern Lights' assets at February 2014 inflated Northern Lights' proportion of units in the Aurora Trust because the PE/valuation multiples used in the 21 February 2014 memorandum were arbitrary. Consequently, PAC alleges that the directors should not have voted in the absence of a reliable forecast of Northern Lights' earnings.
15. But PAC does not say how in February 2014 they would have been ascertained for Northern Lights' boutiques.
16. Let me return to Seizert for a moment.
17. PAC has also said that the information and methodology available to the directors which was used to value Northern Lights' assets at February 2014 inflated Northern Lights' proportion of units in the Aurora Trust because Seizert was overvalued by approximately USD 40 million.
18. PAC calculates the USD 40 million by deducting from the USD 121 million valuation of Seizert by PAC management the USD 81 million valuation of Seizert at which Northern Lights could contractually purchase Seizert.
19. Now in answer to a line of questioning from me about the USD 40 million discrepancy, Mr Kennedy said: HIS HONOUR: So, Mr Kennedy, what do you recall about your own consideration of this discrepancy, if any, at the time of this meeting? MR KENNEDY: Well, I think that - I'm - I don't have a specific recollection, your Honour, but my understanding was that there was some pre-existing arrangement that predated this discussion about being able to acquire the balance of Jerry Seizert's operation or interest in the business for a predetermined value. And those calculations are normally set almost when they're setting up business with the boutique operator, so it probably goes back a number of years or a significant period in the history of Seizert. Q: And in terms of the discussions at this board meeting you don't recall---? A: No, no. Q: ---any precise discussions? A: No, no. Q: But you think that there may have been discussion about it? A: Yes, yes. There was a lot of discussion about the whole McGill paper, let's be clear. You know, it was widely acclaimed, if I can say that, widely recognised that it was a significant and good - a transaction that was well worth taking to the next stage.
20. Mr Fitzpatrick said that Seizert was correctly valued in the table in the 21 February 2014 memorandum. And he said that the fact that Northern Lights could contractually secure the remaining 70% of Seizert at a discounted value did not affect Seizert's value.
21. Ms Donnelly said of the supposed discrepancy: MR ANNABELL: So, you were aware, reading this, that Northern Lights was moving to 100 per cent ownership of Seizert based on a deal with Seizert management that valued Seizert at 81 million? MS DONNELLY: Yes. Q: And you were aware that that figure, 81 million, was less than the figure - less than the value that PAC was attributing to Seizert of 121 million? A: Yes. Q: And, in effect, Northern Lights would have a quick value uplift on Seizert? A: Not Northern Lights. It was Northern Lights and [PAC], because we bought that 40 jointly. We were both involved in that transaction. Q: Do you recall any discussions of the discrepancy of between the figure of 81 million and 121 million? A: No, I don't.
22. In my view on the evidence, Seizert was not overvalued in the 21 February 2014 memorandum by USD 40 million. As the directors explained, they understood that this was the difference between the valuation Northern Lights could enforce on Seizert management (USD 81m) and the objective valuation performed by PAC management (USD 121m).
23. Let me move to a different topic.

The so-called "red flag" matters which ought to have raised questions about the true value of Northern Lights' boutiques

1. PAC alleges that there were matters in Mr Howard's February memoranda that ought to have raised questions about the true value of Northern Lights' boutiques.
2. Now in Mr Bradley's report he identified what he considered to be "serious 'red flag' alarms" for the board. Mr Bradley said that it was clear to him that even at this early stage of its review, PAC management should have raised serious questions about the true value of many of the funds in the Northern Lights portfolio, including the three major funds which provided the bulk of Northern Lights' earnings, being Seizert, Aether, and WHV.
3. Now there was confusion at trial about what a "red flag" was. Mr Kennedy assumed that it meant a stop sign so that PAC's case was that each "red flag" should have stopped the merger. Mr Fitzpatrick took it to mean an indication that further investigation was warranted. Moreover, he expected to see red flags. In my view, the latter is the intended meaning.
4. Now I agree with the respondents that the table in Mr Bradley's report distorted what Mr Howard's February memoranda said.
5. Indeed, the table in Mr Lewin's report, where Mr Lewin juxtaposed Mr Bradley's quotes against what Mr Howard's February memoranda said, demonstrated Mr Bradley's selectiveness.
6. Further, Mr Lewin did not accept that there were "red flags" in Mr Howard's February memoranda when Mr Bradley's selective quotes were placed in context. Mr Lewin's opinion was that the picture of the boutiques as outlined by Mr McGill and Mr Howard to the board was consistent with the profile of fund management boutiques he described. I agree with his assessment.
7. Moreover, the board, which comprised experienced directors, was capable of reading and understanding the papers put before it.
8. Ms Donnelly's evidence was that by 2014 she had had experience in investing in start-up companies and boutiques. She expected things to go wrong with boutiques most of the time, particularly in their start-up phase. The problems were part of the nature of the business. As a director making a decision whether to invest in a boutique she wanted to be told all of the good and bad aspects about a boutique. To her, at the time, the commentary in the February material was not a "red flag" or "alarm" but was information that she could and did take into account, along with other information, in assessing the risk of what she was being asked to vote on.
9. Further, Mr Kennedy rejected the suggestion that extracts of Mr Howard's memoranda shown to him caused him concern, saying that that was the industry that they were playing in. He said that the extracts highlighted risks that needed to be taken into account, which he did.
10. Mr Fitzpatrick accepted that many of the excerpts shown to him indicated that further investigation could be warranted, but said that many of them were trivial in terms of valuation. But in any event he had considered the excerpts and made a decision about them for the purposes of what the board was being asked to resolve.
11. Mr Fitzpatrick said he regarded Mr Howard's February memoranda as sound because boutiques are people businesses, and that was what the memoranda focused upon. Mr Fitzpatrick said that not all red flags would be resolved with most transactions. With most transactions there would be a few red flags outstanding. Further, Mr Fitzpatrick said that if a red flag could not be ameliorated or eliminated, then one could adjust the valuation or decide not to proceed with the transaction.
12. In my view the directors read Mr Howard's February memoranda and properly considered and identified matters that had to be taken into account when deciding to vote.
13. Further, the minutes record that Mr McGill spoke to the non-executive directors about Northern Lights' boutiques. The minutes also record that there was a comprehensive discussion. Clearly, the board discussed Mr Howard's February memoranda.
14. But in any event, given the decision that the directors were being asked to then make and that they all knew that due diligence was yet to occur, voting in favour of the resolution was not a breach by the directors of their duties. Clearly, the only way for PAC to investigate the observations in Mr Howard's February memoranda was to meet with Northern Lights' boutiques and obtain further information. But this could not occur without executing the terms sheet.

No independent valuation of Northern Lights' boutiques

1. PAC said that the directors breached their duties because in February 2014 they voted in favour of the resolution in the absence of an independent valuation of Northern Lights' boutiques for the purpose of determining the allocation of units in the Aurora Trust. The valuation had to be independent, and had to use a range of valuation methodologies and assumptions, including comparable market transactions, PE multiples and DCF valuations. Now I have addressed the independence question, but let me address some further points.
2. Mr Bradley's evidence was that the February 2014 memoranda did not provide adequate justification for the valuation of Northern Lights, that the merger would be value-enhancing for PAC shareholders or for the proposed 60:40 ownership of the merged business.
3. He said that the directors should have known or perceived that the proposed merger was at a very early stage of investigation, would likely involve significant new risks for PAC and its shareholders, was not yet supported by any thorough due diligence on the value, performance or prospects of Northern Lights' boutiques, and that there was therefore no compelling basis for the proposed 60:40 ownership structure of the merged entity as proposed by PAC management.
4. But as I have already said, at the time of the February resolution it was early days.
5. Further, Mr Bradley's evidence is based on the premise that at the February 2014 board meeting the directors had in effect decided on the 60:40 split. That evidence is problematic to say the least. That had not been locked in.

No analysis of regulatory risks, concentration risks or structure

1. PAC originally said that the directors breached their duties because they voted in the absence of an analysis presented to the board of the following matters.
2. First, it is said that the directors had no analysis of the broader USA funds management market, including regulatory risk. PAC alleged that that market is the investment management industry in the USA and identified regulatory risk as the risk associated with laws or regulations in the USA that would adversely impact on Northern Lights' boutiques or adversely impact on returns to PAC from Northern Lights' boutiques.
3. Second, it is said that the directors had no analysis of the concentration risk in merging with Northern Lights. PAC identified concentration risk as the risk associated with the dependence of Northern Lights' future earnings on a limited number of boutiques or a limited number of investors in those boutiques.
4. Now it would seem that by the end of trial PAC was not persisting with these problematic points. But let me address them anyway as they are not irrelevant to the broader context including the general sophistication of the directors.
5. Now as at the February 2014 board meeting there was no analysis presented in relation to the broader USA funds management market, including regulatory risk.
6. Mr Kennedy accepted that there was no risk analysis provided for the February board meeting. But he said that he was aware of the regulatory and concentration risks when he voted at the February 2014 meeting. His evidence was that he did not need an analysis to vote on a non-binding terms sheet because of the following matters.
7. First, there was always a regulatory risk with any investment. However, PAC was investing in boutiques principally located in the USA and not in a third world country. He also assumed that Northern Lights was trading lawfully, but expected any problems in that regard to have been identified during due diligence.
8. Second, PAC's strategy to diversify was largely driven by concentration risk so he knew what it was. He did not need a report on the risk of investing in boutiques principally located and investing in the USA. His view at the time was that the merger, if it transpired, would dilute PAC's concentration risk.
9. Mr Fitzpatrick was asked whether Mr Howard's February memoranda highlighted a concentration risk because Northern Lights' performance was heavily dependent on the performance of three boutiques. Mr Fitzpatrick answered that that was clear. Further, he said that from PAC's perspective even bringing in Seizert would lead to diversification.
10. I have no reason to doubt the evidence given by these very experienced directors.
11. Now with respect to regulatory risk, Mr Bradley accepted that he had not identified one. His concern was that he did not find in the documents any discussion about such a risk. And as for concentration risk, Mr Bradley accepted that he was not saying that the board was unaware of the risk. Rather, he expected to see an analysis in the board papers and there was not one.
12. In my view, the directors considered and understood the risks. Moreover, not only was regulatory risk ever-present, but it was self-evident from the board papers. Further, the concentration risk was also clear to the directors. After all, PAC had its own concentration risk and diversification was the obvious way to reduce such a risk.
13. Let me deal with one more matter. To the extent that PAC alleges that the directors breached their duties in February 2014 in voting on the resolution without an understanding of the commercial benefit to PAC of the merger structure proposed, the allegation has no substance. Clearly, what was proposed and known to the directors was a trust structure with a potential 60:40 split. Further, it was well apparent that the structure was designed to minimise double taxation, preserve franking credits and minimise foreign exchange risks.
14. Let me now turn to the second decision point.

Voting in favour of the April resolution at the 16 April 2014 board meeting

1. PAC alleges that the directors breached their duties because at the April 2014 board meeting, they voted in favour of the April resolution where the circumstances alleged to exist as at the February 2014 board meeting continued to persist. I would repeat the same points that I made above.
2. PAC alleges that the directors breached their duties because, at the April 2014 board meeting, they voted in favour of the April resolution in circumstances where they had failed to ensure that there was a proper economic and commercial basis for the proposed 60/40 allocation of units in the Aurora Trust as between PAC and Northern Lights.
3. PAC alleges that a proper economic and commercial basis for the allocation of units in the Aurora Trust meant that the allocation would have to have been based on an appropriate and independent valuation performed by a qualified and experienced external expert retained by PAC separate from management, and whose remuneration was not linked to the merger between PAC and Northern Lights.
4. But these allegations are a repetition of the allegations with respect to February 2014 that I have already disposed of.
5. There is no substance to PAC's case that the directors at this time did not have adequate information or had not engaged in the necessary analysis to pass the resolutions that they did at this time.
6. Further, the entry into of the revised terms sheet did not set PAC on a course that would result in losses. I repeat what I said in relation to the February board meeting.
7. Now it is convenient at this point to say something more concerning Gresham before turning to discuss the third decision point.

Gresham

1. PAC engaged Gresham in early April 2014. Gresham is an Australian based advisory firm and did not have offices or specific experience in the United States.
2. The scope of Gresham's role was to prepare a financial model for the merger, provide corporate finance advice in relation to valuation, corporate structure and capital structure, provide advice on positioning the merger with shareholders and the market, assist in the drafting of an explanatory memorandum, and brief and manage the independent expert in their preparation of a report.
3. But Gresham was not ultimately tasked with the preparation of an independent expert report for shareholders in relation to the approval of the merger.
4. Now it was not within the scope of Gresham's retainer to do a detailed valuation of Northern Lights' businesses. The task that Gresham performed was to build a model "manager by manager" that presented an aggregate view of what the earnings of the merged business would look like.
5. For the purpose of preparing that model Gresham was instructed to adopt the forecasts provided by Northern Lights. Gresham was not engaged to perform a formal valuation. They did not provide a separate full-scale valuation range and utilise multiple valuation methodologies. And nor did they produce a due diligence report with an identification of "red flags".
6. Now I have already addressed some aspects of the chronology, but let me add to and/or repeat some elements.
7. Now in May 2014, Gresham commenced the preparation of some financial modelling for the proposed merger.
8. On 2 May 2014, the directors received an email from Mr McGill attaching a "Gresham Process Update". The attachment noted that "Quality of earnings analysis on historical NLCP financials is being prepared by Deloitte for the debt process, and will be available in the week commencing 12 May".
9. On 13 May 2014, Mr McGill received an email from Mr Pollock of Gresham attaching a "draft work in progress financial model". The email and attachment were forwarded to Mr Fitzpatrick by Mr McGill.
10. On 21 May 2014, Gresham presented its financial model for the proposed merger to the PAC board.
11. Prior to this presentation, Mr Pollock of Gresham sent an email to the board, which stated: Ahead of the financial model discussion on Wednesday, please find attached a draft of the Project Bondi financial model and discussion material covering the key output from the model. We will continue to updated the model as new information comes to hand from NLCP. The model does not yet to incorporate the following:

• Forecast for NLCP assets EAM, Blackcrane & NLAA (minimal impact)
• Reconciliation of forecast distributions for NLCP assets (simplified assumption adopted in the current version of the model)
• Some accounting and tax questions are still being worked through with Deloitte (the model does however reflect the most recent discussions with Deloitte) …

1. Mr Pollock's email also attached an excel spreadsheet titled "Project Bondi Draft Model v 245". Despite Mr Pollock's email noting that the document was a draft, model v 245 was the only version of Gresham's model that was received by all of the directors prior to the merger.
2. On 21 May 2014, in its presentation to an informal meeting of the board, Gresham had a slide headed "Valuation" which showed for a 30% interest concerning WHV and using a 14% discount rate, a DCF value of AUD 7.6 million. It is clear from the slide that Gresham only used Northern Lights' forecasts. Further, there was no valuation provided by PAC, no range of values provided and no use of any different valuation methods. The slide showed that Gresham had "incorporated into the NLCP valuation" withholding tax and dividend tax expected to be paid by PAC shareholders.
3. Further, the 21 May 2014 slide packs as well as later slide packs contained the following disclaimer: The Presentation utilises information which has not been independently verified (including opinion, anecdote and speculation) and which has been sourced from one or more of the recipient, its management, public sources and third parties. Further, this Presentation contains statements, estimates, forecasts and projections that: may be affected by inaccurate assumptions, expectations and estimates and by known or unknown risks and uncertainties; are predictive in character and inherently speculative; and may or may not be achieved or prove to be correct.
4. Clearly, Gresham was not independently verifying base financial information or forecasts.
5. Gresham's presentation included a description of the inputs into its model. The relevant slide showed that Gresham had adopted Northern Lights' forecasts, subject to calendarization, that is, setting common balance dates/financial years, and conversion to AUD, but had not prepared its own forecasts. The presentation also included a disclaimer noting that it utilised information which had not been independently verified.
6. Further, in an email from Gresham dated 22 May 2014, Mr McGill was informed that "the sensitivity analysis Tim sent through tonight shows that the real Armageddon scenario for Tama is if Seizert earnings materially decline over the forecast period".
7. Now Gresham was not retained by PAC to prepare a detailed valuation for the purposes of determining the allocation of units in the Aurora Trust as between PAC and Northern Lights. It did not determine the 60:40 split, which was determined by PAC's and Northern Lights' management.
8. But Gresham in some instances raised concerns about the values attributed by Northern Lights to certain of its boutiques. For example, Gresham questioned the value of the dividend attributable to the Aurora Trust from WHV following the merger. In June 2014, Gresham wrote to Northern Lights and stated that "… we cannot reconcile the USD 4.0m annual dividend assumption? We get closer to USD 1.0m in FY14 and FY15 building to USD 4.0m by FY17F". I will return to discuss the question of WHV later.

Voting in favour of the July resolution at the 23 July 2014 board meeting

1. PAC alleges that the non-executive directors breached their duties because in July 2014 they voted in the absence of a due diligence committee. But the points that I have made about the February resolution apply with respect to the July resolution of course adjusted for the facts that had unfolded over the intervening period.
2. Further, as the evidence about the board papers for the March, April, June and July 2014 board meetings and Gresham's 2 May 2014 update show, the directors were aware that Gresham was managing the due diligence process, and were aware of who was conducting the various parts of due diligence.
3. Let me turn to some other specific topics.

No independent analysis of earnings

1. PAC alleges that the directors breached their duties in July 2014 because they voted in favour of the July resolution in the absence of an independent analysis of Northern Lights' historical QoE and forecast earnings.
2. PAC alleges that such an analysis required a detailed examination of Northern Lights' data and assumptions concerning the reasonableness, nature and amount of its historical and forecast earnings undertaken by an appropriately qualified and experienced external expert retained by PAC, separate from management, and whose remuneration was not linked to the merger occurring.
3. Now there was a QoE analysis undertaken by Deloitte US as part of the debt process.
4. Further, Deloitte US was a suitable adviser. And PAC and Northern Lights had the same interests in borrowing funds. Further, Deloitte US had its own reputation to maintain, and was unlikely to produce sub-standard work to prospective US lenders.
5. Further, the draft Deloitte due diligence report examined historical earnings and contained a number of forward-looking comments about earnings.
6. Further, the Deloitte report was taken into account by Gresham. And Gresham raised no issues about the Deloitte report with the directors. And the US lender was obviously satisfied with it.
7. I will return to discuss other aspects of the Deloitte report in more detail later.
8. Further, with respect to the qualitative aspects of a QoE analysis, the directors had before them Mr Howard's May assessment. I will return to this later.
9. In my view the directors had sufficient information concerning Northern Lights and its boutiques, save and except for WHV, to vote as they did on 23 July 2014 without committing any breaches of their duties. I will return to WHV later and for that purpose also distinguish between the position of Mr McGill and the position of the other directors.

No assessment of earnings per share enhancing or value enhancing

1. PAC alleges that the directors breached their duties because on 23 July 2014 they voted in the absence of a reliable and verified assessment that the merger would be EPS and value enhancing for the PAC shareholders.
2. PAC says that if the underlying forecast earnings of Northern Lights had been properly analysed, then the PAC board would not have had a proper basis to conclude that the merger would be earnings per share accretive and/or value enhancing in light of the concerns with some of the underlying forecast earnings for Northern Lights' boutiques.
3. But Mr Lewin's opinion, which I accept, was that the Gresham materials established for the board that the merger was EPS accretive and value enhancing. Mr Lewin concluded that based on the materials the directors had received, they did not breach their duties. Mr Lewin identified that Gresham's 23 July 2014 presentation contained an EPS analysis showing the merger was expected to be EPS accretive.
4. Further, Gresham had advised the directors in writing on 21 May 2014, 2 June 2014 and 23 July 2014 that the merger would be EPS accretive and value enhancing. Moreover, Gresham personnel attended the presentations and board meetings on those days.
5. In my view there was no reason why the non-executive directors should not have relied upon what Gresham advised. Further, I note that those directors' reliance on Gresham satisfied the requirements of s 189 of the Act. In this respect, before I turn to another topic it is convenient to say something more concerning s 189.
6. Now the directors say that they relied upon information and documents contained in the board papers, emails and presentations which were prepared by various parties, including Mr McGill (in the case of the other directors), Mr Howard, PAC management, Gresham, Freehills and Deloitte.
7. Section 189 requires that where the director relies on information or professional or expert advice, he must do so in good faith and only after having made an independent assessment of the information or advice. Further, there must be evidence that he in fact relied on the information provided (Australian Securities and Investments Commission v Mitchell (No 2) (2020) 382 ALR 425 at [1459]).
8. In my view all of the directors other than Mr McGill have established the elements of s 189 concerning the information and the sources thereof that I have identified. But PAC contends otherwise, particularly as it concerns Mr Fitzpatrick.
9. Clearly, Mr Kennedy, Ms Donnelly and Mr Hayes have satisfied s 189 in relation to the sources of information that they said that they relied upon.
10. But contrastingly, Mr McGill, who was fully seized of the process and had knowledge of its deficiencies, has not satisfied s 189 particularly concerning information sourced to Gresham or Northern Lights concerning WHV. His reliance on others in this respect was not reasonable. Now given that I have found against Mr McGill concerning the WHV issue only, it is only necessary to elaborate on the s 189 position concerning Mr McGill in that context, which I will do later.
11. Let me say something more concerning Mr Fitzpatrick.
12. In respect of Gresham, Mr Fitzpatrick stated that he understood that Gresham was undertaking a detailed modelling exercise which included a boutique level valuation analysis. But of course Gresham was never engaged to provide a fully and properly verified independent valuation. They relied upon the earnings projections provided by Northern Lights, although of course Gresham made some adjustments to some of the figures and analysis provided as I have discussed elsewhere.
13. Further, Mr Fitzpatrick also acknowledged that different valuation methodologies were not used by Gresham in regard to the analysis of Northern Lights and its boutiques, as compared to what was done for the Pinnacle proposal in 2012.
14. Further, it is said that Mr Fitzpatrick approached Gresham in or around July 2014 to ask whether a formal valuation ought be obtained for the proposed merger given that an independent expert report was not being commissioned. This was not ultimately done.
15. Further, in respect of Deloitte, Deloitte USA was not in fact engaged by PAC. Rather, Deloitte USA was engaged by Northern Lights, and Deloitte's draft report was provided to PAC with Northern Lights' permission in draft and on a non-reliance basis.
16. Further, as to the Deloitte due diligence report, Mr Fitzpatrick acknowledged that knowing of its existence and the importance that such an analysis could provide, he should have called for the report.
17. Mr Fitzpatrick's reliance on s 189 is doubtful. But not without some hesitation, in my view his reliance was reasonable including his reliance upon what Mr McGill had said to him.
18. But I should make clear one point. In terms of Gresham, the directors can only rely on what Gresham did rather than rely upon an overstated position of what they may have thought that Gresham had done.

No assessment of earnings per share enhancing or value enhancing compared with other investment opportunities

1. PAC alleges that the EPS assessment should have compared the merger with other investment opportunities. But PAC's case about the July resolution is the same as PAC makes in respect of the February and April resolutions. The same points made about the February resolution apply with respect to the July resolution.
2. Further, the evidence disclosed that after February 2014, Berkshire's attempts to find a suitable, mature boutique in which PAC could invest were in vain. There was no other investment opportunity with which the merger could be compared.
3. This separate allegation of PAC goes nowhere.

No assessment of the merger against the sale of RARE

1. PAC alleges that the directors breached their duties because in July 2014 they voted in favour of the July resolution in the absence of quantification of the position that PAC shareholders would have been in if the merger did not take place, including considering the impact of the divestment of RARE. But PAC's allegations about the July resolution are the same as PAC makes in respect of the February and April resolutions. And nothing altered with respect to the sale of RARE between February and July 2014. PAC's points go nowhere.

Inflation of Northern Lights' 40% entitlement because Northern Lights' 2014 figures were not representative

1. PAC alleges that the directors breached their duties when in July 2014 they voted in favour of the July resolution as the information and methodology available to the directors which was used to value Northern Lights' assets inflated Northern Lights' proportion of units in the Aurora Trust because Northern Lights' FY14 performance was not representative. Consequently, PAC alleges that the directors should not have voted in the absence of a reliable forecast of Northern Lights' earnings.
2. But since February 2014 there had been sufficient due diligence and other analysis carried out to justify the percentages struck, save and except concerning WHV which I will return to later.
3. PAC's general criticism is not made out.

Inflation of Northern Lights' 40% entitlement because its earnings were based on assets it did not own or should have been excluded

1. PAC alleges that the directors breached their duties because in July 2014 they voted in favour of the July resolution at a time when the information and methodology available to the directors which was used to value Northern Lights' assets inflated Northern Lights' proportion of units in the Aurora Trust because Northern Lights' earnings were based upon Northern Lights owning 100% of Seizert and, since Northern Lights only owned 30%, should have been reduced by 70%.
2. Further, it is said that a value was ascribed to WHV even though Northern Lights had no investment in WHV, but only a contractual right to a distribution.
3. Now save for the WHV matter which I will deal with separately, PAC's allegation should be rejected.
4. PAC's allegations about the July resolution are the same as PAC makes in respect of the February and April resolutions. Nothing altered with respect to these analyses between February and July 2014. And the points made about the February resolution apply with respect to the July resolution.

Inflation of Northern Lights' 40% entitlement because the valuation multiple used was arbitrary

1. There is no substance to the suggestion that the PE multiples were arbitrary in a relevant sense.

Inflation of Northern Lights' 40% entitlement because Seizert was overvalued by USD 40 million

1. I have already touched on this earlier and would reject PAC's case concerning this.
2. But at this point it is convenient to say something more on the question of valuation.

Valuation

1. PAC says that a prudent director should have ensured that PAC was acquiring Northern Lights at an appropriate price, and it was necessary for the board to have a clear understanding of the value that each of PAC and Northern Lights contributed to the transaction. But PAC says that this was not done in the case of the merger.
2. PAC says that there was no independent market boutique valuation against external benchmarks.
3. Further, it is said that the work done by Gresham was in the form of a DCF calculation, and assumed the reliability of the FY 2014 forecasts provided by Northern Lights. Gresham was not tasked with an independent verification of Northern Lights' forecasts.
4. Further, PAC says that there was no evidence of different valuation methodologies being employed by advisers in assessing the value of Northern Lights and its boutiques.
5. Further, Mr Fitzpatrick's evidence was that once he knew there would be no independent expert report he considered that due diligence and valuation work had to be upgraded. He approached Gresham about providing a more formal valuation in July 2014 but did not proceed to do that.
6. Further, it is said that the Gresham model did not independently arrive at a split of 60:40 in favour of PAC.
7. Mr McGill gave evidence to the effect that model v 245 demonstrated that Gresham had made its own assessment of appropriate forecasts: The merger model … set out forecasts of Northern Lights' future performance. For example, at the worksheet labelled '9. Seizert Assumptions' (as is also the case for the other Northern Lights boutiques) there are lines 'Narra Case', which set out the forecasts supplied by Northern Lights. There are also lines 'Gresham Case', which reflected Gresham's own assessment of an appropriate forecasts (arrived at after discussion with [PAC] representatives such as me, Mr Howard and Mr Ferragina but which also reflected their assessment). It was the 'Gresham Case' line, rather than the 'Narra Case', which is reflected in the valuation and other outputs of the model. That is, the forecasts (and other figures supplied by Northern Lights) were not uncritically incorporated into the model. Instead, they were tested and, where appropriate, adjusted by [PAC] management and Gresham before use in the financial model.
8. But there are a number of difficulties with this evidence.
9. First, the evidence is in part inconsistent with Gresham's role as set out and defined in its engagement letter.
10. Second, it appears to be no more than Mr McGill's own supposition as to Gresham's role based upon extrapolation from the document.
11. Third, the evidence is inconsistent with model v 245. Under the "Assumptions" tab (at cells E63 to E65), it stated: "Case used for Narra: Narra Case - Nov Numbers." Hovering a cursor over the cells displays the text "Should always be NARRA case". This appears to suggest that Gresham's model was doing no more than adopting the numbers supplied by Northern Lights.
12. Indeed, model v341 had comparative valuations of $329.49 million for PAC's boutiques and $375.18 million for Northern Lights, being a split of 46.76/53.24.
13. In my view the non-executive directors reasonably relied on Gresham's work albeit that it did not constitute a proper independent freestanding valuation.
14. Further, as Mr Lewin opined, there was no reason why the non-executive directors should not have relied upon what Gresham advised.
15. Further, PAC's criticism of Gresham's valuation because it was a DCF valuation is unfounded. As Mr Fitzpatrick said, DCF valuations have always been regarded as the most accurate.
16. Further, PAC's criticism of Gresham's valuation, namely, that it assumed the reliability of Northern Lights forecasts when such forecasts were aggressive or optimistic, should not be accepted.
17. First, any forecast can be used and, if there are concerns about its reliability, that can be taken into account in the choice of discount rate. Further, using data provided by another party does not mean that Gresham did not consider it. The evidence shows that Gresham did consider and discuss with PAC management the reliability of data it was using in its model.
18. Second, the evidence chronology demonstrates the work Gresham did from May 2014 based on updated data, including audited accounts and updated forecasts. And the fact that the retainer may not have been specific as to this is not to the point.
19. PAC's allegations should be rejected as they concern the non-executive directors.
20. And as concerns Mr McGill, I have difficulty with his position concerning the WHV question but not otherwise. Save and except for the WHV question, he did not act in breach of duty concerning his analysis or the information that he sought relevant to his assessment of the valuation(s) and ultimately the percentages split.
21. Let me turn to another topic concerning the Deloitte due diligence report.

Deloitte US - Due diligence/modelling

1. Deloitte USA prepared a draft report for Northern Lights, shared with PAC, titled "Draft due diligence findings" dated 23 May 2014 in which Deloitte analysed historical financial statements and other accounting, financial and operating data of Northern Lights and boutiques such as Seizert and Aether, with a primary emphasis on QoE for financial years 2012, 2013 and the last 12 months up to March 2014.
2. Now the directors were aware of the preparation and existence of the Deloitte due diligence report prior to its finalisation.
3. In early May 2014 Mr McGill provided the other PAC directors with a Gresham document which stated that the "Quality of earnings analysis on historical NLCP financials is being prepared by Deloitte for the debt process, and will be available in the week commencing 12 May". Mr McGill requested the Deloitte report from Mr Carver on 13 May 2014.
4. On 18 June 2014 Mr McGill received the Deloitte report. But the non-executive directors' evidence was that they never received a copy of the Deloitte report.
5. Now Mr McGill did not recall whether he circulated the report to the non-executive directors. But he said that his usual practice was for documents to be circulated by being uploaded to a secure external document distribution service provided by BoardBooks. He said that the report was the type of document that it was his practice to upload to BoardBooks. He believed that the Deloitte report would have been uploaded to BoardBooks some time before the 23 July 2014 meeting.
6. Now Mr McGill contends that on the evidence I should find that he provided the draft Deloitte report to the non-executive directors. But this should not be accepted for the following reasons.
7. First, Mr McGill's evidence was as follows: The Applicant claims that I ought to have forwarded the Deloitte Due Diligence Report on to the other directors. I have no recollection as to whether I did or did not do so, but consistent with our usual practice, it may well have been uploaded to the Boardbooks system by which board papers and associated documents were circulated to board members. In any event, learnings from the report were incorporated into Gresham's merger model.
8. That evidence does not rise higher than speculation.
9. Second, there is no documentary evidence to support Mr McGill's assertion that I should find that he provided the draft Deloitte report to the non-executive directors. It was not contained in the board papers for the July 2014 board meeting, nor was it emailed to PAC's board, in circumstances where Mr McGill had the report for over a month before the board meeting. Mr McGill accepted that there was no record of him providing the draft Deloitte report to the non-executive directors.
10. Third, the evidence of the non-executive directors does not support Mr McGill's submission that he provided the draft Deloitte report to them. None of them recall receiving the document. Mr Kennedy and Mr Fitzpatrick gave clear evidence that they had not read the report prior to the proceeding. That is despite their evidence that they carefully reviewed the board materials for each meeting.
11. Mr Kennedy's evidence was that BoardBooks was used for formal board papers as well as other documents that management wanted to make available to board members. He said that it was his practice in 2014 to ask PAC for hard copies or have his personal assistant print hard copies. Late papers were emailed to him. Mr Kennedy said that it was not his practice in 2014 to use BoardBooks to access documents.
12. Mr Hayes could not recall how he typically received board papers.
13. Mr Fitzpatrick also was not aware of whether the Deloitte report may have been uploaded to BoardBooks.
14. Ms Donnelly was asked whether she had seen a quality of earnings analysis on Northern Lights and said she had not. Ms Donnelly said that she would definitely have looked at BoardBooks before the 23 July 2014 board meeting.
15. On balance, I am not satisfied that Mr McGill circulated the Deloitte report to the non-executive directors prior to the 23 July 2014 board meeting.
16. Mr Fitzpatrick's evidence was that he did not call for a copy of the quality of earnings report and that he should have. The non-executive directors also did not recall discussing the Deloitte report at the 23 July 2014 board meeting where the directors passed a resolution to enter into the merger.
17. Now all of the directors were aware of the Deloitte report and its existence. But other than Mr McGill, there is no evidence to suggest that the directors called for the report or reviewed and considered the matters in the report prior to resolving to approve the merger. Mr Lewin acknowledged that the directors should have called for the report.
18. Now PAC says that the Deloitte report should have put the directors on notice about serious issues relating to the historical performance of Northern Lights' boutiques.
19. For example, the Deloitte report indicated that in relation to WHV there was serious doubt it would make the projected distribution of USD 4m in financial year 2014. And in relation to Seizert, the report indicated that the financial year 2013 was an outlier year and that the earning distributions after 3 years may change.
20. It is said that these statements should have raised serious questions about the value being attributed to Northern Lights' business as a whole, and should have raised serious concerns for any diligent director who received the report.
21. Mr Lewin conceded that it was reasonable to suggest that the directors should have asked for the Deloitte report, and that the report contained "red flags" or material matters that ought to have been included in any due diligence reporting to the board owing to their materiality.
22. Mr Fitzpatrick accepted in his evidence that he should have called for the report when he was notified about its existence, but ultimately did not do so.
23. The directors, including Mr McGill, say that they relied on Gresham to take the Deloitte report into consideration in its advice. But PAC says that this was not a reasonable assumption. Mr Fitzpatrick conceded to having no idea how the Deloitte report had been taken into account by Gresham.
24. Given the risks involved, the nature of the market, and the importance of the transaction, PAC says that the directors should have turned their minds independently to those risks.
25. Now Mr McGill accepted at trial that he was responsible for bringing the report to the attention of the PAC board, certainly prior to the decision to enter into the merger at the 23 July 2014 board meeting, and accepted that there is no record of the report being provided to the non-executive directors prior to their decision to enter into the merger in July 2014.
26. None of the non-executive directors recall receiving the document and none recall any discussion about the Deloitte report and its findings at the July 2014 board meeting.
27. Now Mr McGill says that even if he failed to provide the draft Deloitte report to the non-executive directors, the document was of limited utility.
28. Mr McGill seeks to downplay the utility of the Deloitte report to PAC. He refers to the document as an accounting exercise, refers to the various exclusions and limitations in the report, and notes that the report was prepared for the debt process. But none of these points undermine the position that the report should have been provided to PAC's board.
29. First, the document was not simply an accounting exercise. It contained a considered analysis of the quality of earnings of Northern Lights' boutiques, including qualitative statements about whether WHV would make, or was required to make, a distribution to Northern Lights. Those qualitative statements required consideration of the report itself.
30. Second, Mr McGill gave specific evidence that he considered the observations made in the Deloitte report as part of his analysis of the potential merger, and that the observations made in the report regarding WHV informed his analysis.
31. Third, although the Deloitte report was prepared for Northern Lights' debt process and contained a number of limitations on its scope and the ability of parties to rely upon the report, that did not mean that it was not a material document that should have been considered by the board. This was accepted by Mr Fitzpatrick, Mr Bradley and Mr Lewin. That is particularly the case where PAC did not conduct or commission its own quality of earnings analysis.
32. Now without considering the report itself, as Mr McGill himself did, the board could not have independently formed a proper view of those matters.
33. Mr Bradley said that his view was that any director reading the Deloitte report would have raised questions and concerns. This meant that the non-executive directors should have been provided with the report so that they could have considered it, and interrogated it and its authors as they saw fit.
34. Mr Lewin accepted that the Deloitte report contained a number of forward-looking comments. He also accepted that those forward-looking comments could, potentially, be relevant to an assessment of the reliability of Northern Lights' forecast earnings.
35. Mr Lewin's evidence was that if the Deloitte report contained an expression of concern relating to the future performance of boutiques, that was a reason for its provision to the other directors.
36. Now in my view, in summary, Mr McGill ought to have but failed to provide the other directors with the Deloitte report.
37. But in my view this failing does not go anywhere as the other directors had much of the relevant information in any event and would not have changed the decisions that they made on 23 July 2014.
38. Now putting to one side Mr McGill for the moment, there is another dimension to consider.

Should the other directors have called for the Deloitte report?

1. Now the allegations are that the non-executive directors breached their duties because in July 2014 they voted without calling for the Deloitte report, interrogating its authors and reviewing its findings.
2. PAC says that the Deloitte report was prepared for Northern Lights, not PAC, was provided on 18 June 2014, contained red flags, should have put the non-executive directors on notice about serious issues about Northern Lights' boutiques, and should have raised serious questions and serious concerns for any diligent director receiving it.
3. PAC says that it was not reasonable for the non-executive directors to assume that Gresham took the Deloitte report into consideration particularly as the non-executive directors did not explain how Gresham did so.
4. Mr Lewin conceded that it was reasonable to suggest that the non-executive directors should have asked for the Deloitte report. I tend to agree. But in context, none of this amounts to any breach of duty on their part. This is because Gresham took into account the relevant matter. Further, most of the information had appeared in Mr Howard's May assessment which the directors fully considered.
5. Now the evidence established that the non-executive directors knew that Deloitte US was preparing what Gresham described as the "QOE draft data book" and the "final long-form QOE analysis" (in Gresham's 2 May update) or "Quality of earnings analysis" (in Gresham's 2 June presentation).
6. Mr Kennedy gave evidence that he did not call for the QoE analysis because he expected and knew that Gresham, the expert, was receiving it and would use it in preparing ultimate information for the board. Mr Kennedy could not recall whether the Deloitte report was discussed at the 23 July 2014 board meeting.
7. Mr Fitzpatrick gave evidence that he did not call for the QoE analysis. He said that Gresham picked up that analysis in its model which was a matter entirely up to Gresham. Mr Fitzpatrick had this exchange with me: HIS HONOUR: Just so that I understand your answer. Are you saying that on balance you should have called for it. Is that putting yourself back in the mindset at the time or is that with the benefit of hindsight? I just want to understand the answer? MR FITZPATRICK: At the time I felt it was - it had been commissioned by Northern Lights, as I understood it, for a debt process. That meant from my point of view I arguably should have called for it, but given it was designed for debt and it was - then you would expect it to be somewhat more conservative and I was more interested in the equity outcomes. So once that was in process I sort of thought, well, I don't need to concern myself about that, there's other things you've got to worry about, so - Q: Did you pay attention to the author of it, the fact that it was Deloitte US? A: Yes. Yes, no I understood that. Q: Did that influence your thinking? A: Yes. I mean, their obligation was really to Northern Lights.
8. Ms Donnelly gave evidence that she did not call for the QoE analysis because she expected that Gresham, who had expertise that she did not, was receiving it and would use it. She did not know how Gresham used the information, but gave this evidence: MR ANNABELL: Did you know precisely how Gresham proposed to incorporated Deloitte's QoE work into its analysis? MS DONNELLY: No, but I would imagine, having gone through the process myself, that they would have firstly had to synchronise all the figures, because they would come in the financial year end 30 December. They would have had some adjustments that were already made by Deloittes. They would have included normalising salary figures, etcetera, etcetera, and I would imagine the qualitative comments would have been incorporated into what they had already read and then made decisions about it. There would have been a lot of figures being adjusted because of the synchronisation required.
9. Ms Donnelly could not recall whether the Deloitte report was discussed at the 23 July 2014 board meeting.
10. Now Mr Lewin said that the Deloitte report was an appropriate QoE report which he was used to seeing as part of due diligence. Further, his view was that since the non-executive directors had been told Gresham had incorporated the Deloitte report in the model, and because Gresham was advising the board about the merger, there was indirectly a communication of the Deloitte report to the board.
11. Further, Mr Lewin did accept in cross examination that various matters in the Deloitte report would be matters of concern or red flags for the board of PAC to consider, but this was on the assumption that the reader of the document was otherwise unaware of those matters.
12. Further, Mr Lewin also stated that in assessing whether there was a breach of duty, the focus should not be on the non-provision of the Deloitte report itself, but on whether the relevant contents of the Deloitte report were communicated to the directors. I agree.
13. Mr Lewin stated: Mr Bradley's suggestion the directors should have asked for the Deloitte Report is reasonable and I note McGill says he did not interrogate the authors of the Deloitte Report, but says the information from that report had been taken into account by PAC's advisor, Gresham, and consequently by PAC's board. I think it's reasonable for the directors to have relied on a summary from McGill or Ferragina, if this is what happened. …
14. So, Mr Lewin's evidence was focused on whether the relevant information rather than the Deloitte report itself was communicated to the other directors, which in my view was the correct focus.
15. Now PAC's liability expert, Mr Bradley, said in his report: In my opinion, the failure of Managing Director McGill to provide the Deloitte Due Diligence Report to the PAC board prior to the 23 July 2014 resolution was a material breach of his duty of care and diligence. I base my opinion on the significance of the accounting adjustments identified by Deloitte to prior year financial performance of the NL funds as outlined in paragraph 104 above. The Deloitte report should have 'red flagged' for PAC directors serious questions about the reliability of information provided by NL about its past performance and by implication about NL's forecasts of its future performance. The Deloitte Report would have put a reasonable director on serious notice that further detailed due diligence was required before approving the proposed merger, a fortiori the managing director whose responsibility it was to put forward to the PAC board a sound merger proposal all the relevant supporting analysis and reports.
16. But Mr Bradley's opinion was expressed by reference to historical accounting adjustments which he conceded he did not understand and which had other proper explanations.
17. Mr Bradley was asked whether those accounting matters "in fact did not reflect or give rise to matters of serious concern, do you agree that the opinion you express ... would lack its foundation?". Mr Bradley accepted this, but then said that it was his view that any director reading that report would have raised questions and concerns.
18. There was then the following exchange: MR CALEO: In any event, Mr Bradley, if there was information in the Deloitte document that was relevant to provide to other directors, would you agree that the focus ought to be on whether that relevant information is shared rather than the focus being on whether the actual document is handed around? MR BRADLEY: Yes, I would agree with that. If there were a summary of the findings and an explanation as to what they meant so the directors could get the gist of it, that would probably have sufficed.
19. Further the non-executive directors were told by Gresham what it was doing. It is not suggested that Gresham misled those directors. It was reasonable to rely on what Gresham told them.
20. Further, in my view, save for the WHV question, the matters in the report which PAC says were important were otherwise brought to the attention of the directors, even if the Deloitte report itself was not provided to them.
21. In summary, Mr McGill should have provided the Deloitte report to the other directors. Further, the other directors should have called for it at or prior to 23 July 2014. But I am not prepared to find that these failures constituted a breach of duty on the part of anyone. I say this because of the following matters, which demonstrate that any such failures go nowhere.
22. Let me turn more specifically to the characterisation and content of the Deloitte report.

Characterising the Deloitte report

1. Now although described on its face as containing draft due diligence findings, the Deloitte report was in substance a quality of earnings analysis.
2. As to its methodology, the report noted: The following combined due diligence adjusted financial schedules contain management's estimates, on a high level, for FY12, FY13 and LTM Mar-14 and include NLCP, SCP and AIP:

• Combined EBITDA
• Combined Balance Sheet Management of each entity provided the audited and internal financial statements. The starting point of the combined financial schedules was to combine the audited financial statements (for FY12 and FY13) of companies, NLCP, SCP and AIP, to estimate an unadjusted combined total. Based on discussions with NLCP, SCP and AIP management, these statements were further adjusted for (i) elimination adjustments between the entities that are contemplated as part of the transaction and (ii) "diligence" type adjustments that were estimated, on a high level, based on one-time and/or non-recurring items, and (iii) management's "pro-forma" adjustments which were provided by management as further run-rate adjustment items. Actual results could differ from these expectations. Management adjustments were only applied to the most recent period presented which is LTM Mar-14 as directed by management. In addition, the tables include "Other Potential Consideration" items that may impact the run-rate cash-flows and earnings of the combined entities. As these items have (i) not yet been implemented or approved, (ii) an impact that could not be estimated and/or (iii) did not impact diligence adjusted financial information (but may impact future cash flows for example) they have not been reflected in the diligence adjustments. …

1. In addition, the report provided that there were various specific exclusions from the scope of Deloitte US' engagement, including any detailed evaluation of the quality of assets, any review of business operations, any assessment of the commercial merits of the proposed transaction, and any valuation and appraisal services.
2. In addition, the report provided that: This written communication was prepared solely for the benefit, information, and confidential internal use of Client. No other person or entity is entitled to rely, in any manner or for any purpose, on this written communication. The observations described in this written communication do not constitute, in any way, a recommendation by us for Client or anyone else to participate in the Proposed Transaction or any related transaction and this written communication should not be a part of, or be made available in connection with, any prospectus, offering circular, or any soliciting, promoting, marketing, underwriting, recommending, or selling of securities or other interests.
3. Clearly, the report was prepared for the debt process, and it was prepared primarily for attracting an external lender. Unremarkably it was expressed conservatively.
4. The Gresham presentation referred to the Deloitte report as being for the benefit of the merger debt process which was its primary purpose.
5. The report restated Northern Lights' historical earnings to reflect Northern Lights' accounting outcomes according to the transaction proposed including consolidation of 100% of Seizert and Aether earnings, and the elimination of certain items such as shared revenue arrangements, commissions and marketing expenses.
6. But other work such as Gresham's analysis of the proposed merger and Mr Howard's May 2014 assessment arguably were of greater importance than the Deloitte report in assessing features of the proposed merged entity.
7. Mr Howard's assessment was regarded by Ms Donnelly as a good report with a "warts and all" assessment of the boutiques.
8. It was regarded by Mr Fitzpatrick as a document which sought to analyse Northern Lights' boutiques drawing attention to the relative strengths and weaknesses of each boutique on their own and in comparison with other Northern Lights boutiques.
9. Mr Hayes regarded Mr Howard's assessment as demonstrating that management's due diligence inquiries were thorough and comprehensive. He said that anyone with appropriate experience in boutique funds management will attest that within a stable of boutiques, there will be ones that are proven underperformers such as Aubrey, GVI, TAAM or boutiques such as Orion, where unforeseen circumstances reduced them from prosperity to decline. He said that the report, in drawing the board's attention to potential weaknesses in some of Northern Lights' boutiques, informed him of the identifiable risks, and that that is what due diligence was all about.
10. Mr Kennedy thought at the time that the assessment was good in that it explained the strengths and weaknesses of each of Northern Lights' boutiques from both a management and performance perspective in a straightforward way. He said that it was just the type of assessment that he expected to receive from PAC's management. And he said that nothing in it caused him concern. He said that he remembered thinking that Northern Lights' portfolio had similar issues to PAC's portfolio.

Significance of the content of the Deloitte report and whether such content was otherwise brought to the non-executive directors' attention

1. The Deloitte report contains numerous accounting adjustments to Northern Lights' earnings. It also refers to the estimated fair value of Seizert and Northern Lights' total investments.
2. But PAC has mischaracterised the content and effect of those accounting adjustments. Some of them are adjustments to exclude a boutique which was not being contributed to the merger. Further, PAC overlooks some of the favourable management adjustments referred to in the report.
3. Let me also say something about the Deloitte report's reference to the estimated fair value of Seizert and Northern Lights' total investments. As to Seizert, the estimated fair value of Seizert in March 2014 was USD 25 million. As to Northern Lights' total investments, the Deloitte report stated that the estimated fair value of Northern Lights' total investments was USD 107.814 million.
4. Now the figures of USD 25 million for Seizert and USD 107.814 million for Northern Lights' investments were much lower than the value attributed by the Gresham model. But as the directors have pointed out, those figures in the Deloitte report are not meaningful in the context of the contemplated merger.
5. The report itself was based on Northern Lights having a 30% interest in Seizert and a 25% interest in Aether, but it also noted the more substantial interests which were to be contributed to the merger: … NLCP currently owns 30% of SCP (originally invested on December 30, 2008). … Post-transaction, SCP will be structured with two classes of stock, preferred and common and NLCP and [PAC] will own 100% of the Preferred and 50% of the common, with the key employees owning the remaining 50% common. …. NLCP currently owns 25% of AIP. … Post-transaction NLCP and [PAC] will own all of the common units of AIP.
6. The Deloitte report shows that the figure of USD 107.814 million applied to the overall portfolio value does not include an estimated value for WHV, in addition to being based on the current holdings of Seizert and Aether. The consolidated schedule of investments has a total estimated fair value of USD 107.814 million but does not refer to WHV.
7. Further, the figure for Seizert of USD 25 million was referable to Northern Lights' 30% interest in that fund manager. But the transaction contemplated 100% of Seizert's preferred stock and 50% of Seizert's common stock being contributed to the merger.
8. Further, to the extent that the report contained criticisms of the various boutiques, the directors had already been made aware of those matters by reason of similar statements made in Mr Howard's May 2014 assessment which the directors had received.
9. Further, many of the matters which PAC points to in the Deloitte report are observations made by management, rather than adverse qualitative commentary from Deloitte.
10. Let me set out some of the extracts from the Deloitte report in order to demonstrate what was said in it and to make some comparison with other information that the directors had been given. In this respect I have drawn in part on a comparison submitted to me by the non-executive directors but with some modification.

WHV

1. WHV was the subject of a considerable amount of evidence and I will discuss this in more detail in a separate section of my reasons.
2. Now PAC asserts that the Deloitte report said in relation to WHV that pursuant to Northern Lights' contractual arrangements with WHV, WHV had a discretion to make distributions, had in the past made none and indicated that there was serious doubt that it would make the projected distribution of USD 4 million in FY14.
3. Now the Deloitte report stated: WHV pro-forma dividend income (NLCP) - Adjustment reflects the impact of pro-forma dividend income from WHV Investment Management, Inc. ("WHV"). NLCP provides WHV the following: i) members of its team to serve in various capacities for WHV, including the CEO role (filled by Andy Turner in Jan-13); ii) sales and distribution leadership; iii) M&A consulting services. In exchange for this, NLCP receives a variable management fee, expense reimbursement, a share in the growth of dividends and a share in the increase of the enterprise value of WHV at the time of a liquidity event. In FY13, NLCP entered into a dividend and appreciation rights agreement with WHV that entitles NLCP to dividends based on a graduated tiered scale as follows:

• 17.5% of dividends greater than $2.2m and less than $3.2m
• 21.875% of dividends greater than $3.2m and less than $4.2m
• 26.25% of dividends greater than $4.2m Although distributions are at the discretion of WHV management and its Board, and NLCP has not received a distribution from WHV since making its investment in 2013, management believes it will receive an annualized pro-forma dividend income of approximately $4m beginning in FY14 as a result of this arrangement. WHV did not pay a distribution during 2013 due to uncertainty regarding a potential buy-out of a key employee. As of Mar-14, this situation has been resolved. Based on the tiered scale described above, WHV needs a minimum of approximately $12m of annual distributable cash in order for NLCP's share to equal $4m. Distributable cash comes from a combination of excess cash held by WHV and cash from operations. At Mar-14, WHV had approximately $13m in excess cash on its balance sheet ($20m of cash less $7m of cash required for operating reserves). WHV's YTD Mar-14 annualized EBITDA is $9.1m which, after accounting for taxes, results in approximately $6m of distributable cash. Management stated that the combination of excess cash on the balance sheet and cash from operations is projected to be adequate to meet the annual $12m threshold for distributable cash for more than 2 years. Subsequently, WHV projects annual EBITDA for FY16 and beyond to be at least $18m, which on its own, after accounting for taxes, results in $12m of distributable cash. It should be noted that the payment of dividends may be impacted by such items as variability in WHV's future EBITDA vs. plan, WHV's use of excess cash as well as WHV's discretion in dividend distributions.

1. So, the Deloitte report does not say that there was serious doubt that WHV would make the projected distribution. Instead, it sets out the nature and history of Northern Lights' arrangements in respect of WHV and the level of funds which WHV would require in order to pay the forecast dividend.
2. As to the nature of Northern Lights' contractual arrangements with WHV, I will discuss this later.
3. Now PAC asserts that the Deloitte report stated that during the last three years, WHV had witnessed substantial underperformance from their flagship products, resulting in significant client attrition, in part masked by the market appreciation in FY13.
4. But in context, the Deloitte report stated: … Management stated that the investment strategy is one that has produced excellent results over the long term; however, the strategy is quite volatile and can be out of sync with the market for extended periods. … During the last three years, WHV witnessed substantial underperformance from their flagship products, resulting in significant client attrition, in part masked by the market appreciation in FY13. Management stated that the firm's Small Cap product had a solid year of performance in FY13 and should be in a position to gain assets in 2014. At the same time, NLCP was retained to help WHV expand its product offering through identifying products for the WHV platform. Late in the FY13, the firm launched the WHV/Seizert Small Cap Value fund, which WHV's retail sales team is now actively marketing. In Q2-14, WHV jointly invested in EAM alongside NLCP, and will launch two mutual funds and provide marketing services on EAM's behalf in Jun-14.
5. In any event, the directors were already aware of WHV's underperformance. An appendix to a memorandum from Mr McGill and Mr Howard, which formed part of the board pack for the 24 February 2014 board meeting, provided summaries of Northern Lights' boutiques and outlined WHV's investment performance, saying: … As can be seen above performance has been poor over the past three years, and further outflows are expected but the client base is largely retail through the WHV mutual fund distribution network, which is advantageous in avoiding lumpy outflows. …
6. Mr Howard's assessment stated that: WHV - On-site meeting: San Francisco This business is one of the more appealing pieces within the NL structure, despite its main strategy clearly struggling with performance; the WHV platform provides access to the extremely large US intermediary market (mutual funds). … … Currently the main strategy within the WHV stable is the International Equity Fund run by Richard Harayama (he was formerly an employee of WHV but split out to form his own boutique a number of years ago, but still sits within the WHV office). FUM for this strategy is US$10.5 billion, out of the US$12 billion that WHV manages within its platform, this has fallen by US$1.5 billion in the past 18 months on the back of poor performance. … … The reality is that more outflows are expected, with projections of up to 25% for 2014, but Turner notes that break-even is at US$2.5 billion FUM so despite the recent outflows earnings remain strong (ebitda was US$13 million in 2013). The simple equation that WHV outlined is that they need to outrun the outflows with new deals and new sales. They currently run two other internal strategies - global equities (Harayama) and a US small cap strategy (Harayama one of four Portfolio Managers). There is also the recently launched WHV Seizert Small Cap strategy, which as highlighted earlier has already raised $70 million. …

Seizert

1. As to Seizert, PAC asserts that the Deloitte report said that in relation to Seizert, the financial year 2013 was an outlier year and that the earning distributions after year 3 may change and not all be allocated to the combined business.
2. PAC also refers to an additional sentence from the Deloitte report which stated that further consideration on the run-rate assets under management and revenue growth of the business may be warranted when comparing such growth to historical periods, especially as management stated that FY13 was an outlier period.
3. But in context, the Deloitte report stated: … According to management, SCP's Mid Cap and Concentrated Large Cap products significantly outperformed the market in FY13. Management stated that although they have historically outperformed the market the magnitude of their performance during FY13 was an outlier. FY13 AUM increased from $3.4bn to $4.7bn in FY13 ($1.3bn increase). This was driven largely by market performance which positively impacted FY13 AUM by $1.5bn versus $528m in FY12.
4. Further, the appendix to Mr McGill's and Mr Howard's 21 February 2014 memorandum sets out the investment performance of Seizert. The outperformance of Seizert funds, particularly its Mid Cap fund, is readily apparent from that table.
5. Further, Mr Howard's assessment made observations about Seizert's performance which were similar to those set out in the Deloitte report: … The manager's investment style does mean that it will show large swings against the relevant benchmark. The Mid Cap strategy was ahead by just under 15% against the Russell Mid Cap index in 2013, but this followed a period a year earlier where it underperformed the benchmark by over 8%. Despite these large swings in relative performance they note that they have only ever had one client termination and that client's generally understand what they are going to get from Seizert (this no doubt has a lot to do with the work of Jack Swift and the Northern Light's team in communicating the investment philosophy). What does cause them concern is those clients that will chase performance and look to invest when relative returns are strong with the danger that they then terminate at the bottom. … …
6. Further, Mr Howard's assessment addressed Seizert's investment performance. And Mr McGill was accurate when he gave evidence that in relation to investment performance of Seizert, the directors were fully informed including in relation to any FY13 outperformance.
7. Now PAC asserted as to Seizert that the Deloitte report stated that Seizert's earnings distributions after year 3 may change.
8. The relevant section of the Deloitte report stated: Earnings attributable to non-controlling interest in SCP (NLCP) - NLCP and [PAC] will own 100% of preferred stock and 50% of common stock. Distributable cash of SCP will be as follows:

• 100% to the preferred shareholders for each of the first three years post- closing;
• Thereafter, annually:
• First $8.0m to preferred;
• Second, in the event average EBITDA is greater than $8.0m, 75% to preferred and 25% to common for an amount equal to the difference between average EBITDA and $8.0m; and
• Third, 100% to the common. As the SCP earnings distributions after year 3 may change (and may not all be allocated to the combined business), the impact of this change to run-rate earnings distributions should be considered.

1. Now the non-executive directors were made aware of this arrangement in the board papers for the 23 July 2014 meeting. There was a detailed presentation to the directors by Gresham which explained the nature of the interest in Seizert in the following terms:
2. So, the directors were aware of the Seizert earnings to which the merged entity would be entitled and were also aware that there was an earnings profile for three years "from close" which would later change.
3. In my view, even if the Deloitte report itself was not provided to the other directors, PAC has not established that the other directors were thereby deprived of the opportunity to consider the change to Seizert's earnings profile.

Tamro

1. As to Tamro, PAC asserts that the Deloitte report said that it did not have a strong transition plan for the inevitable retirement of its CIO and that Tamro was very dependent on its CIO.
2. In context, the Deloitte report stated: … Management stated that a privately-owned asset manager like TAMRO would traditionally be valued using an 8x multiple applied to current year EBITDA. NLCP has carried its TAMRO investment at something closer to 5x EBITDA. Given TAMRO's continued performance and growth in AUM, management believed it reasonable to place a higher weighting towards market comparables than the income approach. However, according to management, TAMRO does not have a strong transition plan for the inevitable retirement of its CIO. Management stated that TAMRO is very dependent on the CIO who has over 27 years of experience in equity research and portfolio management. As such, management elected to place the final value of TAMRO in the lower portion of the range calculated … The final amount represents a valuation to something closer to 6x EBITDA.
3. In addition, Mr Howard's assessment addressed the issue of Tamro's CIO and succession planning in the following terms: … Tamro has 16 employees, all have equity in the business - Tasho is the CEO and CIO of the business but from our discussions it was evident that he is very happy to delegate to allow him to focus on investing, focusing on the flagship US small cap strategy. The investment team comprises of 7 people, while the business team has 9 people in it, Kathleen Neumann oversees the business team and is responsible for the management of the business. Tim Holland is the other Portfolio Manager alongside Tasho on both strategies, however at the end of the day Tasho still has the final say on the portfolios. Holland also has responsibility for overseeing client management and sales, so as part of his role he is often the 'face' of Tamro, Tasho flags him as the obvious successor but stresses that he has no plans to retire. Holland is the third largest shareholder, so appears to have tied himself into the company for the long term. …
4. It cannot seriously be suggested that absent receipt of the Deloitte report, the other directors had no information about Tamro's CIO or succession planning.

The del Rey interest

1. As to del Rey, PAC says that the Deloitte report said that FY13 marked the third consecutive year that del Rey's international product trailed the benchmark.
2. In context, the Deloitte report stated: … NLCP stated that FY13 marked the third consecutive year that del Rey's international product trailed benchmark, although the firm's Global Equity product outperformed. This led to significant attrition in AUM during the year with assets declining more than $900m to $1.4bn. According to management, del Rey has some significant client concentration and thus its financial health will largely be a function of client tolerance. …
3. Now the other directors were already on notice as to concerns about del Rey's viability. Mr Howard's assessment had pointed out that there were questions around the future viability of del Rey. And he set out a table which indicated that del Rey had underperformed against the benchmark on a three-year trailing basis. Mr Howard also said: … From the perspective of the key metrics of the merger this manager has very little impact and while medium term business viability of del Rey can certainly be questioned it does not change our positive view of the deal.
4. But in any event, del Rey was ultimately excluded from the merger. PAC's case on this aspect goes nowhere.

Raven

1. As to Raven, PAC says that the Deloitte report said that in FY13, Raven relied on its members to fund working capital.
2. In context, the Deloitte report stated: … Raven's fund I assets were required to be fully deployed by Feb-14, but Raven required an extension through Jul-14. Raven continues to completely focus on identifying and evaluating new investment opportunities for its first fund which closed at $150m in FY13. As such, through FY13, Raven relied on its members to fund working capital. Management stated that the recent commitments that Raven received as of year-end has made Raven more profitable and Raven would begin to pay dividends to NLCP. …
3. The fuller statement in the Deloitte report indicated that the reliance on members to fund working capital was a temporary matter.
4. Moreover, Mr Howard's assessment provided a detailed assessment of Raven, including that: … Raven did not have an easy to start to life and NL flag that they should have written it off prior to the planned first raising, when the 2 i/c walked away from the business, effectively halting the first fund raising. … … Raven is a true boutique, with only 4 people and focused in a niche space it is not a manager that is going to become a material part of the merged business. However, based on the discussion with NL it appears that after a rough start this manager has a strong foundation in which to grow into a profitable boutique going forward. NL is confident that Raven will have a much better run in future fund raisings as a result of reaching the all-important mark of US$100 million in its first fund. Whether or not this conviction is warranted should become quite clear by the end of 2014 as a result of the planned fund raises over the next six months.
5. Consequently, the other directors were aware that Raven was a nascent business that may or may not succeed. The other directors were not ignorant of the relevant information about Raven.

Goodhart

1. As to Goodhart, PAC says that the Deloitte report said that there had been poor performance and challenging partner dynamics.
2. In context, the Deloitte report stated: … Goodhart was originally designed as a hedge fund "fund of funds" through FY11. Due to poor performance and challenging partner dynamics, Goodhart did an overhaul of its business. Goodhart brought in a new investment team, adding to sales resources, and expanded its product set which increased AUM by $3.3m in FY13 (0.8% growth over FY12) and $37.1m in Q1-14 (8.8% increase over Dec-13). Management stated that most of the new assets have come into the firm's Hanjo product which includes a generous performance fee. First distributions from Goodhart are expected in FY14.
3. The fuller paragraph in the Deloitte report conveys a more favourable assessment of Goodhart.
4. Moreover, similar observations about partner dynamics and performance had already been provided in Mr Howard's assessment: … … by 2012 there was a difference of opinion amongst the founders on the direction that the business should take; Bartlett and Taylor wanted to focus on single manager strategies either by looking to partner as a third party distributor or go down a Northern Lights path and invest in the business. With this decision made, three of the original founders left the business - Fox, Hay and Lavin - and a number of the original strategies were closed. The result has been that by the end of 2013 FUM stood at just over US$400 million and today the focus is on three funds; two Japanese equity strategies managed by a team that sits within Goodhart and an emerging markets strategy run by a French manager, HMG Finance. … … It is difficult to envisage any consulting group providing a buy rating at the outset mindful that the strategy is a variation on the flagship fund and hence does not have any identifiable track record. … … It is difficult to share Bartlett's confidence in the growth projections for Goodhart with the fund offerings that he currently has …

Alpha

1. As to Alpha, PAC says that the Deloitte report said that it was no longer a registered investment adviser due to poor performance.
2. In context, the Deloitte report stated: AlphaShares, LLC ("AlphaShares") was formed as an investment management firm dedicated to providing investors with investment strategies that allow them to participate in China. Due to poor performance, as of FY11, AlphaShares is no longer an registered investment adviser. They currently develop ETF indices for investing in China. The ETFs are then sold to Guggenheim who pays a licensing fee (based on AUM) to AlphaShares for the use of these indices that are offered to their clients. …
3. So, some three years before the contemplated merger, Alpha had experienced poor performance but had changed its business such that it provided exchange-trade fund indices. That activity appears not to have required it to be registered as an investment adviser. Consequently, the isolated statement in the Deloitte report refers to an historical matter which had ceased to have ongoing significance.
4. Similarly, Mr Howard in his assessment said: This small boutique provides of China focused equity benchmarks that form the basis for a number of Chinese equity ETFs. The benchmarks are built around the beliefs and research of co-founder and CIO, Dr Burton Malkiel - the professor of finance at Princeton University (and author of the well-known finance book, 'A Random Walk Down Wall Street'). NL describe Alphashares as a unique business model that has no full time staff, hence costs are extremely low, is low maintenance and easy to run. The main function is to review the index rules, which happens once a year, as well as a monthly operating committee. Greenwood sits on the Index Committee and NL also undertakes the accounting function for the group. The biggest cost that Alphashares incurs is utilising S&P to calculate the index. Guggenheim has an exclusive contract to sell/distribute the Alphashares ETFs … … With the business well and truly established and costs virtually non-existent, Alphashares is just past break-even in terms of P&L. It requires very little resources from Northern Lights and is unlikely to require additional working capital for the foreseeable future. Any material improvement in earnings will be entirely predicated by US investor sentiment towards China, if we do see this improve then there could be an uptick in earnings for this boutique, but unlikely to be of a scale that dramatically improves the bottom line of the merged business.
5. Again, the other directors were not ignorant of the information about Alpha in the Deloitte report.

Elessar

1. As to Elessar, PAC says that the Deloitte report said that Elessar's continued losses diminished its working capital and that its owners agreed to inject USD 500,000 into the business.
2. In context, the Deloitte report stated: … In FY13, Elessar produced a solid year of performance, exceeding the Russell 2000 Value Index by more than 200 basis points. This marked the sixth time in seven calendar years the firm has outperformed the index. However, despite this consistent performance, Elessar continues to struggle to grow its AUM. According to management, Elessar's best prospect relates to its mutual fund it launched in FY13 which has steadily grown to over $11m. At Dec-13, AUM increased by $8.3m (10.9%) as compared to Dec-12. However, revenue as a percentage of AUM decreased 8bps ($37k) from FY12. Elessar's continued losses have diminished its working capital. In Q1-14, one of Elessar's owners agreed to inject $500k into the business via a low interest rate personal loan to carry the firm at least through the end of FY14.
3. So, the Deloitte report's overall description of the business is more favourable than the extract emphasised by PAC.
4. In any event, Mr Howard's assessment informed the directors that: … … NL estimates that break-even for this manager is US$130 million, reality is that momentum needs to dramatically improve for this point to be reached within the next year. Giesen has recently provided a US$500,000 low interest loan to the business and they have been cutting back costs - this should allow them to get to the first quarter of 2015 assuming the FUM flows do not improve. …
5. Accordingly, even before Mr McGill received the Deloitte report, the other directors were informed of the information about Elessar highlighted by PAC.
6. Again, the other directors were not ignorant of the information about Elessar in the Deloitte report.

Nereus

1. As to Nereus, PAC says that the Deloitte report referred to its negative EBITDA performance over the past 3 years.
2. In context, the Deloitte report stated: … As Nereus continues to be in the fundraising period, management has elected to continue to hold Nereus at funded costs. However, given the negative EBITDA performance over the past 3 years and the uncertainty of achieving this first close, consideration on the valuation/impairment of this investment may be warranted.
3. Now Mr Howard's assessment expressed considerable reservations about Nereus: … … While the headline projections are impressive, the risks cannot be understated - the reality is that the return expectation for any investment in India, and in this case alternative energy, should come up with an attractive return premium commensurate with the risks the investor is taking on. Projections provided by NL paint an extremely pay off scenario seven years out, we have not incorporated these 'blue sky' outcomes into our model. A unique investment opportunity that is more akin to an investment banking deal rather than traditional funds management.
4. Accordingly, even before Mr McGill received the Deloitte report, the other directors were informed of relevant information about Nereus. Again, the directors were not ignorant of the information about Nereus in the Deloitte report.

Conclusion - Deloitte report

1. In summary, the various statements in the Deloitte report upon which PAC focuses were all the subject of information provided to the other directors, save and except some aspects of WHV.
2. Accordingly, even if Mr McGill failed to provide the Deloitte report itself to the other directors, this omission was not significant save and except for WHV which I will discuss later.
3. Now Mr McGill accepted in cross-examination that the Deloitte report ought to have gone to the other directors, but that concession is of limited value. I do not construe it as an acceptance that absent provision of the Deloitte report, the other directors were relevantly uninformed.
4. Moreover and in any event, even if there was a technical breach of duty it has no causal consequences if the other directors were aware of the salient information or would have acted no differently in approving of the merger.
5. Now more generally, the other directors were aware by 2 May 2014 that Deloitte was conducting a quality of earnings analysis because a process update from Gresham, which Mr McGill circulated to them, noted that: …

• Quality of earnings analysis on historical NLCP financials is being prepared by Deloitte for the debt process, and will be available in the week commencing 12 May. … …

1. So, the other directors were aware of the existence of analysis by Deloitte before they voted in favour of the transaction documents execution resolution and signed the circular resolution. They could have called for that analysis had they wished to see it.
2. Instead, they were satisfied and entitled to rely on Gresham, particularly in circumstances where Gresham's presentation at the 2 June 2014 board meeting noted: …

• For the benefit of the merger debt process being managed by NLCP's advisers in the US, Deloitte has prepared a quality of earnings analysis on NLCP's historical earnings
• This information has been provided to [PAC] and incorporated into the transaction financial model

1. Further, to the extent that the directors had already been informed of a matter by other means, the suggestion that the Deloitte report had additional gravitas does not provide any support for finding that a failure to provide the report amounted to a breach of duty.
2. Further, even if Mr McGill did breach his duties by not providing the Deloitte report to the other directors, PAC has failed to establish that the breach caused loss.
3. PAC's causation allegation is to the effect that: … if Mr McGill had provided the Deloitte Due Diligence Report to each of the non-executive Respondents then each of the non-executive Respondents exercising their powers and discharging their duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in PAC's circumstances and occupied the office held by, and had the same responsibilities within PAC as, that Respondent, would have determined not to vote in favour of the Transaction Documents Execution Resolution or to sign the Circular Resolution such that the Transaction Documents Execution Resolution would not have been passed and PAC would not have entered into the merger with Northern Lights.
4. Now it is unclear how it is said that if Mr McGill had given the Deloitte report to the other directors before the 23 July 2014 board meeting, each of the other directors would not have voted in favour of the transaction.
5. This is particularly the case given that before the directors voted on the transaction documents execution resolution, they were already aware of the relevant matters addressed in the Deloitte report as I have detailed earlier save and except aspects concerning WHV.
6. Moreover, a further difficulty which PAC's causation case confronts is that it has principally run a "no transaction" case. PAC's case is that had the alleged breaches not occurred, the merger would not have proceeded on any basis.
7. But in one of the more useful exchanges with me, Mr Kennedy gave the following evidence: HIS HONOUR: I'm just interested in asking you a question. What would have caused the transaction not to go ahead, as opposed to just recasting it and change the percentages? If it wasn't earnings per share accretive, would that have been the end of the matter, the transaction wouldn't have gone ahead or---? MR KENNEDY: I use the word re-cut and, see, you possibly could have recast the percentages from 60/40 to 65/35 or 70/30, some figure that was better relative to the businesses, the earnings per share. Q: Yes? A: I mean, if Seizert had lost FUM - it had 5 billion US, if it had lost FUM, then that would have had a material impact on their earnings, then we would not - I think that would have been a significant red flag, to use Mr Cameron's language, but when we entered the transaction, Seizert was going beautifully, but we could have done a number of things, your Honour: we could have re-cut the percentages or we could have canned the deal. I personally would not have wanted to can the deal, because I think, as I gave evidence yesterday, strategically this made enormous sense for us. Q: But does that mean - let's assume hypothetically dividends don't come through WHV, so it's not earnings per share accretive---? A: ---It might be line ball, though, your Honour. Q: Yes, it might be. You personally would have seen a way forward in re-cutting or recasting the percentages? A: Yes.
8. Similarly, there was the following exchange between myself and Ms Donnelly: HIS HONOUR: Would another possibility have been to seek to re-adjust the 60/40? MS DONNELLY: Oh, before that, yes. Yes, of course.
9. It seems to me that the other directors would not have abandoned the transaction in the counterfactual scenario to be assumed. They would have proceeded with the merger, albeit on revised terms.
10. In summary, PAC has not made out its "no transaction" causation case on this particular aspect.
11. Now putting to one side the Deloitte report, it is appropriate that I now deal with other criticisms made by PAC.

Howard assessment

1. PAC has criticised the directors' reliance upon Mr Howard's May assessment. Various points have been made.
2. First, Mr Bradley gave evidence that the document did not constitute a rigorous due diligence of Northern Lights' boutiques. He made the following points. It is a summary of qualitative statements told to Mr Howard by Northern Lights or the Northern Lights' boutiques. It does not serve the functions alleged by the directors, and does not include any third party or independent analysis. The Howard assessment did not and could not replace the need for a quality of earnings analysis on Northern Lights' boutiques and a proper assessment of forecast future earnings and their reasonableness. The assessment appears to contain high level views and impressions of Northern Lights' boutiques. It is subjective commentary based on Mr Howard's impressions when he visited the US and met with the various fund managers for brief periods of time.
3. Now Mr McGill accepted that the Howard assessment did not consider certain matters such as variations to distributions after a certain period of time with Seizert and the impact that they may have on the merged entity, and the investment performance of Seizert.
4. Mr McGill also accepted that the assessment was focused on the personnel behind the various boutiques rather than on the financial information concerning the boutiques.
5. Second, in any event, PAC says that the document noted a number of matters that should have raised "alarm bells" for directors, including the following concerns regarding Northern Lights' key boutiques.
6. As to Northern Lights, the document questioned Northern Lights' ability to control their fund managers. As to WHV, the document noted that funds under management had fallen by USD 1.5 billion over the past 18 months, and noted that further outflows were expected. As to Seizert, the document noted issues with succession planning. As to Aether, the document noted that Aether's offering would not resonate strongly with the Australian market.
7. Mr Fitzpatrick agreed that the document alerted him and the other directors to some red flags about the boutiques.
8. Further, Mr Lewin agreed that the Howard assessment identified relevant risks for PAC to consider in respect of Northern Lights' boutiques, including the key ones mentioned above, and that if the report had been interrogated by the PAC board members, that those risks would have been apparent to them.
9. Now PAC made detailed criticisms concerning the Howard assessment and various topics. It is not necessary to set out the detail here. In my view its criticisms lacked real merit save and except contractual aspects concerning WHV.
10. PAC relied upon Mr Bradley's criticisms of the Howard assessment, but his evidence was problematic. He lacked experience in investing in boutiques and he selectively quoted parts of the assessment which distorted what Mr Howard had said.
11. In any event, PAC's criticisms of the Howard assessment lack substance.
12. First, the report was clearly just one aspect of due diligence.
13. Second, PAC does not explain how the qualitative element of a report could be anything other than subjective and based upon information provide by Northern Lights' boutiques.
14. Third, Mr Howard's qualitative analysis is no different in form to that in the Deloitte report, which PAC has emphasised as valuably disclosing "red flags".
15. Fourth, Mr Lewin agreed that the assessment identified relevant risks about Northern Lights' boutiques for PAC to consider. He also agreed that if the board had interrogated the assessment the risks would have been apparent to it.
16. Moreover, the evidence discloses that all of the non-executive directors did consider the Howard assessment and discussed it at the 2 June 2014 board meeting.
17. Let me turn to some other criticisms made by PAC.

Windfall gains to Northern Lights from Seizert and Aether

1. PAC says that the directors breached their duties because on 23 July 2014 they voted such that Northern Lights received a windfall gain because the Aurora Trust guaranteed the borrowings to acquire 70% of Seizert and 75% of Aether.
2. Now PAC and Northern Lights made a complex, multi-faceted agreement. One part of the agreement required borrowings for the simultaneous acquisitions of interests in Seizert and Aether. The directors knew about this part of the agreement for months as it was explained in board papers commencing in April 2014.
3. There is evidence that this part of the overall transaction was taken into account in setting the overall price, that is, the unit allocation.

Legitimate reason for the merger

1. PAC says that the directors breached their duties insofar as they voted in favour of the July resolution in circumstances where they had not reasonably satisfied themselves that there was a legitimate reason for the merger.
2. But as the evidence establishes, the legitimate reasons for the merger had been set out consistently from the 21 February 2014 memorandum to Gresham's 23 July presentation and the directors read and agreed with those reasons. They were the benefits of the merger.

PAC acquiring its interest in the Aurora Trust within an appropriate valuation range

1. PAC says that the directors breached their duties insofar as they voted in favour of the July resolution in circumstances where they had not reasonably satisfied themselves that PAC was acquiring its interest in the Aurora Trust within an appropriate valuation range.
2. For the reasons already discussed, I would reject this allegation.

The complex transaction structure for the merger with Northern Lights

1. PAC says that the directors breached their duties insofar as they voted in favour of the July resolution in circumstances where they had not reasonably satisfied themselves that the complex transaction structure for the merger with Northern Lights was warranted and produced commercial and economic benefits to PAC.
2. But the directors had been told since the February memoranda that the structure would be complex and had been receiving papers from Deloitte Tax Australia about it.
3. Ms Donnelly said that with respect to the structure of the merger, Deloitte was to be mutually hired by PAC and Northern Lights to advise on taxation issues. She already knew the tax issues at this stage, but if not, she learned them by early 2014. From her experience with international tax she could tell from early in the merger process that the structure was going to be complex for several reasons to do with tax.
4. First, PAC, as an Australian company, paid tax on income and PAC shareholders received franking credits for tax paid by PAC. The merger would have to minimise double taxation and preserve the franked status of any dividends PAC paid for Australian shareholders, but the franking credits may not be much use to US shareholders.
5. Second, in the US tax is levied at both Federal and State levels, and so the structure would have to accommodate those two levels.
6. Third, Northern Lights' boutiques were structured for tax such that each boutique did not pay tax but distributed income to its investors who paid tax on the distribution according to their own tax situations. The merger structure was going to have to deal with any desire of Northern Lights' US investors to continue to receive before tax income.
7. Fourth, there were different tax years being 30 June for Australia and 31 December for the US. So there would need to be synchronisation.

Reliability of the forecast performance of Northern Lights

1. PAC says that the directors breached their duties insofar as they voted in favour of the July resolution in circumstances where they had not satisfied themselves that the forecast performance of the Northern Lights boutiques was reliable, especially given the findings of the Deloitte report.
2. This allegation is in substance identical to the claims made about the Deloitte report which I have already rejected.

The business judgment rule

1. Now each of the directors relies on the business judgment rule in s 180(2) of the Act in their defences. I have already set out the relevant extracts from Mariner Corporation at [484] to [490]. The onus of proof to establish the elements of s 180(2) is on the directors (Australian Securities and Investments Commission v Mitchell (No 2) at [1435]).
2. PAC says that the directors' reliance on the business judgment rule is misplaced for the following reasons.
3. First, the business judgment rule requires directors to inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate (s 180(2)(c)).
4. PAC says that the evidence at trial demonstrated that the directors failed to examine and give full attention to all materials presented to them and form an independent view as to whether or not those materials supported the merger and all of its constituent elements.
5. PAC says that the mere fact that advisors were present at the 23 July 2014 board meeting was not an adequate way for the PAC directors to satisfy their duties in relation to a transaction of such a scale and consequence for PAC shareholders.
6. Further, PAC says that the lack of any evidence in the board pack, board minutes and contemporaneous correspondence demonstrates that crucial matters such as the risk of WHV not making a distribution and the value ascribed to Northern Lights' interest in WHV were not discussed at the 23 July board meeting. To the contrary, PAC says that it appears from the correspondence subsequent to the 23 July board meeting that risks and concerns regarding WHV were raised between Mr McGill and Mr Fitzpatrick to a large extent and also Gresham after the board had resolved to approve the merger.
7. I will deal with the WHV question separately and later.
8. Second, PAC says that on the materials that were available, the directors ought to have been on notice of significant risks in the merger, which should have caused them to vote against the merger. It is said that the February memoranda identified numerous alarm bells. And it is said that the Deloitte due diligence report should have raised serious questions about the financial performance of Northern Lights' portfolio. And whilst the evidence supports the view that the directors other than Mr McGill did not receive the Deloitte report prior to entering into the merger, PAC says that the evidence at trial demonstrated that at least from 2 May 2014 the directors knew of the report's preparation and existence and despite this knowledge they did not call for the report.
9. It is said that no reasonable person in the position of the directors could have believed, in light of the foregoing, that entering into the merger was in the best interests of PAC.
10. Further, it is said that Mr McGill's reliance on the business judgment rule in answer to the specific allegations made against him is misplaced for the following reasons.
11. The business judgment required to be made here and as specifically alleged against Mr McGill, was the decision to inform the other directors of the concerns held by Mr McGill surrounding WHV and provide Mr Kennedy, Ms Donnelly and Mr Hayes with copies of model v 341 and model v 368 before the PAC board entered into the merger.
12. This failure by Mr McGill meant that the necessary critical information that should have been before the PAC board in making such an important decision was absent and the PAC board passed the 23 July 2014 transaction documents execution resolution and the circular resolution effectively "in the dark" regarding these critical matters.
13. PAC says that Mr McGill had more than a sufficient amount of time prior to the 23 July 2014 board meeting where the directors resolved to enter into the transaction, prior to signing the implementation deed and prior to the circular resolution in November 2014, to inform the other PAC directors regarding documents such as the Deloitte report and model v 341 and to communicate with clarity the concerns regarding WHV.
14. Further and generally, the specific material that PAC asserts was crucial for the PAC board members to have before them and to have considered and debated prior to entering into the transaction, being at least the Deloitte report and model v 341 as well as contextual information from Mr McGill and Mr Fitzpatrick regarding their concerns about WHV, were all available to them via Mr McGill at or around the time of the 23 July 2014 board meeting, the signing of the implementation deed, and the circular resolution.
15. Further, PAC says that there was no evidence at trial, documentary or otherwise, of a reasoning process supporting any rational belief held by Mr McGill that his judgment in not providing the board with the material was in the best interests of PAC.
16. Now putting to one side Mr McGill and the WHV question, in my view the directors have established the necessary elements to satisfy the business judgment rule.
17. The directors clearly made a business judgment. And there is no suggestion by PAC of lack of good faith or material personal interest.
18. Now PAC says that the directors failed to examine and give full attention to all materials presented to them and form an independent view as to whether or not those materials supported the merger and all of its constituent elements, thereby not satisfying s 180(2)(c). But the directors adequately informed themselves. Each of them believed the information provided in the cumulative papers they received after the April board meeting. And it can be inferred from the length of the relevant presentations and meetings that there was a comprehensive discussion of that material.
19. Further, the HSF file note proves that matters such as WHV were discussed at the meeting even though they were not recorded in the minutes.
20. Further, PAC says that no reasonable person in the position of the directors could have believed that entering into the merger was in the best interests of PAC, thereby saying that the directors did not satisfy s 180(2)(d). But the directors' reasoning, being that the diversification and other benefits of the merger outweighed the risks known by the directors but also expressly stated by Gresham in Gresham's 23 July 2014 presentation, was rational and demonstrated that the decision was in PAC's best interests.
21. I will return to Mr McGill and the WHV question later.

Summary - third decision point

1. I reject PAC's case concerning the third decision point, save and except for the position concerning WHV that I will come to later.
2. I will discuss the fourth decision point concerning the circular resolution later in these reasons and after I have discussed the shareholder approval question, the WHV question and aspects concerning the implementation deed.

The question of shareholder approval - listing rule 11.2

1. PAC says that pursuant to listing rule 11.2 of the ASX listing rules, the merger with Northern Lights required shareholder approval as it involved a disposal of PAC's main undertaking. PAC says that this is due to the following features of the merger.
2. Prior to the merger, PAC says that its main business activity comprised the business of funds management and investing in fund managers. Its business model involved investing capital in and providing support services to fund managers or boutiques. It is said that the merger involved PAC transferring its boutiques in which it had direct interests in exchange for units in the Aurora Trust.
3. PAC says that under the listing rules an entity is taken to dispose of its main undertaking if it disposes of or agrees to dispose directly or through another person by any means, including by decreasing an economic interest or disposing of part of an asset; see listing rule 19.12.
4. PAC says that following the merger it no longer directly owned its main business activity and instead held an indirect interest through the Aurora Trust.
5. Further, it is said that PAC no longer had control of the investment decisions that were made by the boutiques, and nor did it have control of the Aurora Trust. Therefore it is said that PAC, following completion of the merger, no longer had control of the investment decisions that represented the main business or the main undertaking that PAC engaged in as an investor in boutique companies. It is said that the absence of control is apparent from the following matters.
6. First, it is said that a memorandum from Ms Maria Batoon to PAC's board dated 28 May 2014 confirmed that "key decisions by the Board of the Trust [are] shared as provided by the relevant documents and Trust Deeds, ie neither [PAC] nor NLCP will have control". I should say now that Ms Batoon's description is neither an accurate nor a complete description.
7. Second, it is said that pursuant to the unitholders deed, certain decisions required special board approval requiring a majority of directors of both PAC and Northern Lights. It is said that matters requiring special board approval included matters relating to investments, material contracts, and material changes in the businesses of the entities comprising the Aurora Trust.
8. Third, it is said that before any potential investment or divestment opportunities could be passed to the trustee of the Aurora Trust for approval, the investment committee had to unanimously approve the investment decision. I will return to this later.
9. Fourth, it is said that Northern Lights Capital Group was responsible for the management of the Aurora Trust portfolio on the terms set out in the advisory agreement between Aurora Investment Management Pty Ltd, in its capacity as trustee of the Aurora Trust, and Northern Lights Capital Group dated 24 November 2014.
10. Now PAC has made other allegations which are relevant to this particular topic.
11. PAC says that a director exercising reasonable care and diligence would have made inquiries as to what written legal advice PAC had obtained regarding shareholder approval and the assumptions underpinning any such advice and requested a copy of any such legal advice as well as any communications to and from the ASX before voting to approve the transaction.
12. Further, it is said that the directors failed to consider whether the information provided to the ASX was accurate and complete.
13. Further, it is said that if the directors had not breached their various duties in relation to the failure to seek and obtain shareholder approval for the transaction, then the transaction documents execution resolution would not have been passed and the circular resolution would not have been signed and PAC would not have entered into the merger with Northern Lights.
14. Further, it is said that by failing to seek and obtain the approval of PAC's shareholders to the merger, the transaction documents execution resolution and the circular resolution were ultra vires.
15. Now the directors deny that the merger required shareholder approval under the listing rules.
16. They say that the merger did not involve PAC disposing of its main undertaking within the meaning of the listing rules. PAC's business remained investing in boutiques.
17. Further, they say that the question whether PAC controlled the trustee of the Aurora Trust is irrelevant to the issue of whether PAC disposed of its main undertaking. But even if it were relevant, they say that PAC controlled the Aurora trustee after the merger.
18. Further, the directors say that they were informed by the work and legal advice of HSF that PAC did not require shareholder approval of the proposed transaction to be obtained under listing rule 11.
19. Further, the directors say that even if they breached their duties, PAC has failed to prove any causal link between such breach and any loss.
20. Further, the directors deny that a consequence of shareholder approval being required but not obtained, if that be the case, was that the merger resolutions were ultra vires and that the directors are therefore liable to restore the so-called substitutive value contended for by PAC.
21. Now before turning to the chronology of events, let me make some preliminary remarks.
22. Seeking shareholder approval required an expert to be retained, the expert to produce a report, the directors to provide an explanatory memorandum, the report and memorandum to be printed, notice convening the extraordinary general meeting to be given to PAC's shareholders and such a meeting to be held. And the actual time required to complete such steps would have been extensive.
23. Under s 249HA of the Act the convening period for the EGM required 28 days' notice. Moreover, before the expert report and explanatory memorandum were ready to be sent to shareholders, the expert would have to value the PAC boutiques and Northern Lights' boutiques.
24. Mr Fitzpatrick said that he thought that the entire process would have taken 3 to 4 months. Moreover, Mr Fitzpatrick said that it would have cost at least some hundreds of thousands of dollars. Further, Mr Fitzpatrick said that the costs of shareholder approval could have been material to PAC's end of year result.
25. Moreover, time was a critical factor in transactions involving boutiques, where performance usually changed quickly and the parties could accordingly seek to renegotiate or terminate the deal. Mr Fitzpatrick put it pithily when he said that time kills all deals.
26. Further, as part of seeking shareholder approval, disclosures of confidential material would be necessary, which brought with them risks such as a rival appearing and disrupting the deal or perhaps adverse reactions to the deal from the founders of the boutiques if the process was not properly managed.
27. Let me turn then to the chronology concerning the consideration of the necessity to obtain shareholder approval.

The chronology of events relevant to shareholder approval

1. Mr McGill's 21 February 2014 memorandum about the proposed merger anticipated that shareholder approval of the merger would be needed. So, the indicative timeline included the following reference: Wk of 5 May Send out Explanatory Memorandum and supporting documentation to [PAC] shareholders. Wk of 9 June Shareholder meetings seeking approval.
2. And as the merger developed there were three listing rules, being rules 7, 10 and 11, that may have generated the need for shareholder approval.
3. Further, the expectation that shareholder approval would be required was also reflected in Gresham's retainer letter dated 2 April 2014 where two of Gresham's tasks were to: …

• In relation to the explanatory memorandum, assist in the drafting and the management of other advisers;
• In relation to the independent expert report, brief and manage the independent expert in their preparation of the report. …

1. Now by 7 April 2014 Gresham was organising regular due diligence calls and meetings about the merger. The Gresham participants in these calls were one or more of Mr Pollock, Mr MacGregor, Mr Graham and Mr Moulin. The HSF representatives were Mr Dunne and Ms Lo. The participating PAC executives were one or more of Mr McGill, Mr Howard and Mr Ferragina.
2. On 11 April 2014, Mr Ferragina was in communication with Mr Stuart Alexander, partner at Deloitte, regarding the potential transaction and what PAC might require from Mr Alexander in terms of assistance with the merger in regard to shareholder approval.
3. Now a due diligence team call occurred on 15 April 2014 to which HSF was invited. The attendees were Mr Pollock, Mr MacGregor, Mr Graham, Mr Moulin, Mr Dunne, Ms Lo, Mr McGill and Mr Ferragina. Several of the items on the agenda were legal matters, including the question of the shareholder approval process.
4. On 15 April 2014, but after the due diligence call, Mr McGill emailed the other directors about changes to the terms sheet. With respect to shareholder approval Mr McGill said: … What hasn't changed is that the term sheet remains non-binding and conditional. The NL board considered the revised version on Sunday and has given its in-principal approval. If the [PAC] board also approves it then both parties intend to sign it later this week. Freehills have reviewed the term sheet and advise that [PAC] will not be required to make any disclosure upon signing. If the term sheet is signed, our collective attention will shift to the remaining tasks of raising the required upfront debt finance, remaining due diligence work, negotiation and drafting of formal legal documentation and processes to achieve final board and shareholder sign offs. …
5. The reference to HSF's advice about disclosure was a reference to whether executing the terms sheet would trigger the need for PAC to disclose the negotiations to the ASX under PAC's continuous disclosure obligations.
6. Let me say something about the 16 April 2014 board meeting relevant to the shareholder approval question.
7. The minutes record that the meeting was via teleconference, commenced at 10.05am and concluded at 12.14pm. All directors were present.
8. The revised terms sheet recorded that completion of the merger was conditional upon "Approval of the [merger] by each Party's governing bodies, and equity holders, as required". It also recorded the proposed 60:40 split.
9. The minutes of the meeting record that: Mr McGill advised the Board on developments on this matter since the last Board meeting, including the business updates he has provided to Northern Lights.
10. Ms Donnelly gave evidence about shareholder approval being discussed at this meeting.
11. She remembered Mr McGill saying something about HSF asking the ASX whether the ASX thought shareholder approval was required. She did not remember any more than that. The reason why she remembered Mr McGill saying something is that she remembers that when she later received and read the relevant HSF letter she was not surprised that HSF had asked the ASX whether shareholder approval was required. She remembered that Mr McGill had already told the board what HSF was going to do. She placed the date of what Mr McGill said as 16 April 2014 because that was the board meeting before she received the relevant HSF letter which I will come to.
12. Mr Fitzpatrick gave evidence about shareholder approval being discussed at this meeting.
13. He did not now recall who it was who first informed him although it is likely to have been Mr McGill, or when he first learned that it may not be necessary for PAC to have the shareholders of PAC approve the merger. He had a vague recollection that he first learned of the possibility during a board meeting when Mr McGill was briefing the board on the current status of due diligence.
14. He accepted that this was likely raised at the 16 April 2014 board meeting. He believes it was Mr McGill who told him that HSF had said to him that it may not be necessary under the ASX listing rules for there to be a shareholders meeting, but HSF were going to consider the question further and seek confirmation or a ruling from the ASX.
15. Mr Kennedy gave evidence about shareholder approval being discussed at this meeting. His recollection was that it was still anticipated that apart from the board needing to be satisfied that the merger should proceed, PAC would need to get shareholder approval.
16. With respect to the revised terms sheet, he understood that at least from PAC's perspective the reference to the approval of governing bodies included PAC obtaining shareholder approval.
17. He recalled that it was at this meeting that Mr McGill said that HSF had advised that HSF thought that shareholder approval was not required but HSF wanted to put its arguments to the ASX to check that the ASX agreed with HSF's view.
18. Further, he recalled reading the HSF letter to the ASX in early May 2014. He remembers that when he first read the HSF letter he was not surprised about the fact that HSF was seeking confirmation from the ASX that shareholder approval was not required. He remembers that Mr McGill had already told the directors at a meeting what HSF had advised. He does not remember speaking to Mr McGill after the 16 April 2014 board meeting and before he received the HSF and ASX responses. He believes that Mr McGill told him about HSF's view at the 16 April 2014 board meeting.
19. In cross-examination Mr Kennedy was clear about what Mr McGill said but uncertain about when it was said. Mr Kennedy ultimately answered a question from me that he did not remember the discussion occurring on 16 April 2014, but the date can be fixed by other evidence.
20. From the evidence, it seems clear that at the board meeting Mr McGill told the directors that HSF had advised that HSF thought that shareholder approval was not required but HSF would put its views to the ASX to check that the ASX agreed with HSF's view.
21. After the board meeting, on 16 April 2014 Mr McGill sent an email to HSF and Gresham saying: … How are you going with the "avoid the need for [PAC] shareholder approval ideas"? I've spoken to NL about this and they are excited by the idea - and willing to recut the convertibility feature as necessary if you think it works. Please let me know. This is probably my top priority issue to be firmed up now. (Charlie, please call me and I'll brief you on this) …
22. During cross-examination Mr McGill was asked whether he wanted to avoid the step of seeking shareholder approval. But he did not accept that characterisation. Mr McGill explained that the idea that shareholder approval may not be necessary emanated from one of HSF or Gresham in one of the weekly process meetings in the two weeks prior to this email. He said HSF was asked to advise upon it. He said this email was him enquiring, in clumsy language, how HSF was progressing with its advice about someone else's idea, not instructing HSF to work out a solution to a problem. I note that there is no reference to rule 11 in Mr McGill's email.
23. On 16 April 2014 Mr Dunne of HSF responded to Mr McGill about shareholder approval as follows: Andrew In relation to your note below (and a possible structure that would avoid the need for shareholder approval), we have set out briefly below our thoughts on the shareholder/ASX approval process and possible alternative structuring options. Scenario 1: No binding commitment to issue [PAC] voting shares In the event there is no binding commitment on [PAC] to issue shares to NL, it is our view that no shareholder approval will be required under Listing Rule 7 (issues above 15%) and section 611 of the Corporations Act (the takeovers code) in order for Project Bondi to complete. In addressing NL's desire to achieve liquidity in the event a 'dual listing' does not materialise, it would be worth considering whether NL would be amendable to receive some form of security which is non-voting (eg. a form of preference share with limited voting rights or a debt instrument which is not convertible into voting securities). The interest would be transferrable. In such a scenario, NL could elect to receive up to 15% (or a lower amount depending on the available 'headroom') of [PAC] shares and the remaining percentage in some other form of security. [PAC] could retain the right to satisfy the obligation with ordinary shares if, at the time of the conversion, it wished to seek shareholder approval for the issue. The difference from the current proposal is that [PAC] would not be compelled to issue equity (above the 15% and 20% thresholds), but would have the option (pending a shareholder vote at the time) to do so. We would need to speak to ASX in respect of Listing Rule 10 (transactions with persons in a position of influence) and Listing Rule 11 (significant transactions) to confirm that these rules do not apply to Project Bondi. We think there are good arguments that Listing Rules 10 and 11 do not apply. Ultimately we will have to convince ASX that this is the case. The process would be as follows: we would commence discussions with ASX next week and would start to prepare an application letter seeking ASX's confirmation that Listing Rules 10 and 11 do not apply. If we are able to submit an application to ASX next week, the earliest ASX would give us their view is likely to be 2 May (this is based on our reading of the scheduled 'ASX national managers meetings' whereby such applications are considered). … .
24. There are three matters to note about the email. First, there were three rules being rules 7, 10 and 11 that may have generated the need for shareholder approval. Second, this appears to be the first mention of rule 11. Third, contrary to PAC's assertion that Mr McGill and HSF were involved in some illicit strategy designed to circumvent rule 11, there were three rules potentially engaged. Rule 7 was the focus of attention but HSF were advising PAC about all three.
25. On the same day, Mr McGill responded to HSF as follows: Thanks Peter and Shing. Alternative 1 is sounding encouraging. I agree with your proposed next steps on that. By the way, I don't understand how Listing Rule 10 could apply (but I haven't studied it). This is an arms length deal with NL not a related party. The fact that the proposed structure will include the trust doesn't change the fundamental nature of the transaction as an arms length deal.
26. On 16 April 2014 Gresham provided Mr McGill with an update on the various workstreams that Gresham was performing or co-ordinating. Under the "Legal Workstream" Gresham wrote: … HSF are focused on bottoming out whether a shareholder vote is required, with a focus on terms relating to Tama's rights to convert into Narra shares. HSF will come back today with a view on whether a SH vote is required. Engagement with ASX on necessary waivers would progress next week, should HSF form the view a vote is not required. HSF have committed to circulating a comprehensive list of all the required documentation for the process early next week.
27. On 17 April 2014, Mr McGill emailed Mr Carver that: … By the way, Freehills are becoming more comfortable that [PAC] may be able to execute this transaction without the need for shareholder approval. However, we're still not sure about this and won't be certain until Freehills have met and discussed the relevant Listing Rules with the ASX. They plan to do this over the next week or so. I'll keep you updated. It would be a massive prize in relation to process from here saving time and costs and also avoiding sensitivities around potential disclosures that we would otherwise have to face. It would also give us extra time for the debt raising process without compromising the 30 June target date. Fingers crossed!
28. On and after 17 April 2014, HSF requested and Gresham provided information to be included in a proposed HSF letter to the ASX.
29. On 22 April 2014 there was a due diligence meeting which seems to have discussed the shareholder approval process and ASX engagement.
30. On 23 April 2014 Gresham recorded the outcome of that meeting as being that HSF would send through a draft of an HSF letter on 24 April 2014 and that a response from the ASX was anticipated in early May 2014.
31. Now the HSF letter that was prepared went through a few drafts with input from Gresham, Deloitte Australia and PAC executives. Everything that HSF asked for was provided by Gresham.
32. Now the draft letter to the ASX prepared by HSF stated that "[i]t is envisaged that [PAC] and NLCP will have joint control of the Trust." This was also stated in a memorandum prepared by Deloitte Australia at around the same time. It was acknowledged in both of these documents from PAC's advisers that PAC and Northern Lights would have joint control of the Aurora Trust, and that PAC's proportionate share of the Aurora Trust's net assets would be 60% and Northern Lights' share 40%.
33. Now by his 24 April 2014 email copied to Mr McGill and Mr Ferragina at 8:29pm, Mr Dunne circulated a draft letter. His email said: Please see attached the revised letter (in clean and mark-up). I will give the document a cold read tomorrow (I apologise the cold is getting the better of me tonight). There is one inconsistency that we will need to reconcile in that the accounting text says: "It is envisaged that [PAC] and NLCP will have joint control of the Trust", whereas elsewhere we have said that: "The Proposed Transaction will not result in any change in control of the board of [PAC] (and [PAC] will have control of the board of TrustCo)." Anyway I suspect it will now not take long to finalise the letter over the weekend.
34. The "inconsistency" arose from different concepts. Deloitte Australia, which prepared accounting information for insertion in the HSF letter, had introduced the accounting concept of control. Mr Dunne queried that language as it was inconsistent with the legal concept of control which he had used in the draft.
35. Later on 24 April 2014 Mr McGill replied to Mr Dunne and said that "I think we should delete the reference to joint control". Mr Ferragina followed minutes later saying "[y]ou're right that these terms are accounting. I question whether the ASX will be influenced by accounting policies and terms in arriving at their decision".
36. Mr McGill's solution was to "delete the reference to joint control" noting that that was "merely an accounting concept rather than a commercial matter". Mr Ferragina responded saying that: [t]he point you made re the common board and the obligation to act for all shareholders makes me question the level of control. You're right that these terms are accounting. I question whether the ASX will be influenced by accounting policies and terms in arriving at their decision.
37. Following this exchange, the words "it is envisaged that [PAC] and NLCP will have joint control of the Trust" were removed from the draft letter to the ASX.
38. On 28 April 2014, Mr Dunne sought Mr McGill's confirmation of the wording in the draft letter to the ASX as follows: … As noted in section 1, [PAC] will be entitled to appoint 5 directors to the board of TrustCo and NLCP will be entitled to appoint 4 directors. If less than the full composition of directors are appointed, [PAC] will retain voting control at the TrustCo board level. The composition of [PAC's] board of directors and NLCP's board of directors are each expected to be the same as the board of TrustCo (5 [PAC] appointees, and 4 NLCP appointees) with the CEO and the Chairman of [PAC] remaining unchanged. The Proposed Transaction will not result in any change in control of the board of [PAC].
39. Mr McGill responded to the above email from HSF to state "Thanks Peter. That's fine. Please go ahead and lodge the revised letter now." Mr McGill then passed on the information to Mr Fitzpatrick, informing him that "we've just sent this letter to the ASX seeking their in-princip[le] view on the need (or lack thereof) for [PAC] to seek shareholder approval for Project Bondi. We expect to hear back from them over the next week or so." Mr Fitzpatrick, Mr Howard and Mr Carver were each sent a copy of the HSF letter.
40. On 28 April 2014, the HSF letter was sent to the ASX. There are various matters to note about the HSF letter.
41. First, although the heading of the letter refers to rule 11.1 and rule 11.2, rule 10 was also the subject of the letter; the heading to section 4 of the letter confirms this. Further, by 28 April 2014 rule 7 was no longer potentially engaged.
42. Second, HSF had read ASX Guidance Note 12 (GN 12), which was mentioned in section 3.1 of the letter, and so in the second paragraph HSF was seeking "in-principle advice from the ASX". HSF requested that the ASX "provide [HSF] with confirmation that [PAC] will not be required to seek shareholder approval in connection with the Potential Transaction".
43. Third, HSF understood that rule 11.2 was a subset of rule 11.1 and that there was a clear overlap in the concepts involved in each rule.
44. Fourth, with respect to the board and control of "TrustCo", which became the Aurora trustee, the HSF letter relevantly said: 1 Overview of Potential Transaction …

• [PAC] will be entitled to appoint 5 directors to the board of TrustCo and NLCP will be entitled to appoint 4 directors; and … 2 ASX Listing Rule 11.1.1 … (c) Proposed changes to the board or senior management As noted in section 1, [PAC] will be entitled to appoint 5 directors to the board of TrustCo and NLCP will be entitled to appoint 4 directors. If less than the full composition of directors are appointed, [PAC] will retain voting control at the TrustCo board level. The composition of [PAC's] board of directors and NLCP's board of directors are each expected to be the same as the board of TrustCo (5 [PAC] appointees, and 4 NLCP appointees) with the CEO and the Chairman of [PAC] remaining unchanged. The Proposed Transaction will not result in any change in control of the board of [PAC]. …

1. Fifth, with respect to shareholder approval, the HSF letter relevantly said: … 3.2 Submissions as to why the ASX should not exercise its discretion under ASX Listing Rule 11.1.2 We address each of the four main categories listed above in turn: (a) No back door listing As noted above … (b) No inconsistency with basis of listing This category is not applicable … (c) No change to nature of main undertaking [PAC] is an Australian based company that invests capital in, and provides a range of services to support the growth and development of, boutique fund management companies. NLCP has an essentially identical business, albeit with a US focus. [PAC] and NLCP own and operate complementary businesses operating in the same industry, but in different countries. The two propose to combine their businesses into the Trust, such that the nature of the business of each will not change - rather, each will simply obtain an exposure to an identical business operating in a different geography. Similarly, the Potential Transaction will not result in an increase in the scale of the activities of [PAC]. This is because, like NLCP, it will exchange its 100% interest in its existing Australian business for a 60% interest in the merged business (that is, the Trust) commensurate with the contribution of that Australian business to the overall Australian and American merged business. We submit that there will therefore be no change to the nature of [PAC's] main undertaking. An investor in [PAC's] shares will continue to have an investment in boutique fund management businesses, and the change in scale of activities is not material. (d) No new main undertaking This category is not applicable as [PAC] has not previously disposed of or abandoned its main undertaking and the Potential Transaction will not result in [PAC] acquiring a new main undertaking. 3.3 ASX Listing Rule 11.2 The Potential Transaction does not involve a disposal by [PAC] of its main undertaking. Following the implementation of the Potential Transaction, [PAC] will retain a 60% interest in the enlarged business.
2. HSF's submission about rule 11.2 in the HSF letter drew on its submission about the "nature" and "scale" and "main undertaking" discussed immediately above in its submission about rule 11.1. PAC's criticism that HSF only dealt with rule 11.2 in 2.5 lines overlooks two matters. First, HSF knew that rule 11.2 was conditional upon rule 11.1 applying. Second, HSF was in substance repeating what it had already said about rule 11.1.
3. Now I am prepared to infer that the HSF submissions contained in the HSF letter represented HSF's opinion. In my view, HSF was not going to engage with the ASX unless HSF first formed the view that shareholder approval was not likely to be required. The inference from the fact that HSF did so engage with the ASX is that HSF had formed such an opinion.
4. Further, PAC could have proved the contrary by calling Mr Dunne, its solicitor. It made a forensic decision not to do so. I am entitled to draw an inference that the evidence Mr Dunne would have given would not have assisted PAC's case before me.

• As has been previously noted, Freehills were able to successfully achieve a waiver from the ASX, relieving [PAC] from the need to seek shareholder approval for the proposed transaction. In so doing, we will save at least a month of time as well as the costs associated with preparing an Explanatory Memorandum, holding shareholders meeting and commissioning an Independant Experts Report. …

1. Gresham's 2 June 2014 Project Bondi board presentation for the 2 June 2014 board meeting said with respect to shareholder approval: ASX response received on 29 April indicates [PAC] shareholder approval for the transaction is not required, based on the information provided to ASX.
2. The minutes of the 2 June 2014 board meeting concerning shareholder approval said that "The Board noted that … ASX waiver has been received whereby shareholder approval is not required for this transaction".
3. Mr Kennedy's evidence was that he understood Mr McGill's reference to a waiver to be referring to the ASX response. He confirmed that he had not looked at the rule dealing with waivers. As to whether there had been a formal ASX waiver, Mr Kennedy said: Well, I don't know - I don't know the correct terminology, but we got a letter from ASX saying that we didn't need to have [shareholder] approval. Whether it's a waiver, a disclaimer, whatever it is, that's your language. And yes, there's a statement there about a waiver, but I didn't look necessarily and concern myself with the word that McGill has put, either in his report or was put in the minutes.
4. It is clear that Mr Kennedy relied upon the content of the ASX response and was not concerned about the inapposite "waiver" description of it given by Mr McGill.
5. Mr Fitzpatrick accepted that there was no formal waiver, even though he said the ASX response was "a pretty complete letter".
6. Ms Donnelly said with respect to Mr McGill's comment about HSF obtaining a waiver, that she remembers that this was Mr McGill's summary of the ASX letter and of what he had already said in his 2 May 2014 email. She had already read those documents. She was already working on the basis that shareholder approval was not required so long as the structure of the transaction did not alter from what HSF had told the ASX.
7. Now another of the board papers for the 2 June 2014 meeting was Ms Batoon's 28 May 2014 memorandum entitled "Accounting Issues - Project Bondi" .
8. Ms Batoon's memorandum is the basis of PAC's contention that reliance cannot be placed on the ASX response because there was a change between the HSF letter on 28 April 2014, which said consistently with the revised terms sheet that PAC had control, and 28 May 2014, when Ms Batoon expressed her accountant's opinion that there was "joint control".
9. I admitted Ms Batoon's memorandum for a limited purpose, namely to show what Ms Batoon's opinions were. The objections to the admission of Ms Batoon's memorandum into evidence, and my later exchange with PAC's counsel, highlight the following matters.
10. First, Ms Batoon was not a lawyer, so her opinion on an essentially legal concept does not carry weight.
11. Second, the drafts of the documents about which Ms Batoon expressed her opinion were not in evidence and preceded the implementation deed by over two months.
12. Third, Ms Batoon's opinion of the documents not in evidence was that: These documents do not specifically provide that such decision making activities are to be decided by majority but rather implicit that the Board of the Trust decides unanimously thus, control of the Trust is shared.

• ASX Listing Rule - Cap on the employee scheme/execs cap. Must get shareholder approval.
• Melda - need to go thru REM committee -
• WHV service contracts - very valuable. The guys will get downward salary adjustment if they lose WHV service contracts.
• WHV:

1. Distribution & Sales Services - Jack Swift & team services
2. M&A advisory agmt - NL provides services to WHV - 1.6m p.a. to NL
3. Dividends & appreciation

• Rights agreement - NL gets a vested entitlement of a percentage of a sale of the business.
• WHV has $13m of cash
• $4m distribution from WHV to trust - this is the projection Gresham made.
• WHV contracts come up for renewal this year and being extended for 2 years.
• Deferred deal fee - ? Mike suggested maybe try to make it upfront.
• Medley also want assurance on WHV. 100% owned by Laird Norton. Geoff Winston \will be on our board.
• Translate the [?] profit share?
• do a quick REM committee tomorrow
• the LTIP/terms need to be a CP/condition item
• Mike said need a call tomorrow on REM, recommendation on the deal.
• Recommendation on the deal?
• Strengths of the deal - mkt material
• 4 face to face
• 6 have or 2 there
• ASX relief - waiver - what are the requirements?

1. So PAC says that from the entire contents of this part of Ms Lo's notes, it is far from clear that the reference to "ASX relief - waiver" is confined to a reference to listing rule 10.14. It says that a more natural reading of Ms Lo's file note is that the reference to "waiver" arose in the context of a discussion concerning the deal at large, because it appears after a heading "recommendation on the deal". It says that if read in this manner, then it is more natural to conclude that the reference to "waiver" is in fact referable to the "deal", in other words the merger itself.
2. Now I accept that that is a possible reading of the note taken by itself. But in my view it is an improbable reading as all concerned were then proceeding on the basis that shareholder approval for the merger was not necessary, and therefore no broad formal waiver was necessary.

Witnesses' evidence

1. Let me say something further about the witnesses' evidence at this point.

Mr McGill's evidence

1. Mr McGill's evidence at trial on the issue of shareholder approval was as follows.
2. He accepted that until sometime in April 2014 shareholder approval was in contemplation by PAC and the board for the proposed merger with Northern Lights. Mr McGill's evidence was that he considered this to be necessary based on his knowledge of the ASX listing rule requirements and his experience as well as that of his colleagues.
3. He could not recall whether written legal advice from HSF was provided to the PAC board regarding whether shareholder approval should be obtained or not.
4. To the extent that written legal advice was obtained, it would not necessarily be tabled at the board meeting but it would certainly be available to directors should they have requested it.
5. Mr McGill recalls being surprised when HSF took the position that the merger would not require shareholder approval, and that his expectation that the transaction would require the approval of shareholders was because PAC was effectively disposing of its main undertaking.
6. Mr McGill's evidence was that PAC did receive legal advice regarding shareholder approval and it was contained in an email dated 16 April 2014 from Mr Dunne to Mr McGill.
7. However, the substance of the advice that he relied on in relation to the application of listing rule 11 to the potential merger was as follows: … We think there are good arguments that Listing Rules 10 and 11 do not apply. Ultimately we will have to convince ASX that that is the case. …
8. Mr McGill's evidence was that he read and understood that paragraph to mean that HSF's or Mr Dunne's view was that those listing rules do not apply.
9. But listing rule 11, and in particular listing rule 11.2, was not front of mind for Mr McGill and, therefore, PAC and the PAC board, when contemplating the requirements for shareholder approval and engaging with the ASX.
10. Ultimately, Mr McGill confirmed that following HSF raising at a process meeting sometime in early April 2014 that there was a possibility that shareholder approval could be avoided, he gave no further independent consideration to the operation of listing rule 11.2.
11. But the evidence demonstrates that the principal focus of seeking to avoid shareholder approval concerned the prospect that PAC might have to issue shares to Northern Lights if they were going to convert their equity units into shares in the capital of PAC because of the operation of listing rule 7 and s 611 of the Act.
12. The focus was not on the disposal of the main undertaking and the operation of listing rule 11.2. Under cross-examination, Mr McGill acknowledged that was the case.

Mr Kennedy's evidence

1. Now during discussion with PAC's counsel at trial I suggested that any board member reading the HSF letter to the ASX would naturally assume that it contained HSF's opinion based on its instructions at the time. PAC did not accept that position, but the evidence establishes that that is how it was taken.
2. Mr Kennedy's evidence about reading the HSF letter and the ASX response was as follows. With respect to the HSF letter, he remembers that when he read it, he understood that HSF was seeking confirmation from the ASX that shareholder approval was not required under rule 11.1.2 or rule 11.2. He did not know what rules 11.1.2 or rule 11.2 precisely said, but because of what Mr McGill had told the board and because of the letter itself he knew that those rules dealt with transactions that changed a company's main undertaking. He thought that when HSF was making a statement on PAC's behalf or making a submission to the ASX, HSF was stating HSF's advice to PAC. He thought this because he did not think HSF would intentionally mislead the ASX. So, for example, when HSF said to the ASX that "[PAC] considers that the Potential Transaction will not result in a significant change to the nature or scale of its activities", he took that to mean that in HSF's opinion there would not be a significant change. He assumed, because HSF were not accountants, that one or more of Gresham, Deloitte or PAC management had provided HSF with the financial information included in the HSF letter. He thought that the other details of the transaction contained in the HSF letter did not differ from what he had been told about the transaction in the revised terms sheet discussed at the April 2014 board meeting.
3. Further, the ASX letter confirms the recollection he had before re-reading it. The ASX confirmed that shareholder approval was not required provided that the transaction stayed much the same as HSF had described it to the ASX.
4. Further, Gresham's 2 May 2014 process update brought back several recollections. With respect to "Approvals/Consents", he recalled that Gresham had repeated what he had read about shareholder approval and that Gresham said that the transaction could be completed without obtaining consents from PAC's boutiques.
5. Now the cross-examination of Mr Kennedy focused upon the following matters.
6. First, the fact that the HSF letter was not a formal letter of advice to the board, with which Mr Kennedy agreed.
7. Second, the content of the letter referred to "control" of the Aurora Trust. Mr Kennedy said he thought that he was entitled to assume that HSF, who were intimately involved in the legal aspects of the merger, correctly recorded matters.
8. Third, whether he had independently turned his mind to whether approval under rule 11.2 was required. Mr Kennedy said that he relied upon HSF.
9. Fourth, whether he read the HSF letter as containing HSF's opinion. Mr Kennedy said that he did.
10. Fifth, whether, by reference to documents such as Ms Batoon's 28 May 2014 memorandum, the transaction ultimately stayed within the parameters of the HSF letter after the ASX response. Mr Kennedy said that if it did not, he would have expected HSF to inform the board at subsequent board meetings that HSF attended or HSF to approach the ASX again.
11. Further, Mr Kennedy said that given HSF's advice and the ASX response, he did not think it was proper to have made PAC spend management time and money seeking unnecessary shareholder approval.
12. Further, Mr Kennedy said that he decided that it was not necessary for PAC to seek shareholder approval because of what Mr McGill had said and because of the HSF letter and the ASX response. He also said that not one of Mr McGill, Gresham or HSF itself who attended the 23 July 2014 meeting suggested that HSF had changed its view.
13. Further, he said that despite having been a commercial solicitor for a not inconsiderable period, his role was to ensure that PAC had obtained legal advice and he would not have second guessed HSF. He did not make enquiries about the content of the HSF letter because he relied on Mr McGill and HSF to have correctly set out the current position concerning the proposed structure for the merger.

Mr Fitzpatrick's evidence

1. Mr Fitzpatrick regarded the HSF letter as conveying HSF's opinion that shareholder approval was not required. Consequently, Mr Fitzpatrick did not consider it necessary or desirable to obtain a written letter of advice addressed to the board.
2. The cross-examination of Mr Fitzpatrick focused upon the following matters.
3. First, the fact that there was no formal letter of advice to the board, with which Mr Fitzpatrick agreed. But he said that the board had the HSF letter and he did not see why PAC should get a second letter from HSF. Mr Fitzpatrick's evidence was that written legal advice from HSF was not received because it was not necessary given that the ASX had sent a letter to PAC saying that it did not need to obtain shareholder approval. Once he received and reviewed the ASX correspondence, his evidence was that it had effectively closed off the issue, and he would not have considered it necessary to have looked for a second opinion.
4. Second, whether Mr Fitzpatrick had independently turned his mind to whether approval under rule 11.2 was required. He said that the HSF letter and the ASX response "sort of overran" him considering rule 11.2.
5. Third, whether Mr Fitzpatrick understood the ASX response as a waiver of rule 11.2. He said that he understood it as the ASX telling PAC that it could go forward without shareholder approval.
6. Fourth, whether Mr Fitzpatrick expected Mr McGill to inform the board about any change in the transaction that would take it outside the scope of the ASX response. He said that he did.
7. Mr Fitzpatrick was not cross-examined about PAC not having "control" of the Aurora trustee but he said that PAC had control so the outcome in the ASX response was not surprising.
8. Further, Mr Fitzpatrick still considered, even after the HSF letter and the ASX response, seeking shareholder approval in any event but decided not to pursue it because of the expense and delay involved and his expectation that shareholders would criticise the holding of an unnecessary EGM.
9. Generally, Mr Fitzpatrick's evidence was that after he had received the HSF letter and the ASX response, the issue of seeking shareholder approval was effectively closed. In other words, Mr Fitzpatrick decided that PAC would not seek shareholder approval. He had left it to HSF and Mr McGill to deal with legal matters and would follow HSF's advice.

Ms Donnelly's and Mr Hayes' evidence

1. Ms Donnelly gave similar evidence to the evidence of Mr Kennedy. In particular, she said that in May 2014 when she read the HSF letter she took it to reflect HSF's opinion and she thought the opinion made sense. She said that she did not separately consider rule 11.2. Rather, she relied on HSF's opinion as reflected in the HSF letter.
2. Ms Donnelly said that since the advice was that shareholder approval was not required, her view was that PAC should not waste money by needlessly incurring the costs of seeking approval.
3. She said that if something changed about shareholder approval she would have expected HSF to tell management or the board. She said that she had no legal training and would not have second guessed HSF. She had read the HSF letter and nothing in it seemed glaringly wrong. Hence she saw no need to make enquiries as she relied on management and HSF to accurately set out the position.
4. Mr Hayes' evidence was that he had a vague recollection of HSF approaching the ASX and the ASX saying that shareholder approval was not required. He said he would not have second guessed what HSF had done. He said that his understanding was that HSF had given advice that shareholder approval was not required and that the ASX had confirmed that to be the case.
5. He said he would not have wasted shareholders' funds simply to protect his own position as a director by having an unnecessary shareholders' meeting if HSF and the ASX said it was not necessary.

Expert witnesses

1. Mr Bradley said that the directors should have known at the time of approving PAC entering into the merger, that is, on 23 July 2014 and/or on 16 November 2014, that PAC did not have shareholder approval nor did it have written legal advice regarding the non-requirement for shareholder approval. He said that there was no evidence that the directors including Mr McGill asked for or received formal written legal advice as to whether or not shareholder approval would be required under listing rule 11.2.
2. Further, he said that the letter received from the ASX on 29 April 2014 was not sufficient grounds for not seeking shareholder approval for a transaction as important and as large as the merger.
3. Further, he said that as a matter of prudence, even if listing rule 11.2 did not technically apply, the directors on behalf of PAC ought to have sought shareholder approval for the merger. And he said that the failure to do so was a breach of the directors' duty of care and diligence. That argument was initially only faintly pressed by PAC. By the close of trial the matter was not really pursued.
4. Mr Bradley also said that obtaining shareholder approval would have, as a matter of normal market practice, required the board to provide PAC shareholders with an independent expert's report. Mr Bradley made the following points.
5. First, such a report by a qualified professional expert would have included an analysis of the merits of the transaction, the valuation of Northern Lights independent of the valuations undertaken by Mr McGill and Mr Carver which were inherently self-serving, and the risks involved in the merger.
6. Second, such an independent expert's report would have set out for the benefit of PAC's shareholders in detail the expert's analysis of the advantages and disadvantages of the proposed transaction to arrive at an opinion whether the transaction was fair and reasonable and when taken as a whole was in the best interests of PAC shareholders.
7. Now I reject Mr Bradley's evidence about shareholder approval partly on account of the instructions he was given and the assumptions he was asked to make, but primarily because it is a counsel of perfection too far removed from the realities of real-time proper corporate governance.
8. As to the instructions, he was instructed that PAC was a funds manager, which naturally caused Mr Bradley to apply to PAC his experience at the much larger Perpetual which was a funds manager.
9. As to the assumptions, Mr Bradley was asked to assume that shareholder approval was required for the merger. This led Mr Bradley to express the obvious opinion that the directors should have known that they did not have shareholder approval and that it was a breach of their duties to have approved the merger in such circumstances. Of course the assumption was problematic as I will later discuss.
10. Further, Mr Bradley said that he found no evidence that the directors considered the need for written legal advice. But Mr Bradley did not take into account the evidence that the directors thought that the HSF letter represented HSF's advice and consequently did not take the matter any further.
11. Further, Mr Bradley dismissed the ASX response as being based on a one-sentence statement by HSF that the merger did not involve disposal of its "main undertaking", but Mr Bradley wrongly assumed that HSF's submission to the ASX about rule 11.1 had nothing to do with HSF's submission about rule 11.2.
12. Further, Mr Bradley wrongly assumed that there was no time pressure in relation to the merger.
13. Now Mr Lewin disagreed with Mr Bradley. His evidence was that the directors were entitled to rely upon the HSF letter and the ASX response and written legal advice was not required.
14. Further, under cross-examination Mr Lewin gave the following evidence: MR WALLER: Do you accept that directors of a public company - of a publicly listed company have an obligation to satisfy themselves whether listing rules apply? MR LEWIN: Yes, I do, on the proviso that the listing rules can be quite technical and so legal advice is important to that decision that the directors make. Q: Yes. And do you accept that, in seeking legal advice, directors should ensure that the advice is clear and unequivocal so they are left in no doubt as to what the position is in respect of compliance with listing rules? A: I accept that. Q: Yes. Do you accept that that advice, again, ought be provided in writing rather than orally so there can be no doubt as to the content and substance of that advice? A: I think that would be ideal. Q: Yes? A: But depending on the relationship; if the legal - if the legal adviser has done his job and communicates that in the course of the process and it's communicated clearly in a manner, then that should suffice to - but I mean, ideally you would expect that it would be in writing and it would be clear. Q: And providing it in writing ensures that there's a record of it rather than recollections of what may or may not have been said; do you agree? A: I agree.
15. Further, he gave the following evidence in an exchange with me: HIS HONOUR: If a company is instructing its lawyers to write to the ASX to get an indication from the ASX, and the lawyer gave to the company a draft letter and said, "This is my opinion. Do I have instructions to send it?", and that was sent; would that take the place of a formal separate letter of advice? MR LEWIN: Your Honour, it should. Again, if the lawyer's view is - if the lawyer is putting a submission to ASX--- Q: Yes? A: ---where the facts of - where the details of the transaction have been correctly described in the letter to ASX, and that may be the reason why there might be some to and fro between the lawyer and the client to make sure those facts are legally stated, then I would have been happy to rely on that as a chairman of a public company. Again, you know, one appoints lawyers who - for their expertise and their experience in an area and if they believe based on that expertise and experience that they are putting a correct submission to ASX and that's in writing, then that should be sufficient--- Q: Yes. Thanks?--- A: ---in my opinion.
16. Further, Mr Lewin's opinion about seeking shareholder approval even if rule 11.2 did not apply was that if HSF's opinion was that shareholder approval was not required, the directors were entitled to accept that opinion and not seek shareholder approval in view of the costs and time involved.
17. I accept Mr Lewin's opinion which more accords with the other evidence given and the commercial realities of the situation.
18. Let me now turn, at last, to the listing rules and whether shareholder approval was required for the merger.

General principles concerning listing rule 11

1. As at 1 July 2014, listing rule 11 provided: Change to activities Proposed change to nature or scale of activities 11.1 If an entity proposes to make a significant change, either directly or indirectly, to the nature or scale of its activities, it must provide full details to ASX as soon as practicable. It must do so in any event before making the change. The following rules apply in relation to the proposed change. 11.1.1 The entity must give ASX information regarding the change and its effect on future potential earnings, and any information that ASX asks for. 11.1.2 If ASX requires, the entity must get the approval of holders of its ordinary securities and must comply with any requirements of ASX in relation to the notice of meeting. The notice of meeting must include a voting exclusion statement. 11.1.3 If ASX requires, the entity must meet the requirements in chapters 1 and 2 as if the entity were applying for admission to the official list. Change involving main undertaking 11.2 If the significant change involves the entity disposing of its main undertaking, the entity must get the approval of holders of its ordinary securities and must comply with any requirements of ASX in relation to the notice of meeting. The notice of meeting must include a voting exclusion statement. The entity must not enter into an agreement to dispose of its main undertaking unless the agreement is conditional on the entity getting that approval. Rules 11.1.1 and 11.1.3 apply. …
2. Now before dealing with rule 11.2 in detail I should say something about the other rules.
3. During the relevant period, listing rule 7 provided a set of requirements for listed entities regarding changes to their capital structure, either by issuing securities or reorganising existing capital, including that a listed entity could not issue in excess of 15 percent of capital without the approval of shareholders.
4. During the relevant period, listing rule 10.1 provided: Approval required for certain acquisitions or disposals 10.1 An entity (in the case of a trust, the responsible entity) must ensure that neither it, nor any of its child entities, acquires a substantial asset from, or disposes of a substantial asset to, any of the following persons without the approval of the holders of the entity's ordinary securities: 10.1.1 a related party of the entity. 10.1.2 a child entity of the entity. 10.1.3 a substantial holder in the entity, if the person and the person's associates have a relevant interest, or had a relevant interest at any time in the 6 months before the transaction, in at least 10% of the total votes attached to the voting securities in the entity. 10.1.4 an associate of a person referred to in rules 10.1.1 to 10.1.3. 10.1.5 a person whose relationship to the entity or a person referred to in rules 10.1.1 to 10.1.4 is such that, in ASX's opinion, the transaction should be approved by security holders.
5. The expression "main undertaking" is not defined in the listing rules. However, guidance can be obtained from listing rule 19.12 and the definition of "undertaking" which includes "assets and businesses" and GN 12 which notes that "main undertaking" is synonymous with "main business activity". Clearly, the "main undertaking" is to be ascertained objectively and by reference to the subject matter of the transaction viewed in context.
6. Now in terms of the question of "dispose" or "disposing", listing rule 19.12 as it then was stipulated: to dispose or agree to dispose directly or through another person by any means, including the following:

• Granting or exercising an option.
• Using an asset as collateral.
• Decreasing an economic interest.
• Disposing of part of an asset.

1. PAC says that the obligation to comply with the listing rules derives from both their contractual nature and the Act; see s 793C and s 1101B(1).
2. Section 793C provides: (1) If a person who is under an obligation to comply with or enforce any of a licensed market's operating rules fails to meet that obligation, an application to the Court may be made by: (a) ASIC; or (b) the licensee; or (c) the operator of a clearing and settlement facility with which the licensee has clearing and settlement arrangements; or (d) a person aggrieved by the failure. (2) After giving an opportunity to be heard to the applicant and the person against whom the order is sought, the Court may make an order giving directions to: (a) the person against whom the order is sought; or (b) if that person is a body corporate (other than a notified foreign passport fund) - the directors of the body corporate; about compliance with, or enforcement of, the operating rules. (3) For the purposes of this section, a body corporate (other than a notified foreign passport fund) that is, with its agreement, consent or acquiescence, included in the official list of a licensed market, or an associate of such a body corporate, is taken to be under an obligation to comply with the operating rules of that market to the extent to which those rules purport to apply to the body corporate or associate. (4) For the purposes of this section, if a disclosing entity that is an undertaking to which interests in a registered scheme relate is, with the responsible entity's agreement, consent or acquiescence, included in the official list of a licensed market, the responsible entity, or an associate of the responsible entity, is taken to be under an obligation to comply with the operating rules of that market to the extent to which those rules purport to apply to the responsible entity or associate. … (5) For the purposes of this section, if a body corporate fails to comply with or enforce provisions of the operating rules of a licensed market, a person who holds financial products of the body corporate that are able to be traded on the market is taken to be a person aggrieved by the failure. (6) There may be other circumstances in which a person may be aggrieved by a failure for the purposes of this section.
3. Section 1101B(1) provides: 1101B Power of Court to make certain orders Court's power to make orders in relation to certain contraventions (1) The Court may make such order, or orders, as it thinks fit if: (a) on the application of ASIC, it appears to the Court that a person: (i) has contravened a provision of this Chapter, or any other law relating to dealing in financial products or providing financial services; or (ii) has contravened a condition of an Australian market licence, Australian CS facility licence, Australian derivative trade repository licence or Australian financial services licence; or (iii) has contravened a provision of the operating rules, or the compensation rules (if any), of a licensed market; or (v) has contravened a condition on an exemption from the requirement to hold an Australian market licence or an Australian CS facility licence; or (vi) is about to do an act with respect to dealing in financial products or providing a financial service that, if done, would be such a contravention; or (aa) on the application of ASIC or the Reserve Bank or both, it appears to the Court that a person has contravened a provision of the operating rules of a licensed CS facility; or (b) on the application of a market licensee, it appears to the Court that a person has contravened the operating rules, or the compensation rules (if any), of a licensed market operated by the licensee; or (c) on the application of a CS facility licensee, it appears to the Court that a person has contravened a provision of the operating rules of a licensed CS facility operated by the licensee; or (d) on the application of a person aggrieved by an alleged contravention by another person of subsection 798H(1) (complying with market integrity rules) or 981M(1) (complying with client money reporting rules) or a provision of the operating rules, or the compensation rules (if any), of a licensed market, or subsection 908CF(1) (complying with rules about financial benchmarks), it appears to the Court that: (i) the other person did contravene the provision; and (ii) the applicant is aggrieved by the contravention. However, the Court can only make such an order if the Court is satisfied that the order would not unfairly prejudice any person.

Construction of the rules

1. There is little doubt that the rules should be read in a flexible and commercial fashion, rather than in an inflexible literal fashion. Sclerotic textualism is to be eschewed. The rules are a commercial instrument addressed to commercial players operating in a commercial market.
2. The principles on which the rules are based, found in the "Introduction" to the rules and incorporated as part of them by rule 19.1, relevantly embrace the interests of maintenance of investor protection.
3. The Court is required to interpret the rules in accordance with rule 19.2, which provides: An entity must comply with the listing rules as interpreted:

• in accordance with their spirit, intention and purpose;
• by looking beyond form and substance; and
• in a way that best promotes the principles on which the listing rules are based.

1. When construing and applying a rule a court may have regard to the GNs published by the ASX about that rule as I discussed in TPT Patrol Pty Ltd v Myer Holdings Ltd (2019) 293 FCR 29 at [1262], [1272] to [1284] and [1308] to [1314]. Although the ASX's opinion is not determinative, nevertheless the ASX's opinion about the application of the rules is influential.

The structure of rule 11 and the ASX's role and powers under rule 11 and related rules

1. Rule 11.1 applies "If an entity proposes to make a significant change, either directly or indirectly, to the nature or scale of its activities". If so, "notification" to the ASX before making the change is compulsory under rule 11.1. The notification must contain "full details" and such other information the ASX asks for (rule 11.1.1).
2. Rule 11.1.2 gives the ASX a discretion. It may require security holder approval to be obtained in accordance with rule 14, even if there is doubt about whether rule 11.1 is engaged. Rule 14.1 and GN 12 require notice to be given, with sufficient information to enable security holders to decide how to vote, such information to be in the notice or an explanatory memorandum. Because of the subject matter of rule 11, the provision of sufficient information ordinarily entails an independent expert's report about the consideration being given for the undertaking, but not necessarily.
3. The application of rule 11.2 to a particular transaction is conditional on rule 11.1 first applying. The structure of rule 11 is that a significant change requires notification to the ASX but a particular type of significant change, say the disposal of the main undertaking, requires shareholder approval.
4. GN 12 makes clear that it is the ASX's preference that an entity seeks the ASX's in-principle advice about whether rule 11.2 applies to a proposed transaction. Such advice will give the entity a degree of certainty about the ASX's position and the ASX's advice is to be referred to in the entity's announcement to the ASX when the transaction proceeds.
5. Now as I have indicated, rule 11.2 is not engaged unless rule 11.1 is first engaged. Further, the fact that rule 11.2 is a subset of rule 11.1 explains why rule 11.1 was the primary focus of HSF's submission in the HSF letter.
6. There is no definition of the words "significant change", "nature", "scale" or "activities" in rule 19. As for "activities", in context it means "business activities", as opposed to community activities.
7. The definition of "nature" can be taken to refer to character, kind or sort. As GN 12 explains, the ASX definition of "nature" looks for a change "in the character of an entity's business activities", or, in the case of an entity which has a clearly identifiable main undertaking, "in the character of its main undertaking".
8. The ASX's approach to the "nature" limb of rule 11.1 is demonstrated by the examples which the ASX gives. So, where an entity's main business activity is manufacturing consumer goods, a change to mining exploration is a change in nature, but a change in the type of consumer goods manufactured is not, because the main undertaking remains manufacturing of consumer goods. And where an entity's main business activity is exploring for minerals, a change to exploring for oil and gas is a change in nature, but a change of the type of mineral explored for or the exploration tenements is not; the main undertaking remains mineral exploration.
9. The definition of "scale" can be taken to mean a certain relative or proportionate size or extent. GN 12 looks for a "change (upwards or downwards) to the size of an entity's business operations".
10. With respect to "significant change", "significant" can be taken to mean of consequence, and the noun "change" means variation, alteration, deviation or transformation.
11. The ASX considers that a "significant change" means a "major change" or a "substantial or sizeable change".
12. As for rule 11.2, rule 19.12 defines "undertaking" to include "assets or businesses", but there is no definition of "main undertaking".
13. In Australian Securities Commission v Cracow Resources Ltd, unreported, NSWSC, 12 August 1993 BC9305041 Windeyer J dealt with listing rule 3S(2), the predecessor to rule 11.2. Windeyer J answered the question whether "main undertaking" meant "main asset" or "main investment" in the negative. He held that "undertaking" meant "business of the company".
14. Windeyer J gave examples of transactions which did not amount to disposals of a main undertaking. First, the main asset of a bus company may be its buses, but its main undertaking is the operation of a bus company. So, changing the mode of operation by selling and leasing back its buses would not be a disposal of its main undertaking. Second, a change in business direction that resulted in a stockbroker selling its mortgage broking business but continuing stockbroking would not amount to the disposal of the main undertaking.
15. Now on the evidence before him, Windeyer J decided that the company's undertaking was investing in mining enterprises. In so deciding, he had regard to the company's business plan as disclosed in the annual reports, which was to create a more broadly based mining enterprise, not just to invest in shares. Now with that identification of the undertaking, and although historically the company's main assets were shares in mining companies and loans to those companies, a change from indirect investments (shares) to direct investment (mining tenements) was not a change to the company's undertaking.
16. In summary, it is sufficient to say that I have construed "main undertaking" as meaning main business activity, but not just the main asset or main investment. This approach also conforms to GN 12.
17. Now the word "dispose" is defined in rule 19.12 but the definition is largely circular. The meaning of "dispose of" is to make over or part with property. The words carry with them a sense of permanent alienation, and that is how they should be applied; see for example Expectation Pty Ltd v Pinnacle VRB Ltd [2001] WASC 144 at [57] to [60] per Murray J.
18. Moreover, the transaction must be assessed as a matter substance rather than form and in a way that best promotes the principles on which the rules are based. If the "nature" of the entity's main undertaking will remain the same after the disposal as it was before, then the transaction is not a "disposal" irrespective of any change in the "scale" of that undertaking.

Control of a company

1. Now before proceeding further I should say something on the question of control as PAC has raised the point.
2. The concept of control of an entity is concerned with the ability to determine the outcome of decisions of the entity. In the context of a company, this ordinarily means the ability to carry a resolution by majority at the general meeting, and thus to determine the composition of the board of directors.
3. In Hancock v Rinehart [2015] NSWSC 646, Barrett J said (at [152] and [153]): The concept of "control" of an entity is concerned with the ability to determine the outcome of decisions of the entity … In the context of a company, this ordinarily means the ability to carry a resolution by majority at the general meeting - and thus to determine the composition of the board of directors … At an earlier stage of the present litigation … I said that "control" normally means the ability to control the board of directors through a majority of the general meeting… Control is concerned with decision-making, rather than proprietorship, and control, like ownership, can be indirect: there are circumstances in which those who have the ability to carry a resolution may become bound to act on the direction of another (for example, a mortgagee). The "control" requirement is directed to the ultimate power to decide how an entity acts, as distinct from beneficial ownership, and also as distinct from the delegated power of directors or officers. Although typically those who wholly own a company will control it, that is not necessarily so: it is not unknown for those entitled to exercise voting power to become bound or accustomed to exercise their voting rights in accordance with the direction of another … In such a case, that other person will "control" the company if he or she has a sufficient accumulation, directly or indirectly, of voting power to carry the general meeting. …
4. Control is concerned with decision-making, rather than proprietorship. Any control requirement is directed to the ultimate power to decide how an entity acts. Section 50AA of the Act reflects these concepts, but only for the purposes of the Act. Hence the focus there is on the ability to decide what an entity's financial and operating policies are.
5. In the context of a trust, control is a more difficult concept. By analogy with the position that a company is controlled by those who have the ability to determine the composition of the board of directors through a general meeting, so may a trust be controlled not necessarily by those who have its day-to-day management (the trustee), but by those who have the ability to control the trustee through the power of removal and replacement (the appointor). But at least where there is no appointor, then it is generally the trustee who can decide how the trust will act, and thus controls the trust.

PAC's contentions

1. Now the directors contend that as a matter of construction, the application of rule 11.2 to a particular transaction is conditional on rule 11.1 being engaged first. Relatedly, the directors contend that the fact that rule 11.2 is a "subset" of rule 11.1 explains why rule 11.1 was the primary focus of HSF's submission in the HSF letter.
2. But PAC disagrees with this position and makes the following points.
3. First, rules 11.1 and 11.2 do not operate in the manner contended for by the directors. It is not the case, as a matter of construction, that rule 11.1 has to be enlivened before one passes through a gateway to rule 11.2. Rather, rule 11.1 addresses a number of things companies must do whenever proposing anything which constitutes a significant change to the nature or scale of its activities, including information which must be supplied to the ASX.
4. Second, rule 11.2 provides in addition that wherever a "significant change" also involves disposal of the company's main undertaking, the approval of shareholders is required.
5. PAC says that here, rule 11.1 was clearly engaged. A significant change is a "major change". PAC says that this merger cannot be described as anything other than a major change.
6. Further, PAC says that the rules are not required to be interpreted in any technical way, but rather by focusing on the substance rather than form and by adopting an approach which best promotes the principles upon which the rules are based.
7. PAC says that the purpose of rule 11.2 would be frustrated if an overly narrow approach is adopted to a consideration of what constitutes the disposal of the "main undertaking" of a company.
8. PAC accepts that rule 19.12 does not define "main undertaking", but makes two points. First, rule 19.12 provides that "undertaking" includes the "assets or businesses". Second, rule 19.12 provides that an entity "disposes" of its main undertaking if it: [Disposes] or agree[s] to dispose directly or through another person by any means, including the following.

• Granting or exercising an option.
• Using an asset as collateral.
• Decreasing an economic interest.
• Disposing of part of an asset.

1. Read with rule 19.12, PAC says that rule 11.2 clearly means that there is a disposal of a company's main undertaking when either a company decreases its economic interest in the company's assets or business or where a company disposes of part of an asset.
2. In the present case, PAC says that both limbs of "dispose" are engaged.
3. In respect of the first limb being a "decrease in economic interest", it is said that PAC decreased its economic interest in the company's assets or businesses when it entered into the merger.
4. It is said that the allocation under the unitholders deed resulted in a decrease in PAC's economic interest in its main undertaking once the merger transaction was consummated.
5. The total economic value that PAC held in the Aurora Trust, taking into account the interests held by Northern Lights as a Class B and Class B-1 unit holder and the allocation of the redeemable preference units being the XRPUs and YRPUs to Northern Lights and BNP Paribas, constituted a decrease in economic interest with respect to PAC's boutiques, when compared with PAC's position prior to the merger where it held direct interests in all of its boutiques.
6. Further, in respect of the second limb being a "disposal of part of an asset", it is said that the merger resulted in PAC disposing of (at least) part of an asset in the sense that, as part of the transaction, PAC transferred all of its interests in the PAC boutiques to the Aurora Trust in exchange for approximately 61 per cent of the units in the Aurora Trust.
7. Further, PAC says that it divested itself of its significant investment in RARE which contributed approximately eighty five percent of PAC's EBITDA and sixty per cent of its portfolio value. The merger's viability then became heavily dependent on Seizert, Aether and WHV.
8. Further, PAC says that prior to the merger, it held its various interests in boutiques as direct assets, rather than indirectly post-merger. And it says that it was exposed to risk from Northern Lights' boutiques' performance post-merger.
9. Further, PAC says that its main business activity prior to the merger was taking minority interests in boutiques. It is said that this involved PAC exercising control of the decision-making process in making those investments.
10. But it is said that after the merger, it was instead the responsibility of the investment committee to bring all investment decisions to the Aurora trustee board. It is said that those decisions about what investments ought to be made was no longer solely within the control of PAC board members. It is said that it became a shared undertaking required to be undertaken jointly by PAC and Northern Lights through the Aurora Trust, by reason of the constitution of the investment committee under the unitholders deed, with Mr Carver chairing the committee and it being responsible for bringing all investment opportunities for the Aurora Trust to the board for final approval.
11. PAC says that this was a significant change, and one which represented a disposal of PAC's main undertaking.
12. PAC says that as a result of these disposals, that is, the decrease in economic interest and disposal of part of an asset of PAC's main undertaking, listing rule 11.2 applied.
13. It is said that the failure of the directors to obtain shareholder approval prior to the merger was a contravention of that rule.

Analysis

1. I do not agree with PAC's position. Shareholder approval was not required.
2. Before the merger, PAC's main business activity was investing in fund managers. PAC's main business activity was buying, holding and disposing of minority interests in boutiques. The provision of PAC services to boutiques was an ancillary undertaking. Further, PAC did not take capital from investors which PAC managed on their behalf. PAC was not itself a fund manager.
3. Now after the merger, PAC continued investing in boutiques. PAC invested in interests in boutiques whether to be held directly by PAC or through a company like Pinnacle. In this regard the trustee of the Aurora Trust was in the same position as Pinnacle.
4. Moreover, as the respondents correctly point out, one should not elevate form over substance. One should have regard to the spirit of the listing rules as emphasised in GN 12. In this regard, example 2 in GN 12 is given in the following terms: Example 2: entity B is a mining exploration entity that has succeeded in proving up ore reserves on one of its tenements and now wants to develop and operate a mine on the tenement. Rather than seek to raise capital to do this itself, it proposes to joint venture the development with an established mining producing entity and to dispose of a 75% undivided interest in the tenement to the other entity in return for the other entity providing capital and know-how to develop the mine. This is not a disposal of B's main undertaking. B's main undertaking after the disposal (mining exploration and production) is the same as its main undertaking before the disposal, albeit it will be conducting that undertaking as a 25% joint venturer rather than as a 100% owner.
5. By analogy, PAC's main undertaking was the same after the merger as it was before. It was buying, holding and disposing of interests in boutiques, both Australian and foreign. That is what the HSF letter submitted and what the ASX letter accepted.
6. PAC's entry into the merger did not constitute a disposal of its main undertaking.
7. Further, the question of the control of the Aurora Trust by the control of the Aurora trustee is not directly relevant to the question whether there had been a disposal. PAC would still be investing in boutiques even if the Aurora trustee was completely independent of PAC.
8. But in any event, PAC controlled the Aurora trustee under the terms of the merger.
9. The three significant documents governing the Aurora trustee were the unitholders deed, the trust deed for the Aurora Trust and the Aurora trustee's constitution.
10. Under the unitholders deed, at completion the board of the Aurora trustee was to have 9 directors, 5 appointed by PAC and 4 appointed by Northern Lights, with Mr Fitzpatrick being the first chairman. Each director had one vote unless another director was absent, in which case the 5:4 ratio was maintained by giving directors present additional voting rights.
11. All resolutions were to be passed by a simple majority unless special board approval was required. This was a resolution that had to be passed by a majority of both PAC's and Northern Lights' representative directors.
12. The Aurora trustee's usual business decisions were listed in a schedule and included investing in a boutique, capital expenditure and other matters.
13. The unitholders deed provided that those usual business decisions and others not specifically mentioned in the relevant schedule required approval by a simple majority of the Aurora trustee's board, which was the primary organ for management of the Aurora Trust.
14. PAC has omitted reference to provisions of the unitholders deed which dealt with usual business decisions being dealt with by a simple majority of the trustee's board, with PAC having 5 out of the 9 directors.
15. Now there were certain actions specified in the unitholders deed and the trust deed that required special board approval or the approval of unitholders.
16. Those actions were mainly concerned with appointments to the investment committee, dealings in unit holdings and deferring unitholders' entitlements. As the directors have rightly characterised, those matters are explicable by their ability to affect unitholders' rights inter se.
17. Now the Aurora trustee had committees including an executive committee responsible for bringing all investment opportunities to the board for final approval. The board, which PAC controlled by 5 votes to 4, had the final say.
18. Now PAC says that Northern Lights was managing investments in the Aurora Trust and making investment decisions. But this is simplistic, does not have regard to the structure that I have just mentioned and confuses control with management. Management could have been outsourced to any adviser without PAC losing control of the trustee due to its 5 to 4 voting power.
19. Further, the unitholders deed prevailed over the trust deed to the extent of any inconsistency. But in any event nothing in the trust deed required special board approval other than resolutions altering rights attached to certain units.
20. Further, the constitution of the Aurora trustee subordinated the powers of the trustee's organs to both the unitholders deed and the trust deed.
21. In summary, and as structured by the constituent documents, the Aurora trustee set the financial and operational policies for the Aurora Trust, with PAC nominating 5 out of 9 of the directors of the trustee.
22. Now PAC has relied on Ms Batoon's memorandum. But this only represented her opinion. In the context of the constituent documents, her view and the memorandum carried little weight.
23. Accordingly, at all relevant times, PAC controlled the Aurora trustee.
24. In summary, the merger did not attract the operation of listing rule 11.2. and there was no breach of that rule.
25. These conclusions make it unnecessary for me to address the ultra vires point. But for the moment, let it be assumed that shareholder approval was required under listing rule 11.2.

The ultra vires question

1. PAC also alleges that the approval of the merger transaction by the directors was ultra vires the PAC constitution in that it did not comply with clauses 1.4 and 7.6.
2. Clause 1.4 of the PAC constitution relevantly provided: If the company is admitted to the official list of the ASX, the following applies: (a) Nothing contained in this constitution prevents an act being done that the Listing Rules require to be done; (b) If the Listing Rules require an act to be done or not to be done, authority is given for that act to be done or not to be done (as the case may be); …
3. Now immediately one can see that this clause is facultative rather than prohibitive.
4. Clause 7.6 of the PAC constitution relevantly provided: … (a) The directors are responsible for managing the business of the company. (b) The directors may exercise to the exclusion of the company in general meeting all the powers of the company which are not required, by the Corporations Law or by this constitution, to be exercised by the company in general meeting. …
5. PAC says that on a proper construction of clauses 1.4 and 1.7 of the PAC constitution, the directors did not have the power to approve a merger transaction in circumstances which were not in compliance with listing rule 11.2.
6. PAC says that its constitution is not to be read so narrowly as to empower directors to perform acts which are contrary to the listing rules. Rather, clause 1.4(b), properly construed, empowers directors only to do that which the listing rules require, and conversely confers no power on the directors to do that which is "not to be done" under the listing rules.
7. Now to the extent that adopting this approach to construction involves any element of implication, the circumstances are very different from those which I discussed in Donaldson v Natural Springs Australia Ltd [2015] FCA 498 at [148] to [164] in the following terms: There is little doubt (Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 (Lion Nathan) at [28], [29], [46] to [59], [97] to [102], [122] to [124], [232], [233], [238], [244], [251] to [257] and Oil Basins Ltd v Bass Strait Oil Company (2012) 297 ALR 261; [2012] FCA 1122 at [32]) that:

• the Constitution should be read and construed as a whole;
• general principles of construction of commercial contracts (see generally Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35]) are applicable to the Constitution; more particularly, the commerciality of a particular construction may tip the balance in its favour where it is implausible that the parties could be taken to have intended otherwise;
• the Constitution should not be construed narrowly or pedantically;
• words used should usually be given their natural and ordinary meaning;
• a construction of a provision which gives a congruent operation of the various applicable provisions of the Constitution should be preferred to another construction which does not; and
• extrinsic evidence may be adduced as an aid to construction, subject to a qualification that I will address in a moment, but only in the limited manner envisaged in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22] and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [35] to [41]. Moreover, a purposive interpretation, rather than a creative interpretation, of the Constitution should be given, so long as it is understood that this is an objective exercise bounded by such principles. Notwithstanding the generality of the principles just expressed, in construing a Constitution "ordinarily primacy must be given to the objective intention discernible from the language in which the [C]onstitution is expressed rather than to other features of the surrounding matrix of fact in which its provisions may have been made" (HNA Irish Nominee Ltd v Kinghorn (2010) 78 ACSR 553; [2010] FCAFC 57 at [42]). This is because the range of surrounding circumstances available as aids to construction is a more unstable (or at least changeable) foundation than that available for construing contracts generally. Constitutions and replaceable rules can be amended at different times and in different circumstances. Further, the members are likely to change. Further, and more generally, a Constitution serves a public purpose; it is not merely an embodiment of a private bargain. Surrounding circumstances can be taken into account in construing the provisions of a Constitution, but restraint needs to be exercised (Lion Nathan at [55], [56], [59], [63], [102], [124], [226], [236], [254], [255] and [259]). … Perhaps recognising his difficulty in relying upon any breach of cll 51 and 53, Donaldson also put a case based upon an implied term of the Constitution. It was pleaded in the second further amended statement of claim at [46] in the following terms: Further or alternatively, it was an implied term of the Constitution being a contract between Donaldson and each other member, that each of Zink, Rose and Prime Log was required not to use their position of influence over NSA's board of directors or officers to cause or persuade NSA to conduct its affairs in such a way that NSA would be in breach of the Express Terms (Implied Term). This implied term in fact was said to be substantiated by the matters in [47] of the second further amended statement of claim which read … I must say that I found this assertion of an implied term confected. The implication of a term in fact (as distinct from a term implied in law or a term implied from custom or usage) is an exercise in interpretation or construction, although not an orthodox one (Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 (Belize) at [18] to [22]; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (Codelfa Construction) at 345; Commonwealth Bank of Australia v Barker (2014) 312 ALR 356; [2014] HCA 32 at [22]). Whether one is interpreting the express terms or identifying and then filling any gaps between the express terms, one is seeking through an objective exercise to identify the presumed intention of the parties. After all, one is seeking to give effect to the objectively ascertained meaning or intention of the parties. The output of that exercise may, in one context, result in a particular construction of an express term. In another context, it may result in the implication of a term to fill such a space. Spaces inevitably arise, if only because of Wittgenstein's "language games" or because of the limitations on human foresight or the drafter's ingenuity (Hooley R, "Implied Terms after Belize Telecom" (2014) 73 Camb LJ 315 at 327). But to accept this over-arching theme does not greatly assist me. I must apply BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 as tailored to the context of construing a particular type of corporate instrument, namely, the Constitution. Indeed, this required multi-conditioned approach (although various "conditions" overlap) to determine whether there should be an implication of a term in fact demonstrates that construction alone, in the sense of determining linguistic meaning, is neither sufficient nor a workable solution to determining the implication of a term in fact (Courtney W and Carter J, "Implied Terms: What is the Role of Construction? (2014) 31 Journal of Contract Law 151 at 166 to 167). It is also necessary to proceed with an additional degree of caution in implying a term into the Constitution of a company (Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693; Stanham v National Trust of Australia (1989) 15 ACLR 87 and Lion Nathan at [239] to [243]). It is not merely a contract between the contracting parties negotiated between them prior to inception. Those bound by the Constitution may have only become bound thereafter. Moreover, the model of consensual negotiation of its terms has little, if any, role to play. Further, the Constitution has separate legal significance in terms of a constituent document given statutory recognition under s 140 of the Act. It serves, in one sense, a public purpose transcending merely an instrument containing the rights and obligations of the negotiating parties protecting their own selfish and private interests. The application of each condition of BP Refinery must be seen and applied in that light. No condition of BP Refinery ought not be contextualised to account for the circumstances of an instrument not merely embodying a private bargain. Donaldson referred to Belize. But as Lord Hoffmann observed at [16], one simply does not introduce terms to make the Constitution fairer or more reasonable. Absent rectification, the Court has no power as such to improve upon the instrument which it is called upon to construe. Let it be accepted that Donaldson's implied term in fact was required to satisfy the five conditions identified in BP Refinery at 283 (see also Codelfa Construction at 346 to 347), viz: [F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract. In my view, this implied term did not satisfy the second, third or fourth BP conditions. In terms of the necessity to give business efficacy, as The Moorcock (1889) 14 PD 64 at 68 made clear, one is seeking to identify "an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have". It must be "clearly necessary" in the context of the terms and circumstances of the particular contract (Heimann v Commonwealth of Australia (1938) 38 SR (NSW) 691 at 695); a broader context of necessity is applied when dealing with terms implied in or by law. Moreover, this "business efficacy" condition overlaps with the "so obvious" condition. As was said in Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 at 609: A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties, "What will happen in such a case", they would both have replied, "Of course, so and so will happen; we did not trouble to say that; it is too clear". ...

1. In that proceeding, a particular implied term was contended for and it fell short of the test in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283.
2. In contrast, here the construction of clause 1.4 urged upon me by PAC is said to involve no more than reading the clause in a manner which will best promote its meaning and purpose and render the PAC constitution efficacious. This is urged upon me as a conventional mode of interpretation, and does not involve asking me to find an implied term. PAC's construction of the constitution reads its provisions in a manner which means that directors are required not to take steps which will put the company in non-compliance with the listing rules.
3. PAC says that by failing to comply with listing rule 11.2, the directors acted in excess of the powers conferred on them by PAC's constitution.
4. As a result, it is said that the transaction documents execution resolution was made and the circular resolution was signed ultra vires.
5. PAC says that the directors did not have the power to approve the merger pursuant to clauses 1.4 and 7.6 of PAC's constitution and acted ultra vires.
6. And it also follows that the act of approving the merger cannot be validated pursuant to s 125(1) of the Act because it is not "an exercise of a power by the company" so as to fall within that section.
7. As Austin J found in Hillig v Darkinjung Pty Ltd (2006) 57 ACSR 733 at [24] and [25], s 125 of the Act does not save an act that does not comply with the provisions of a company's constitution directed to the powers of directors. He said at [24] and [25]: Professor HAJ Ford summarised the effect of [Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279] (Ford's Principles of Corporations Law, LexisNexis, looseleaf, [12.130]): A provision directed only to powers of directors, the members in general meeting or any other person acting for the company could not be the express restriction or prohibition contemplated by s 125(1). I respectfully agree. If it were otherwise, some other sections of the Corporations Act generally regarded as expressing important principles of company law would be rendered otiose - for example, s 201M (which provides an act done by a director is effective even if the director's appointment did not comply with the company's constitution), s 129(1) (which entitles a person to assume that a company's constitution has been complied with) and s 129(2) (which entitles a person to assume that anyone who appears from the Australian Securities and Investments Commission's records to be a director or company secretary has been duly appointed). A large body of company law dealing with the consequences of a company organ, such as the board of directors or the company in general meeting, failing to comply with constitutional requirements for decision-making, and the potential scope for the curative application of s 1322, would have to be revised to cater for the application of s 125(1). If s 125(1) were applied in a case of non-compliance with requirements for the amendment of the company's constitution, the result would be at odds with s 136(3), which permits the company's constitution to provide that a special resolution to modify or repeal the constitution does not have any effect unless a further requirement specified in the constitution has been complied with. It is improbable that the legislature intended s 125(1) to affect these parts of company law, and clear from the explanatory memorandum to the 1983 Bill that the drafters had no such intention.

Analysis

1. Now it is trite that a corporation has the powers given to it by the Act or its constitution.
2. Section 124 invested PAC with the powers which a natural person has. Section 124 provides: (1) A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to: (a) issue and cancel shares in the company; (b) issue debentures (despite any rule of law or equity to the contrary, this power includes a power to issue debentures that are irredeemable, redeemable only if a contingency, however remote, occurs, or redeemable only at the end of a period, however long); (c) grant options over unissued shares in the company; (d) distribute any of the company's property among the members, in kind or otherwise; (e) grant a security interest in uncalled capital; (f) grant a circulating security interest over the company's property; (g) arrange for the company to be registered or recognised as a body corporate in any place outside this jurisdiction; (h) do anything that it is authorised to do by any other law (including a law of a foreign country). A company limited by guarantee does not have the power to issue shares. (2) A company's legal capacity to do something is not affected by the fact that the company's interests are not, or would not be, served by doing it. (3) For the avoidance of doubt, this section does not: (a) authorise a company to do an act that is prohibited by a law of a State or Territory; or (b) give a company a right that a law of a State or Territory denies to the company. (4) Subsection (1) does not prevent a mutual entity that is a company limited by guarantee issuing MCIs.
3. Section 125 provides: (1) If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company's exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company's constitution. (2) If a company has a constitution, it may set out the company's objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company's constitution.
4. Section 140 gives a constitution contractual effect as between the corporation, its officers and its members. It provides: (1) A company's constitution (if any) and any replaceable rules that apply to the company have effect as a contract: (a) between the company and each member; and (b) between the company and each director and company secretary; and (c) between a member and each other member; under which each person agrees to observe and perform the constitution and rules so far as they apply to that person. (2) Unless a member of a company agrees in writing to be bound, they are not bound by a modification of the constitution made after the date on which they became a member so far as the modification: (a) requires the member to take up additional shares; or (b) increases the member's liability to contribute to the share capital of, or otherwise to pay money to, the company; or (c) imposes or increases restrictions on the right to transfer the shares already held by the member, unless the modification is made: (i) in connection with the company's change from a public company to a proprietary company under Part 2B.7; or (ii) to insert proportional takeover approval provisions into the company's constitution.
5. Section 125 permits a constitution to impose restrictions or prohibitions on the exercise of the corporation's powers, but it also provides that the exercise of a power contrary to a restriction or prohibition is not for that reason alone invalid. Now although s 125 abolishes the ultra vires doctrine as it applies vis-à-vis third parties, s 125 does not affect the consequences of an excess of power by one of the organs of the corporation.
6. Now the rules are a contract between the listed entity and the ASX. And it may be noted that s 793C(1) is engaged if a person "who is under an obligation to comply with" the rules fails to comply and s 793C(3) deems an entity whose securities are listed on the ASX to be such a person.
7. But unless a constitution requires the corporation to comply with the rules, a breach of the rules is not a breach of the constitution.
8. Now in this regard, constitutions take many forms. Clauses such as clauses 1.4 and 7.6 of PAC's constitution are common in constitutions, but on occasions the directors' powers are expressed to be subject not only to the Act, but also to the listing rules.
9. The principles concerning the construction of a constitution are contractual and are well known; see Donaldson v Natural Springs Australia Ltd which I have already set out. I also discussed this question in Aveo Group Ltd v State Street Australia Ltd [2015] FCA 1019 at [58] to [61].
10. The constitution of a company constitutes a contract between the members of the company inter se, between the company and its members and between the company and its officers (s 140(1)).
11. Now I reject PAC's attempt to make clauses 1.4 or 7.6 do the work of what is in essence a missing clause.
12. Clause 1.4 is facultative. It ensures that PAC's constitution does not prevent PAC from complying with the rules and gives PAC power to do what the rules require to be done or not done. Clause 1.4 does not impose an obligation on PAC or any of its organs to do anything. For this reason, clause 1.4 cannot be "contravened" as PAC alleges.
13. Let me turn to clause 7.6.
14. The first restriction on the directors' powers contained in clause 7.6(b) applies where the powers of PAC are "required" by the Act to be exercised by PAC in general meeting.
15. But the only section of the Act identified by PAC is s 793C. But that section does not "require" a listed entity to do anything. Rather, s 793C gives standing to specified persons to seek relief in a court when a rule is not complied with.
16. Further the second restriction in clause 7.6(b) applies where the powers of PAC are "required" by the PAC constitution to be exercised by PAC in general meeting. But there is no clause in the PAC constitution requiring shareholder approval to be obtained under rule 11.2. And as I have said, clause 1.4 is facultative and does not itself require anything.
17. In summary, the failure to obtain shareholder approval could not, and did not, amount to a contravention of clauses 1.4 or 7.6 of the PAC constitution.
18. Now reference was made to Zytan Nominees Pty Ltd v Laverton Gold NL (1988) 1 WAR 227 where a shareholder sought to enjoin a threatened breach of the listing rules by Laverton Gold NL. But the reasons of Malcolm CJ do not refer to an express clause of Laverton's constitution that required it to comply with the rules. Malcolm CJ said (at 232) that "because Zytan is a shareholder of Laverton, Laverton is under a contractual obligation to Zytan to comply with the ASX Listing Rules." Malcolm CJ cited two authorities as support for his proposition, but those cases concerned the contract between the listed company and the ASX, not the contract in the form of a constitution between the listed company and its shareholders.
19. In my view the obligation relied upon by PAC does not exist. And it cannot be an implied term, as the implication of a term into a constitution requires the five conditions in BP Refinery to be satisfied.
20. The putative implied term fails to satisfy at least two of the BP Refinery conditions for the reason that the drafter of the PAC constitution recognised the interrelationship of the rules and s 793C. In that regard, if PAC failed to comply with the rules, s 793C(5) deemed a PAC shareholder to be a "person aggrieved". Consequently, as the respondents correctly pointed out, the implied term is not needed to give business efficacy to PAC's constitution as the latter is effective without it.
21. Further, the drafter of PAC's constitution knew about the rules yet, having included clause 1.4, did not include the implied term as an express term. In such circumstances the implied term is hardly so obvious that it goes without saying.
22. In summary, the merger resolution was not ultra vires even if there had been, contrary to my earlier conclusion, a breach of listing rule 11.

Breach of duty

1. PAC asserts that by failing to seek and obtain the approval of PAC's shareholders to the merger in compliance with listing rule 11.2 or PAC's constitution, the directors breached their duty of care and diligence under s 180(1) and the general law at each of the key decision points following the decision not to obtain shareholder approval, being the 23 July 2014 board meeting and the approval of the circular resolution in November 2014.
2. In this case, PAC says that it was reasonably foreseeable that the directors' acts and omissions referred to above might harm the interests of PAC.
3. Further, PAC says that it cannot be said that the directors took all steps that a reasonable person would take in their position to ensure that the company complied with the Act.
4. Further, PAC says that if shareholder approval had been sought, the evidence is that an independent expert report would have been obtained to independently assess the relative valuations ascribed to Northern Lights' business and to PAC's business in arriving at the allocation of units. Now the cost of such a report may have been a couple of hundred thousand dollars. But PAC says that for a transaction of the scale, size and significance of the proposed merger transaction, that cost would have been appropriate to incur.
5. It is said that this breach of duty by the directors had the effect that the merger was effected without complying with the requirements of listing rule 11.2. This in turn had the effect that none of the procedural requirements which would have attached had shareholder approval been sought were adhered to.
6. PAC says that had the approval of shareholders been sought, then the shortcomings in relation to the valuations with respect to a number of the boutiques, including WHV, and the particular risks associated with any predictions concerning declarations of dividends by WHV would have come to light. And had those matters been revealed, no director exercising reasonable care would have voted in favour of the merger.
7. Further, PAC says that any reasonable consideration of the question whether shareholder approval was required called for receipt of and proper consideration of legal advice on the topic.
8. Further, PAC says that the directors did not obtain legal advice from HSF on the question of whether shareholder approval was required under the listing rules, and on the consequences of not seeking shareholder approval.
9. PAC says that the failure on the part of the directors to exercise reasonable care and diligence in such a manner constituted a contravention of s 180 and a contravention of the directors' duties at general law.

Analysis

1. Now with the exception of PAC's original allegation that shareholder approval should have been sought in any event, this aspect only becomes relevant if shareholder approval was required and PAC's constitution was breached.
2. Now PAC alleges that the directors breached their duties because they made the merger resolutions when there was no written legal advice addressed to the board about the need for shareholder approval with respect to the merger.
3. But was it necessary that there be formal certain written legal advice addressed to the board before making the merger resolutions? And why was reliance on the HSF letter a breach of duty?
4. In my view, what was required was a considered legal opinion. But this was given by the HSF letter which performed two functions. It was a clear expression of HSF's opinion and it was a vehicle to see whether the ASX disagreed with HSF's opinion.
5. And given that the HSF letter represented HSF's opinion and that the letter was given to the directors and understood by them to be HSF's opinion, as I have found, in my view the directors had received written legal advice about the shareholder approval issues.
6. The HSF letter was certainly formal. It was on HSF letterhead and it made important submissions to the ASX. The only difference between the HSF letter and the formal written legal advice which PAC refers to, is that the latter would have been addressed to the board. PAC suggested no other distinction.
7. Mr Lewin gave evidence, which I accept, to the effect that a reasonable director was justified in relying upon the HSF letter and formal written legal advice addressed to the board was not required in the circumstances. Mr Lewin's evidence correctly favoured substance over form. The directors' duties were to see that PAC had obtained legal advice about shareholder approval issues and to follow that advice unless clearly wrong, which they did. They did not have to receive that advice in a letter addressed to them.
8. PAC's criticisms have no substance. Let me address some other matters.
9. First, it is alleged that the directors breached their duties because a director exercising reasonable care and diligence would have ensured compliance with PAC's constitution. Further, PAC said that the non-executive directors failed to ensure that PAC complied with the Act.
10. PAC referred to authorities about directors contravening s 180(1) by causing or failing to prevent the relevant company from breaching the Act.
11. In Mariner Corporation I said (at [444], [446] to [448]): The duty owed under s 180 does not impose a wide-ranging obligation on directors to ensure that the affairs of a company are conducted in accordance with law. It is not to be used as a back-door means for visiting accessorial liability on directors. Further, it is not to be used in a contrived way in an attempt to empower the Court to make a disqualification order under s 206C by the artificial invocation of s 180 (a civil penalty provision), when such a route is not otherwise available directly. As observed in ASIC v Maxwell at [104] and [110] by Brereton J: [104] There are cases in which it will be a contravention of their duties, owed to the company, for directors to authorise or permit the company to commit contraventions of provisions of the Corporations Act. Relevant jeopardy to the interests of the company may be found in the actual or potential exposure of the company to civil penalties or other liability under the Act, and it may no doubt be a breach of a relevant duty for a director to embark on or authorise a course which attracts the risk of that exposure, at least if the risk is clear and the countervailing potential benefits insignificant. But it is a mistake to think that ss 180, 181 and 182 are concerned with any general obligation owed by directors at large to conduct the affairs of the company in accordance with law generally or the Corporations Act in particular; they are not. They are concerned with duties owed to the company … [110] Generally speaking, therefore, ss 180, 181 and 182 do not provide a backdoor method for visiting, on company directors, accessorial civil liability for contraventions of the Corporations Act in respect of which provision is not otherwise made. This is all the moreso since the Corporations Act makes provision for the circumstances in which there is to be accessorial civil liability. Whether there were in this case breaches of the directors' duties - and, in particular, of their duty of care and diligence - depends upon an analysis of whether and to what extent the corporation's interests were jeopardised, and if they were, whether the risks obviously outweighed any potential countervailing benefits, and whether there were reasonable steps which could have been taken to avoid them. (Emphasis added.) … Further, as Austin J observed in ASIC v Rich at [7238]: [Section] 180 does not provide a backdoor method of visiting on company directors a form of accessorial civil liability for contraventions of the Corporations Act for which provision is not otherwise made (ASIC v Maxwell at [110]); the question is whether the directors have breached their statutory duty of care and diligence in exposing their company to contraventions of the law. It is wrong to assert that if a director causes a company to contravene a provision of the Act, then necessarily the director has contravened s 180. No contravention of s 180 would flow from such circumstances unless there was actual damage caused to the company by reason of that other contravention or it was reasonably foreseeable that the relevant conduct might harm the interests of the company, its shareholders and its creditors (if the company was in a precarious financial position) (see ASIC v Maxwell at [99]-[110] and Australian Securities and Investments Commission v Macdonald (No 11) (2009) 230 FLR 1; 256 ALR 199 at [236]).
12. But this part of PAC's case is not maintainable. There has been no breach of the constitution or breach of the Act.
13. Second, it is alleged that the directors breached their duties because a director exercising reasonable care and diligence would have considered whether shareholder approval should be sought and obtained. The unstated premise of the allegations is that the directors did not consider whether shareholder approval should be sought and obtained.
14. But the directors did consider shareholder approval including reading and considering the HSF letter and the ASX letter.
15. PAC's case on this aspect is hopeless.
16. Third, it is alleged that the directors breached their duties because a reasonable director in their position when voting on the merger resolutions would have recognised that the saving of time and money was not a relevant or determinative consideration as to whether the shareholder approval should be obtained.
17. But as the respondents correctly point out, the unstated and false premise in PAC's allegations is that the saving of time and money influenced the directors' decision about shareholder approval.
18. The reality is that the saving of time and money was a consequence of the decision not to seek shareholder approval, not a factor which motivated the decision because the decision was motivated by what HSF had recommended and the ASX's response.
19. Now it is true that each of the directors welcomed the ASX's agreement with HSF's opinion. But the directors' decision not to seek shareholder approval was based upon HSF's advice and the ASX's agreement with that advice, and the saving of time and money was a consequence of the board's decision to follow HSF's advice and the ASX's agreement with that advice, not the basis of the decision.
20. Further, PAC said that not only did the PAC board fail to seek shareholder approval, it was actively avoided by at least Mr McGill.
21. Insofar as Mr McGill was concerned, the allegation of active avoidance was based on the allegation that Mr McGill deliberately sought to avoid the need for shareholder approval by requesting HSF to remove the reference to "joint control" from the HSF letter.
22. But I agree with Mr Christopher Caleo KC for Mr McGill that the evidence demonstrates that far from Mr McGill avoiding seeking shareholder approval, until HSF advised otherwise, Mr McGill thought shareholder approval was required. And after 16 April 2014, HSF was in control of shareholder approval issues, not Mr McGill.
23. Fourth, PAC says that the directors breached their duties because a director exercising reasonable care and diligence would have recognised that rule 11.2 did not provide for the ASX to exercise its discretion to waive a company's compliance with the rule.
24. But the evidence establishes that none of the directors understood that the ASX had waived the requirement for shareholder approval. Rather, having read the HSF letter and the ASX response and what Gresham had said about them, they believed that the ASX shared HSF's view that shareholder approval was not required.
25. Fifth, it is said that the directors failed to make inquiries as to what written legal advice for PAC had been obtained regarding shareholder approval and the assumptions underpinning any such advice.
26. Now with respect to making inquiries regarding the assumptions underpinning any such advice, nothing in the HSF letter appeared substantively incorrect.
27. Further, HSF was advising PAC about legal aspects of the merger and that included drafting or negotiating what turned out to be numerous contracts. The directors trusted that HSF had given its advice on the basis of the current state of the documents and negotiations.
28. Further, the directors were entitled to expect that HSF, who were involved in the legal aspects of the merger right through to settlement, would inform them if any material assumption or instruction changed. They were not so informed.
29. Finally, PAC would and did have control of the Aurora Trust in any event. This particular complaint of PAC goes nowhere.
30. Sixth, at one stage PAC alleged that the directors breached their duties because the directors had failed to reasonably satisfy themselves that PAC would be justified in merging without seeking shareholder approval. And it alleged that shareholder approval was required even if rule 11.2 did not apply.
31. All I need to say at this point is that it was reasonable for the directors not to have sought shareholder approval if rule 11.2 did not apply. This part of PAC's case never had any substance to it.

Business judgment rule

1. Now even if the directors have contravened their duties, they are nevertheless entitled to rely upon the business judgment rule. But PAC contends to the contrary and says that the defence raised by the directors cannot be sustained.
2. First, it says that the business judgment rule is not available in these circumstances, where the purported decision in relation to obtaining shareholder approval was not a decision that related to the "business operations" of PAC. Section 180(3) defines business judgment to mean a judgment "to take or not take action in respect of a matter relevant to the business operations of the corporation".
3. The explanatory memorandum to the Corporate Law Economic Reform Program Bill 1998 (para 6.8) stated: The operation of the business judgment rule will be confined to cases involving decision making about the ordinary business of operations of the company. For example, the decision to undertake a particular kind of business activity promoted in a prospectus would be the kind of business judgment to which the proposed rule may apply. However, compliance (or otherwise) with the prospectus requirements imposed by the Law would not be a decision to which the proposed rule could apply.
4. In Australian Securities and Investments Commission v Fortescue Metals Group Ltd (2011) 190 FCR 364, Keane CJ said (at [197] and [198]): … [T]he decision not to disclose the true effect of the agreements cannot be described as "business judgment" at all. A decision not to make accurate disclosure of the terms of a major contract is not a decision related to the "business operations" of the corporation. Rather it is a decision related to compliance with the requirements of the Act. It is not an intention lightly to be attributed to the legislature that a director of a company might lawfully decide, as a matter of business judgment, that a corporation under his or her direction should not comply with a requirement of the Act. Section 180(3) of the Act defines "business judgment" to mean a judgment "to take or not take action in respect of a matter relevant to the business operations of the corporation". …
5. It follows, so it is said, that any decision not to seek and obtain shareholder approval, which was required under the listing rules and PAC's constitution, was not a decision in respect of a matter relevant to the business operations of PAC. Now assuming that the authorities in this area are not problematic on this aspect, in any event the conclusion concerning PAC and shareholder approval does not follow.
6. Second, and in any event, PAC says that both the documentary and witness evidence at trial demonstrated that the directors did not satisfy the requirements of the business judgment rule defence when approving the merger without shareholder approval, namely, they failed to inform themselves about the subject matter of the judgment and they did not rationally believe that such a decision was in the best interests of the company.
7. But in my view the business judgment rule was satisfied.
8. Section 180(3) requires, first, the identification of the "business operations" of PAC and, second, the identification of the "matter relevant to" them.
9. PAC's business operations were investing in, and providing services to, boutiques. The matter relevant to those operations was whether they should be merged with Northern Lights' counterparts. The merger resolutions were decisions to "take action in respect of" that matter.
10. Fortescue is no impediment to the application of the business judgment rule in the context before me. In that case the board decision was characterized as one not to make disclosure under the continuous disclosure obligation imposed by s 674(2). The Full Court rejected the director's reliance on s 180(2) because a decision not to comply with the Act was not a decision in respect of a matter related to business operations (Fortescue at [197]).
11. But the directors' decisions here are more akin to the decision to make a takeover bid as characterized in Mariner Corporation.
12. Further, PAC does not suggest that the merger resolutions were not made in good faith or that any of the directors had a material personal interest in the decisions to make those resolutions. The evidence demonstrates that the directors saw the transaction as beneficial to PAC and they believed it was in the best interests of PAC, thereby satisfying the requisite test for good faith (Mariner Corporation at [488] and [544]).
13. Further, the directors adequately informed themselves. The decisions about shareholder approval called for legal expertise which they did not have. The HSF letter was advice from a law firm with relevant expertise.
14. Further, the evidence establishes that the directors believed that their decision to make the merger resolutions without seeking shareholder approval was in the best interests of PAC.
15. In my view, all directors are entitled to rely upon the business judgment rule in the present context.

Causation

1. Now the contravention or breach of duty alleged by PAC is voting in favour of the merger resolutions when shareholder approval was required and there was no formal written legal advice given to the board that shareholder approval was not required.
2. But PAC had to establish that but for the contravention or breach the merger would not have occurred. The question to be addressed is the necessarily hypothetical one of what would have happened if the directors had not contravened s 180 or breached their other common law and equitable duties.
3. PAC says that had the directors turned their mind to whether shareholder approval was required and obtained considered legal advice on the question of the application of the rules, the merger either would not have progressed because the transaction documents execution resolution would not have been passed and the circular resolution would not have been signed, or the merger would not have progressed in the absence of an independent valuation of Northern Light's boutiques being obtained.
4. PAC says that had an independent valuation been obtained, the erroneous assumptions underpinning a number of the valuations would have been made known to the board.
5. But in my view, the evidence readily leads to the conclusion that formal written legal advice addressed to the board would have been easily obtained from HSF, and to the same effect that no shareholder approval was required.
6. PAC has always borne the burden of establishing that such advice would have led to an answer that shareholder approval was required. PAC has not discharged that burden.
7. Further, even assuming that the formal written legal advice was that shareholder approval should be obtained because of uncertainty about the legal position, the evidence demonstrates that it would have been sought. And PAC has always borne the burden of establishing that in such circumstances shareholder approval would not have been obtained at an extraordinary general meeting. But PAC has not even attempted to discharge that burden.
8. In summary, PAC has failed to prove that the merger would not have occurred if the asserted contravention(s) or any other breach of duty had not occurred.
9. Let me turn to the question of equitable remedies relevant to the shareholder approval question, although this is all hypothetical given my other findings.

Equitable remedies

1. Now PAC alleges that the acts performed by the directors which it is said were ultra vires the PAC constitution were performed by the directors in breach of their equitable duties. PAC seeks an order that the value of the PAC assets which were dissipated be restored. PAC seeks equitable compensation.
2. Now it is not in doubt that equitable compensation is available for breaches of equitable duties. And the aim of equitable compensation is to restore the innocent party, as nearly as possible, to the position in which he would have been had the breach of duty not occurred. The remedy must however be fashioned to fit the nature of the case and the particular facts. And equitable compensation is to be assessed as at the time of the trial with the benefit of hindsight.
3. Now where a director causes a company to enter into a transaction which is ultra vires, the director is liable as in substance a custodial fiduciary.
4. In Agricultural Land Management Ltd v Jackson (No 2) (2014) 48 WAR 1 Edelman J confirmed that an award of substitutive compensation is not confined to a common account taken against a trustee. It also applies to custodial fiduciaries, such as company directors. A custodial fiduciary, including a company director, may have a liability to restore an asset or its value where that asset has been dissipated without authority. The touchstone of something done without authority may include a transaction to which a director commits a company in a manner which is ultra vires its constitution.
5. Edelman J said at [375]: Since substitutive compensation is concerned with the duty to restore the value of an asset dissipated without authority it will not apply to every breach of duty by a company director … One "policy" recognises the liability of a custodial fiduciary (including a company director) to restore an asset, or its value, where the asset has been dissipated without authority. This requires substitutive compensation …
6. Now Edelman J found that the directors' obligation to pay substitutive compensation was not enlivened for various reasons, including that where the beneficiary complains about a dissipation of an asset by the entry into of a contract, it is not possible to say that the dissipation was unauthorised or should be treated as unauthorised when it was made under a contract which was never rescinded.
7. Further, a falsification required falsification of the entire transaction. But in Edelman J's context, the beneficiary could not disallow the disbursement (the purchase price of land) and yet retain the proceeds of the transaction (the land).
8. Now let it be assumed that by failing to obtain shareholder approval the directors or PAC itself breached the constitution and that the merger resolutions were ultra vires.
9. PAC says that having acted ultra vires, the directors have an obligation to restore the assets or their value, being the assets of PAC that were contributed to the Aurora Trust, where those assets have been dissipated without authority.
10. PAC appears to contend that if a director causes the company to enter into a transaction that is unauthorised the director is strictly liable to restore the assets transferred in the transaction.
11. Now I accept that there are various authorities that establish that a director is liable "as if" he was a trustee where the director causes a company to enter into an ultra vires transaction, for example, acquiring shares when the constitution prohibits the acquisition or causing the entry into of an illegal transaction, for example, funding an acquisition of its own shares.
12. The nature of the duty which the director had breached in such circumstances has not always been identified. But one thing that is clear from the authorities is that a director's liability for such transactions was not strict.
13. I should also note that the authorities concerning a director who caused the company to transfer its assets do not readily assist in clarifying the nature of duty of the director with respect to ultra vires transactions; see Bishopsgate Investment Management Ltd (in liq) v Maxwell (No 2) [1994] 1 All ER 261 at 265 per Hoffmann LJ.
14. In Re International Vending Machines Pty Ltd and the Companies Act [1962] NSWR 1408 Jacobs J, after noting that duties of directors often differed from duties of trustees, said (at 1420): However, the question still remains whether any of the duties of a director and of a trustee are alike and more particularly in this case it falls to be determined whether a director of a company, who disposes of property of the company in an ultra vires manner, is liable in the same way as a trustee would be liable for disposing of trust property in a manner beyond the powers conferred on him by the trust instrument. … The act is wrongful; the director knows the wrongful circumstances and the director in this regard is in the same position as a trustee who disposes of trust property in breach of the law or of the terms of the trust instrument. …
15. It is unnecessary to discuss these questions further given that I do not consider that the merger transaction was ultra vires. But if I had to decide the question I would not adopt any hard and fast rule. It all depends. Clearly an intentional or fraudulent misappropriation of property or entry into of an unauthorised transaction could well justify substitutive compensation being ordered against a director without too much rumination concerning the relevance of or assistance given by analogies with trustees.
16. Finally and in any event, there are two insurmountable legal impediments to substitutive compensation being ordered in PAC's favour. The two necessary pre-conditions requiring satisfaction before substitutive compensation can be ordered were not satisfied. PAC did not rescind any of the contracts which resulted in the merger. Further, PAC has not relevantly falsified the merger transaction. It wants to falsify what it gave away (its boutiques) whilst retaining what it received (Northern Lights' boutiques).
17. I do not need to trouble myself further on these questions given my other findings.

Relevant facts concerning WHV

1. It is now necessary to discuss the WHV question in more detail. And for that purpose I need to turn to some relevant facts.

WHV general matters

1. WHV is an asset management firm based in San Francisco that started in 1937 and which has managed institutional client portfolios since 1945. The WHV platform as at May 2014 had selling agreements in place with a range of "top tier" broker dealers in the US which represented around 100,000 advisers and USD 11 trillion in assets under management.
2. In terms of WHV, the key personnel as at 2014 were Mr Carver, director of WHV from around the beginning 2013, Mr Jeff Vincent, CEO of Laird Norton since around 2004, Mr Turner, CEO of WHV since the beginning of 2013, and Mr Jack Swift who was responsible for "distribution capability" for WHV and the provision of marketing, sales and other services to WHV pursuant to the service agreement between WHV and Northern Lights.
3. The terms of the service agreement required Mr Swift to be available to provide the services to WHV, including assisting WHV in implementing the sales and marketing plans as in place from time to time and being responsible for managing the sales team under the direction of WHV's CEO, Mr Turner.
4. There was a WHV dividend and appreciation rights agreement which I will discuss in more detail later.
5. Further, there was a voting and right of first refusal agreement, which was amended on 18 July 2014 and effective on the closing of the merger.
6. This was an agreement between Northern Lights, Laird Norton and WHV, which was operative until the third anniversary of the effective date (1 January 2013) or one year after the expiration or termination of the service agreement or, as amended by the first amendment to the voting and right of first refusal agreement, after the second anniversary of the closing of the merger if an independent director of WHV acting in that capacity approved such termination.
7. One of the recitals stated that: [i]n connection with the relationship of the parties being established under the Service Agreement, the parties deem it to be in their respective best interests to provide for an agreed composition of the Company's board of directors, for restrictions on the transfer or issuance of any interest in the current or futures classes of the capital stock of the company (WHV) and its assets...
8. It was provided that there would be five board members of WHV.
9. Provision was made for the selection of directors in the following terms. First, there was to be Mr Turner, director and chief executive officer of WHV, who was also a non-executive director of Northern Lights and a significant shareholder of Northern Lights, or any other person who was the CEO of WHV. Second, there was to be Mr Carver, director of WHV, who was also executive director and co-founder of Northern Lights. Third, there was to be Mr Vincent, for as long as he was the CEO of Laird Norton; he was also a non-executive director and shareholder of Northern Lights. Fourth, there was to be an independent director chosen by Laird Norton and who it may remove and replace from time to time. Fifth, there was to be another director elected and removed and replaced from time to time by Laird Norton.
10. So, three of the five board seats were either taken directly by Laird Norton or indirectly chosen by it.
11. Other terms included that the Northern Lights director, Mr Carver, could be removed only with advance written consent of Northern Lights.
12. Further, each of Laird Norton and WHV unconditionally and irrevocably granted to Northern Lights rights of first refusal concerning any share sale or asset sale.
13. Further, it was provided that nothing would restrict the transfer or issuance of shares to Northern Lights or its affiliates.
14. Further, there were termination rights by mutual agreement between Northern Lights, Laird Norton and WHV, cross-termination of the agreement upon termination of the service agreement in accordance with particulars terms contained in that agreement, and other scenarios.
15. Further, there were overlapping roles as between Northern Lights and WHV.
16. Mr Carver was an executive director and co-founder of Northern Lights and a director of WHV since the beginning of 2013.
17. Mr Turner was a non-executive director and co-founder of Northern Lights, and a significant shareholder of Northern Lights; in addition, he was the CEO of WHV from the beginning of 2013.
18. Mr Swift was part of Northern Lights' management team and CEO of Northern Capital Group Distributors; he was also responsible for distribution capability for WHV as per the service agreement.
19. Mr Vincent was a non-executive director and major shareholder of Northern Lights since 2001, and also the CEO of Laird Norton, the 100% owner of WHV. As at 2014, Laird Norton had a diversified investment portfolio with interests in real estate, wealth management and funds management.
20. Now Mr Carver also became a director of the Aurora trustee. So too did Mr Vincent.
21. It is convenient at this point to return to the events in late 2013.

NL presentation - 4 December 2013

1. In the board papers for the 4 December 2013 board meeting there was a "Data Presentation" authored by Northern Lights.
2. One slide had figures for assets under management (AUM). WHV was shown as having more than 50% of the AUM in total for Northern Lights of USD 21.853 billion. The WHV AUM was shown at USD 12.155 billion.
3. The relevant table had a footnote to the WHV figures: Northern Lights has contractual economic rights with WHV to share in the growth of the firm under an agreement as of 1 January 2013.
4. And yet it took Mr McGill until 11 June 2014 to wake up to the fact that he needed to obtain a copy of the dividend and appreciation rights agreement. And even then, it was others who noted that it was missing and sought it.
5. Further, the footnote reference was hardly an accurate or complete description of the relevant agreement.
6. Further, there was also a portfolio metrics summary, but the figures for revenue and EBITA shown for 31 December 2013 for WHV were not showing distributions available for Northern Lights.

February 2014 board meeting

1. As at February 2014, Mr McGill had not seen any contractual documentation relating to WHV and was relying on what he had been told by Northern Lights.
2. In the board papers a value of $19.125m was initially ascribed to WHV when no equity interest in WHV was held by Northern Lights. There is a footnote 2 indicating that this was a revenue share agreement with no investment made by Northern Lights.
3. In the board papers, a paper prepared by Mr McGill and Mr Andrew Howard stated that: The relationship with WHV is only one year old, with the catalyst for the partnership coming from Laird Norton, a shareholder in Northern Lights and WHV. The AUM of the group is dominated by the international equity fund run by Richard Harayama, who was originally an employee of WHV and is now a sub-advisor via his own boutique. As can be seen above performance has been poor over the past three years, and further outflows are expected but the client base is largely retail through the WHV mutual fund distribution network, which is advantageous in avoiding lumpy outflows. The real attraction of WHV from a [PAC] perspective is that it provides us access to the potentially lucrative US mutual fund market through an established distribution network. The potential synergies that this could provide for our current and future managers in terms of a new market are extremely appealing and it could be argued that [PAC] would be unlikely to ever be able to replicate this capability on its own. …
4. In relation to the February 2014 board paper, Mr McGill acknowledged in his evidence that three years of poor performance would be a matter of concern.

May 2014 communications regarding WHV

1. During May 2014 Mr McGill was privy to several communications which raised further questions as to whether WHV had the capacity to make distributions.
2. First, on 13 May 2014 the chief investment officer, Mr Howard, wrote to Mr McGill and Mr Ferragina stating in relation to WHV: … WHV: no detail yet received. Based on what we know FUM will be under pressure over the course of this year as a result of the poor performance of the International strategy … While not easily demonstrated in the model I do see this as one of the most valuable strategic pieces in the NL structure. …
3. Second, Mr Howard's assessment circulated to the board on 28 May 2014 stated that WHV's main strategy was struggling with performance and that the main strategy: … has fallen by US$1.5 billion in the past 18 months on the back of poor performance.
4. Third, Mr McGill, but none of the other directors, including Mr Fitzpatrick, received the Deloitte due diligence report.
5. The Deloitte report included several qualitative statements regarding whether WHV would make, or was required to make, a distribution to Northern Lights.
6. The Deloitte report contained the following statements in relation to WHV: … Although distributions are at the discretion of WHV management and its Board and NLCP has not received a distribution from WHV since making its investment in 2013, the management believes it will receive an annualised pro forma dividend of approximately $4m beginning in FY14 as a result of this arrangement. WHV did not pay a distribution during 2013 due to uncertainty regarding the potential buy-out of a key employee. As of Mar-14 this situation has been resolved. … … It should be noted that the payment of dividends may be impacted by such items as variability in WHV's future EBITDA vs. plan, WHV's use of excess cash as well as WHV's discretion in dividend distributions. … During the last three years, WHV witnessed substantial underperformance from their flagship products, resulting in significant client attrition, in part masked by the market appreciation in FY13. … … … At Mar-14, total AUM decreased $2.5bn driven by the AUM decrease in WHV ($2.1bn) … …
7. These matters raised concerns regarding WHV. Mr McGill in his evidence said "[w]e were concerned and interested in the WHV situation generally and understanding it …". He went on to say that "[w]e were particularly focused on the first year" albeit conceding that the second element being the discretion to pay was significant.
8. Concerns within the Deloitte report about WHV included the following matters.
9. First, the performance data for WHV was only provided for the FY13 year. There was no data provided for the FY07 to FY12 years. Mr McGill sought to explain the lack of financial data by saying that he understood WHV to be a turnaround situation.
10. Second, there was a statement that: NLCP has a dividend right that gives NLCP 17.5% of dividends between $2.2 and $3.2 million, 21.875% of dividends between $3.2m and $4.2m and a 26.25% of dividends greater than $4.2m. According to management, given that NLCP's interest is held as a dividend and stock appreciation right, NLCP will only receive cash when WHV makes distributions to shareholders. As noted in the combined EBITDA section, although distributions are at the discretion of WHV, management believes it will receive an annualised pro-forma dividend income of approximately $4m beginning in FY14.
11. As PAC rightly submits, when it was put to Mr McGill that this paragraph brought home how tenuous the situation was in relation to the receipt ultimately of distributions being at the discretion of WHV, he agreed.
12. Further, I also agree with PAC that Mr McGill's evidence during cross-examination changed with respect to the matters raised by the Deloitte report. Initially, he gave evidence that the Deloitte report gave him comfort on the WHV issues. But Mr McGill subsequently acknowledged that statements in the Deloitte report regarding WHV were a cause for concern.
13. Further, although he claimed that the information that there was for WHV reflected a business turnaround, he did not have the financials so he could not have known what it was turning around from.
14. Further, on 22 May 2014, Mr Erickson sent to Mr Ferragina and others some WHV modelling setting out WHV's forecasts. This was provided in the form of spreadsheets. Mr Ferragina forwarded this on to Gresham personnel and also copied in Mr McGill. In the spreadsheet for WHV headed "Five Year Plan - Financial Model", there was a projection (line 23) for the "Base Dividend Declared" for inter-alia 2014 to 2018. The projection was zero dollars for each year.

June events

1. Now on 10 June 2014 Mr Pollock of Gresham sent an email at 4:44am to Mr Erickson, Mr MacGregor, Mr Moulin, and Mr Kegan Greene and Ms Andrea McGuirt of William Blair titled "WHV questions" that said: A couple of high priority questions have come up today in relation to WHV that we wanted to raise with you. These are listed below.
2. Can you please put the WHV Dividend and Appreciation Rights Agreement ("Rights Agreement") in the data room?
3. Can you please provide some breakdown of NLCP's Corporate revenue (ie from which boutique are service fees / management fees coming from)? Specifically what portion of NLCP's corporate revenue came from WHV in 2013?
4. Are their updated forecasts available for NLCP corporate? This doesn't appear to be in the valuation model
5. When forecasting WHV earnings that will be contributed to the Trust, we have reviewed two source documents:
   1. NL valuation model (showing a fixed EBITDA of $9.6m and a fixed dividend of $4m every year)
   2. WHV corporate 5 year forecast How should we be forecasting WHV? Ie what percentage of WHV NPAT should be attributable to the Trust and how should we calculate the WHV dividends to the Trust?
6. Regarding remuneration, what remuneration does Jack Swift receive from WHV? Does Jack Swift have any other sources of remuneration associated with NLCP? As we are sending out [PAC] boutique consent presentations this week, it would be great if you could help us with these questions as soon as possible.
7. So, Gresham requested a copy of the WHV dividend and appreciation rights agreement which was not in the data room.
8. Mr MacGregor of Gresham sent an email at 12:55pm to Mr McGill, Mr Moulin, Mr Howard, Mr Ferragina and Mr Pollock that said: Attached is an updated presentation, including updated multiples and various numbers throughout. We've tried to label pages that have changed with a red-dot so you can extract them into any amended versions (note, the consent wording in here remains the IML version). Relevant figures changed are in red (note also the pie chart (p4) and the table (p10) are updated). Major changes:

• Updated [PAC] VWAP (used to calculate the total deal value). The new value is 203.9. We should discuss if you want to continue to update this or fix at a certain [PAC] share price.
• Deal multiples updated based on revised EBIT (see pg 10). Note the major change here is reducing the WHV interest from 30% to 20% in the model to reflect the ownership interest table on page 11 (we note that there remains an outstanding question here about what income stream we get from WHV. The 20% interest equates to around A$1.5m in FY14 which looks a little low based on comments in your DD summary notes that state it is worth around US$3m p.a. to NL. We asked Blair to clarify last week and were going to raise it on this mornings DD call with them before they cancelled it). For the moment, it may be wise to leave the more conservative number in there as is now the case.
• Trust debt multiple remains at 1.2x but we have not yet updated for the change to the Seizert upfront cash payment. We have a few questions on how this is to be treated.
• EBIT tables on page 10 updated. Happy to discuss.

1. This was before Mr McGill received a copy of the dividend and appreciation rights agreement.
2. Later that day, Mr McGill at 2:53pm sent an email to Mr MacGregor, Mr Moulin, Mr Howard, Mr Ferragina and Mr Pollock and said: Thanks. Comments:

• I think we should use a [PAC] share price of $10 and, for the purposes of this presentation, leave that fixed.
• On p.10, please refer to the bottom line as NPAT rather than EBIT.
• We need to confirm our understanding of the relationship with WHV. I don't think we yet understand this but we should! There are 3 agreements: Services Agreement, Voting and Right of First Refusal Agreement, and a Dividend and Appreciation Rights Agreement. It's the last of these that we haven't yet seen (been provided?)
• Our diligence notes from our visit with WHV suggest that overall, the WHV deal is worth around USD$3m pa to NL (see paragraph 2, p.4 of Howies notes in the attached document). Until we've got a better or confirmed understanding of the WHV deal, I think we should continue to assume $3m pa of income from WHV - therefore, please reverse the change that you've made to the WHV earnings contribution.

1. The reference to "Howies notes" is to the Howard assessment.
2. Mr Howard replied at 3:01pm to Mr McGill, Mr MacGregor, Mr Moulin, Mr Ferragina and Mr Pollock and said: My understanding of the WHV relationship is that the revenue generated is the aggregate from 1) % of WHV earnings received (I can't recall off the top of my head what the specifics are but I think it entitles NL to a share of earnings above a threshold amount) and 2) the service agreement between NL and WHV for work done by NL in identifying new teams for WHV which is c. US$1 million p.a. I would think that the revenue received by NL for the contract with WHV would be picked up in the NL company revenue and not the WHV revenue, so in total c. US$2.5 - US$3 million is realistic, we just need to make sure it is not double counted
3. Later that day at 6:42pm Mr MacGregor sent an email to Mr Howard, Mr McGill, Mr Moulin, Mr Ferragina and Mr Pollock and said: Thanks Andrew. We agree with you that we need to clarify both the WHV and NLCP Corporate earnings forecasts to ensure we have the right numbers and that there isn't any double counting. Below is a summary of what we know and need to clarify:

• WHV earnings forecast
• NL have never provided an explicit forecast for the contractual income stream owing to NL from the WHV agreement. There are certain documents in the data room but there are gaps (we have requested the missing Dividend and Appreciation documents).
• Based on earlier due diligence discussions (see Andrew's [PAC] DD notes), we believe that WHV contributes around US$3.0m p.a., possibly more subject to discretionary bonuses and share of WHV earnings.
• The William Blair team have included their own estimate in the financial forecast provided to the banks. They show higher WHV related earnings of US$4.0m per annum. These forecasts were signed off by Trent so we have a basis to put some degree of faith in this higher number.
• Our model from last week only included A$2.3m per annum as the WHV contribution in FY14F. This was based on an estimated 30% share of earnings which we took as an assumption from the NLCG model provided in November. Whilst this is lower than the US$3.0 or US$4.0m noted above, it is possible the residual WHV income is already accounted for in NLCP Corporate revenues. See below.
• NLCP Corporate division

1. We were never provided explicit forecasts for Corporate but have had this on the high priority question list for some time. Our model takes the FY13 Corporate revenue number of ~$8.0m and keeps this constant over the forecast period.
2. The breakdown we have for FY13 Corporate breaks out commissions, services and management fees. There is an amount of circa US$2.0m in FY13 noted as Services revenue (no further detail or breakdown is provided). It is possible that this amount relates to the WHV Services revenue and hence is forecast at US$2.0m each year in our model (adding to the explicit $2.3m noted above). The NL QOE report from Deloitte does not break NLCP corporate into any further detail or detail WHV in any way.
3. The William Blair model provided to the banks (showing US$4.0m of WHV earnings) also includes a separate NLCP corporate revenue forecast. It is higher than our NLCP Corporate forecast which either suggests (a) they are double counting the WHV Services revenue or (b) we are under estimating WHV in only assuming $2.3m in FY14. We need to clarify this. We have questions into Trent and WB on all of the above points as well as:

• Providing the missing Dividend and Appreciation document into the data room
• Remuneration payments to Jack Swift At the moment, our intention is to retain the previous modelling assumption we were running with (Andrew M - the FY14 $16.0m EBIT for NL) until we have further clarity.

1. At 3:43pm Mr McGill sent an email to Mr Carver that said: …

• Could you please arrange for a copy of the Rights Agreement between WHV and NL to be sent through - that document doesn't currently appear in the data room. Mike Fitzpatrick asked me about the tenure/term of the deal with WHV. I need to properly understand it before responding to him. But, in the context of getting consents from boutiques, the question he asked was whether we should seek to extend the term of the WHV deal as well (or at least get their confirmation that they won't terminate the existing arrangements for some period). Other potential discussion items with WHV: … …

1. There is no evidence that Mr Fitzpatrick received or reviewed the WHV dividend and appreciation rights agreement, but he had seen a summary of it or was given a verbal description of it by Mr McGill.
2. On 10 June 2014 Mr McGill sent an email to Mr Howard in which Mr McGill requested a chat with Mr Howard about the WHV contracts and said "Mike was querying the terms of this and I couldn't recall the details. Eg term, annual value, etc".
3. On 11 June 2014, Mr Erickson at 9:51am sent an email to Mr Pollock, Mr MacGregor, Mr Moulin, Mr Greene, Ms McGuirt and Mr Ferragina and said: Thanks for the note. Apologies that the Dividend and Appreciation Rights agreement did not make it in folder 9.2.9.22 with the other WHV agreements. Please find the attached for information. I am also attaching my version of the 2014 NLCG management company budget. This does the best job of breaking down management fees, retainers, etc. Please take a look and let me know what you need. As for future forecasts of NLCG corporate expenses, we do not have projections together. For the Blair model, we assumed a breakeven with Trust reimbursing expenses. For general purposes, we manage to a breakeven on cash year-over-year. Going forward, I think you could use the attached budget as the a baseline and make reasonable assumptions for expense growth as helpful. Specific to WHV:
4. We have assumed a $4.0 million dividend based on general understanding of the WHV business and what we project for life going forward. I would have to defer to Joe Ferragina on how to determine the % of WHV's NPAT attributable to the Trust given that NLCP/Trust really only hold a dividend/appreciation right rather than an actual full equity interest.
5. Specific to Jack's arrangement, 100% of Jack's remuneration is paid by WHV effective January 2013. For 2013, he received both a base compensation of $812,500 and a bonus of $750,000. We expect that to be similar in 2014. Hope that helps. Happy to chat more.
6. A copy of the dividend and appreciation rights agreement was attached to this email.
7. On the same day at 10:58am, Mr MacGregor replied to Mr Erickson, Mr Pollock, Mr Moulin, Mr Greene, Ms McGuirt, and Mr Ferragina and said: Thanks for this. In the interest of time, we thought we'd send back a few quick clarifying questions which we can add to if more come up over the next 24 hours.
8. The Dividend and Appreciation Rights (DAR) agreement stipulates the formula for the payment of dividends to NL. Based on the WHV 5 year play that we were previously provided and the formula, we cannot reconcile the US$4.0m annual dividend assumption? We get closer to US$1.0m in FY14 and FY15 building to US$4.0m by FY17F. This is based on 100% of the dividend as defined in the DAR (and assuming 100% payout of WHV NPAT with tax payments per the WHV model of 34.6%) however I note that only 85.72% accrues to NL with 14.18% going to Jack Swift. Can you provide more detail supporting how you get to the US$4.0m? Does that relate only to the NL 85% and what WHV earnings base is this calculated on?

• Remove the $2.5m NLCP mgmt. fee - Andrew to confirm if there is any prospect of retaining it
• Include the additional WHV special dividend income - Joe to confirm from Trent that they have the retained earnings to pay it The EPS impacts are largely offset by the above, may end up being slightly positive. Let us know if you disagree with the approach.

1. The email suggested that Gresham's model was calculating a $1 million distribution from WHV for the first 2 years based on the percentages in the WHV dividend and appreciation rights agreement. Gresham also noted the risks in relation to WHV's discretion to pay the dividend. The forecast of $1 million was significantly less than the distribution which the July model (model v345) was calculating, being $3,790,238 for FY14 and then $1,059,018 for FY15. It appears that the June numbers were less because they did not include the addition of "excess cash" to the calculation of the distribution.
2. Now proper answers to the questions or queries raised concerning WHV were never adequately given. Clearly, Mr McGill's conduct in not properly pursuing detailed responses was less than satisfactory.
3. On 24 June 2014 there was an email exchange between Mr McGill and Mr Fitzpatrick. Mr McGill commented on the WHV contracts and said: … … Although WHV is profitable (USD$6.9m NPAT for CY13), no dividends have yet been paid and so NL hasn't yet received any share from the dividend sharing arrangement. …
4. Mr Fitzpatrick sent an email to Mr McGill saying: I did not pick this up last night tho I was looking for it. It covers all the bases. The WHV earnings are a bit obscure, otherwise it is fine.
5. Mr McGill then replied to Mr Fitzpatrick and said: Do you want me to reply to Anton or should it come from you?
6. Mr Fitzpatrick then replied to Mr McGill and said: You send it
7. Mr McGill further replied to Mr Fitzpatrick and said: Ok. Btw, did you notice that the WHV contracts actually give NL a perpetual/vested entitlement to a share of future dividends or liquidity proceeds. This was one of the areas that you/we were worried about given the price we are paying for NL. The service revenues are at risk within the short term (2 years), but in the event that WHV terminates NL, NL would nonetheless remain entitled to its share of future dividends and liquidity proceeds.
8. Frankly, it would seem to me that Mr McGill had little idea of the precise terms of the dividend and appreciation rights agreement and the various "outs" and problems with it.
9. Further, communications between Mr Fitzpatrick and Mr McGill well demonstrate that contrary to the evidence given by some of the directors in terms of emphasis, WHV was not just there to provide US exposure for PAC or some sort of indirect "exposure" or influence concerning WHV's funds under management.
10. Further, the WHV question was referable to the price in effect being "paid" and did not just concern the question of debt servicing.

June board papers

1. In the board papers for 2 June 2014, WHV was ascribed a value of $20.8 million.
2. The value had increased from $7.59 million in the Gresham model v 245 and the discount rate utilised had decreased from 14% to 13%.

Dividend and appreciation rights agreement

1. Now as I have already indicated, on 11 June 2014 Mr McGill received the dividend and appreciation rights agreement via email. The covering email dated 11 June 2014 attaching the dividend and appreciation rights agreement set out a series of questions identified by Mr MacGregor of Gresham to Northern Lights.
2. This was the first occasion on which an officer of PAC had received the dividend and appreciation rights agreement. This was particularly late in the process in the following circumstances.
3. The dividend and appreciation rights agreement was critical to determining what, if any, income stream was likely to be received and how that would impact on the value ascribed to Northern Lights' interest in WHV.
4. The Gresham model v 245, the only version of the model which in my view was provided to the board, had already been circulated the previous month.
5. As acknowledged by Mr McGill, "[t]he only thing you're buying is a potential cash flow stream under a purely contractual arrangement in relation to WHV".
6. There is no evidence that the dividend and appreciation rights agreement was sent to Mr Fitzpatrick or to any of the other non-executive directors at this time and, crucially, at any time prior or during the 23 July 2014 board meeting.
7. Mr Fitzpatrick's evidence was that he had not seen the agreement but had received a verbal summary from Mr McGill although he was unclear about the timing of this. Mr Hayes also gave evidence that he did not recall being shown or reading a revenue share agreement between WHV and Northern Lights.
8. Now Mr McGill gave evidence that he did not obtain any legal advice about the contractual terms involving WHV, even though he conceded that from as early as May or June 2014 he realised that there was no guarantee of getting any distribution through the contractual arrangements with WHV.
9. Later in his evidence he suggested that HSF had a responsibility to advise on this matter before conceding that HSF's role went no further than advising whether the agreement was "enforceable whether under American law or Australian law and it contains the terms that you, the management, think it does contain …".
10. I will return to discuss the terms of the WHV dividend and appreciation rights agreement later and Mr McGill's position concerning it.

23 July 2014 board meeting

1. On 18 July 2014, Northern Lights, Mr Swift, Laird Norton and WHV entered into a first amendment to the dividend and appreciation rights agreement under which WHV acknowledged the merger with Northern Lights as being a permitted transfer.
2. Prior to the July 2014 board meeting, Mr McGill was aware that there was serious doubt as to whether WHV would make or was required to make a distribution to Northern Lights in 2014 or in any subsequent year. At this time Mr McGill knew about the concerns identified in the Deloitte report.
3. Mr McGill accepted that in the middle of June 2014 he had concerns about Northern Lights' ability to ensure that it would receive payments from WHV and that this was a matter he was focused on.
4. Further, Mr Fitzpatrick had expressed concerns to Mr McGill privately about WHV in July 2014.
5. On 20 July 2014, Mr Fitzpatrick sent an email to Mr McGill that said: I had a call out of the blue from Scala, on another matter. He did not venture for the on WIG. I rang Macoun and left a message, that given the history, they should put an offer to us. Have you mentioned it to Tim-I think it will give him confidence that we are keen to expand. A couple of things from the papers

• do we have a response for Advocate? We should give him one now, which notices he confuses profit with performance and the need for scale. The Press release has some issues. The release could be enhanced by:
• more hullabaloo about strategy.
• showing the value of [PAC] implicit in the deal - sorting out the numbers for profitability and eps in schedule 1. Have these moved? Why bother if these are the eps numbers? Does this have the BNP conversion to [PAC] shares?
• WHV needs explanation, unfortunately. It is too big, and the lack of equity ownership begs the question as to why it is counted.
• the acquisition debt is also poorly explained. Is there an updated model? Besides failure to get a decent tax opinion, what are the other threats? If Perpetual want a shareholder meeting, will the docs let us hold one if we decide we want to? If their /our numbers move, how much till it is a MAC event. What is the order of events? I would have thought they would sign first, we would then sign and announce.

1. Clearly, Mr Fitzpatrick had some concerns regarding WHV.
2. On 21 July 2014, Mr McGill replied to Mr Fitzpatrick and said: Thanks. Re the Project Bondi points: I've asked Gresham to email the latest model to you. Refer to p.24 of their presentation for Wednesday's board meeting for a summary of what's changed since 2 June. Basically, the significant changes to FY14PF eps are due to:
3. debt pricing has increased from 6.5% to 10% all in; and
4. we're now paying more of the Seizert consideration upfront. These issues have been flagged previously in my email updates to the board but I don't think the board has previously been provided with the updated model output as is now shown on p.24. In our ASX disclosure documents, we need to show FY14PF figures. However, we've deleted the quantitative references to eps outcomes based on FY14PF and instead simply said that the deal will be "Materially eps accretive to [PAC] shareholders from close". In part this changed disclosure approach was due to the deal changes noted above but it also brought us back into line with disclosure practice of peers (eg BTIM re their Hambros deal and Henderson in relation to Geneva deal). In neither of those cases did they quote an actual eps accretion number (actually, BTIM recognised that their Hambros deal would be eps negative initially) P. 24 shows the eps outcomes after BNP exchanges. I've asked Alastair from Gresham to circulate the latest version of the financial model.
5. Mr McGill did not directly address Mr Fitzpatrick's concerns regarding WHV.
6. On around 21 July 2014, PAC received a revised financial model from Gresham, being model v 341.
7. Model v 341 assumed or reflected the following matters.
8. First, $4 million in distributions would be made to the Aurora Trust each year from FY14 to FY21.
9. Second, the discount rate applied to WHV had decreased to 13 per cent from 14 per cent in model v 245 sent to the board on 19 May 2014.
10. Third, the DCF valuation of WHV had increased to AUD 43.53 million from AUD 7.59 million in model v 245.
11. Mr Fitzpatrick and Mr McGill were the only directors who were provided with and reviewed model v 341.
12. The 23 July 2014 board pack contained a draft investor presentation which indicated that WHV was the largest boutique by value of funds under management, accounting for 49 percent of the total funds under management.
13. There was internal debate at PAC as to whether that figure ought be included in a presentation to be made publicly available. Mr McGill decided that the WHV funds under management figures ought be included after previously being removed. Whilst this had the effect of boosting the overall funds under management numbers, it also overstated the contribution of WHV to Northern Lights as it was based on an uncertain contractual entitlement rather than an equity interest.
14. On 23 July 2014, the board met and considered the merger between PAC and Northern Lights. There is no mention in the board minutes of consideration of the value to be ascribed to WHV. But the file note of Ms Lo does indicate that there was some discussion of WHV. I will return to this later.

• Claw back of the $42m - unsecured.
• 30% of the NL guys are internal.
• Leverage or credit worthiness our 80% of the guys
• WHV's FUM - need to be relooked. Gresham going to check becomes $38m if WHV is removed.
• WHV needs to be checked.

• of units the people get is set when our shares at $10.

• Should it be pegged to current price at closing? …
• Melda - need to go thru Rem committee -
• WHV service contracts - very valuable. The guys will get downward salary adjustment if they lose WHV service contracts.
• WHV:

1. Distribution and sales services - Jack Swift and team services
2. M&A advisory agmt - NL provides services to WHV - 1.6m p.a. to NL
3. Dividends & appreciation

• Rights agreement - NL gets a vested entitlement of a percentage of a sale of the business.
• WHV has $13m of cash
• $4m distribution from WHV to trust - this is the projection Gresham made.
• WHV contracts come up for renewal this year and being extended for 2 years.
• Deferred deal fee - ? Mike suggested maybe try to make it upfront.
• Medley also want assurance on WHV. 100% owned by Laird Norton. Geoff Winston \will be on our board.
• Translate the [?] profit share?
• do a quick REM committee tomorrow.
• the LTIP/terms need to be a CP/condition item.
• Mike said need a call tomorrow on REM, recommendation on the deal.
• Recommendation on the deal?
• Strengths of the deal - mkt material
• 4 face to face
• 6 have or 2 there
• ASX relief - waiver - what are the requirements?

1. Ms Lo's notes do not state, contrary to the version set out in Mr McGill's submissions, the source of which is unknown, and which PAC says no reliance ought be placed on, "WHV to be checked".
2. In fact, Ms Lo's transcription records "WHV needs to be checked", and this note sits below a reference to WHV's funds under management. There is no evidence about whether any such checks were undertaken. Further, none of the directors have given an explanation as to why the notion of "checking" was being considered as late as 23 July 2014.
3. Further, the reference to WHV sales service contracts where it appears in Ms Lo's transcription is in the context of the remuneration committee.
4. Further, the language of "$4m distribution from WHV to trust - that is the projection Gresham made" was not, as suggested by Mr McGill, similar to the Deloitte report.
5. At p 20 of the Deloitte report it was stated: Although distributions are at the discretion of WHV management and its Board, and NLCP has not received a distribution from WHV since making its investment in 2013, management believes it will receive an annualized pro-forma dividend income of approximately $4m beginning in FY14.
6. As PAC points out, the former is styled as a Gresham projection, whereas the latter is correctly characterised as a belief held by Northern Lights management, proffered to Deloitte.
7. Further, under the bullet point "Recommendation on the deal" there is no reference in Ms Lo's transcription to risks or downsides associated with WHV. Instead, it refers to "Strengths of the deal - mkt material".
8. Now the other directors' submissions contain their own transcription of the HSF file note. But as PAC correctly points out, they too contain errors. I have put their transcription to one side.
9. Further, the fact that no risks associated with WHV declaring a dividend were discussed in detail during the meeting is also consistent with the evidence concerning the events which occurred after the meeting which I will come to in a moment.
10. In my view the discussion at the board meeting in relation to WHV was confined to a discussion of the fact that Gresham had supplied models which contained a projection of a $4 million distribution from WHV to the trust.
11. I agree with Ms Rachel Doyle SC for PAC that it would seem that the following topics were not discussed at the board meeting, being:
12. the terms of the dividend and appreciation rights agreement and the significant deficiencies and loopholes therein;
13. the risk that WHV might exercise its discretion not to declare a dividend at all and the different nature of that risk in the specific contractual context as compared with a share interest; and
14. WHV's financials for the period 2010 to 2013, and WHV's history in respect of declaring dividends.

After the board meeting

1. Mr Fitzpatrick left a voicemail for Mr McGill which Mr McGill referred to in an email dated 23 July 2014 to Mr Carver of Northern Lights.
2. I agree with PAC that the message from Mr Fitzpatrick on 23 July 2014 after the PAC board meeting had concluded is inconsistent with him having an appreciation of and accepting the risks in relation to the $4 million dividend from WHV whilst at the meeting.
3. It demonstrates that the risks concerning whether WHV would declare a dividend occurred to him after the meeting, rather than being an issue that had been discussed in detail or resolved during the board meeting.
4. Mr Fitzpatrick conceded in cross-examination that after the 23 July 2014 board meeting his concerns regarding WHV became sharper and deeper. The emails reflect these concerns.
5. On 23 July 2014 at 6.15pm, Mr McGill wrote to Mr Carver stating: … I forgot to ask about WHV dividends which is something that Mike just left me a voicemail about. You previously mentioned the possibility that you/we may get some more comfort from WHV about the payment of future dividends. Obviously this is something that Medley would also be very focussed on. Was WHV amenable to this at all? I think the context for Mike's question on this is recognition of the RPU refinancing obligations going forward and the potential importance of WHV's contribution to group cashflows.
6. On 25 July 2014 Mr Carver responded to Mr McGill and stated: We won't have anything more definitive than what is in the contracts, but my expectation is that WHV will likely make some dividend payment this year (though I'm not sure if it will be big enough for us to participate or not). They currently have $24m of cash on the balance sheet, so after reserves, I would think there would be enough, but want to be sure we don't have an expectation for it. We had a board meeting at WHV this week, and agreed to have a lengthy discussion (with the hope to establish a dividend policy) at the next board meeting. Happy to discuss when you get in this morning.
7. Apparently, Mr McGill conveyed this back to Mr Fitzpatrick.
8. On 26 July 2014, Mr McGill sent an email to Mr Ferragina and others dealing with the draft ASX announcement concerning including the WHV funds under management figures.
9. On 28 July 2014 at 10.41am, Mr McGill wrote to the PAC directors stating: In spite of working late across the weekend, as I write this drafting of the transaction documents is not yet finalised. There are no substantive commercial issues outstanding and the work is merely technical drafting with lawyers for both sides being careful to ensure that the final drafting works for their respective clients. At this stage, my best guess on timing is that the deal will be signed on Tuesday afternoon/evening and announced Wednesday morning. The ASX Disclosure documents have been amended over the weekend. I will send final versions to the board prior to announcement. However, there is one important statement that I wanted to alert directors to immediately. I would like to include the statement that "The transaction is expected to be dividend accretive for [PAC] shareholders." I think it is very important that we say this given the gearing, vendor finance and earn-outs within the capital structure. Investors will rightly wonder what the implications are for [PAC]'s dividend and, as we know, [PAC]'s share price depends significantly upon our dividend yield. I believe the statement proposed should address any such concerns. Could you please let me know whether or not you are comfortable with the proposed statement about dividends.
10. On 28 July 2014 at 3.18pm, Mr Fitzpatrick responded to Mr McGill saying: Andrew, As the modelling reflects the statement, I am happy. We rely on the accuracy of the model - are there any reservations about any of the assumptions?
11. In response to that email, Mr McGill sent an email to Mr Fitzpatrick at 3.41pm saying: No, I'm comfortable with all assumptions.
12. Later that day, Mr McGill wrote to the PAC directors and stated that: Attached is a summary of the dps output from the base case model. I asked Gresham to prepare this in response to the board's questions earlier today about model support to justify the proposed disclosure that "… the transaction is expected to be dividend accretive for [PAC] shareholders…" The attached shows that the dps forecast is higher than the status quo position and therefore the statement is supported. Note that the model assumption is 100% payout ratio. This is high and in reality the board may choose to payout a lower ratio. A lower payout ratio is possible whilst still confirming the "dividend accretive" disclosure and therefore the disclosure remains supported. As background, Directors may also recall that [PAC]'s payout ratio in 2011 and 2012 did in fact approach 100% before dropping back a bit in 2013.
13. On 29 July 2014 Mr McGill stated in an email to Mr Pollock of Gresham: …

• Currently the [PAC] board is not prepared to state that the deal is dividend accretive. They require some further commitment from Laird Norton/WHV/Jeff Vincent in relation to payment of dividends by WHV before having the necessary confidence to make this disclosure. …

1. So, this is all reflective of the fact, as known, that there was no such commitment.
2. On 29 July 2014, Mr McGill sent an email to Mr Carver which stated: … Next time we speak, can we please chat again about WHV. I just had Mike [Fitzpatrick] on the phone from Dubai. He's worried about the WHV dividend. If it doesn't get paid (particularly in FY15) then our reported earnings and cashflow will be materially worse than forecast. Also, he's worried about the potential competing uses for WHV cash (eg new investments). How does that work given that one of our contractual duties is to source new investment opportunities for WHV? Is it true that new investments by WHV could prevent a dividend from ever being paid? Mike says my arse is on the line on this issue (helpful!). He wants me to take out the comment in the ASX release to the effect that the deal is expected to be dividend accretive - I'm worried about that because it's an obvious question that I'll be asked and anything less than a firm answer could lead to share price weakness because a lot of our retail investors are there due to the fully franked yield.

Signing the implementation deed

1. On 1 August 2014, Mr Howard sent an email to Mr Pollock, Mr McGill and others concerning an "answer around why WHV's FUM [had] fallen". The email contained a suggested statement: "WHV continue to pursue new fund opportunities to assist in diversifying the Fund line up, an additional fund is expected to be added before the end of the year".
2. On 4 August 2014, Mr McGill signed the implementation deed which had set out the agreement between Northern Lights and PAC for the contribution of certain assets to the Aurora Trust upon completion of the merger. But the problematic circumstances regarding WHV remained.
3. Now under cross-examination, Mr McGill was asked about this interaction with the non-executive directors regarding WHV between the board meeting on 23 July 2014 and 4 August 2014: MR WALLER: Well, when did you advise the board of the steps that you had taken between 23 July and the signing of the implementation deed on 4 August? MR MCGILL: I was speaking to Mike about this frequently. Q: But not the board? A: Not the board. … Q: This attempt to improve the position further, was that a board discussion or was this just you and Mike doing your own thing? A: I don't recall - it was certainly Mike and I, but I don't recall … I don't recall other directors mandating it.
4. Clearly, when Mr McGill signed the implementation deed, there was still serious doubt about whether WHV would make or was required to make a distribution to Northern Lights. Further, he had failed to advise the other directors of this matter, and he had failed to ensure that they were provided with a copy of model v 341.
5. I will return to the terms of the implementation deed later.

Subsequent events including the circular resolution and completion

1. On 7 August 2014, PAC received a revised financial model from Gresham being model v 368.
2. In model v 368 it was assumed that distributions would be received from WHV of $4 million for each of FY14 to FY21, the discount rate applied to WHV remained at 13% (as in model v 341), and the DCF valuation for WHV had increased to $54.27m out of a total enterprise valuation for Northern Lights of $375.56m (from $45.53m in model v 341).
3. Despite the concerns that Mr McGill and Mr Fitzpatrick had in relation to the likelihood of payment of a distribution by WHV, the value of WHV in model v 368 increased from AUD 43.53 million to AUD 54.27 million applying a discount rate of 13% (a further increase from AUD 7.59 million in model v 245).
4. This increase occurred because a higher terminal value was attributed to PAC's earnings in the model.
5. The "11.WHV" tab included the same information regarding distributions, dividend tranches, and percentages as model v341. But an adjustment was made to the calculations regarding the WHV cash available for distributions.
6. In model v368 a figure of $8 million from an opening balance of $14.7 million was contributed to distributions in FY14PF and the remaining $6.7 million cash available then contributed to distributions in FY15. In model v341 the available cash was only applied to distributions in FY14PF.
7. Under cross-examination, Mr McGill was unable to explain why Gresham continued to produce models as at 7 August 2014. And he could not recall why, despite the heightened concerns about WHV, the valuation of WHV in the modelling was increasing. He could not explain why the valuation for WHV had increased from $43.35m to $54.27m and he did not recall raising the issue with Gresham nor discussing this issue with any of the other directors.
8. Now Mr McGill contends that he did not receive the Gresham model v 368. But PAC says that in circumstances where the Gresham model v 368 was discovered by PAC, Mr McGill was the managing director of PAC at the relevant time and was intimately involved with the merger transaction and reviewing financial models prepared by Gresham, I should find that Mr McGill did in fact receive the Gresham model v 368, and that he reviewed it.
9. But I disagree.
10. As to model v 368, it would seem that this was not provided to the other directors. But there is no documentary evidence that Mr McGill received it either. The only documentary evidence relevant to model v 368 is that the model was received by Mr Ferragina on 7 August 2014 which was after the execution of the implementation deed.
11. Now Mr McGill stated that generally he was provided with versions of the Gresham model. But Mr McGill's evidence was that he did not recall that he had ever seen model v 368 or that it had been provided to him by anyone.
12. In the circumstances I accept that Mr McGill did not receive model v 368. And it is convenient to note at this point that if Mr McGill never received model v 368, PAC's allegation of his failure to inform the other directors of its contents falls away.
13. Let me proceed with the chronology. The concerns surrounding WHV and whether any dividend or distribution would be paid in 2014 continued to be a concern.
14. On 8 October 2014, Mr McGill and Mr Fitzpatrick exchanged emails regarding WHV. Mr Fitzpatrick said "Big issue is WHV".
15. Mr McGill replied: Ok. I agree about WHV issue and will get the team thinking about it more. Also, when it comes to funding (cash), we can add transaction costs as an upfront issue to be addressed so as to not impact our ability to pay dividends. I think we need to present a merged cashflow forecast to the board at Torrey Pines highlighting these issues. Would be good for Jeff Vincent to buy in to a solution.
16. Mr Fitzpatrick then replied "Absolutely. We are on the same page - locking up that dividend has to be our no. 1 objective".
17. On 5 November 2014, there was an email from Mr Erickson to Mr Pollock of Gresham: The $2 million of cash flow in the December cash flow is actually the dividend number projected out of WHV. That number could be $3 million based on our best information to-date but that dividend has yet to be declared. If you change the number to $3 million for the WHV dividend, we should reduce the $1 million payment in June by the same so we stay at a net $3 million. Joe has promised to wrestle Andy Turner [Non-Executive Director of NL and CEO of WHV] to get more out of WHV. More to come on that front!
18. On 10 November 2014, Mr McGill sent an email to Mr Erickson, Mr Ferragina and Mr Carver concerning the subject matter of WHV dividends that said: Tim just called me from Indonesia before boarding his flight home - I think he's in transit now for the best part of the next 24 hours. I've cc'd him here so that he can catch up on correspondence when he's next in email contact. Based on what Tim said just now, I'm quite worried about WHV. Tim mentioned that the WHV board met last week but that no dividend declaration was made and that neither Jeff [Vincent] nor the Laird Norton family representative really pushed the issue. Previously we'd assumed that the $2m dividend would be declared and paid in December whereas now we know for sure that it won't which gives pause for thought about our assumptions for future WHV dividends. Cashflow You and Joe are closer to this than I am, but I think we had $2m of cashflow in the forecast from WHV in December. I think we now need to update our cashflow forecasts for this change which will impact both Aurora and Midco cashflows. Did the forecasts previously provided to Medley include the WHV $2m? If so, I'd expect that we are now obliged to update Medley as to the new position? Obviously it's a bad time to be delivering this news given that were also concurrently trying to finalise terms with Medley. Earnings The other implication from this is in relation to the full year FY14 earnings (and first half FY14 earnings in particular). The WHV contribution in the first 2 months was a high proportion of our total earnings. Admittedly there will be a huge level of Abnormals in the 1H14 earnings which will cloud the picture but I'm worried that the normalised figure will now evidence that the business is actually behind the run rate level of earnings implied by our previous public announcements (we said that the deal would be eps enhancing). If WHV declare a dividend in the 2nd half of the financial year which includes the $2m amount then earnings will catch up by June and so the full year figure would be as expected. A solution to the earnings issue would be if WHV agreed to a restructure of the Dividends Agreement to require declaration of a dividend on Midco's entitlement every 6 months with Midco then required to reinvest the amount received. Alternatively, maybe it could become a profit share agreement with the timing of cash payment linked to the timing of payment of dividends. It's an accounting issue really - anything that works to allow Aurora to book its share of WHV earnings is fine by me. I mentioned this idea to both Jeff and Andy at Torrey Pines but haven't yet followed up on it. I was thinking that we could action this post-completion but now I'm wondering whether we need to get in-principal agreement on this now? I didn't think it was right for me to contact Jeff or Andy directly on this now without Tim's ok. I hope I'm worrying too much about this but I know that it's a sensitive issue for the [PAC] board, particularly Mike! More bad timing - the [PAC] board is meeting tomorrow at noon.
19. Clearly, there were major concerns regarding WHV as to there being no dividend and a real risk concerning future dividends. It would seem that on or around 10 November 2014, WHV's board of directors had elected not to pay a dividend.
20. On 11 November 2014, Mr Carver replied to Mr McGill, Mr Erickson and Mr Ferragina and said: Andrew, thanks for the note - and sorry all that I am out of touch today. I land around 7pm seattle time if we need to talk. I just want to quickly respond to make sure that I didn't mis-communicate when I called you earlier. If anything, I view the situation with WHV more positive than when we were together in Torrey Pines. Andy [Turner] recommitted to his willingness to work with us on our need for a dividend, and I believe will be happy to sit down and discuss as soon as we've formulated a proposal. When we discussed it, his tone was very constructive. And just to make sure I was clear, WHV didn't formally adopt or reject any dividend policy - which again I think is positive, as we haven't yet had the opportunity to propose to them what we'd like. So I think we are well positioned to sit down, have a constructive discussion, and get a good outcome. I do understand the importance of timing, and like you, I have not seen the cash flow projections, so can't comment on what, if any, impact this might have on our current cash flow expectations. I am happy to drive our discussion with WHV together with you right away. We can discus the best strategy and timing when we next talk. I'll check in when I get to seattle. …
21. Clearly, this response could be characterised as waffle coming from Mr Carver.
22. On 11 November 2014, Mr Pollock of Gresham sent an email to Mr Erickson, Mr Lange, Mr Ferragina and Mr Moulin that said: Trent / Tim Please find attached the updated monthly cash flow forecasts. Can you please take a look at the NL / MidCo cashflows for in the first few months (ie rows 7, 12, 18, 31) and let me know if you're happy that these forecasts for MidCo represent your latest view? As you can see in cell C65, these forecasts have MidCo going into negative cash in November 2014. Is this assumption correct? Appreciate in our discussion last week you mentioned $2m of inflows may offset this amount, should we include these in November? Joe / Trent HSF have asked that we provide the opening cash balances for both sides for the debt documentation. Please let me know when these numbers firm up and I'll pass them through to the lawyers.
23. On the same day, Mr Ferragina forwarded a copy of that email to Mr McGill and said: It will be interesting to see if they acknowledge that WHV will not pay a divvy
24. Clearly, McGill was quite worried about the WHV dividend at this time. It is unclear how it could be said that a dividend would be paid in 2014.
25. Now Mr McGill under cross-examination denied that it was apparent to him prior to signing the circular resolution that there would be no distribution from WHV in 2014. But I do not take this evidence seriously.
26. Further, Mr McGill also asserted that he still had confidence in the Gresham model despite the WHV income stream being in jeopardy. He stated he had confidence in the model as the "transaction was … significantly EPS-enhancing and we had still conversations going with WHV about recognition of income, and in my mind even if a $4 million dividend was not payable, a smaller amount may well be …".
27. Later in his evidence Mr McGill seemed to accept that in the period to 31 December 2014 there would be no dividend but that "[t]he longer-term prospects for the business were still as they had been".
28. Ms Donnelly accepted that the $4 million dividend from WHV was relevant to how the PAC board would have proceeded in November 2014, and that if it became clear to her that the WHV board was not going to pay the $4 million dividend then that would have been of concern to her.
29. Mr Bradley expressed the view that a diligent managing director should have drawn the correspondence, including the 10 November 2014 email from Mr McGill to Mr Carver, to the attention of the PAC board prior to the PAC board signing the circular resolution. Mr Bradley then said that a failure to do so in his opinion was a breach of Mr McGill's responsibilities as managing director. I agree.
30. Moreover, even though it was apparent at this time that a dividend would not be paid by WHV, Mr McGill did not seek legal advice on whether the implementation deed could be renegotiated prior to completion.
31. Mr McGill conceded that he knew before the circular resolution was signed on and prior to 16 November 2014 that the board of WHV were proposing not to make a distribution.

After signing the circular resolution and prior to completion of the merger

1. On 18 November 2014 at 1:38pm Mr McGill wrote to Mr Erickson and Mr Pollock of Gresham stating: …

• Whilst not a costs matter as such, I am concerned that the $2m dividend receipt from WHV which was assumed for December is now at risk following the failure of the WHV board to declare a dividend last month. Together with the $2.6m amount needed by NL at completion for reimbursement of previously paid costs this implies a short term $4.6m hole in the cashflow forecast prepared by management. …

1. On the same day at 7:54pm, Mr Pollock sent to Mr Erickson, Mr Carver, Mr McGill and others updated monthly cash flow forecasts with the statement "WHV dividend assumed to come in December 2014".
2. On 20 November 2014, Mr McGill sent an email to Mr Declan O'Callaghan of Deloitte and Mr Ferragina concerning a proposed amendment to the dividend and appreciation rights agreement that said: Immediately post completion, one priority will be to work towards amending the existing WHV Dividend and Appreciation Rights Agreement. The goal is to effectively change it to being a profit share arrangement with the timing of payment of cash amounts linked to when dividends are paid by WHV to its shareholders. Attached is the existing WHV Dividend and Appreciation Rights Agreement and my suggested amendments to achieve the goal. Could you please review from an IFRS accounting perspective (ie from Aurora and [PAC]'s perspective) and confirm whether the proposed amendments would be effective to allow Aurora/Midco to book their share of WHV profit in each half year. I want to agree the proposed amendments between [PAC] and Deloitte first before circulating to the lawyers, NL, Laird Norton and WHV for their input (and hopefully approval).
3. In my view this was all wishful thinking on the part of Mr McGill. Why would WHV agree to any of such amendments?
4. Mr McGill's proposed second amendment to the dividend and appreciation rights agreement was as follows: Name of Agreement to be changed to "Profit, Dividend and Appreciation Rights Agreement" New clause 2B Entitlement - With respect to each 6 month period beginning on or after 1 July, 2014, each Rights Holder shall become entitled to an amount equal to the Profit Pool Interest, such amount to be paid when and as described in clause 3. Additional definitions to be included in clause 1 "Profit Pool" means a dollar amount equal to Company Profit multiplied by the Applicable Percentage according to the following chart. Profits greater than Profits less than or equal to Applicable Percentage n/a $2,200,000 0 $2,200,000 $3,200,000 17.500% $3,200,000 $4,200,000 21.875% $4,200,000 n/a 26.250%

"Profit" means net profit as per USGAAP for the Company for the 6 month periods ended 30 June and 31 December each year. "Profit Pool Interest" means the bookkeeping account established for each Rights Holder to which an amount is credited on 30 June and 31 December each year equal to the product of the Profit Pool multiplied by the Rights Holder Percentage. Additional language for clause 3.2 (insert after 2nd sentence) Amount paid to Rights Holders will be debited against that Rights Holders Profit Pool Interest to reduce the outstanding balance.

1. Mr McGill accepted that the proposed amendments were not prepared by HSF and nor had they been agreed to by WHV.
2. The reality is that PAC had no control as to whether WHV would or would not agree to Mr McGill's proposed amendments.
3. On the same day, Mr McGill wrote to the other directors stating: I thought you would appreciate an update on current status of work towards completion of the NL merger. … …

• I've drafted amendments to the WHV Dividend and Appreciation Rights Agreement and the amendments are being considered by Deloitte before being put to WHV/NL/Laird Norton. This is a post-completion matter but we are getting a head start. The goal is to change the agreement into a profit share so as to allow Aurora Trust and [PAC] to book their respective share of WHV earnings each accounting period even if WHV is yet to declare a dividend; … …

1. It is clear from this email that Mr McGill was concerned about the failure by WHV to declare dividends under the dividend and appreciation rights agreement, and was concerned about the ability to recognise a share of WHV's earnings if a dividend was not declared.
2. The proposed amendments by Mr McGill to the dividend and appreciation rights agreement were to be effective from 1 July 2014.
3. The approach by Mr McGill to amend the dividend and appreciation rights agreement in late November 2014 was also inconsistent with his evidence that he still had confidence in the future about the dividend being paid to the Aurora Trust.
4. On 20 November 2014, Mr Pollock sent an updated cash flow model to Mr Carver, Mr McGill and others. It stated that it assumed inter-alia that "$2m from WHV comes into Midco in December".
5. On 21 November 2014, Mr Pollock sent an updated xlsx spreadsheet to Mr Carver, Mr McGill and others setting out cash flow projections. In relation to WHV it showed the following.
6. In terms of any WHV distribution, the projection was for $2 million on or before 31 December 2014, and then $1 million for each quarter thereafter so that by 31 December 2015 a total of $4 million was projected for 1 January to 31 December 2015.
7. In the notes to the xlsx spreadsheet this was said to be "Per Trent and Carver on 7/21/14 [21 July 2014]", which was recorded next to the $4 million figure and the WHV line of the spreadsheet.
8. On 21 November 2014, four days prior to completion of the merger, Mr McGill stated in an email to Mr Erickson "[w]e desperately need the $2.0m from WHV in December!". The full text of the email said: Having spoken to Trent just now, for the record, please let me correct my maths below and restate the logic that I understand: NL was to deliver $15m from Redwood plus $3.7m to cover the Aether issue. Total cash required from NL is therefore $18.7m. In fact only $16.3m is being contributed, being a shortfall of around $2.4m. This amount of $2.4m is the amount of completion expense reimbursement required by NL to have sufficient cash available to meet the Redwood and Aether obligations. I think that's it. The side letter will need to be adjusted based on the $2.4m amount ($2,463,000 to be precise). Treasury will fund the shortfall to allow completion to occur. We will have no margin for error with our cashflow going forward and I may need to ask for assistance to manage Midco cashflow over the next couple of months. We desperately need the $2.0m from WHV in December!

Completion of the merger

1. Completion of the merger between PAC and Northern Lights occurred on 25 November 2014.
2. A week later, Mr McGill wrote in his CEO report dated 3 December 2014 as recorded in the Aurora board papers under the heading "Cashflow": Following the merger, group liquidity is very low. Let me be clear - at this point in time, we remain solvent and in compliance with minimum cash requirements for licenses. However, management of cashflow is the highest priority for us at the moment and Midco will depend heavily upon receiving dividends and distributions that are forecast over the next few months. … …

• Critical Midco forecast cash inflows:
• WHV dividend of USD2.0m in Dec; …

1. At the board meeting of the Aurora trustee held on 10 December 2014 it was recorded that: … Mr McGill advised that following the merger group liquidity is low but group companies remain solvent and in compliance with minimum cash requirements for licenses. The proposed dividend from WHV is now not being paid but there is still the expectation of dividends from Tamro and Seizert. …
2. By 30 June 2015, there had been an impairment recorded of $16,806,616 against WHV.
3. In the accounts for the Aurora Trust for the year ending 30 June 2015 (the accounting period was 25 November 2014 to 30 June 2015), WHV was entirely written off. An impairment expense was shown in the accounts of $16,806,616 for the write-off of that investment as at 30 June 2015. The opening balance (25 November 2014) was $15,314,378 (based on fair value).
4. In the 2015 annual report it was stated: … … The product has a lengthy track record that is characterised by highly volatile performance. At the beginning in late 2014 performance endured a significant setback due to the strategy's overweighting in energy and material stocks. This underperformance has been accompanied by significant client redemptions, and FUM have declined significantly over the last year to $8.9 billion. … The economic relationship with WHV is not a typical one for Aurora, which does not have direct ownership in WHV, but rather participates only in the growth in dividends if and when declared by WHV. Given the contraction in the firm's FUM, Aurora does not expect to receive dividends this financial year.

Value of WHV as at the merger date

1. Now some of the evidence from both forensic accounting experts, Ms Dawna Wright for PAC and Mr Tony Samuel for the directors is pertinent to both the WHV and the Gresham model issues.
2. First, in relation to WHV, Ms Wright in her primary report ascribed a value of zero to Northern Lights' interest in WHV as at the merger date of 25 November 2014. Under cross-examination, Ms Wright said that her opinion of zero value expressed in her first report was not an opinion on WHV per se but instead on the value of the right that the Aurora Trust had in relation to WHV.
3. In Ms Wright's reply report she stated in relation to ascribing a value to WHV: In my view, there is little to no value of NLCG's interest in WHV at the Valuation Date given:
4. No divide[n]d historically received;
5. The risks associated with holding contractual rights, where any distribution is after ordinary shareholders;
6. The high degree of uncertainty of a dividend being received just prior to the Merger in November 2014;
7. The risks of distributions being withheld; and
8. The lack of reliability of the forecast in relation to future distributions.
9. Further, Ms Wright assessed in her reply report the value of WHV at $4,694,929 utilising aspects of Mr Samuel's calculations. She came up with that value by performing a DCF calculation using the forecast dividends included in Mr Samuel's calculations. She used a discount rate of 70% to account for the significant risk of a dividend not being paid. In my view her discount rate more accords with the very high risk concerning WHV dividends, particularly as reflected by the material in evidence before me.
10. Ms Wright did not consider Mr Samuel's calculations using discount rates of 30% and 40% to be reasonable. I must say that I agree with her. Ms Wright rightly considered that the level of uncertainty and risk associated with this investment warranted a higher discount rate, akin to that of the upper end of the range for a start-up.
11. Second, Mr Samuel acknowledged that when he assessed the true value of Northern Lights' interest in WHV at $18,852,554 he had not drawn a distinction between whether money was available for the dividend to be paid or, alternatively, whether those dividends could be paid pursuant to the relevant contractual terms. Mr Samuel accepted that there were two risks associated with WHV. There was the risk of whether there was cash on hand for a dividend to be declared. Further, there was the risk that even if there was cash on hand, it could be reinvested and capitalised.
12. He also gave the following evidence when asked by me whether the value of a contractual right would diminish if the dividend could be postponed: I would agree with that, particularly if it was something like 10 years. Yes. The longer the - if there was a long delay, I would attribute more risk to it, yes.
13. Third, Mr Samuel accepted that the value he ascribed to WHV of $18.852 million differed, as is obvious, to the value ascribed in model v 368 of $54.27m.
14. Now there was a difference between the experts concerning the methodology used for the assessment of valuation. But given the nature of what I am deciding at this first stage trial and also given my findings, I do not need to descend into the detail of their difference at this stage, save to make some short observations.
15. Distinctions were made between "true value" on the one hand and "market value" on the other hand. Further, distinctions were made concerning whether or not subsequent events could be taken into account. And there were further subtleties concerning whether a distinction should be drawn between subsequent events where the cause of loss was intrinsic and those where the cause of loss was extrinsic. Ms Wright considered that causes of decline in value that were intrinsic or inherent in the thing itself should be taken into account, but causes of decline in value that were independent or extrinsic should not be taken into account. And there were other questions concerning the use of hindsight.
16. Further, there were differences of view concerning whether and in what circumstances and how a DCF methodology should be used as compared with a capitalisation of earnings (CME) methodology, the latter of which was preferred by Mr Samuel at least for WHV.
17. Ms Wright disagreed with Mr Samuel's use of the CME method to value Northern Lights' interest in WHV because:
18. WHV did not pay any distributions to Northern Lights in 2013;
19. it was a contract rather than a direct equity investment with dividends only accruing to Northern Lights after distributions were paid to ordinary shareholders first;
20. the contractual rights did not represent any ownership or equity interest in WHV and therefore was not comparable with the benchmarks adopted by Mr Samuel;
21. there was considerable uncertainty in relation to whether a dividend/distribution would be received; and
22. any dividend/distribution flowing to Northern Lights was contingent on WHV's board of directors declaring a dividend.
23. I accept Ms Wright's views for present purposes, but do not need to make any final decision on the question of value. I will hear further from the parties as to these matters in the context of a second stage hearing on any outstanding causation questions and on the question of damages or any other relief.

The various issues concerning WHV

1. Now clearly WHV was a significant integer in PAC's merger with Northern Lights.
2. First, the PAC board papers on 23 July 2014 record WHV as contributing 49% of the total funds under management for Northern Lights and 24% of the entire merged entity.
3. Second, the Gresham model v 341 dated around 21 July 2014 ascribed a value of $43.53m to WHV out of a total enterprise value for Northern Lights of $365.96m.
4. Moreover, despite the assertions of the respondents, the inclusion of WHV in the transaction was intended to do more than simply provide access by PAC to the lucrative US mutual funds market.
5. Now I should say at the outset that in my view Mr McGill breached his duty concerning the WHV question. And I say that in the context of recognising that the degree or range of skill required of an executive director, such as a managing director, is higher or broader than that expected from non-executive directors.
6. Specific allegations were made by PAC against Mr McGill, in addition to those allegations made against all the directors of PAC, which in my view have been made out against Mr McGill.
7. First, it is said that Mr McGill failed to bring various concerns, such as whether WHV would make or was required to make a distribution to Northern Lights in 2014 or in any subsequent year, to the attention of PAC's board at the time that they voted in favour of the transaction documents execution resolution at the 23 July 2014 board meeting, at the time when he signed the implementation deed and at the time when each of the non-executive directors signed the circular resolution on or about 16 November 2014.
8. Generally, I have accepted PAC's case in this respect given the context of the terms of the instrument that I am considering. The distributions under the dividend and appreciation rights agreement and the risks associated therewith were not to be equated with the scenario of potential dividends that a shareholder might receive and the risks of not receiving such dividends.
9. Second, it is said that he failed to ensure that each of Mr Kennedy, Ms Donnelly and Mr Hayes were provided with model v 341, which significantly increased the value ascribed to WHV, prior to voting in favour of the transaction documents execution resolution at the 23 July 2014 board meeting. More generally, it is said that Mr McGill failed to bring the Gresham model v 341 and concerns regarding WHV and its payment of dividends to Northern Lights to the attention of PAC's board.
10. Generally, I have accepted PAC's case in this respect.
11. Third, it is said that he failed to ensure that each of Mr Kennedy, Ms Donnelly and Mr Hayes were provided with model v 368, which further increased the value ascribed to WHV, prior to the time the non-executive directors signed the circular resolution on or about 16 November 2014.
12. I have rejected this part of PAC's case as I do not accept that Mr McGill received model v 368.
13. Fourth, it is said that Mr McGill signed the implementation deed in circumstances where there was concern about WHV and where he had not ensured that each of Mr Kennedy, Ms Donnelly and Mr Hayes had received model v 341. More generally, it is said that Mr McGill executed the implementation deed in circumstances where, inter alia, he had not provided the Deloitte report to the PAC board and had not brought the Gresham model v 341 and concerns regarding WHV and its payment of dividends to Northern Lights to the attention of the PAC board.
14. Generally, I have accepted PAC's case in this respect, but only as to concerns relating to WHV.
15. Fifth, it is said that prior to the non-executive directors signing the circular resolution, Mr McGill failed to inform them that there was serious doubt about whether WHV would make a distribution to Northern Lights in 2014 or in any subsequent year. Mr McGill accepted in his evidence that he did not circulate communications between 23 July 2014 and signing the circular resolution regarding his concerns about WHV to the PAC board.
16. Generally, I have accepted PAC's case in this respect.
17. Now the risks for PAC associated with WHV in the context of the proposed transaction were twofold.
18. First, the terms of the dividend and appreciation rights agreement as between WHV and Northern Lights reserved to WHV the discretion to decide to not declare a dividend at all, and to instead divert any excess cash flow to reasonable reserves for capital expenditure.
19. Second, it was not clear, based on the information and modelling which was made available to the directors of PAC, whether WHV had sufficient cash reserves to declare a dividend in 2014 and thereafter.
20. Further, Northern Lights only held contractual dividend and appreciation rights in WHV rather than an equity interest. Mr McGill did not properly understand the significance of the risks associated with this difference. Further, the values attributed to WHV in the iterative versions of the Gresham models were and remain based on unexplained assumptions. Mr McGill was responsible for not addressing this deficiency.
21. Further, given the position concerning WHV, there was no reliable evidence before the PAC directors prior to them signing the circular resolution that the proposed merger would be EPS accretive. Again, Mr McGill was responsible for this failure.
22. Further, PAC has alleged that at each decision point in February 2014, April 2014, July 2014 and November 2014, the percentages split in the units in the Aurora Trust was not properly addressed. I agree with this criticism given the WHV problem. There should have been a re-adjustment of the unit percentages in favour of PAC to reflect the WHV risks. Mr McGill was responsible for this not having occurred.
23. But I should also say upfront that I have rejected PAC's case against the non-executive directors concerning WHV. Any blame for WHV not having been properly addressed is to be attributed to Mr McGill.
24. Now before I proceed further I should say something concerning the question of amendment.

Amendment

1. Part way through the trial PAC sought leave to file the third further amended statement of claim (3FASOC). The 3FASOC contained amendments to the existing [49] and contained new [50C] to [50L]. PAC did not propose to call any additional evidence in respect of the proposed amendments, nor did it seek leave to recall any witnesses for further cross-examination.
2. According to PAC, the proposed amendments to the 3FASOC reflected the evidence adduced in cross-examination of Mr McGill and Mr Fitzpatrick. In summary, the amendments pleaded the following matters.
3. First, prior to the 23 July 2014 board meeting, Mr McGill was aware that:
4. there was serious doubt about whether WHV would make, or was required to make, a distribution to Northern Lights in 2014 or in any subsequent year; and
5. on 21 July 2014, PAC had received from Gresham a revised financial model (model v 341), which substantially increased the value attributed to WHV from the version of the model which had been sent to the board on 19 May 2014.
6. Second, prior to signing the circular resolution in November 2014, Mr McGill was also aware that on or about 7 August 2014, PAC had received a revised financial model (model v 368), which further increased the value attributed to WHV.
7. Third, Mr McGill breached his duties of care and diligence by failing to inform the non-executive directors of the concerns regarding WHV and about model v 341 prior to the 23 July 2014 board meeting.
8. Fourth, Mr McGill breached his duties of care and diligence by failing to inform the non-executive directors of the concerns regarding WHV and about model v 341 prior to the signing of the implementation deed on 4 August 2014 and by signing the implementation deed.
9. Fifth, Mr McGill breached his duties of care and diligence by failing to inform the non-executive directors of the concerns regarding WHV and about model v 368 prior to the signing of the circular resolution in November 2014.
10. Further, the 3FASOC includes additional particulars setting out PAC's causation case in respect of each of the contraventions alleged.
11. Now the amendments were sought to be justified on the basis that it had always been part of PAC's pleaded case that the valuation methodology used by PAC to value Northern Lights' assets inflated Northern Lights' entitlement to units in the Aurora Trust, in part because the earnings attributable to WHV should have been excluded. But it was said that it was only as a consequence of the cross-examination of Mr McGill and of Mr Fitzpatrick that the following matters became apparent to PAC, being:
12. the extent to which Mr McGill had concerns regarding whether WHV would make, or was required to make, a distribution to Northern Lights in 2014 or in any subsequent year;
13. the fact that Mr McGill reviewed the Deloitte due diligence report, and specifically noted the commentary regarding WHV;
14. the fact that Mr McGill reviewed Gresham model v 341;
15. the fact that Mr McGill had likely received and reviewed Gresham model v 368; and
16. the fact that Mr McGill failed to draw his concerns regarding WHV, and models v 341 and v 368, to the attention of the PAC board.
17. It was said that as a result of matters arising during Mr McGill's cross-examination, a decision was made to directly challenge the truthfulness of the evidence given by Mr McGill.
18. Further, it was said that the difficulty in recognising Mr McGill's subjective awareness of the matters concerning WHV and the significance of model v 341 and model v 368 had been compounded by the fact that the proceedings were a derivative action, where PAC had limited access to the personnel at PAC who could interpret and assist with the understanding of the underlying documents of PAC. Further, Gresham had refused to speak to PAC's representatives regarding the financial models.
19. It was said that it was only in cross-examination that PAC was able to question Mr McGill about his subjective knowledge of WHV, model v 341 and model v 368.
20. I granted leave to amend in the terms sought for the following reasons.
21. First, as to the nature and importance of the amendments, the confined and targeted amendments to the 3FASOC were significant to PAC's case. They reflected matters raised in the evidence of key witnesses which were not apparent on the face of documents alone, in circumstances where PAC had no assistance from the key decision-makers at PAC at the relevant time. The amendments were important as they related directly to the alleged failure of former CEO and managing director Mr McGill to discharge his duties and provide relevant information to his fellow board members shortly before implementing the merger. The extent of Mr McGill's concerns regarding WHV and his review and interrogation of certain Gresham financial models was not apparent on the discovered documents nor was it apparent from Mr McGill's witness statement.
22. Second, as to the extent of the delay and the costs associated with the amendment, the amendments were narrow and directly reflect the evidence already given. And PAC did not propose to recall witnesses to make good these allegations. They were supported by the evidence given at trial. Further, I gave the respondents, particularly Mr McGill, an opportunity to put on further, limited evidence regarding the proposed amended paragraphs. Therefore, delay was not a highly relevant factor.
23. Third, as to the prejudice that might be assumed to follow from the amendment, counsel for Mr McGill raised the potential possibility for "irremediable prejudice" if the amendments were to be allowed. He said that Mr McGill, in pursuing lines of inquiry to defend such new allegations against him, was met with a problem that the records of matters that reflect discussions at certain board meetings were no longer available. But to address this concern, PAC wrote to Gresham's solicitors seeking their confirmation as to whether Gresham has retained those records. Gresham confirmed that it still retained the relevant records on Project Bondi and, therefore, there was no irremediable prejudice suffered by Mr McGill of the kind outlined by counsel. Further and insofar as Mr McGill asserted that prejudice remained by reason of the proposed amended allegations against him, the matters raised in the 3FASOC at [49], and [50C] to [50L], were matters that were raised and explored in the cross-examination of Mr McGill, with the opportunity afforded to him to address such matters in re-examination.
24. I considered there to be no insurmountable prejudice caused to the respondents if leave to amend was given.
25. Fourth, as to the explanation of any delay in applying for that leave, Mr Burt, the solicitor for PAC provided a detailed explanation, with reference to the evidence given in cross-examination at trial, of the reason for the delay in PAC applying for leave to amend. The need for the amendment to the pleading was not apparent until late in the proceeding, during the trial and following the evidence given by Mr McGill and Mr Fitzpatrick. I accepted that explanation.
26. So, after hearing and considering submissions from the parties, I granted leave to PAC to file a 3FASOC. I also afforded the opportunity for the respondents to adduce further evidence and recall witnesses should they wish to do so in responding to these additional claims in the 3FASOC. I also directed the respondents to file and serve defences to the 3FASOC.
27. Some six weeks after my orders, and despite having taken steps in accordance with the order by serving defences, the non-executive directors filed an application to set aside the leave to amend order. I heard this application and rejected it.
28. Now in my view the application was unnecessary as the non-executive directors accepted when the application for leave to amend was heard that if the amendments proposed by PAC deleted reference to Mr Fitzpatrick, any potential conflict of interest for the non-executive directors' legal representatives would disappear. The version of the 3FASOC served on the parties deleted relevant references to Mr Fitzpatrick.
29. I also expressed the view in hearing the application that any claim for contribution could be deferred until after the principal judgment was delivered. And in any event, the adjudication of the cross-claim would not arise if I did not find in favour of PAC in the first stage liability judgment concerning the new allegations concerning Mr McGill in the 3FASOC.
30. Further, the "exceptional circumstances" required for an order pursuant to r 39.05 of the Federal Court Rules 2011 (Cth) were not made out.
31. There had been no material change in circumstances or new material discovered which could not reasonably have been put before me on the previous occasion when the leave to amend application was heard and determined. To the contrary, the new allegations against Mr McGill were based on the evidence adduced during cross-examination, and the non-executive directors were on notice at the time that the matter was argued that Mr McGill might seek to raise a proportionate liability defence or cross-claim.
32. The non-executive directors did not identify what "exceptional circumstances" were applicable here in order to satisfy the requirements of r 39.05(c). The non-executive directors had had full notice. The asymmetry of information favoured them in terms of what they knew about the matters relevant to the merger in 2014. Further, the amendments reflected the evidence as it unfolded at trial.
33. Further, as to the proportionate liability claim in Mr McGill's defence, leaving aside the potential inapplicability of such a regime, it was difficult to see how such an allegation gave rise to a conflict between Mr Fitzpatrick and the other non-executive directors.
34. It was difficult to see any real prejudice to the non-executive directors resulting from the proposed amendments, and allowing the orders granting leave to amend to stand, particularly in the following circumstances.
35. First, the asymmetry of information between the parties meant that the respondent directors could have provided further evidence regarding key issues, such as WHV, which was raised in PAC's 2FASOC, as part of its lay evidence, but chose not to do so.
36. Second, PAC's choices were limited given the nature of the proceeding being a derivative action.
37. Third, the non-executive directors chose to be represented by the same legal representatives who ought to have known of a risk of conflict, given the differing roles, responsibilities and involvement of their clients in the merger. Now from the commencement of the proceeding, Mr McGill was separately represented. But a forensic decision had been made that all the other directors would be jointly represented, even though there was always the prospect that evidence might emerge in such a way as to make their interests diverge.
38. Fourth, counsel for the non-executive directors during oral submissions when the application to amend was being heard and determined, agreed with me that if the words "and/or Mr Fitzpatrick" were deleted from [49(aa) & (ab)] of the then proposed 3FASOC such that the new allegations of knowing about and/or receiving certain important information were directed only to Mr McGill, then that would remove any potential conflict.
39. Fifth, the non-executive directors did not advance any reason why they should be permitted to resile from the above concessions. And as I have indicated, at the time the application for leave to amend was heard, the non-executive directors were on notice that Mr McGill might seek to raise a proportionate liability defence or cross-claim.
40. Sixth, in any event I made clear during the course of argument that if Mr McGill filed a cross-claim, which was flagged during the hearing, I would not adjudicate on it, but would instead deliver a first-stage judgment. Further, any issues estoppel that might arise from my principal judgment would carry over to any contribution claim.
41. Now if I ultimately found no liability on the part of Mr McGill in regard to the allegations made in the 3FASOC then the issue would never arise. But if I did find liability on the part of Mr McGill having regard to the evidence at trial, then Mr McGill would have the opportunity to prosecute his cross-claim. Of course that latter scenario has now arisen.
42. For these reasons I both allowed the relevant amendments and also rejected the non-executive directors' application to vacate my amendment orders.
43. Now I have earlier set out the relevant chronological sequence of facts concerning WHV.
44. Given that foundation, it is appropriate to begin by setting out how Mr McGill has sought to justify before me his conduct and to meet PAC's case against him.
45. I will then turn to addressing such matters and in that context also explain why I have accepted that PAC's case against the non-executive directors concerning WHV has not been made out in the sense that PAC has not made out a case of breach of duty concerning those directors.

Mr McGill's case by way of defence

1. Now PAC alleges that at the time the non-executive directors voted in favour of the transaction documents execution resolution at the 23 July 2014 board meeting, Mr McGill had failed to inform the non-executive directors about various matters being the following.
2. First, it is said that he failed to inform the directors that there was a serious doubt about whether WHV would make, or was required to make, a distribution to Northern Lights in 2014 or in any subsequent year.
3. Second, it is said that he failed to inform the directors that PAC had received model v 341 and that it contained assumptions as to $4 million distributions from WHV, a decrease in the discount rate and an increase in the DCF valuation applied to WHV.
4. Now as to the 23 July 2014 board meeting itself, Mr McGill gave the following account in his witness statement.
5. After the presentations and tabling of the documents, Mr Fitzpatrick led general discussions about the proposal and in particular a discussion about the management adjustments identified in the Deloitte report.
6. Mr McGill said that during this discussion, Mr Fitzpatrick and he both expressed confidence in several of the management adjustments being the Aether, Seizert and BNP items but noted risk in relation to the forecast $4.0m dividend from WHV which was a matter within the discretion of the WHV board.
7. Mr McGill said that the directors acknowledged comments by him or Mr Fitzpatrick that WHV appeared to hold sufficient cash in order to make the $4.0m payment should its board resolve to do so.
8. Now Mr McGill's account of the meeting was challenged in cross-examination in passages that I have set out earlier. But Mr McGill says that his evidence of the discussion about WHV is supported by the file note of the 23 July 2014 board meeting made by Ms Lo of HSF.
9. But in my view Ms Lo's note does not support the proposition that detailed risks were discussed concerning WHV.
10. Further, Mr McGill says that the other directors' evidence was that risks in relation to any distribution from WHV were the subject of discussion among the board. But I would note at this point that this is an over-statement of the evidence.
11. Mr Kennedy was asked: MR CAMERON: Was there a discussion about WHV and the concerns with respect to the $4 million dividend? MR KENNEDY: There was a discussion. I remember a discussion. Q: When? A: I can't recall. Q: And between whom? A: I'm pretty confident that Mike Fitzpatrick was one of the parties, but whether - where it was and who was there, I'm not clear. Q: And what was the substance of that conversation with Mr Fitzpatrick? A: Well, to make sure that we received the dividends from WHV. … Q: So as at July 2014 when the deal had been approved but the circular resolution had not been signed, there was concern with respect to WHV, and that - yes? A: Yes.
12. Now Mr Hayes had no recollection as to the discussion of WHV at the 23 July 2014 board meeting or thereafter, but his overall recollections were limited.
13. Ms Donnelly had a limited recollection of the 23 July 2014 board meeting and did not recall whether she was told at the meeting that there were concerns about whether a distribution would be paid to WHV.
14. But Ms Donnelly did accept that WHV was forecast to deliver earnings of approximately $4 million. The figure of $4 million, which is the same figure recorded in Ms Lo's file note, appeared in model v 341.
15. Ms Donnelly was also asked: MR ANNABELL: And you don't recall any discussions about whether the WHV board - or concerns that the WHV board will not declare a dividend? MS DONNELLY: I - I think there were discussions. Q: Do you recall when those discussions took place? A: I don't, no. Sorry, this is many years ago.
16. Mr Fitzpatrick agreed that there were risks associated with WHV, including in a context where he had referred to the lack of equity ownership.
17. He was also asked specifically about his knowledge as at the time of the 23 July 2014 board meeting: MR WALLER: The fact is, Mr Fitzpatrick, that at that time when you approached the meeting on 23 July, quite aside from the way things might have been expressed in a press release, you had a concern, didn't you, about whether or not WHV would make a distribution to Northern Lights? MR FITZPATRICK: I did. … Q: And one of the concerns you had at this time, I suggest, was WHV and whether or not it would in fact make distributions. Was that a risk you took into account on this occasion? A: Definitely. Q: And was it discussed at the meeting? A I can't imagine it wasn't. I believe it was.
18. In addition, Mr Fitzpatrick had Mr McGill's account of the meeting put to him and was asked if it was an accurate summary of what occurred. He said he thought that it was.
19. But later when Mr Fitzpatrick was recalled for further cross-examination, he stated that he did not remember whether WHV was mentioned at the meeting but he thought that it would have been discussed. He further accepted that it was likely that the issue of WHV was raised shortly after the meeting.
20. Further, Mr Fitzpatrick's evidence was that at the time of the board meeting he took into account the risk that WHV might not make a distribution, and that this reflected any discussion about WHV at the board meeting. But this is all a simplistic assessment. I will return to this topic.
21. But even if some general conversation took place at the board meeting concerning WHV, I disagree that the key relevant risks were discussed. I will return to this later.
22. PAC says that Mr McGill was aware when the transaction documents execution resolution was passed and when the circular resolution was passed, that the Gresham financial model v 341 increased the assumed distribution from WHV and increased the DCF valuation attributed to WHV. That assertion of PAC is accurate.
23. There were numerous versions of the Gresham model.
24. Model v 245 was presented by Gresham to all the directors on 21 May 2014. At the "WHV" and "NLCP Valuation Summary" tabs in model v 245, there were figures for the profit before tax contribution from WHV. It was projected that WHV would make distributions of AUD 1.62 million in the year ending 30 June 2014, AUD 1.67 million in the year ending 30 June 2015, and AUD 850,000 in the year ending 30 June 2016 and similar figures thereafter. In addition, the discount rate applied to WHV's earnings was 14% and the DCF valuation attributed to the business was AUD 7.59 million.
25. Further, as to a later iteration of the model being model v 341, both Mr McGill and Mr Fitzpatrick received it on 21 July 2014. In model v 341 it was projected that there would be WHV distributions of $4 million for each of the years ending 30 June 2014 to 30 June 2021. In addition, the discount rate applied to WHV's earnings had reduced to 13% and the DCF valuation attributed to the business was AUD 43.53 million.
26. In my view Mr McGill did not explain any of these changes or their significance to the other directors, particularly Mr Kennedy, Mr Hayes and Ms Donnelly.
27. But Mr McGill says that PAC focuses on form and not substance. But Mr McGill says that in circumstances where all directors engaged in a discussion at the board meeting about WHV and that discussion proceeded by reference to a forecast distribution that was contained in model v 341, any finding that Mr Kennedy, Mr Hayes and Ms Donnelly did not have their own copy of the entire model is irrelevant.
28. But I disagree. I will return to this topic.
29. PAC claims that the board did not have sufficient information about the transaction because of deficiencies concerning the WHV question. PAC says that the board did not have reliable and independently verifiable evidence that the merger would be EPS and/or value enhancing for PAC shareholders.
30. But Mr McGill says that the other directors had the benefit of a detailed discussion about the projected income from WHV and the risk that it might not be received. I disagree.
31. Further, according to Mr McGill, the principal attraction of WHV for PAC was not the projected dividend distribution but the access it provided to the potentially lucrative US mutual fund market through an established distribution network. Further, he said that the distribution was relevant to the debt servicing question. I will return to these matters.
32. Further, PAC says that the other directors did not have a reliable independent valuation of the Northern Lights boutiques for the purposes of determining the allocation of the units in the Aurora Trust, by reason in part of the deficiencies concerning the question of WHV. But Mr McGill says that those directors had the output of Gresham's work as reflected in the papers for the 23 July 2014 board meeting.
33. Mr McGill says that he met his duties by bringing to the other directors' attention the details of arrangements with WHV, including the discretionary nature of the projected $4 million payment.
34. But again there are problems with Mr McGill's position as I will return to.
35. PAC alleges that Mr McGill was aware that there was serious doubt about whether WHV would make or was required to make a distribution to Northern Lights in 2014 or in any subsequent year. It is said that he was relevantly so aware before the making of the transaction documents execution resolution on 23 July 2014 and the execution of the circular resolution on 16 November 2014.
36. Now one reference to distribution is to Northern Lights' rights under the dividend and appreciation rights agreement. But another reference to distribution is to Northern Lights' other rights to income from WHV under other service agreements.
37. Now as early as the 4 December 2013 board meeting, Mr McGill says that he was aware in general terms of the nature of Northern Lights' rights in respect of WHV. Annexed to his report for that meeting was a data presentation, which stated that Northern Lights had contractual economic rights with WHV to share in the growth of the firm under an agreement as of 1 January 2013.
38. Similarly, the appendix to Mr McGill's and Mr Howard's 21 February 2014 memorandum, which was circulated for the February 2014 board meeting, stated: WHV Investment Management, Inc … Description: The key terms of the investment provide Northern Lights a variable management fee, expense reimbursement, a share in the growth of dividends, and a share in the increase of the enterprise value of WHV at the time of a liquidity event. In exchange for these rights, Northern Lights provided members of its team to serve in various capacities for WHV, including the CEO role, as well as sales and distribution leadership and distribution services. …
39. The document also contained a PAC summary, which noted that Mr Fitzpatrick was aware of this material.
40. The February 2014 board pack also contained a memorandum from Mr McGill and Mr Howard which said, in a footnote referring to WHV, "[r]evenue share agreement. No investment made by NL".
41. In cross-examination, Mr Kennedy was asked about this footnote in the following terms: MR CAMERON: Did you ask any questions in relation to the revenue share agreement that's footnoted there? MR KENNEDY: Yes. Yes, yes. It was - because it was different and unusual. Q: And what were those? You clearly have a good recollection of what occurred. What were the---? A: ---I remember WHV specifically. Q: Yes. And so what were the questions that you asked Mr McGill in relation to the revenue share agreement? A: I think I wanted to know more about the relationship with WHV.
42. Mr Fitzpatrick was also asked about the footnote and accepted that he was aware in February 2014 that Northern Lights did not have any ownership interest in WHV.
43. Further, Mr Fitzpatrick accepted that there was some doubt as to the arrangements with WHV. The following cross-examination occurred: MR WALLER: And you understood, didn't you, that there was no contractual right to a dividend, was there? MR FITZPATRICK: At this stage, that was under discussion. Q: At this stage, there was a no contractual right that Northern Lights had to receiving an annual dividend from WHV? A: In retrospect, I don't know, because there was some work done on them where there was a calculation as to what dividend could be paid. Q: Right? A: I just can't remember where that is, but there was certainly some debate at that stage as to how - as to how that would work. Q: And there was some uncertainty surrounding---? A: ---Yes. Absolutely. Yes.
44. Further, Ms Donnelly noted that she was aware of the revenue sharing arrangement with respect to WHV as at February 2014. She also confirmed that she remained aware of this in June 2014 in the sense that she was aware that Northern Lights did not have a direct interest in WHV.
45. Now Northern Lights' rights in respect of the distribution of dividends from WHV were set out in the dividend and appreciation rights agreement, which Mr McGill received on 11 June 2014.
46. Further, Northern Lights' rights were also addressed in the Deloitte report, which Mr McGill received on 18 June 2014.
47. Now given clause 3.1 of the dividend and appreciation rights agreement, the terms of which I have set out later, PAC contends that there was a real prospect that Northern Lights might receive nothing under the dividend and appreciation rights agreement and that this could be legitimately achieved without regard to the interests of the holders of rights under that agreement. But according to Mr McGill WHV was obliged by clause 3.1 to act in good faith and to act "consistent with past practices".
48. Mr McGill says that WHV had previously made substantial payments of dividends, including USD 4.9 million in the year ending 31 December 2020 and USD 13.9 million in the year ending 31 December 2013.
49. Further, according to Mr McGill, PAC has not properly distinguished between the existence or otherwise on the part of a company of a binding obligation to pay a dividend and the formation of a commercial view by the holder of an interest in that company as to whether a dividend would be paid and, if so, in what amount.
50. Mr McGill says that in almost all cases where PAC took a minority equity interest in a boutique, it was most unlikely to be able to compel that boutique to pay a dividend in any given year. The decision to declare a dividend lay with the board of that company.
51. Mr McGill says that in commercial substance, in circumstances where no equity interest was to be taken in WHV, the arrangement under the dividend and rights appreciation agreement replicated that position.
52. And Mr McGill says that there is no evidence that either he or any of the other directors held the view that the board of WHV was obliged each year to declare a dividend, irrespective of the financial circumstances of the business.
53. But this is all a simplistic assessment which I will return to shortly.
54. Further, Mr McGill says that whilst he knew that it was not certain that WHV would declare a dividend and make a distribution to Northern Lights, he says that he held the opinion that it was appropriate to project that it would do so.
55. He said that there was an alignment of interests between the actual shareholders and the contractual rights holder that ultimately, before shareholders get anything, they had to honour. And he said that "it was in my mind not so much … whether it was gone for [ever], but it was more a question of timing". In my view, his position was optimistic if not naïve.
56. Now Mr McGill stated that "the way that agreement operated was, if there was no payment in any given year, it carried forward, it wasn't gone forever". But this does not accord with the terms of the dividend and appreciation rights agreement.
57. But Mr McGill's counsel sought to get around this evidence by saying that there are at least two ways in which Mr McGill's understanding was consistent with that agreement.
58. First, he said that if no payment was made in any given year, this may assist in subsequent years, on the basis that less of the free cash flow would reasonably be required for capital expenditures and working capital.
59. Second, he said that the accumulation of the dividends would enure to the benefit of WHV. And by reason of clause 4 of the dividend and appreciation rights agreement, PAC would share in that benefit upon the occurrence of a "Liquidity Event".
60. Now I have set out clause 4 and the definition of "Liquidity Event" later. "Liquidity Pool" was also defined in clause 1, such that where the "Liquidity Proceeds" were between USD 40 million and USD 50 million, 17.5% of those proceeds would be shared, where Liquidity Proceeds were between USD 50 million and USD 60 million, 21.875% of those proceeds would be shared, and where Liquidity Proceeds were above USD 60 million, 26.250% of the proceeds would be shared.
61. As set out in the definition of "Percentage" in clause 1, Northern Lights was entitled to 85.72% of the Liquidity Pool, subject to its rights gradually vesting over a two year period, as noted at clause 2.1. I will set out the relevant terms later.
62. Now Mr McGill said that the dividend and appreciation rights agreement provided for Northern Lights to take a meaningful share in the capital growth of WHV, such that non-payment of a dividend in any given year did not mean that it necessarily lost the benefit of the cashflow derived in that year. But I must say that this position put to me on Mr McGill's behalf was unconvincing and I will return to this topic shortly.
63. Further, Mr McGill also said that in addition to the dividend and appreciation rights agreement, Northern Lights had rights under the WHV service agreement, the first amendment to the service agreement (extending the agreement for at least two years), the voting and right of first refusal agreement, and the first amendment to the voting and right of first refusal agreement.
64. Now under the service agreement Northern Lights had received M&A service fees equivalent to USD 800,000 p.a., paid in equal monthly instalments. It had also received sales and marketing fees equivalent to USD 812,500 p.a., paid in equal monthly instalments. And it had received a discretionary bonus in the amount of USD 750,000, which Northern Lights received and then appears to have paid on to Mr Jack Swift.
65. Mr McGill says that these other agreements are relevant in that the income which Northern Lights expected to receive from WHV was not limited to what might be derived from the dividend and appreciation rights agreement alone.
66. Further, and more generally, Mr McGill has also relied on the defence that if he failed to provide the requisite information to the other directors, he made a business judgment to adopt that course. I should say now that on the evidence I would reject such a defence.
67. Let me deal with Mr McGill's position concerning PAC's claim about the execution of the implementation deed on or about 4 August 2014.
68. Mr McGill signed the implementation deed on or about 4 August 2014 to give effect to the transaction with Northern Lights. Now whilst by the making of the 23 July 2014 transaction documents execution resolution, PAC had decided to proceed with the transaction, it was not until the execution of the implementation deed that it made a contractual commitment to Northern Lights to do so. This commitment was subject to certain conditions.
69. PAC says that the circumstances concerning WHV were continuing and that Mr McGill had not brought them to the attention of the other directors.
70. Now Mr McGill sent an email to Mr Pollock of Gresham on 29 July 2014, stating that: …

• Currently the TRG board is not prepared to state that the deal is dividend accretive. They require some further commitment from Laird Norton/WHV/Jeff Vincent in relation to payment of dividends by WHV before having the necessary confidence to make this disclosure. …

1. Mr McGill says that the content of this email is consistent with the board having been informed of the discretionary nature of distributions from WHV, being content to proceed with passage of the transaction documents execution resolution nonetheless but tasking Mr McGill with doing what he could to gain a greater commitment from WHV about payment of the dividend. But this is all downplaying the significance of what occurred.
2. Further, Mr McGill sent an email to Mr Carver of Northern Lights on 29 July 2014, which stated: Next time we speak, can we please chat again about WHV. I just had Mike on the phone from Dubai. He's worried about the WHV dividend. If it doesn't get paid (particularly in FY15) then our reported earnings and cashflow will be materially worse than forecast. Also, he's worried about the potential competing uses for WHV cash (eg new investments). How does that work given that one of our contractual duties is to source new investment opportunities for WHV? Is it true that new investments by WHV could prevent a dividend from ever being paid? Mike says my arse is on the line on this issue (helpful!). He wants me to take out the comment in the ASX release to the effect that the deal is expected to be dividend accretive - I'm worried about that because its an obvious question that I'll be asked and anything less than a firm answer could lead to share price weakness because a lot of our retail investors are there due to the fully franked yield.
3. Mr McGill says that this email is consistent with there having been a detailed discussion of WHV at the 23 July 2014 board meeting, Mr McGill having been tasked by the board to do what he could to gain a greater commitment from WHV, Mr Fitzpatrick mulling over the discussion at the board meeting and following it up with Mr McGill. But again, this to my way of thinking was Mr McGill seeking to soft-sell to me what was really going on.
4. Now Mr Fitzpatrick also accepted in relation to the 29 July 2014 email the following: MR WALLER: And you understood, or at least it's conveyed in this email, that the way in which the dividend and appreciation rights agreement that Northern Lights had with WHV, the way it was framed meant that there could well be circumstances where, even if WHV had cash, none of that would actually find its way into a dividend or into a distribution, it could be used for other purposes before it ever made it to Northern Lights? MR FITZPATRICK: That was my understanding of it. I'm not sure whether it's right. That was my understanding.
5. And in relation to the same email chain, Mr Fitzpatrick also accepted the following: MR WALLER: Didn't that suggest that, whether they had the cash or not, WHV had a discretion about whether they would ever declare a dividend and that would mean that there was a real possibility that no money would flow from WHV to Northern Lights quite aside from whether WHV had the cash? MR FITZPATRICK: We were used to doing minority investments in companies and this in the end was analogous to a minority investment in a company, so we weren't totally hot on an absolute right to get a certain string of payments.

Analysis - WHV

1. In my view there were many deficiencies in Mr McGill's conduct concerning WHV.
2. First, Mr McGill only received a copy of the dividend and appreciation rights agreement on 11 June 2014. Clearly, he should have procured and properly read that agreement months earlier. Indeed, it was others that brought to his attention that PAC did not have a copy of what was a fundamental agreement. His conduct was sloppy and careless.
3. Second, by reason of the absence of a copy of the dividend and appreciation rights agreement until very late in the piece, the agreement was mischaracterised and misdescribed in PAC's internal documents from December 2013 to July 2014. The varying descriptions given from time to time were either wrong or incomplete or both. Mr McGill was responsible for such misdescriptions. Indeed, the agreement was still misdescribed in PAC's ASX announcement at the time of the merger as a "profit share agreement". This was not a complete or accurate description.
4. Third, Mr McGill should have sought proper and detailed external legal advice on the provisions and risks inherent in the agreement. He failed to do so. His failure to do so meant that he did not fully understand or appreciate the risks inherent in it or how far removed it was from an interest in shares and the usual risks associated with a company deciding not to declare a dividend but to retain funds, thereby increasing the capital value of a share investment.
5. Now Mr McGill sought to fudge the question of legal advice by at one stage saying that HSF had given advice on this. But the truth is that HSF were only asked to verify or confirm its existence and formal enforceability.
6. Further, as a consequence of these failures the other directors were not properly informed as to the deficiencies, loopholes and risks in the dividend and appreciation rights agreement. This put the other directors at a serious disadvantage.
7. Fourth, at times during his evidence Mr McGill manifested an incomplete understanding as to how the terms of the agreement operated. His performance on that question in the witness box was underwhelming. He seemed to perceive that if WHV made no distribution then the relevant profit would accumulate to Northern Lights' advantage and ultimately the Aurora Trust's benefit. But this was confused and wrong. Mr McGill in his closing submissions sought to repair the damage, but unsuccessfully.
8. Fifth and relevant to the risk of WHV not making distributions or dividends, Mr McGill thought that WHV had a practice of paying dividends. He based this proposition on the accounts of WHV for the years ending 31 December 2010 to 31 December 2013 provided to him on 12 June 2014. But this was wrong as a matter of substance if one carefully considered these accounts.
9. Now during his evidence, Mr McGill was asked directly by me whether he had financial information suggesting that WHV had declared and paid a dividend to its shareholders in the five years prior to the 2014 financial year. His response was: "No. I didn't". But later in re-examination Mr McGill was reminded of an email to which he was copied in on 12 June 2014. That email from Mr Moulin at Gresham attached a long list of 23 "outstanding documents" including among them, WHV Investment Financial Statements December 31, 2012 and 2013 and the WHV Consolidated Financial Statements December 31, 2011 and 2010.
10. The accounts for WHV which were among the 23 attachments to the covering email disclosed the following position in relation to dividends declared by WHV in these calendar years:
11. 2010: USD 4.9 million non-cash;
12. 2011: USD 0;
13. 2012: USD 0; and
14. 2013: USD 13.9 million non-cash.
15. I should note that the so-called dividends in 2010 and 2013 have a problematic characterisation which I will discuss in a moment.
16. It is not in dispute that at the time the merger was under contemplation, no dividend had yet ever been distributed to or passed on by WHV to Northern Lights. The Deloitte report stated "…NLCP has not received a distribution from WHV since making its investment in 2013".
17. So, no dividend was declared by WHV in the 2011 and 2012 year. The 2010 and 2013 "payments" are questionable.
18. There were no dividends distributed by WHV for the years ending 31 December 2011 and 31 December 2012.
19. Now for the year ending 31 December 2010, the WHV accounts showed a dividend of USD 4,900,000. But this was recorded as an "Intercompany dividend to Parent - recorded as a reduction to intercompany receivable from the parent".
20. A note to the accounts described this in the following terms: Related Party Receivable - Parent The Company has a treasury arrangement with its Parent, whereby the Company's cash is managed and, at times, utilized by its Parent for corporate purposes. As a member of a consolidated group, federal income tax payments are paid by the Parent. Dividends to the Parent may be declared annually, and are typically recorded as a reduction in the related party receivable - Parent. The Parent currently does not have a source of funds to pay this receivable other than through its ownership of the Company or from its shareholders.
21. For the year ending 31 December 2013, the accounts showed USD 13,900,000 as "Dividends declared and paid". But again this was recorded in a similar fashion as for the year ended 31 December 2010, that is, as "Intercompany dividend to Parent - recorded as a reduction to intercompany receivable from the Parent".
22. To suggest, as Mr McGill at one stage attempted to do, that this demonstrated a practice of WHV paying dividends, let alone a willingness to make distributions to external investors, was specious. Only Laird Norton was "paid" a dividend through book entries as explained by the note that I have set out.
23. Mr McGill's attempt to rely upon these accounts as demonstrating a practice of WHV paying dividends cast a shadow over the reliability of his evidence concerning WHV.
24. Further, there were various representations made to PAC by Northern Lights from time to time and information provided concerning WHV's value and distributions that were either waffle or should have made Mr McGill very wary concerning both the value of the "rights" concerning WHV and the likelihood of it paying dividends. Let me set these out as part of a short chronology, albeit that I have referred to some of this material earlier.

Representations made to PAC by Northern Lights

1. On 28 November 2013, Mr Tim Carver, executive director of Northern Lights and a director of WHV, emailed Mr McGill and Mr Ferragina a model with projections for Northern Lights' boutiques, stating: Attached please find a model that outlines our thinking on projections for our portfolio companies. I forward this with the usual disclaimers (a) please keep this information strictly confidential, and (b) please keep in mind that these are projections, and as such the only thing certain about them is they will ultimately be wrong!
2. The attached document included for WHV:
3. under the heading "Portfolio Company Distributions", $4 million in each of 2014 to 2019 inclusive, and $31.4 million in 2020; and
4. a DCF value range of 22.1 million to 33.5 million.
5. On 24 February 2014, the memorandum from Mr McGill and Mr Howard dated 21 February 2014 included within the February board papers attributed a value for WHV of USD 19.125m, without noting any ownership percentage; further, there was a column titled "Multiple of Cost" which had a 0 in it with respect to the row for WHV.
6. On 17 March 2014, there was a meeting of Mr McGill and Mr Howard with WHV personnel being Mr Andy Turner, CEO of WHV, Ms Jessica Pickens, Mr Scott Blankenship and Ms Melanie Grace.
7. Mr Howard's notes record the following:

• Boutique investments:
• Potential conflicts between WHV and NL over new boutique offerings. WHV takes priority over deals which will have primary appeal to Intermediary space, NL over those with Institutional appeal; attraction is the Distribution capability of WHV. …
• Distribution contract: 3yr term, exclusive across all channels, retainer + share of revenue. Say 35-40% of revenue. …
• $20m cash on B/S + "blank cheque" from Laird Norton available for funding new investments by WHV.
• WHV board: Andy, Tim, 2 Laird Norton, 2 outside investors" …
• Overall WHV structure:
• 100% owned by Laird Norton for over 20 years …
• Suite of contracts govern relationship covering Services (Management/Jack, M&A services), Economic Participation Right (in relation to income, NL is entitled to [ ] % of earnings above $[2.5]m pa; in relation to capital, NL is entitled to 25% of exit value above $40m value (of which Andy & Jack have 6% personally)).
• M&A component - in good faith in ordinary course of its business, when NL identifies deals which could suit WHV they must be offered to WHV
• NL receives around $3m pa fees across all services
• WHV board has NL representatives (arguably has de facto control of it really)
• NL gets annual profit participation in perpetuity; 3-5 year vesting period on Economic Participation Rights contract. Services contract is a 2 year term with automatic renewal if not terminated with 6 months notice. Currently seeking to renegotiate for a 3 year term.
• Dick Haryama is a sub-advisor to WHV ie he doesn't own his clients. 10 year sub-advisory contract with 5 years left to run. Haryama earns 50% of fees (30bpts), and 50% of fees are kept by WHC (30bpts).
• Staff: Jack acts as a Consultant to WHV. Andy is CEO.
• 10/12ths of WHV's current revenues come from the Haryama fund; Haryama fund has lost $1.5bn - 2.0bn over past 18 months. Retail outflows are currently $1-3m per month. Jack's forecasts are for 25% FUM loss - if Morgan Stanley were to put Haryama on Sell then the FUM loss would be around 40%. "

1. On 28 April 2014, there was an email from Gresham to Mr McGill and Mr Ferragina attaching two documents provided by Northern Lights, and stating: Please find attached two documents that have been uploaded today in the Project Three data room: NLCP Valuations (includes valuations of the boutiques as well as financial forecasts) and Revenue by Geography. … We note the valuation report does not include Nereus, WHV, Blackcrane, NLAA or EAM.
2. On 22 May 2014, there was an email from Mr Erickson to Mr Ferragina, which was forwarded to Gresham and Mr McGill in the following terms: As promised, attached is the 5-year plan for WHV's forecast as provided by the Company. The password is ''plan". Please presume that the same issues exist as to the assumptions made in the model, as well as the inability to make reps/warranties around the forecasted numbers.
3. The attachment, which Gresham then used, included data for FY12 to FY18, including income and expenses. Now it is to be noted that:
4. the tab "Dashboard 2013 Baseline" had no entry in the field titled "Base Dividend Declared" for each of the years FY13 to FY18 inclusive; and
5. the tab "Financial Statements" had a "0" in the field titled "Dividends Paid on Common Stock" for each of FY13 to FY18 inclusive.
6. On 28 May 2014, Mr Howard sent to the PAC board members an email attaching a document titled "Northern Lights Due Diligence - Manager Assessment". In relation to WHV, the attachment stated: The overall relationship with WHV is worth around US $3million a year to NL plus entitles it to 25% of all dividends about US $2.5million, plus entitled to 25% of exit value about $40 million (of which Turner and Swift have 6% personally). Services contract is for 1 2 years with automatic renewal… . Plans are already underway to lengthen contract to a three year term…
7. Clearly the words "entitles" and "entitled" were inapposite. Moreover, PAC did not receive a copy of the dividend and appreciation rights agreement until 11 June 2014. Clearly, Mr Howard and Mr McGill at this time had little idea of what the terms actually said.
8. On 10 June 2014, there was an email from Mr MacGregor of Gresham to Mr Howard, Mr McGill, Mr Moulin and Mr Ferragina which said: WHV earnings forecast

• NL have never provided an explicit forecast for the contractual income stream owing to NL from the WHV agreement. There are certain documents in the data room but there are gaps (we have requested the missing Dividend and Appreciation documents).
• Based on earlier due diligence discussions (see Andrew's [PAC] DD notes), we believe that WHV contributes around US$3.0m p.a., possibly more subject to discretionary bonuses and share of WHV earnings.
• The William Blair team have included their own estimate in the financial forecast provided to the banks. They show higher WHV related earnings of US$4.0m per annum. These forecasts were signed off by Trent so we have a basis to put some degree of faith in this higher number.

1. One can see here the whiff of an issue.
2. On 11 June 2014, there was an email from Mr Erickson, CFO of Northern Lights, to Mr Pollock of Gresham and forwarded to Mr McGill: Thanks for the note. Apologies that the Dividend and Appreciation Rights agreement did not make it in folder 9.2.9.22 with the other WHV agreements. Please find the attached for information. I am also attaching my version of the 2014 NLCG management company budget. This does the best job of breaking down management fees, retainers, etc. Please take a look and let me know what you need. As for future forecasts of NLCG corporate expenses, we do not have projections together. For the Blair model, we assumed a breakeven with Trust reimbursing expenses. For general purposes, we manage to a breakeven on cash year-over-year. Going forward, I think you could use the attached budget as the a baseline and make reasonable assumptions for expense growth as helpful. Specific to WHV:
3. We have assumed a $4.0million dividend based on general understanding of the WHV business and what we project for life going forward. I would have to defer to Joe Ferragina on how to determine the % of WHV's NPAT attributable to the Trust given that NLCP/Trust really only hold a dividend/appreciation right rather than an actual full equity interest.
4. Specific to Jack's arrangement, 100% of Jack's remuneration is paid by WHV effective January 2013. For 2013, he received both a base compensation of $812,500 and a bonus of $750,000. We expect that to be similar in 2014.
5. On 12 June 2014, an email was sent from Mr Moulin of Gresham to Mr McGill, Mr Ferragina and Mr Howard stating, "please find attached the documents I have received from William Blair this morning". There were 23 attachments to the email, including the following documents in relation to WHV:
6. WHV Investment Financial Statements December 31, 2012 and 2013; and
7. WHV Consolidated Financial Statements December 31, 2011 and 2010.
8. On 18 June 2014, there was an email from Mr Erickson to Mr Ferragina attaching a document titled "WHV economics.xlsx". The attached spreadsheet appeared to set out a calculation of distributions for WHV, including:
9. EBITDA of $18,000,000;
10. total dividends of $12,313,800; and
11. under the heading "1-38%", the total amount of $4,040,359.
12. On 18 June 2014, there was an email from Mr Ferragina to Mr Pollock and Mr MacGregor stating: Trent reckons they have excess cash and retained profits brought forward to fund a $12m div even if WHV does not attain an $18m EBIT
13. On 18 June 2014, Mr MacGregor emailed Mr Ferragina, Mr Pollock and Mr McGill: As a potential positive offset to the issue above, I note based on the WHV feedback from Trent that there is some prospect of upside to our forecasts for WHV. Trent believes that they will receive US$4.0m of dividends from WHV in each of the next 2 years. Currently, in the model we account for only $1.0m which is the number you get when applying the formula in the Dividend and Appreciation Rights document. Trent's view is that they have sufficient retained cash to pay special dividends to make up the shortfall (he is checking to confirm if they have sufficient retained earnings). I guess the risks here are that (a) whether there is sufficient cash each year to pay the special dividend, and (b) whether WHV will actually agree to pay a discretionary special dividend (and large enough to deliver US$4.0m). On the second point, I understand Tim Carver is seeking to renegotiate the WHV agreement to provide some additional rights to dividends?

The situation prior to the 23 July 2014 board meeting

1. Now the Gresham model v 245 was the only version of the Gresham model that was received on 19 May 2014 by all of the directors prior to the merger.
2. Contrastingly, the Gresham model v 341 was sent by Gresham to Mr McGill and Mr Fitzpatrick on 21 July 2014, and they were the only directors who reviewed it.
3. Further, the value attributed to WHV in the Gresham models increased over time. Moreover, this is all in circumstances where the risks identified remained unexplained in Gresham's work.
4. Further, the evidence of Mr Kennedy, Ms Donnelly and Mr Hayes is that they were not provided with the dividend and appreciation rights agreement or Gresham model v 341. Those directors were therefore deprived of any opportunity to assess the real value of and risks associated with WHV. That deficiency can be laid squarely at the feet of Mr McGill.
5. Further, if Mr McGill had informed each of Mr Kennedy, Ms Donnelly and Mr Hayes that there was serious doubt about whether WHV was required to make, and whether it would in fact make, a distribution to Northern Lights, and if Mr McGill had provided those directors with the Gresham model v 341, in which $4 million in distributions from WHV continued to appear, but yet the discount rate had decreased from 14% in the previous model to 13%, then it is likely that they would have postponed voting in favour of the transaction documents execution resolution and instead sought to re-negotiate the relevant percentage split concerning the units in the Aurora Trust. At the least they would have asked what was going on.

Other conduct of Mr McGill before 23 July 2014

1. Now Mr McGill gave evidence that he only raised with Mr Turner, the CEO of WHV and a shareholder of Northern Lights, the issue of what distributions WHV proposed to make in calendar year 2014 around the time of the 23 July 2014 board meeting and subsequent to that meeting.
2. Mr McGill asserted that Mr Turner's interests were aligned with PAC, but as PAC pointed out, Mr McGill had to acknowledge that Mr Turner, as a shareholder in Northern Lights and as CEO of WHV, would have an interest in "promoting that there's going to be a distribution" by WHV "[b]ecause that means that you've got to put a higher valuation on WHV than otherwise."
3. Further, when each of the other directors voted in favour of the transaction documents execution resolution at the 23 July 2014 board meeting, Mr McGill was aware that there was serious concern as to whether WHV would make or was required to make a distribution.
4. In my view, Mr McGill failed to advise Mr Kennedy, Ms Donnelly and Mr Hayes of the serious concern as to whether WHV would make or was required to make a distribution and also failed to ensure that they were provided with a copy of model v 341.

Information after the 23 July 2014 board meeting

1. Now Mr McGill contends that prior to signing the implementation deed on 4 August 2014 he knew in substance no more about the prospects that Northern Lights would receive a dividend from WHV in 2014 than he and the other directors had debated in the 23 July 2014 board meeting. But this assertion should be rejected.
2. First, the evidence contradicts the assertion that there was a meaningful debate at the 23 July 2014 board meeting on the topic of WHV's dividend.
3. Further, in an email on 23 July 2014 after the board meeting, Mr McGill referred to having just received a voicemail from Mr Fitzpatrick about WHV's dividends.
4. As PAC rightly queries, if it was the case that there had been a detailed debate at the board meeting earlier that day, why would Mr Fitzpatrick have then left a voice mail asking fundamental questions about the position in relation to WHV? This phone call after the meeting in my view confirms that whatever had been said about WHV during the meeting had not supplied Mr Fitzpatrick with sufficient information about dividend risk.
5. Second, Mr McGill received information regarding WHV which was not supplied to the PAC board.
6. In an email on 25 July 2014 from Mr Carver to Mr McGill, in response to whether Northern Lights may obtain more comfort around payment of the WHV dividend, it was stated, as I have already set out: We won't have anything more definitive than what is in the contracts, but my expectation is that WHV will likely make some dividend payment this year (thought [sic] I'm not sure if it will be big enough for us to participate or not).
7. This was information provided to Mr McGill but not to the PAC board.
8. Now Mr Fitzpatrick acknowledged that he received new information which he passed on to Mr McGill on 29 July 2014.
9. Mr McGill said in an email to Mr Carver, which I have already set out: Next time we speak, can we please chat again about WHV. I just had Mike on the phone from Dubai. He's worried about the WHV dividend. … Also, he's worried about the potential competing uses for WHV cash (eg new investments). How does that work given that one of our contractual duties is to source new investment opportunities for WHV? Is it true that new investment by WHV could prevent a dividend from ever being paid? Mike says my arse is on the line on this issue (helpful!). He wants me to take out the comment in the ASX release to the effect that the deal is expected to be dividend accretive - I'm worried about that because it's an obvious question that I'll be asked and anything less than a firm answer could lead to share price weakness because a lot of our retail investors are there due to the fully franked yield.
10. When cross-examined about this email, Mr Fitzpatrick said: MR WALLER: That's something that occurred to you, isn't it, and which you raised with Mr McGill when you called him from Dubai? MR FITZPATRICK: Well, obviously at some stage got on top of that agreement, and I must have got some new information to call him from Dubai, otherwise I would have waited. …
11. Third, Mr McGill's own evidence was that he was not speaking to the PAC board between 23 July 2014 and 4 August 2014. In particular, his evidence was: MR WALLER: Well, when did you advise the board of the steps that you had taken between 23 July and the signing of the implementation deed on 4 August? MR MCGILL: I was speaking to Mike about this frequently. Q: But not the board? A: Not the board. … Q: This attempt to improve the position further, was that a board discussion or was this just you and Mike doing your own thing? A: I don't recall. - it was certainly Mike and I, but I don't recall - I don't recall other directors mandating it.
12. Further, Mr McGill did not advise the directors as a board of the communications he was having with Gresham and Mr Carver between 23 July 2014 and the circular resolution.
13. Fourth, Mr McGill sent an email to Mr Pollock of Gresham on 29 July 2014 stating that: …

• Currently the [PAC] board is not prepared to state that the deal is dividend accretive. They require some further commitment from Laird Norton/WHV/Jeff Vincent in relation to the payment of dividends before having the necessary confidence to make this disclosure. …

1. Now Mr McGill says that this email is consistent with the board having been informed of the discretionary nature of distributions from WHV, but being content to proceed with the passage of the transaction document execution resolution nonetheless, but tasking Mr McGill with doing what he could to gain a greater commitment from WHV about payment of the dividend.
2. But the email from Mr McGill to Mr Pollock on 29 July 2014 makes no reference to the contractual discretion and is not consistent with the assertion by Mr McGill. Rather, the email is referring to the anticipated or projected amount or dollar value of dividends which might be paid, and not the risk that they may not be paid at all, due to the discretion which resided with WHV under the dividend and appreciation rights agreement.
3. In any event, the emails preceding the email sent by Mr McGill to Mr Pollock on 29 July 2014 make it clear that the issue of describing the deal as dividend accretive, and the impact of WHV on this, was something that only arose after the 23 July 2014 board meeting.
4. On 28 July 2014, Mr McGill emailed Mr Fitzpatrick, Mr Kennedy, Mr Hayes and Ms Donnelly suggesting the inclusion of the following statement in the ASX Announcement: "The transaction is expected to be dividend accretive for [PAC] shareholders".
5. Mr McGill asked the recipients to let him know whether they were comfortable with the proposed statement about dividends.
6. Mr Fitzpatrick then emailed Mr McGill in response stating: "As the modelling reflects the statement, I am happy. We rely on the accuracy of the model - are there any reservations about any of the assumptions?" Mr McGill responded that he was comfortable with the assumptions.
7. Next, Mr McGill sought and obtained a dividend per share summary from Gresham and then wrote to the directors on 28 July 2014 providing them with this analysis.
8. In my view this sequence of events all shows how unsatisfactorily the WHV question had been dealt with by Mr McGill at the 23 July 2014 meeting and thereafter up to the signing of the implementation deed.

Mr McGill's panic regarding WHV prior to completion

1. Now after the signing of the implementation deed and prior to completion, and as PAC has correctly described the matter, a flurry of emails suggest panic on the part of Mr McGill on the topic of whether any dividend would be paid by WHV.
2. On 8 and 9 October 2014 there was an exchange of emails between Mr McGill and Mr Fitzpatrick where Mr Fitzpatrick said "Big issue is WHV".
3. On 10 November 2014, Mr McGill said to Mr Carver of Northern Lights "I'm quite worried about WHV. …Previously we'd assumed that the $2m dividend would be declared and paid in December whereas we now know for sure that it won't…".
4. Mr McGill's concerns with respect to the WHV dividend continued right up to the completion of the transaction on 25 November 2014.
5. Further, as I have discussed earlier, Mr McGill proposed amendments to the dividend and appreciation rights agreement as late as 20 November 2014. On that same day, he wrote to the PAC directors advising that: The goal is to change the agreement into a profit share so as to allow Aurora Trust and [PAC] to book their respective share of WHV earnings each accounting period even if WHV is yet to declare a dividend.
6. Now the directors have sought to downplay the concerns which were being expressed by Mr McGill at that time with regard to WHV by suggesting that the issue was all about Midco's short term cash flows and not valuation. But this purported justification underwhelmed me.
7. Under the merger, Northern Lights transferred all of its equity in Northern Lights Midco LLC to the Aurora Trust. It is trite to say that cash flows and expected cash flows are a critical integer in determining the value of a boutique utilising a DCF methodology.
8. In my view, had the other directors, particularly Mr Kennedy, Mr Hayes and Ms Donnelly learned of the terms of the dividend and appreciation rights agreement and the reality that WHV was not contractually required to declare a dividend in favour of Northern Lights, and had they been appraised of the scattergun valuations of WHV supplied to PAC, they would likely have called for the merger to be postponed and sought to recalculate the percentages split concerning the units in the Aurora Trust.
9. It is now appropriate to turn more directly to the dividend and appreciation rights agreement.

WHV dividend and appreciation rights agreement

1. I should commence this part of my reasons by setting out clause 8.12 of the dividend and appreciation rights agreement which appropriately characterised Northern Lights' "rights" and provided: The rights of a Rights Holder under this Agreement do not represent an ownership or equity interest in the Company, but only a potential right to payment in the future, if the conditions under this Agreement are satisfied. The benefits payable under this Agreement shall not be funded, but shall constitute an unsecured liability payable, when due, by the Company out of its general assets. The Company shall retain title to and beneficial ownership of all of its assets, whether cash or investments, which it may in its sole discretion set aside or earmark to pay benefits under this Agreement, including any assets placed in a rabbi trust. Neither the Rights Holders nor their beneficiaries shall have any property interest in the Company's specific asserts.
2. Now Mr McGill contends that as early as the 4 December 2013 board meeting, he was aware in general terms of the nature of Northern Lights' rights in respect of WHV. Clearly, he really did not. He only received a copy of the agreement over 6 months later.
3. Now the December 2013 board papers stated "Northern Lights has contractual economic rights with WHV to share in the growth of the firm under an agreement as of 1/1/2013". This was incomplete to say the least, if not misleading.
4. Mr McGill contends that the 21 February 2014 memorandum which formed part of the board pack for the February 2014 board meeting set out a description for all of the directors of the nature of the WHV investment. But Mr McGill's evidence was that as at February 2014, he had not examined any contractual document for WHV and that he was relying upon what he had been told by Northern Lights with respect to its interest in WHV.
5. In fact, Mr McGill only received a copy of the dividend and appreciation rights agreement and the first amendment to the dividend and appreciation rights agreement some four months later on 11 June 2014. This was the day after Mr Ferragina became aware of the existence of this document and asked for a copy. Mr McGill seemed at this time to have been oblivious to the failure to have obtained a copy of the agreement.
6. In his email on 10 June 2014 to Gresham Partners, Mr Ferragina stated: I was going through the docs in the data room and there was a reference to a Dividend and Appreciation Rights Agreement between WHV and Northern Lights in the Voting and Rights of First Refusal Agreement I have not seen this document. Have you come across it, if not can we request from William Blair?
7. Moreover, Mr McGill did not, at any stage, obtain any legal advice about the terms of the contractual arrangements between Northern Lights and WHV from US or Australian lawyers.
8. Now Mr McGill suggested that HSF had a responsibility to advise on this matter before conceding that HSF's role went no further than advising whether a contract was "enforceable whether under American law or Australian law and it contains the terms that you, the management, think it does contain".
9. But the absence of any legal advice in relation to the agreement was particularly problematic in circumstances where Mr McGill conceded in evidence that he thought a prudent director in his position ought to have taken whatever time was necessary to fully consider the implications arising from the contractual arrangements that Northern Lights had with WHV, and that he realised as early as May or June 2014 that there was no guarantee of getting any distribution through the contractual arrangements with WHV.
10. Further, there is no evidence that any of the non-executive directors ever saw the dividend and appreciation rights agreement.
11. There was no evidence that the agreement was uploaded onto BoardBooks. And whilst the agreement was made available in the data room by no later than 22 July 2014, no non-executive director gave evidence that they had accessed the data room, much less that they had read the agreement as a result of such access.
12. Mr Fitzpatrick said that he did not think that he saw a copy of the agreement. But he did think he was shown a summary of it or given a verbal summary of it by Mr McGill. His evidence in this regard appeared tentative and affected by a fading recollection.
13. Now the non-executive directors and Mr McGill dealt with the question of the agreement slightly differently in their evidence.
14. Mr McGill accepted that he knew that it was not certain that WHV would declare a dividend. But he also asserted that there was no evidence that he or any of the non-executive directors thought that WHV was obliged to declare a dividend each year. Apparently, their "deep commercial experience" would have caused them to assume this.
15. In other words, Mr McGill appeared to accept that the non-executive directors' state of mind in this regard was based not on any understanding on their part of the meaning or operation of the agreement, but rather on their commercial experience which Mr McGill asserts would have guided them to conclude that WHV was not obliged to declare a dividend.
16. The other directors adopted the position that although Mr Fitzpatrick had not seen the agreement, he had seen a summary of it or been given a verbal description of it by Mr McGill. They appeared to accept that none of the other non-executive directors knew anything about the agreement.
17. Even more significantly, as PAC points out, the other directors were silent on whether any of them including Mr Fitzpatrick understood the terms of the agreement, much less what approach or risk rating they adopted for assessing the impact of the operation of that agreement on the value of WHV in the context of the merged entity.
18. Further, the directors attempted to rely on what PAC correctly describes as a false analogy between Northern Lights' mere contractual rights to receive a distribution from WHV in some circumstances and the fact that in any circumstance where a company takes a minority equity interest in a boutique, the purchaser is unlikely to be able to compel that boutique to pay a dividend. But this is flawed.
19. A minority shareholder may receive, as a result of their equitable interest, a benefit even when a dividend declaration is not made, by reason of their shareholding in the company increasing in value. Further, a shareholder together with others can seek to discipline the board's behaviour in terms of their dividend policy by their residual powers exercisable at an extra-ordinary general meeting including to replace directors. Further, a shareholder can relatively easily sell out.
20. Further, clause 3 of the agreement prescribed only limited and specific circumstances in which a portion of a declared dividend would be paid to Northern Lights. Those circumstances included where the proposed payment was consistent with past practices, there was free cash flow, there was no violation of the relevant legislative instrument and there had been a deduction for reasonable reserves for working capital and capital expenditures.
21. Clause 3.1 of the agreement provided that: Dividends. With respect to each calendar year beginning on or after January 1, 2013, the Company shall in good faith, at least once per year, consistent with past practices, pay Dividends of (a) all free cash flow of the Company that may be distributed to owners without violating RCW 23B.06.400, minus (b) to the extent not accounted for in clause (a), reasonable reserves for capital expenditures (including investments) and working capital (including for payments under this Agreement), as determined by the Board. Dividends shall exclude the special dividend of $10,000,000 to the extent the Company pays the same in 2012 or (to the extent that the Company's special dividend of $10,000,000 is not paid in 2012 but retained to mitigate against risks relating to its anticipated 2013 restructuring) the Company pays the same or the balance thereof in 2013.
22. Clause 3.2 provided as follows: Payments: Whenever the Company pays Dividends, the Company shall concurrently deliver to each Rights Holder an amount equal to the vested portion of the Rights Holder's Dividend Pool Interest and statement setting forth the calculation of such amount. The unvested portion (if any) of a Rights Holder's Dividend Pool Interest will remain credited to the Rights Holder, and paid within 15 days after it vests. The obligation to make payment to the Rights Holders in respect of Dividends shall cease and end upon the occurrence of a Liquidity Event; provided that the Rights Holders have been paid for (a) all Dividends that were paid prior to the closing of the Liquidity Event and (b) their Liquidity Pool Interest in respect of amounts due at the time of the Closing.
23. In order for clause 3.2 to be enlivened a number of conditions needed to be satisfied. These conditions went directly to the issue of the discretion of payment to Northern Lights and therefore, the Aurora Trust.
24. First, dividends under clause 3.1 would be paid at least once a year where:
25. the proposed payment was consistent with past practices;
26. there was free cash flow;
27. there was no violation of the relevant Washington State law which, inter-alia, limits when certain distributions can be made; and
28. there had been a deduction for reasonable reserves for working capital and reasonable reserves for capital expenditures including investments.
29. As to the first matter, there had been no payment by WHV of a dividend in the 2011 and 2012 years. Clearly, there was a real prospect that WHV could elect to accumulate cash for working capital and/or capital expenditures and that Northern Lights could receive nothing under the dividend and appreciation rights agreement. This could be done without regard to the interests of the holders of rights under the agreement.
30. And Mr McGill accepted that the holding up of any distribution from WHV would seriously diminish PAC's objective of the merger being earnings per share accretive.
31. Second, in order for a payment to be made, the dividend pool had to exceed $2.2 million.
32. The concepts of "Dividend", "Dividend Pool" and "Dividend Pool Interest" were defined in clause 1 as follows: "Dividend" means any dividend, distribution or other payment to an owner of the Company other than stock dividends. "Dividend Pool" means a dollar amount equal to a fraction in which (i) the numerator is all Dividends in a calendar year multiplied by the Applicable Percentage, according to the following chart, and (ii) the numerator is equal to one minus the highest statutory U.S. federal income tax rate applicable to an entity taxed as a C corporation for U.S. federal income tax purposes:1 1 For example, Dividends of $5,200,000 would result in a Dividend Pool as follows: sum of: 2,200,000 to 3,200,000 = 1,000,00017.5% = 175,000; 3,200,000 to 4,200,000 = 1,000,00021.75% = 218,750; over 4,200,000 = 1,000,000*26.25% = 262,500, equals 656,250; divided by one minus [38%], equals $1,058,467.74. Dividends greater than Dividends less than or equal to Applicable Percentage N/A $2,200,000 0 $2,200,000 $3,200,000 17.500% $3,200,000 $4,200,000 21.875% $4,200,000 N/A 26.250%

"Dividend Pool Interest" means the bookkeeping account established for each Rights Holder that equals the product of the Dividend Pool multiplied by the Rights Holder's Percentage.

1. Third, vesting had to be completed within 24 months from 1 January 2013, that is, 1 January 2015. Prior to 1 January 2015, the payments would be limited to the vested part of the dividend pool.
2. Now Mr McGill in his evidence suggested that the entitlement under the dividend and appreciation rights agreement could be carried forward and that it was simply a matter of timing with regard to payment under the agreement.
3. In this regard, Mr McGill stated: MR WALLER: Do you accept that if you had been aware that there was no guarantee at all of WHV making a dividend and a - declaring a dividend and therefore no distribution under the agreement being made to Northern Lights, that that would have significantly decreased the valuation to be ascribed to WHV? MR MCGILL: Not necessarily, and the reason I say that is that, the way that agreement operated was, if there was no payment in any given year, it carried forward, it wasn't gone forever. So that amount that was unpaid, if you like, carried forward to the following year.
4. But Mr McGill's evidence does not really accord with the terms of the dividend and appreciation rights agreement.
5. The non-executive directors conceded that there was nothing that rolled forward to the next year under the agreement. In effect, for each year one starts again with the free cash flow for that particular year.
6. Furthermore, there was no requirement in the dividend and appreciation rights agreement which mandated that a dividend must be paid within a particular time frame, if a dividend had not been paid within the previous year.
7. Now Mr McGill sought to justify his evidence on this topic on the basis of two contentions.
8. First, if no dividend payment was made by WHV to Northern Lights or later to the merged entity in any year, then this may assist in subsequent years, on the basis that less of the free cash flow would reasonably be required for capital expenditure and working capital.
9. Second, accumulation of dividends would ultimately inure for the benefit of Northern Lights or the merged entity by reason of clause 4 of the agreement.
10. Now as to the first proposition, it is speculative to assert that cash not used by WHV in year one would mean that less cash would be required for capital expenditure and working capital in year two.
11. And in relation to the second proposition, it turns upon the occurrence of a "Liquidity Event". As PAC points out, an accumulation of the kind to which Mr McGill referred would only arise in extremely limited circumstances such as a liquidation, the sale of all or substantially all of WHV's assets or a sale of WHV's equity securities.
12. The agreement made the following provision in relation to the payment in the event of a "Liquidity Event": 4 Liquidity Pool 4.1 Estimate. At least 15 days prior to the occurrence of a Liquidity Event, the Company shall estimate the Liquidity Proceeds expected to be received by the Parent or the Company upon the closing of the Liquidity Event, shall estimate the Liquidity Pool accordingly and shall deliver to each Rights Holder a statement setting forth such estimated Liquidity Proceeds and Liquidity Pool and reasonable detail concerning their determination, in each case to the extent then determinable. 4.2 Closing Payments. Upon the closing of the Liquidity Event, concurrently with delivery of any Liquidity Proceeds to the Company or any of its owners, Parent and the Company shall pay or cause to be paid to each Rights Holder an amount equal to the Rights Holder's Liquidity Pool Interest to the extent vested, based on the estimated Liquidity Proceeds payable at Closing. The Company shall not distribute to its shareholders any Liquidity Proceeds payable at closing until final reconciliation as provided in Section 4.3 below has occurred. Distributions to Rights Holders shall be contemporaneous with distributions to the Company's shareholders.
13. Further, the agreement contained the following relevant definitions: 1 Additional Definitions … "Liquidity Event" means the consummation of any transaction or series of transactions that has the effect of (i) liquidation or dissolution of the Company; (ii) a sale, lease, exchange or other disposition of all, or substantially all, of the Company's assets, (iii) a sale of the Company's equity securities after which voting control of the Company is held by persons who are not owners of the Company prior to the sale or (iv) a merger, consolidation, reorganization, conversion or other similar event that shifts voting control of the Company (or any successor entity) to persons who were not owners of the Company prior to the transaction; provided that a Liquidity event must also be a "change of ownership of the corporation" or a "change in ownership of a substantial portion of the assets of the corporation" under Code Section 409A. … "Liquidity Proceeds" means an amount calculated as (a) the aggregate amount that would be received by the shareholders of the Company for their equity ownership of the Company in connection with a Liquidity Event, calculated as if no amounts were owed under this Agreement and, except as set forth in the last sentence of this definition, no Liquidity Bonus (as defined in Dr Turner's employment agreement with the Company) was owed under Dr Turner's Employment Agreement with the Company, regardless of whether such amounts are received by virtue of the Company's shareholders selling their equity interest in the Company or upon a distribution by the Company of the proceeds received or which could be received following a sale or other disposition of assets in connection with a Liquidity Event and after providing for the Company liabilities and obligations except as provided in the next sentence, minus (b) Transaction Expenses. … [As amended by the First Amendment to Dividend and Appreciation Rights Agreement] "Liquidity Pool" means a dollar amount equal to the sum of (i) the Liquidity Proceeds multiplied by the Applicable Percentage, according to the following charge and (ii) a fraction in which (A) the numerator is (1) the amount described in clause (i) multiplied by (2) the amount, if any, by which the highest statutory U.S. federal income tax rate applicable to an entity taxed as a C corporation for U.S. tax purposes exceeds the higher of the LTCG Rate or the Carried Interest Rate in effect at the time the Liquidity Pool is paid, and (B) the denominator is equal to one minus the highest statutory U.S. federal income tax rate applicable to an entity taxed as a C corporation for US federal income tax purposes in the Liquidity Event; provided that in no event may the amount in clause (ii) be less than zero. … Liquidity Proceeds greater than Liquidity Proceeds less than or equal to Applicable Percentage N/A $40,000,000 0 $40,000,000 $50,000,000 17.500% $50,000,000 $60,000,000 21.875% $60,000,000 N/A 26.250%

"Liquidity Pool Interest" means the product of the Liquidity Pool multiplied by the Rights Holder's Percentage. "Percentage" means each Right Holder's percentage in the following charge, subject to provisions of Sections 2.2, 2.3, 2.4 and 2.5: Northern Lights 85.72% Swift 14.28%

1. So, a "Liquidity Event" only occurs in defined and very limited circumstances.
2. Further, there would be no allocation of the "Liquidity Proceeds" if the Liquidity Proceeds, broadly being the aggregate amount received by shareholders, was less than $40,000,000.
3. Further, any "Liquidity Proceeds" which might flow to Northern Lights was affected by the application of a sliding scale, with the result that Northern Lights might receive 85.72% of 17.5% of any Liquidity Proceeds between $40m and $50m, or 85.72% of any Liquidity Proceeds between $50m and $60m and so on.
4. Now it would appear that Mr McGill first floated a version of his "accumulation / roll forward" and "liquidity event" theses in an email to Mr Fitzpatrick on 24 June 2014. But his comments in that email are superficial and not accurate: … Btw, did you notice that the WHV contracts actually give NL a perpetual/vested entitlement to a share of future dividends or liquidity proceeds. This was one of the areas that you/we were worried about given the price we are paying for NL. The service revenues are at risk within the short term (2 years), but in the event that WHV terminates NL, NL would nonetheless remain entitled to its share of future dividends and liquidity proceeds.
5. To the extent that Mr McGill now advances the proposition that when he voted in favour of decisions by the board which are impugned in these proceedings he did so on the basis that he understood the agreement in the manner set out above, then I agree with PAC that this is inconsistent with his discharge of his duties. As PAC described it, it amounts to no more than an untutored adoption of an idiosyncratic interpretation of the agreement, in the absence of legal advice on the topic.
6. Indeed, as I observed, the adoption by Mr McGill of this accumulation or roll forward thesis had two ramifications, namely, in terms of value and risk, and in terms of what the directors really understood they were doing with this investment.
7. Further, none of the non-executive directors have given evidence that the value which they saw as residing in the inclusion of WHV in the stable of Northern Light's boutiques in the event of a merger was that they were relying on an accumulation model, or that some funds might be realised on the occasion of WHV later being liquidated or sold.
8. Further, Mr McGill relied on the fact that under the dividend and appreciation rights agreement there was an obligation to act in good faith and to act "consistent with past practices" under clause 3.1 that I have set out earlier. In this context, Mr McGill then asserted that PAC ignores the fact that WHV had made substantial payments of dividends in the years ending 31 December 2010 and 31 December 2013. But as I have said, this was not in substance the true position.
9. Further, the fact that WHV was obliged by the terms of the agreement to act in good faith did not oblige WHV to have regard solely, or even predominantly, to the interests of the holders of rights under the agreement. WHV was entitled and in fact mandated to ensure that there were maintained reasonable reserves for working capital and capital expenditure items. Why wouldn't WHV accumulate, in theory, forever?
10. Further, Mr McGill accepted that he did not advise the directors as a board of the communications he was having with Gresham and Mr Carver between 23 July 2014 and the signing of the circular resolution. Mr Kennedy said that there was nothing that he was told up until the time he signed the circular resolution to doubt that a dividend would be coming from WHV. Ms Donnelly said she had no knowledge about concerns that the $4 million would not be paid at the time of signing the circular resolution. Mr Hayes gave evidence that he could not recall any discussions between July and November 2014 about the likelihood of WHV paying a dividend.
11. Further, in an email from Mr McGill to Mr Carver dated 29 July 2014 Mr McGill asked the question of Mr Carver, "[i]s it true that new investments by WHV could prevent a dividend from ever being paid?"
12. Further, Mr McGill suggested that Mr Howard's assessment of May 2014 put the non-executive directors on notice of the substance of the issues concerning WHV. But this is contradicted by the evidence of Mr Fitzpatrick and Mr Hayes that they in fact thought there were "green flags" in respect of WHV in Mr Howard's assessment.
13. Further, it is apparent that a number of matters included in the Deloitte report with respect to WHV are not replicated in Mr Howard's assessment concerning the existence of a discretion on the part of WHV in making distributions. In particular, the Deloitte report stated: … It should be noted that the payment of dividends may be impacted by such items as variability in WHV's future EBITDA vs. plan, WHV's use of excess cash as well as WHV's discretion in dividend distributions.
14. It is this element of discretion which Mr Howard's assessment failed to alert the directors to. In fact, the converse position was put forward by Mr Howard in his assessment. He in fact described Northern Lights as being entitled to a dividend.
15. Further, estimated services income was expected to be derived from the arrangement between WHV and Northern Lights Capital Group under a services agreement. But Mr McGill gave evidence that at the end of the transaction, the most significant portion was the dividends or distributions arising as a consequence of dividends.
16. Now the services agreement required the provision of services by Northern Lights, which was defined under the schedule to that agreement to involve assisting WHV in assessing the existing sales and marketing function and assisting WHV in sourcing, negotiating and as needed executing deals for new investment products or product teams.
17. But I agree with PAC that the benefits which might flow to Northern Lights under the WHV services agreement must be treated with caution. The services agreement required the provision of services by Northern Lights, including assisting WHV in sourcing, negotiating and as needed executing deals for new investment products or product teams.
18. Moreover, there is a difference between being entitled to a potential, passive income such as under the dividend and appreciation rights agreement and earning income for the provision of services under the WHV services agreement.
19. Now Mr McGill referred to Northern Lights having a definite entitlement of USD 1,612,500, which comprised a USD 800,000 M&A fee and a USD 812,500 sales and marketing fee, as well as a discretionary bonus of USD 750,000. But such an assertion is not entirely correct when one examines the terms of the WHV services agreement. Pursuant to schedule 2 of that agreement, the sales and marketing fee depended on the provision of services by Mr Swift, the sales and distribution manager of WHV whose services Northern Lights supplied, or his suitable replacement and was not payable in the event of his death or disability.
20. Let me deal with another question concerning adequate cash reserve risks.
21. Now an issue which arises separately from the question whether there was under the dividend and appreciation rights agreement a contractual obligation to make a dividend payment, is whether and when WHV in fact had the capacity to make such a payment.
22. Mr McGill in the context of the 23 July 2014 board meeting referred to $4m in the following terms: "this is the projection Gresham made". He also stated that the board knew or were told that Gresham had projected the receipt of $4 million from WHV. Further, Mr McGill says that as Gresham were present at the board meeting, presumably they "would have spoken up if the sum of $4 million was not their projection".
23. But it is clear that the dividend and appreciation rights agreement was not even obtained, much less considered, by anyone at PAC until very late in the negotiations. And a deal of confusion concerning the position in relation to WHV is manifested in the correspondence concerning the valuations supplied by Gresham.
24. I have already set out some of the relevant emails between 10 June and 13 June 2014 beginning with Mr Pollock's email to Mr Erickson titled "WHV questions" on 10 June 2014.
25. On 16 June 2014 Mr Ferragina sent an email to Mr Erickson of Northern Lights in which he stated "[r]elated to this, I am trying to reconcile the $4m dividend in the 2014 forecasts and trying to understand how this is derived."
26. On 18 June 2014 Mr MacGregor sent an email to Mr Ferragina, the terms of which I have already set out.
27. Now the directors say that if one manipulates cell L100 on the WHV tab in Gresham model v 341, and removes the excess cash available for distributions, then the FY 14 distribution becomes $972,825 and the FY15 becomes $1,059,018. That may be so but no director gave evidence that they were aware of this, referring to $1m under the dividend and appreciation rights agreement rather than the projection from Mr Trent Erickson of $4m.
28. No director gave evidence that they apprehended that the correct way to read the Gresham model v 341 was as projecting a mere $972,825 dividend to Northern Lights for FY 14 and just over $1 million to Northern Lights in FY 2015.
29. Indeed, the directors' closing submissions were to the effect that a projection of $4m was discussed at the 23 July 2014 board meeting. This is confirmed by Ms Lo's note.
30. In any event, I agree with PAC that adopting this approach does not change the distributions used in row 14 of tab "11. WHV" in model v 341, based on the "NL Valuation Model", and which were the relevant integers in the DCF calculation for WHV.
31. Further, by 18 June 2014 the Deloitte report stated: Although distributions are at the discretion of WHV management and its Board, and NLCP has not received a distribution from WHV since making its investment in 2013, management believes it will receive an annualized pro-forma dividend income of approximately $4m beginning in FY14 as a result of this arrangement. WHV did not pay a distribution during 2013 due to uncertainty regarding a potential buy-out of a key employee. As of Mar-14, this situation has been resolved. Based on the tiered scale described above, WHV needs a minimum of approximately $12m of annual distributable cash in order for NLCP's share to equal $4m. … At Mar-14, WHV had approximately $13m in excess cash on its balance sheet … WHV's YTD Mar-14 annualized EBITDA … results in approximately $6m of distributable cash. Management stated that the combination of excess cash on the balance sheet and cash from operations is projected to be adequate to meet the annual $12m threshold for distributable cash for more than 2 years. Subsequently, WHV projects annual EBITDA for FY16 and beyond to be at least $18m, which on its own, after accounting for taxes, results in $12m of distributable cash. It should be noted that the payment of dividends may be impacted by such items as variability in WHV's future EBITDA vs. plan, WHV's use of excess cash as well as WHV's discretion in dividend distributions.
32. Also on 18 June 2014 there was an email from Mr Ferragina to Mr MacGregor of Gresham which stated in relation to the Deloitte report that "P20 has some analysis on the issue we have been grappling with namely the WHV dividend".
33. Further, by 21 July 2014 model v 341 attributed a value of $43.53 million to WHV, out of a total value of $365.96 million attributed to Northern Lights. A discount rate of 13% was applied to WHV and there was assumed to be distributions of $4m from WHV.
34. On 30 July 2014 Mr Moulin of Gresham sent an email to Mr Ferragina which stated: Attached is the spreadsheet Trent sent June 18th. I do not think it will be very helpful. I think it was to show that the US$4m of dividends is achievable from an NPAT of $12m and that the $20m cash available on the balance sheet is used to reach this number in the first years. …
35. What follows from all of this?
36. First, the $4 million projection originated from Northern Lights. It appears to have been based on nothing more than an assertion made by Mr Carver.
37. Second, during June and July 2014, Mr Ferragina, Mr Howard, Mr McGill and representatives of Gresham exchanged various communications regarding the origin and method of calculating the $4 million figure. But those communications exhibited a lack of clarity in relation to the income Northern Lights was earning pursuant to its services agreement with WHV and in relation to both the terms of the dividend and appreciation rights agreement and the circumstances in which dividends would be declared in favour of Northern Lights or the merged entity.
38. I agree with PAC that various views and ideas were floated, none of which were the subject of serious analysis.
39. On 18 June 2014, a representative of Gresham suggested that the more accurate prediction might be about $1m and explained that this is what their model in fact showed.
40. On 21 July 2014, the Gresham model v 341, which was supplied only to Mr McGill and Mr Fitzpatrick, reverted to the use of a $4m assumption, as recorded in tab "11.WHV" and using the "NL Valuation Model" toggle. $4 million was then apparently described as a "projection" by Gresham during the 23 July 2014 board meeting.
41. Now at the 23 July 2014 board meeting there was some reference to the $4 million figure. But as PAC correctly points out, there is no reference in either the minutes or the file note made by Ms Lo of the 23 July 2014 board meeting to any of the following matters being:
42. that distributions are at the discretion of WHV management and its board;
43. that Northern Lights had not received a distribution from WHV since making its investment in 2013;
44. that management of Northern Lights believed that it would receive dividend income of approximately $4 million; and
45. that it should be noted that the payment of dividends may be impacted by such items as variability in WHV's future EBITDA vs. plan, WHV's use of excess cash as well as WHV's discretion in dividend distributions.
46. Moreover, it was not explained in the 23 July 2014 meeting that Gresham's "projection" was derived from nothing more than an assertion from Northern Lights.

Summary concerning the WHV issue

1. Let me make some points by way of summary.
2. First, clearly Mr McGill's source of knowledge was unsatisfactorily from Northern Lights rather than WHV directly.
3. Second, as should have been known to Mr McGill, WHV never had any obligation or incentive to pay a dividend under the dividend and appreciation rights agreement. I have dealt elsewhere with the "outs" given to WHV. And as to any lack of incentive, WHV could accumulate profits indefinitely. Indeed, why wouldn't it have?
4. Third, and relatedly, WHV could not be compelled to declare and pay a dividend. Now Mr McGill and the other directors said that they knew this. They likened the scenario to a share investment. But the analogy was fundamentally flawed.
5. Unlike a share investment, if profits were accumulated and no distribution paid, there was no increased capital value that could be ascribed to the dividend and appreciation rights agreement by reason of the accumulation.
6. Further, directors of a company can be replaced by shareholders, and new directors encouraged to change any accumulation policy. But just holding a contractual right under the agreement could not give or confer any leverage over WHV's management to encourage them not to accumulate.
7. Further, unlike a share investment in a public company where there is no relevant restriction on transfer, the contractual rights under the agreement could not be transferred without WHV's consent; see the first amendment to the dividend and appreciation rights agreement. Indeed, what real value was there that could be disposed of?
8. Now the directors say that a risk was that the directors of WHV retained a discretion to determine reserves for capital expenditures and working capital so that an obligation on the part of WHV to pay a dividend was first subject to the exercise of that discretion by WHV directors acting in good faith. But the directors say that those risks were not exclusive in respect of WHV. Any boutique has a discretion whether to pay dividends.
9. But as I have indicated, and as PAC submitted, this is all a flawed analogy. If you have an equity interest, any retention of an otherwise dividend will increase the value of the equity interest. But any transposition of that idea to the context of the dividend and appreciation rights agreement does not work.
10. Fourth, the considerable changes in value ascribed to WHV from time to time by Gresham should have caused Mr McGill to drill down further.
11. Fifth, WHV had declining performance as was known to Mr McGill.
12. Sixth, on any view Mr McGill knew that Gresham's modelling and the running of the numbers for WHV was not a true valuation.
13. Seventh, clearly Mr McGill and Mr Fitzpatrick were seduced by the very high numbers and percentages concerning funds under management of WHV. But this was all very indirect as too was the exposure to the US markets through WHV. Further, none of this warranted overlooking the quantitative issues concerning distributions and also the value of WHV, the latter of which was relevant to the percentages split calculations. Further, the expected distributions were relevant to EPS calculations.
14. Eighth, Northern Lights' officers and personnel overlapped with WHV's officers and personnel. I have dealt with this elsewhere. Now Mr McGill and the other directors portrayed the overlapping directorships as advantageous for the Aurora Trust in term of exerting influence on WHV. But in my view this all manifested various actual or potential conflicts of interest.
15. Ninth, Mr McGill and the other directors also pointed out that the service fees were payable as a separate income stream, but this was problematic.
16. Tenth, it seemed to be suggested that PAC's concerns relating to WHV's distributions may have had something to do with servicing the Medley loan and that none of this was a problem in November 2014. So, it was suggested that there was less worry about the WHV position at the time of the circular resolution. But this question of servicing was a second order issue.
17. Eleventh, Mr McGill's futile attempt in November 2014 to try and amend the dividend and appreciation rights agreement well signifies the difficulty that he knew he had.
18. Twelfth, Mr Fitzpatrick sought to diminish the monetary flow significance of the WHV question in November 2014. But this was problematic. And in any event did not address the value and percentages split question.
19. Thirteenth, the directors' reference to a "black swan event" concerning WHV to justify what happened is specious.
20. In my view all of the above matters powerfully establish a major deficiency in how Mr McGill went about investigating the WHV position and his presentation to the other directors on this aspect. In my view he breached his duty under s 180.
21. Further, given the circumstances, Mr McGill cannot place reliance on s 189 concerning the relevant sources of information nor rely upon the business judgment rule under s 180(2).
22. Finally, clearly Mr McGill's conduct was deficient and in breach of duty.
23. And clearly, the other directors being Mr Kennedy, Mr Hayes and Ms Donnelly were not properly informed concerning WHV. I will deal with causation questions further in the next section but I would note here the following.
24. First, if those directors had been properly informed prior to the 23 July 2014 meeting and indeed prior to signing the implementation deed, it is likely that they would have caused the approval of the merger to be delayed, sought more information and then sought to re-negotiate the percentages split. But I should say that I do not accept PAC's "no transaction" causation scenario as I will return to in the next section.
25. Second, if those directors had been properly informed after the signing of the implementation deed but before signing the circulation resolution, they would likely have:
26. sought proper legal advice concerning whether clause 3.1(k) of the implementation deed could be triggered;
27. at the least sought to use clause 3.1(k) as negotiation leverage; and
28. taken the steps referred to in the first point just mentioned to try and re-negotiate the percentages split.
29. Now the difficult question concerns Mr Fitzpatrick's position. He had less knowledge than Mr McGill but more knowledge than the other three directors concerning WHV. But in my view Mr McGill did not keep him fully informed about the detail of the problems and the risks. On balance, Mr Fitzpatrick did not breach his duty. Now I accept on causation that he may have been more robust in considering whether to push on with the merger even if he had known all of the difficulties. But even so, the other three directors would have carried the day on the causation scenario likely response.
30. But I accept that none of this has been fully explored in the evidence and there may have to be a further hearing on causation and other matters in light of my principal findings.
31. Let me then come directly to the implementation deed.

The terms of the implementation deed

1. On 4 August 2014, Mr McGill on behalf of PAC executed the implementation deed.
2. PAC says that on the face of the implementation deed, there were reasonable grounds for adopting the view that PAC was not bound to complete the merger following the execution of the implementation deed. The obligation in clause 6 to complete the merger did not become binding until satisfaction or waiver of several conditions precedent to completion.
3. Clause 3.1(k) of the implementation deed contained a condition precedent: Diligence: [PAC] and NL have completed their due diligence of the structure of the Transactions to their reasonable satisfaction.
4. The phrase "structure of the Transactions" referred to in clause 3.1(k) is not defined in the implementation deed. But "Transaction" or its plural (clause 1.2(b)) is defined under clause 1.1 as follows: the proposed merger between NL and [PAC] to be implemented pursuant to the transactions and arrangements that are the subject of the Transaction Documents.
5. As to the meaning of "Transaction Documents", the implementation deed provided under clause 1.1 that the transaction documents comprised:
6. this Deed;
7. the Trust Documents;
8. each Internalisation Agreement;
9. the Exchange Deed;
10. each Employment Agreement;
11. the NL Assembly Agreement; and
12. any document which the parties agreed in writing to be a Transaction Document for the purposes of this Deed.
13. One issue that arises in the present context is whether the WHV/Northern Lights arrangement is within the scope of the "Transaction Documents".
14. Under the merger, payments by WHV to the "Rights Holder" flowed to Northern Lights, to Northern Lights Midco and then to the Aurora Trust.
15. Given that "Transaction Documents" include the NL Assembly Agreement, defined to mean the contribution agreement by and between Northern Lights Capital Partners and Northern Lights Midco, and the implementation deed itself, which includes reference to Northern Lights Midco, it would appear that the payments to be made by WHV were within the scope of the "Transaction" for the purposes of clause 3.1(k) of the implementation deed.
16. Now PAC's case is that the precondition in clause 3.1(k) allowed PAC to terminate the merger if between 23 July and 25 November 2014 Mr McGill as managing director became aware of a new due diligence matter of concern.
17. PAC contends, based on clause 3.1(k), that there were reasonable grounds for adopting the view that PAC was not bound to complete the merger following the execution of the implementation deed. But the directors dispute this.
18. Let me say something about the relevant evidence.

Some further facts

1. At the 2 June 2014 board meeting Deloitte Tax Australia had provided a draft tax opinion dealing with matters such as the structure of companies and transactions to minimise the risk that there would be dual taxation of income.
2. By 4 July 2014 the parties had prepared a list of drafting issues that were dependent on the tax opinion of Deloitte Tax Australia.
3. By email dated 22 July 2014 HSF circulated the then current draft of the implementation deed amongst the parties and their advisers.
4. At that time clause 3.1(k) was not drafted but contained the following note: [Tax opinion: [PAC] and NL have received from the Tax Advisers a tax opinion in relation to the Transaction which is consistent with the [core assumptions/draft opinion letter] as set out in [insert].] [Note: scope to be discussed]
5. The 23 July 2014 draft of the implementation deed contained comments from Northern Lights' solicitors which responded this way about clause 3.1(k): Tax opinion: [[PAC] and NL have received from the Tax Advisers a tax opinion in relation to the Transaction which is consistent with the [core assumptions/draft opinion letter] as set out in [insert].] [[PAC] and NL have each received from the Tax Advisers a favourable Australian and US tax opinion in relation to the Transaction. Whether the opinion is decided to be favourable will be at the sole discretion of each of [PAC] and NL acting reasonably.]
6. The Gresham presentation for the 23 July 2014 board meeting referred to a Deloitte Tax Australia opinion, but this was not provided for the meeting.
7. Gresham said that the tax structure had not been finalised because Deloitte Tax Australia had not finalised its tax advice. Hence receipt of the advice was a new precondition.
8. The minutes of the 23 July 2014 board meeting recorded the board's resolution to approve the merger subject to satisfaction or waiver of conditions precedent to completion, such conditions precedent including that: … The Managing Director being satisfied that all other outstanding matters associated with this transaction being finalised. …
9. There was cross-examination of the non-executive directors about the minutes of the 23 July 2014 board meeting.
10. After being shown the relevant part of the minutes, Mr Kennedy was asked whether he ever asked Mr McGill whether Mr McGill was satisfied that all outstanding matters associated with the transaction were finalised. Mr Kennedy made the point that he was not sure that the minutes covered due diligence. He said "you would have to go back to those - the agreement to see whether that was embodied in the document".
11. Further, it was put to Mr Fitzpatrick that the condition in the minutes was an "important condition precedent, wasn't it, because it allowed matters to be addressed and indeed, in an extreme case, the transaction could not - would not proceed if Mr McGill was not satisfied", to which he answered "Correct". But PAC did not refer Mr Fitzpatrick to what clause 3.1(k) stated.
12. Apart from Mr Fitzpatrick's understanding of the condition, which had to yield to the proper construction of the condition, his answer did not assist PAC because he was not taken to the wording of clause 3.1(k) itself.
13. Let me say something about the cross-examination of Ms Donnelly. Of the precondition in the minutes it was put to Ms Donnelly that "… you understood at the time you entered - you executed - at the time you approved the transaction documents execution resolution in July 2014 that the merger was subject to a number of conditions precedent including this one?". But I intervened, and after being told that Ms Donnelly would not be taken to the implementation deed, I asked the cross-examiner whether the precondition in the minutes accurately reflects what was in the implementation deed. Counsel answered "Yes, that's our understanding".
14. Further, an objection precluded the precondition in the minutes being put to Mr McGill. His cross- examination then focused on clause 3.1(k) of the implementation deed.
15. Now as to the construction of clause 3.1(k) the directors made the following points.
16. The directors said that the tax opinion side letter was one of many contracts made by PAC and Northern Lights on 4 August 2014. In it they agreed what was satisfaction of clause 3.1(k).
17. It was said that when clause 3.1(k) of the implementation deed is read together with the tax opinion side letter, there is no doubt that the words "due diligence of the structure of the Transactions" in clause 3.1(k) are referring to the process by which the respective tax advisers were to agree upon a corporate and trust structure which benefited both, for example, by legitimately avoiding double taxation. It is said that those words have nothing to do with permitting PAC to continue general commercial due diligence with a view to being able to renegotiate commercial terms.
18. Further, it was said that even without resort to the tax opinion side letter, the same construction of clause 3.1(k) ensues.
19. Further, it is said that the drafts of the implementation deed circulated amongst the parties and their advisers are admissible context.
20. It is said that the 25 July 2014 draft, proffered by Northern Lights, established that the "structure of the Transaction" concerned the organisation of the constituent companies and trusts for the merger so as to satisfy the conditions for single taxation. In the draft, there was a footnote 1 to clause 3.1(k) which read: Side letter to provide that this condition is satisfied upon delivery of tax opinion in form previously provided to [PAC].
21. On 29 July 2014 Mr Mark Goldsmith of Deloitte Tax Australia circulated to Mr McGill, HSF personnel and others his comments on draft documents other than the draft trust deed.
22. In relation to the implementation deed he said the following:
23. Implementation Deed
24. We need to ensure the tax related CP is properly reflected in the deed. In this regard could you send me the drafting of the side letter you propose. Hopefully it picks up the language that I put in my email to you yesterday. This is very important because as I have mentioned they are pushing very hard and particularly on the US side I am not comfortable that we have a proper grasp of all the issues and what could go wrong. I also have concerns as to whether the drafting achieves the desired commercial outcomes as we haven't had time to stress test the drafting. Accordingly we need to be able to get out of the deal if there is a material problem that can't be resolved and we need to have the ability to amend the docs if they don't work as intended which hopefully we have under clause 4.3(c) certainly as it relates to tax issues. You might want to have a think about whether clause 4.3(c) allows for the documents to be amended where the amendment is designed to achieve the correct commercial outcome as opposed to being motivated by any tax issue. For example, the drafting of the Synthetic arrangements doesn't work in a particular situation that we later identify when we get to stress test the way it works. Awaiting side letter to review
25. The mechanism embedded in the agreement to deal with the payment of indemnity claims could have adverse tax consequences. For example if [PAC] has to pay an indemnity claim and it agrees to forfeit its units it will be deemed to have disposed of those units and could be deemed to have disposed of them for market value thereby generating a gain. Could we have an intervening step which says that where an indemnity claim arises the units required to satisfy that claim are initial stripped of their rights (so they have no value) and thereupon become "Forfeit Units" which are thereafter redeemed. In this way the units will have no real market value and a deemed disposal at market value should not create an issue. This is not reflected
26. The warranties for tax apply to [PAC] and Group Members which includes the [PAC] Boutiques. I am not sure they can vouch for the tax position of their Boutiques. I raised this issue sometime ago but it is still there so I assume [PAC] are comfortable with this. No change so I assume you have agreed this with [PAC]
27. There are references to [PAC] and NL Internalisation Agreements - are these the Securities Sale Agreements? Now covered off in drafting
28. Further, in evidence was a side letter dated 4 August 2014 in the following form: Implementation deed - Side Letter We refer to the implementation deed (Deed) entered into between [PAC] and Northern Lights Capital Partners, LLC (NL) on or about the date of this letter. Where the context allows, words and expressions defined in the Deed have the same meaning when used in this letter. In particular, we refer to the condition precedent in clause 3.1(k) of the Deed (Relevant CP). [PAC] acknowledges and agrees that the Relevant CP shall be satisfied upon receipt by [PAC] from its Tax Advisors of a tax opinion in relation to the Transaction that: (1) is consistent with the taxation implications outlined in the draft Australian and US Tax structuring Report dated 21 June 2014; and (2) does not set forth any material adverse tax consequences for [PAC] that are reasonably likely to occur as a consequence of the implementation of the Transaction. NL acknowledges and agrees that the Relevant CP shall be satisfied upon receipt by NL from its Tax Advisors of a tax opinion (which opinion may be a "short-form" or "New York-style" opinion to be followed by the delivery of a supporting memorandum as soon as reasonably practicable) in relation to the Transaction that the allocation of items of income, gain, loss, and deduction as contemplated by the form of Partnership Allocation Deed should be respected for United States federal income tax purposes and does not set forth any material adverse tax consequences for NL that are reasonably likely to occur. For the avoidance of doubt, the possibility that the Redeemable Preferred Units and the value, if any, of the rights to exchange Class B Units and Class B-1 Units pursuant to the Exchange Deed, may be subject to sale treatment shall not be deemed a material adverse tax consequence. Clause 17 of the Deed applies, mutatis mutandis to this letter. Signed by Northern Lights Capital Partners, LLC By [unsigned] Signed by [PAC] By [unsigned]
29. Now I should note that there was no signed version in evidence.
30. Further, also in evidence was a signed letter dated 4 August 2014 from Northern Lights dealing with the Northern Lights' warranties contained in Schedule 3 to the implementation deed. It was in the following form: Implementation deed - Disclosure Letter We refer to the implementation deed (Deed) about to be entered into between [PAC] and Northern Lights Capital Partners, LLC (NL). In particular, we refer to the NL Warranties contained in Schedule 3 to the Deed. This letter, including the appendix, is the Disclosure Letter referred to in the Deed and constitutes formal disclosure to you of facts, matters and circumstances that are, or may be, inconsistent with the NL Warranties. The contents of this Disclosure Letter qualify the NL Warranties to which the disclosures may apply and accordingly NL will not have any liability under the NL Warranties (other than the NL Title and Capacity Warranties) to the extent that disclosure is made or deemed to have been made in this Disclosure Letter. Where the context allows, words and expressions defined in the Deed have the same meaning when used in this Disclosure Letter. Please acknowledge receipt of this Disclosure Letter by signing and returning to us the enclosed copy of this Disclosure Letter. … Appendix Disclosures
31. Although this list of disclosures may refer in certain cases to specific numbered NL Warranties, all disclosures made are to be deemed to qualify all the NL Warranties (other than the NL Title and Capacity Warranties).
32. Where a document is referred to or referenced in a disclosure against a NL Warranty (and where access to that document has been provided to [PAC]), that disclosure is taken to be a disclosure of the matters set out in that document and is taken to be a disclosure of the document itself.
33. Specific disclosure is for convenience only and each disclosure is given without prejudice to the generality or effectiveness of any other disclosure. NL Warranty Number Disclosure NL (b)(4) It is NL's view that Redwood Investment Company, Ltd. (Redwood) engaged in a number of business practices that violated the terms of its limited liability company agreement. Corrective actions were taken prior to the August 2013 sale of the bulk of NL's interests in Redwood to Equity International. As reflected in the NL structure diagram set out in Schedule 5, NL Midco will not own certain Securities in Aether Investment Partners, LLC (Aether) that are held by Northern Lights Earn-Out Co, LLC (Earn-Out Co). Midco will have the ability to call certain Securities held by Earn-Out Co, pursuant to the terms of that certain Third Amended and Restated Limited Liability Company Agreement of Aether (Aether LLC Agreement), in exchange for assuming the obligation to pay certain payments then due pursuant to the terms of that certain Purchase Agreement (the "Aether Purchase Agreement") by and among Aether, NL Midco, Earn-Out Co and the other sellers thereto or, if such payments are not earned, then the Securities applicable to such payments are forfeited by Earn-Out Co (Aether Earn-Out Call/Forfeiture Right). In addition, pursuant to the terms of the Aether Purchase Agreement, all or a portion of the Securities held by NL Midco (excluding Securities that represent the Series A Preferred Units of Aether held by NL Midco prior to the consummation of the Aether Purchase Agreement) are subject to forfeiture in the event of a payment default of an earnout payment, as provided in Section 2.5(c) of the Aether Purchase Agreement (Aether Seller Clawback Right). NL (c) A portion of the cash purchase price for Seizert Securities pursuant to the Purchase Agreement (the "Seizert Purchase Agreement" by and among Seizert Capital Partners LLC (Seizert), NL Midco Trust Co and the sellers party thereto is not being paid in full at closing but rather will be paid by November 30, 2014 (including a portion of which that is required to be paid by [PAC] and a portion of which is required to be paid by NL Midco) (Deferred Seizert Cash Consideration). In addition, a portion of the purchase price for such Securities is payable with a seller note which matures 50% on the four year anniversary of closing and the remaining 50% of the five year anniversary of closing (or on certain change of control transactions) (Deferred Seizert Note Consideration; and together with the Deferred Seizert Cash Consideration, the "Deferred … …

1. Further, the directors said that even without the perspective obtained from recourse to such context, clause 3.1(k) was not activated by, for example, a change in the performance of a boutique like Seizert even if there were one. The following points were made.
2. First, attention was drawn to the definition of "Transaction" in clause 1.1 of the implementation deed.
3. Second, both PAC and Northern Lights had to be satisfied about their due diligence concerning the structure of the transaction.
4. Third, attention was drawn to the warranties given by Northern Lights about financial matters given in clause 8.1 and clauses (bb), (cc), (dd) and (jj) in Schedule 3.
5. Given these matters, the directors said that the words "of the structure of the Transactions" in clause 3.1(k) were not referring to, and did not confer, a unilateral right in PAC to renegotiate the merger or walk away from it. Rather, by those words the parties were referring to the parties' reasonable satisfaction of due diligence concerning the organisation of the constituent companies and trusts for the merger.
6. Finally, the directors said that the construction of clause 3.1(k) propounded by PAC should be rejected.
7. PAC asserted that it would appear that the payments to be made by WHV were within the scope of the "Transaction" for the purposes of clause 3.1(k) of the implementation deed. But the directors say that accepting such a conclusion merely makes clause 3.1(k) read: Diligence: [PAC] and NL have completed their due diligence of the structure of the [payments to be made by WHV] to their reasonable satisfaction.
8. The directors say that once the implementation deed was executed, PAC had no contractual right to revisit the outcomes arising from PAC's general due diligence enquiries. The directors say that if Northern Lights' financial information was incorrect, then that was a matter to be pursued by reference to Northern Lights' warranties.
9. So, the directors say that PAC's claim that the board was at liberty to refrain from signing the circular resolution, despite the terms of the implementation deed, is mistaken.
10. Accordingly, the directors say that there is no causal link between the signing of the circular resolution by the non-executive directors and any loss and damage allegedly suffered by PAC.

Analysis

1. Now the directors assert that once the implementation deed was executed, PAC had no contractual right to revisit the transaction or the outcomes arising from PAC's general due diligence enquiries, other than by recourse to Northern Light's warranties.
2. Now as I have indicated, clause 3.1(k) of the implementation deed provided a condition precedent to the merger being: Diligence: [PAC] and NL have completed their due diligence of the structure of the Transactions to their reasonable satisfaction.
3. With respect to clause 3.1(k) of the implementation deed there existed grounds between 7 August 2014 and 25 November 2014 for PAC to not be "reasonably satisfied" with respect to the structure of "the Transactions" due to the lack of essential information in relation to the valuation and forecasts for WHV.
4. On 7 August 2014, PAC received the revised financial model from the Gresham model v 368. The value attributed to WHV in that model had increased to $54.27m out of a total enterprise value of $375.56m.
5. Mr McGill said that he could not explain why the valuation for WHV had increased to $54.27m from $43.35m and he did not recall either raising this issue with Gresham or discussing the issue with any of his fellow PAC board members. As I have already found, Mr McGill did not receive model v 368.
6. Further, the evidence was that in early October 2014, PAC was provided by Gresham with some analysis on available cash to pay dividends that prompted Mr Fitzpatrick to write an email to Mr McGill which said: "Big issue is WHV".
7. This confirms that Mr Fitzpatrick and Mr McGill shared a realisation in mid- November 2014 that a dividend was not going to be declared by WHV.
8. On 10 November 2014, Mr McGill sent an email to Mr Carver stating: … Based on what Tim said just now, I'm quite worried about WHV. Tim mentioned that the WHV board met last week but that no dividend declaration was made and that neither Jeff nor the Laird Norton family representative really pushed the issue. Previously we'd assumed that the $2m dividend would be declared and paid in December whereas now we know for sure that it won't which gives pause for thought about our assumptions for future WHV dividends. …
9. On 18 November 2014, Mr McGill sent an email to Mr Erikson of Northern Lights and Mr Pollock of Gresham which stated: …

• Whilst not a costs matter as such, I'm concerned that the $2m dividend receipt from WHV which was assumed for December is now at risk following the failure of the WHV board to declare a dividend last month. … …

1. These matters and this realisation concerning the position in relation to the dividend were matters which went directly to the value of WHV as a component of Northern Lights' value. This was a matter fundamental to the basis upon which the merger would procced and might be approved. I agree with PAC that the value of WHV was an integer which was intrinsic to the "structure" of the transaction, including the percentages split and any variation thereon.
2. Accordingly, I agree with PAC that these matters identified from 7 August 2014 onwards entitled PAC to rely on an absence of reasonable satisfaction about the structure of "the Transactions" and entitled PAC to treat itself as not being bound to complete the merger on 25 November 2014.
3. Further, as I have indicated, Mr McGill's evidence was that he did not seek legal advice on whether the implementation deed could be renegotiated prior to completion.
4. Now as to the interpretation of the implementation deed, the directors resort to relying upon earlier drafts of the implementation deed and an unexecuted side letter to suggest that clause 3.1(k) was confined in its application to taxation structuring. In the alternative, they say that as a matter of construction the term "structure" is referring to the organisation of the constituent companies and trusts for the merger.
5. But those points are problematic for two reasons as Ms Doyle SC submitted.
6. First, the fact that both the draft on 25 July 2014 contained a footnote which provided "Side letter to provide that this condition is satisfied upon delivery of tax opinion in form previously provided to [PAC]" and there is no evidence of the side letter being executed by PAC and Northern Lights, suggests that the parties did not intend for clause 3.1(k) to be limited in the manner contended for by the non-executive directors.
7. Second, matters relating to the dividend to be paid by WHV and, therefore, the value attributable to WHV on the basis of which the deal constituting the merger was struck go directly to the arrangements for the merger, including the percentages split as between the two parties.
8. In my view PAC had a reasonable case to trigger the condition precedent or at least threaten to do so in order to, at the least, re-negotiate the percentages split on the basis of a much lower value of WHV. And at the least, legal advice should have been sought on the question.
9. Now before dealing with further questions of causation it is necessary to deal with one other topic concerning PAC's fourth decision point.

Voting in favour of the circular resolution

1. PAC contends that the non-executive directors breached their duties to the company in signing the circular resolution in November 2014. This is the fourth decision point that I have referred to earlier.
2. But according to the directors, the evidence establishes two points in relation to this allegation.
3. First, the directors say that any concerns relating to WHV were to do with the operating cashflow of Midco, which had repayment obligations to the US lender Medley, and not valuation which might affect the percentages split apportionment of value. I reject this point as it is a distortion for the reasons that I have previously explained. This finance question was a second order issue.
4. Second, the directors say that by reason of the terms of the implementation deed PAC's contention is not causally relevant to the allegation of breach. The directors say that PAC was bound to complete the deal according to the terms of the implementation deed signed on 4 August 2014. As I have already said, I do not accept such a definitive proposition.
5. Now PAC's allegations about the circular resolution are the same as the allegations made in respect of the February, April and July 2014 resolutions. And in that respect the same points made about the February, April and July 2014 resolutions apply in respect of the circular resolution but taking into account the updated factual context.
6. For the reasons give, in terms of this fourth decision point, there has been no breach of duty by the non-executive directors.
7. But as to the position concerning Mr McGill, at the time of the signing of the circular resolution he was in breach of his duties concerning the WHV question for the reasons that I have previously discussed.
8. Let me now say something more on the question of causation although I accept that I will need to hear further from the parties on this question.

Causation

1. PAC's case is that if the directors had not breached their duties, the resolutions would not have passed and the merger would not have gone ahead. So, PAC's approach to causation is a "no transaction" case. I should say now that I do not accept the "no transaction" case.
2. Now slightly different tests of causation apply to a compensation order under s 1317H of the Act, as compared with damages or compensation for breach of any general law duty.
3. In respect of a compensation order under s 1317H, as a matter of principle, only the damage which as a matter of fact was caused by the contravention may be the subject of an order for compensation under s 1317H. The words "caused by" are given their ordinary meaning, requiring a causal connection between the damage and the contravening conduct.
4. As regards the equitable duty of care, a "but for" test is to be applied, and the relevant question is whether the loss would have occurred but for the breach of the duty of care.
5. Now in this case, PAC says that had the directors not breached their general law and statutory duties by voting in favour of the merger, the merger would not have been approved. Further, PAC says that as a matter of common sense, the breaches of duty by the directors by voting in favour of the merger should be regarded as a cause of the loss resulting from the entry into the transaction.
6. Now the relevant "counterfactual" is that PAC would not have entered into the merger other than in accordance with the Act.
7. PAC says that if the directors had not breached their general law and statutory duties alleged, then the terms sheet execution resolution would not have been passed and PAC would not have entered into the merger with Northern Lights. Without the terms sheet, the merger could not have gone ahead. The term sheet was the preliminary step in negotiations, which set PAC and Northern Lights on the path to the merger.
8. Similarly, PAC says that if the directors had not breached their general law and statutory duties alleged, the revised term sheet execution resolution in April 2014 would not have been passed and PAC would not have entered into the merger.
9. Further, and as at the 23 July 2014 board meeting, PAC says that if the directors had not breached their general law and statutory duties alleged, the transaction documents execution resolution would not have been passed, the circular resolution would not have been signed and PAC would not have entered into the merger.
10. Further, PAC alleges that if Mr McGill had brought the relevant matters to the attention of the non-executive directors and not signed the implementation deed on behalf of PAC, then each of the non-executive directors would have directed Mr McGill not to sign the implementation deed on behalf of PAC and taken steps to rescind the transaction documents execution resolution and PAC would not have entered into the merger with Northern Lights.
11. Further, PAC says that if Mr McGill had determined not to vote in favour of the transaction documents execution resolution or to sign the circular resolution, as a result of his awareness that there was serious doubt about whether WHV would make, or was required to make, a distribution to Northern Lights and/or his knowledge of the contents of Gresham's models, it is likely that the other directors would also have determined not to vote in favour of the transaction documents execution resolution or to sign the circular resolution.
12. Further, PAC says that had Mr McGill not breached his duties by failing to bring model v 341 and his concerns regarding WHV to the attention of the non-executive directors, the merger would not have proceeded. A diligent director would have appreciated that the concerns regarding WHV posed significant risks for PAC and not voted in favour of the resolutions giving effect to the merger.

The directors' arguments

1. Now PAC has made clear that its case is that had the directors not breached their duties, the merger would not have gone ahead. But the directors say that there was no other transaction which would have allowed PAC to diversify and to meet the board's other objectives. I accept what the directors say as to this.
2. Further, the directors say that the evidence demonstrates that had some analysis, assessment, valuation or other piece of information altered the parameters such that the relevant percentages split was no longer appropriate, a different transaction with Northern Lights would have occurred. Again, I accept what the directors say as to this.
3. Mr Kennedy gave evidence that unless there was some major concern like Seizert losing significant funds under management, he would have recut the merger because of its strategic advantages made enormous sense for PAC.
4. Further, even if the EPS accretion was line ball because of something like WHV not making a distribution, Mr Kennedy would have seen a way forward in re-cutting the percentages split.
5. Ms Donnelly was cross-examined about concerns relating to WHV. In answer to a question from me, she said that had it become apparent in November 2014 that WHV would not pay a distribution to Northern Lights, one of the matters that would have needed to be considered was whether the percentages split might possibly be adjusted.
6. In summary then, the directors say that assuming that there was a breach of various duties, a merger would have occurred but on different terms. I agree with the directors. So, I agree with the directors that PAC has failed to prove its "no transaction" case.
7. Further, I also agree with the directors that PAC has failed to prove causation as a matter of timing, particularly concerning the first and second decision points. The first and second decisions did not cause the merger or the damage which PAC alleges ensued from the merger.
8. I do not need to go through the various permutations and combinations given that the ultimate deficiencies that I have found concern WHV and relate to the third and fourth decision points.

Mr McGill's position

1. Now a key element of PAC's claim against Mr McGill is that Mr Kennedy, Ms Donnelly and Mr Hayes ought to have been given a copy of model v 341 by Mr McGill.
2. But Mr McGill says that PAC did not cross-examine any of Mr Kennedy, Ms Donnelly or Mr Hayes as to what they would have done had they been provided with a copy of model v 341.
3. Further, Mr McGill says that it is far from clear why receipt of a model which showed the contribution to be made by Northen Lights would be greater than previously calculated, because of the increased valuation of what Northern Lights would receive from WHV, would have caused concern for those directors when the relative proportion that PAC shareholders were to receive in the Aurora Trust did not materially change.
4. In circumstances where none of those directors was asked any questions about this issue, Mr McGill says that I should not accept the causation case advanced by PAC.
5. Mr McGill also says that a further difficulty is that the primary means by which the transaction was assessed was by reference to earnings multiples, rather than a DCF model. Mr McGill said that the DCF valuations calculated were used as a check or confirmation of the primary valuation approach. The DCF model was simply used as a cross-check. And there was no cross-examination of any of the witnesses that dealt with this distinction.
6. Further, Mr McGill says that the evidence of the non-executive directors was that the attraction of WHV was the access it provided to the potentially lucrative US mutual fund market through an established distribution network. He said that this attraction remained, irrespective of the risk of not receiving in 2014 the projected distribution of $4 million.
7. Consequently, even if there was a breach of duty, Mr McGill says that PAC has failed to establish that it caused any loss.
8. I should say now that I will need to hear further from Mr McGill on causation.

Analysis

1. Now I indicated at an early stage that the first stage hearing would deal with liability issues only, with issues of quantum to follow at a second stage. So, I will keep my comments relatively brief.
2. Now there are several bases on which PAC seeks compensation for the directors' breach of duty of care and diligence including statutory compensation under s 1317H and the equitable duty to take reasonable care and diligence.
3. The words "resulted from" in s 1317H are to be given their ordinary meaning, requiring a causal connection between the damage and the contravening conduct. The inquiry is simply whether the damage suffered by the applicant "resulted from" the relevant contravention. In determining causation under s 1317H, it is appropriate to do so by reference to common sense and experience.
4. Now as I have said, in my view there is not sufficient evidence to find a "no transaction" case.
5. Now PAC says that none of the directors pleaded that the merger would have proceeded on different terms, and none gave any evidence as to what those terms would or could have been, given the need to obtain Northern Light's agreement thereto. I agree. I will need to hear further from the parties.
6. Further, the directors have adduced no evidence from anyone at Northern Lights and point to no documentary evidence which supports the proposition that Northern Lights would have been willing to go back to the drawing board in any significant way with respect to the relevant percentages split. I agree. I will need to hear further from the parties.
7. Now I have rejected PAC's case on the "no transaction" scenario. This is so for various reasons.
8. First, the WHV transaction had various advantages to PAC concerning funds under management and exposure to the US.
9. Second, Mr Kennedy and others gave evidence that they would only have sought to renegotiate the percentages split.
10. Third, in any event there were no other realistic alternative commercial transactions that PAC could have engaged in, particularly so as to achieve the necessary diversification and overseas exposure.
11. This is well apparent from the possibilities that I have discussed in the next section of my reasons, which possibilities were also relevant to the question of potential loss and damage.

Some aspects of potential loss and damage - Pinnacle and WIG

1. Now the positions of Wilson HTM Investment Group Limited (WIG) and Pinnacle Investment Management Limited (Pinnacle) have been central to PAC's claim for damages.
2. As part of its damages counterfactual, being what PAC would have done had PAC not merged with Northern Lights, PAC alleges three hypothetical scenarios which it refers to as PAC's three likely alternative hypothetical investments. PAC alleges that it would still be holding the following hypothetical investments.
3. First, it says that it would have held 100% of the shares in WIG which would have been acquired by PAC in about October 2013 for approximately $0.42, $0.60 or $0.80 per share.
4. Second and alternatively, it says that it would have held 100% of the shares in Pinnacle which would have been acquired by PAC in about July 2014 for approximately $43 million.
5. Third and alternatively, it says that it would have held a bundle of shares in publicly listed companies which would have been acquired by PAC using the proceeds from the sale of RARE in about October 2015.
6. Now according to PAC, the three likely scenarios are not loss of a chance claims. PAC says that any one of these scenarios is part of the causal chain which PAC would have me accept. Of course, PAC has to prove on the balance of probabilities that at least one of them would have occurred.
7. Now in one sense, dealing with these questions at this stage may be unnecessary. After all, I have found against PAC concerning its entire case against the non-executive directors, including Mr Fitzpatrick. Moreover, I have only found against Mr McGill on the WHV question.
8. Of course, the issue then arises as to whether I should consider a "no transaction" scenario or a scenario where the percentage split between PAC and Northern Lights would have been adjusted to deal with the WHV issue.
9. In my view the latter scenario is more likely. On that basis I do not need to deal with the "no transaction" scenario and the three possibilities set out above. But on the assumption that I am wrong, it is appropriate that I say something concerning the evidence led. Moreover, it fortifies my conclusion as to why I have not accepted the "no transaction" scenario.
10. Before detailing the relevant chronology and the three posited alternative hypothetical investments suggested by PAC, I should say something about the relevant entities.

The companies

1. In 2011 Deutsche Australia Ltd held 19.55% of WIG's issued shares. Interests associated with Mr Stephen Wilson held 17.60%. WIG's chairman was Mr Steven Skala, and its other directors included Mr Wilson, who was WIG's managing director, and Mr Chum Darvall.
2. In 2011 WIG's businesses comprised essentially two groups.
3. First, WIG owned 83% of Pinnacle. Mr Ian Macoun was the chairman and managing director of Pinnacle. Like PAC, Pinnacle invested in interests in boutiques. In 2011 Mr Macoun and other Pinnacle executives owned the remaining 17% of Pinnacle. By 2013 that percentage had increased to 20.70% and that remained the position in 2014. Mr Macoun's shareholder agreement with WIG gave Mr Macoun a right of first refusal if WIG wanted to sell its shareholding in Pinnacle. Mr Macoun's position as a shareholder, the holder of pre-emptive rights and his position as Pinnacle's CEO gave him the power to ensure that any sale of Pinnacle suited his own preferences.
4. Second, WIG had stockbroking and allied businesses.
5. Now care needs to be taken when discussing WIG and Pinnacle given that WIG undertook two corporate re-organisations.
6. On 1 July 2015 WIG sold its non-boutique businesses. WIG changed its name to Wilson Group Limited.
7. On 25 August 2016 WIG completed the purchase of the (by then) 24.99% of Pinnacle owned by Mr Macoun and other Pinnacle executives and WIG changed its name from Wilson Group Limited to Pinnacle Investment Management Limited.
8. To avoid confusion, I will refer to WIG as the listed company and Pinnacle as the subsidiary. The relevant factual chronology
9. On 27 October 2011 WIG told the ASX that it had put Pinnacle up for sale and had appointed Grant Samuel to advise it.
10. At the time Mr Fitzpatrick met with Mr Wilson to inform him of PAC's interest in an acquisition or merger involving Pinnacle.
11. At the 9 November 2011 board meeting of PAC, Mr McGill reported that the sale of Pinnacle was to be akin to a public auction by WIG. He also reported that Gresham had been retained by PAC on a monthly retainer of $25,000 and a success fee of $500,000.
12. At the 14 December 2011 board meeting of PAC, Mr McGill reported that the bidding for Pinnacle was in the first instance to be by way of non-binding indicative bids, with WIG negotiating with the highest indicative bidders. He also said that PAC was waiting to receive an information memorandum from Grant Samuel.
13. Now it is important to keep in mind the fluctuating nature of both PAC's and Pinnacle's businesses. Both PAC and WIG reported funds under management on a quarterly basis. And how each of PAC's and Pinnacle's actual funds under management performance compared with its forecasts and market expectations affected both PAC's and WIG's share price. According to the evidence before me, the changing financial fortunes of PAC and Pinnacle was one of the reasons that the acquisition of Pinnacle did not occur.
14. At the 25 January 2012 board meeting of PAC, Mr McGill reported that whilst a non-disclosure agreement had been executed, WIG had yet to provide the information memorandum for Pinnacle. It would seem that WIG had to get sign offs from its major shareholders, from Pinnacle's boutiques and from Mr Macoun and the other Pinnacle minority shareholders.
15. At the 22 February 2012 board meeting of PAC, Mr McGill reported that PAC had received the Pinnacle information memorandum and that Gresham would make a presentation to the board at the meeting.
16. Now part of the Gresham presentation at the 22 February 2012 board meeting was its "Project Everest - Indicative offer Stage" paper. The paper informed the board of the two-staged process: first, a non-binding indicative offer; and second, if the indicative offer was deemed satisfactory, due diligence followed by a final offer. Gresham valued 100% of Pinnacle in the range from $22 to 29 million but noted another $19.6 million of synergies from rationalising personnel and overheads in PAC's favour, giving a value to PAC of $44.6 million. Gresham also advised the board about Mr Macoun's first right of refusal to acquire WIG's interest in Pinnacle and about the fact that Pinnacle's boutiques may have pre-emptive rights over Pinnacle's interests in them. Gresham recommended an indicative offer in the $22 to 27 million range.
17. The board accepted Gresham's recommendation. The board regarded Gresham's work to be of good quality and comprehensive.
18. A draft of PAC's 9 March 2012 non-binding indicative offer was $23 million, payable in cash and PAC scrip, for 100% of Pinnacle. It was conditional. For example, WIG had to confirm that all pre-emptive or other rights held by Mr Macoun or Pinnacle's boutiques had been satisfactorily resolved. The offer noted that PAC's advisers were Gresham and HSF.
19. On 22 March 2012, WIG informed the ASX that none of the indicative offers it had received for Pinnacle were satisfactory to it.
20. Mr McGill's CEO report for the 28 March 2012 board meeting stated what WIG announced two days later. Mr McGill said that Grant Samuel had indicated that PAC's offer was $5 to $10m below the sort of range that the WIG board would have considered necessary to invite PAC through to phase 2 of their process. Mr McGill outlined four options for the board, ranging from increasing PAC's bid to walking away.
21. In March 2012, Mr McGill prepared a review and strategy paper for the board being the "Strategy Review - Board Summary" paper. This was a paper which he prepared for the board once he had time to thoroughly review PAC's business. Mr McGill's paper was an important document because it was to assist the board to set a strategy for PAC for quite some time.
22. The 28 March 2012 board meeting considered and discussed Mr McGill's paper. The priority issue for PAC identified by Mr McGill was its need for growth. PAC needed growth because PAC had not in the previous five years continued to invest in boutiques, several of its boutiques were mature and were thus using less PAC services and many of PAC's boutiques were focused on the same investment sectors.
23. Mr McGill recommended that PAC pursue growth in the short term by means of an acquisition or a merger with another party such as Pinnacle. Mr McGill's paper did not mention any anticipated sale of RARE or IML. Mr McGill spoke to his CEO report and it was decided that he would pursue a number of strategic options.
24. Mr McGill met with Mr Darvall, Mr Macoun and the Pinnacle management team on 2 April 2012.
25. On 17 April 2012 PAC made a revised non-binding indicative offer for 100% of Pinnacle of 6,000,000 PAC shares and $5 million cash.
26. Mr McGill's CEO report for the 27 April 2012 board meeting brought the board up to date with respect to Mr McGill's 2 April 2012 meeting, including that WIG was seeking an offer of more than $30 million for Pinnacle and the 17 April 2012 revised offer, which Mr McGill valued at $29 million.
27. On 23 April 2012 WIG rejected that offer, saying that it was insufficiently attractive to WIG to enable PAC to reach the second stage of the sale process.
28. At the PAC board meeting on 27 April 2012, Mr McGill informed the board that the Pinnacle proposal was concluded at least for the time being on account of WIG's rejection of PAC's revised offer.
29. In Mr McGill's CEO report for the 16 May 2012 board meeting Mr McGill confirmed what he had said at the April meeting, namely that "the Pinnacle opportunity is dead for now following rejection by Wilsons/Pinnacle of [PAC]'s revised offer".
30. The minutes of the 16 May 2012 board meeting record the board's ultimate resolutions arising from Mr McGill's March review, including that PAC strategically focus on several areas, including pursuing merger and acquisition opportunities.
31. Following another conversation he had with Mr Macoun, Mr Fitzpatrick wrote to Mr Skala on 8 June 2012. In that letter, PAC made another revised non-binding indicative offer for 100% of Pinnacle at $42.0 million, subject to conditions.
32. On 14 June 2012, WIG responded to PAC's 8 June 2012 offer. WIG's counteroffer of $42.0 million for 100% of Pinnacle was subject to several conditions which reflected WIG's board's view that PAC's revised indicative offer did not reflect a net value of $42.0 million. If PAC agreed with WIG's offer, PAC would then exclusively have six months to do due diligence on Pinnacle and its boutiques.
33. In Mr McGill's CEO report for the 22 June 2012 board meeting Mr McGill summarised the revival of the Pinnacle deal, including the discussions which he and Mr Fitzpatrick had had with the WIG and Pinnacle, the PAC offer made and WIG's response and the financial and strategic benefits which would be expected to flow to PAC from acquiring Pinnacle. Mr McGill noted that based on WIG's response, PAC was close to making a deal.
34. The minutes noted the revised offer and that if it was accepted PAC would be allowed six weeks exclusivity in which to undertake due diligence.
35. Because the prospects of PAC acquiring Pinnacle looked to be materialising, Mr McGill and Mr Fitzpatrick agreed to retain HSF and to have Gresham update its previous work.
36. Gresham provided its "Project Everest - Due Diligence Update" report dated 18 July 2012. By then Gresham only had Pinnacle head office forecasts and little boutique level information. Gresham's report included an indicative timetable to completion of about three months therefore concluding in October or early November 2012. Gresham noted that PAC's revised offer was in the range of $38 to 43 million, depending on assumptions about PAC's share price. Gresham valued Pinnacle to PAC at $36 million, but noted that anticipated funds under management inflows could produce an extra $7 million of value. Gresham also noted that the acquisition would not occur without Macoun's approval and that three of Pinnacle's boutiques had pre-emptive rights.
37. The minutes of the 18 July 2012 board meeting record that Mr McGill provided a verbal report that Pinnacle due diligence was progressing and that meetings had been held with some Pinnacle boutiques. They also record that Gresham spoke to the board about various aspects of their report, including valuation.
38. On 10 August 2012, Gresham provided a further update of its due diligence analysis. Gresham noted that initial due diligence had identified significant downwards revisions to Pinnacle's business plan. Using a DCF method only, Gresham valued Pinnacle at $37.5 million but noted about $20 million of synergies existed.
39. On 14 August 2012 PAC made a further non-binding cash, scrip and debt offer to acquire 100% of Pinnacle for a cash equivalent of $44.5 million. The offer was heavily conditioned. One condition was that WIG confirm that "all Pinnacle shareholders have agreed to waive potential frustrating rights within the Pinnacle Shareholders Agreement or that such rights have been otherwise dealt with". So, WIG had to obtain the co-operation of Mr Macoun and the other minority shareholders.
40. Mr McGill's CEO report for the 22 August 2012 board meeting in Sydney summarised the negotiations Mr McGill and Mr Fitzpatrick had undertaken with WIG and Pinnacle since the July board meeting. Mr McGill reported on the revised offer consideration. Mr McGill also described the pivotal role that Mr Macoun would play in the consideration of PAC's offer by reason of Mr Macoun's pre-emptive veto and other rights conferred on him by the Pinnacle shareholders agreement and because of his being a member of the WIG board. The board resolved to enter into the terms sheet to acquire Pinnacle.
41. The PAC board met on 3 October 2012. Mr McGill's CEO report said that a highly conditional terms sheet had been agreed with WIG. Mr McGill sought board ratification of the terms sheet. Mr McGill set out the principal terms and noted that with Gresham's assistance the acquisition had been modelled and would be earnings per share accretive by FY14. Mr McGill noted that the deal could be thwarted by Mr Macoun and the other minority Pinnacle shareholders and by two of Pinnacle's boutiques, Resolution Capital and Solaris, which might be excluded from the deal. Mr McGill also noted that Mr Macoun had become increasingly demanding about the acquisition.
42. The board resolved to enter into the terms sheet to acquire Pinnacle.
43. PAC's AGM was held on 2 November 2012. Mr Fitzpatrick and Mr McGill addressed the meeting and showed slides to shareholders during their addresses. In his address to shareholders at the AGM, which he read, Mr Fitzpatrick reported to shareholders on the steps taken following Mr McGill's review of PAC's business, including on the then recent acquisition of interests in Evergreen and Octis and on the significant effort expended on assessment of merger and acquisition opportunities.
44. The PAC board met on 2 November 2012 after the AGM. Mr McGill's CEO report included an explanation from Mr McGill about why the deal was taking so long to consummate. First, WIG was not confident it could obtain the consent of Pinnacle's boutiques to a change of ownership of Pinnacle or deliver Mr Macoun's minority's shares. Second, the negotiations were being driven by Mr Darvall, a non-executive director who was not focused on the deal full time. Third, the drafting of heads of agreement was being impeded by the positioning of both parties with respect to the ASX announcements that would have to be made.
45. On 16 November 2012, PAC forwarded to WIG a further non-binding offer for only a selection of Pinnacle's boutiques. This offer was designed to work around the relevant two Pinnacle boutiques frustrating the merger and to offer incentives to Mr Macoun to merge.
46. On 20 November 2012, WIG wrote to PAC rejecting PAC's 16 November 2012 offer but proposing alternative terms. On 21 November 2012, PAC made a final offer which was to expire at 5pm on 23 November 2012. WIG did not accept PAC's final offer and it lapsed.
47. The PAC board met on 12 December 2012. Mr McGill's CEO report informed the board that the opportunity to acquire Pinnacle appeared to have gone. Mr McGill explained that the primary reasons why the acquisition had gone were that WIG could not obtain the necessary consents from its boutiques and Mr Macoun. Further, with the passage of time there was pressure on that agreement because PAC shares became more valuable, Pinnacle performance diverged from forecasts, some Pinnacle boutiques won additional funds under management and those matters gave both sides scope to argue for a different price.
48. Mr McGill concluded that if the opportunity arose again in 2013 and before PAC risked further waste of management time and costs, PAC should not get involved unless WIG provided guarantees about its ability to deliver the boutiques it was selling.
49. So, by the end of 2012, PAC had spent over a year of management time and considerable money on experts in respect of a drawn-out Pinnacle acquisition process only to find that WIG could not convince Pinnacle's minority shareholders and its boutiques to agree to the acquisition. The ability of Pinnacle's minority shareholders and its boutiques to frustrate the acquisition meant that an acquisition by PAC of Pinnacle was, at the least, problematic. So, by the end of 2012, PAC had decided not to proceed with its attempt at acquiring Pinnacle.
50. Now prior to the January 2013 board meeting Mr Fitzpatrick and Mr Skala discussed Pinnacle. As a result, Mr Fitzpatrick asked Mr McGill to revisit Pinnacle.
51. The PAC board met remotely on 30 January 2013. The board requested a report on Pinnacle if WIG was willing to re-engage on the basis that the sale of Pinnacle would not be conditional on WIG obtaining consents from Pinnacle's boutiques and management.
52. The PAC board met on 20 February 2013. Mr McGill's CEO report informed the directors of recent discussions with WIG. The minutes record that: Pinnacle - Mr McGill advised that he has not, at this stage, reapproached Wilson HTM (WIG), Pinnacle's parent company, to ascertain whether it is willing to re-engage in relation to the sale of Pinnacle. WIG released its half yearly results last week and it does not contain a lot of detail about Pinnacle. Mr McGill is looking at different proposals of how to structure a deal between [PAC] and WIG if WIG is interested in recommencing discussions …
53. At some point in March 2013, Mr Fitzpatrick contacted Mr Skala and said that he thought that WIG and PAC should revisit the discussions which the parties had been conducting during 2012. Mr Fitzpatrick said to Mr Skala that PAC had in mind an options-based purchase model with a price in the order of $48 to $49m. Mr Skala said he would discuss that approach with other WIG board members. Sometime later, Mr Skala told Mr Fitzpatrick that he had discussed the idea of an options based purchase model within WIG, but that WIG was no longer a seller.
54. Mr McGill's CEO report for the 27 March 2013 board meeting said that PAC had currently very few prospective new boutique opportunities. He also summarised the course of Fitzpatrick's recent discussions with Mr Skala to the effect that WIG was no longer interested in selling Pinnacle.
55. Now at lunch after the 5 June 2013 board meeting, Mr McGill presented a SWOT (i.e. strengths, weaknesses, opportunities and threats) analysis of PAC.
56. Mr Kennedy's evidence is that the June 2013 meeting was that year's meeting to review strategy. He learned from the discussion at the board lunch that despite attempts to diversify with the acquisition of Pinnacle and from some deals that were in the pipeline, not much had been achieved in the previous 12 months. Mr Fitzpatrick or Mr McGill said that the best way to diversify in the short term still remained acquiring Pinnacle.
57. Mr Kennedy's recollection is that Mr Fitzpatrick and Mr McGill said that a lot of the problems with Mr Macoun and Pinnacle's boutiques needing to agree to an acquisition of Pinnacle could be avoided if the acquisition took place at the WIG level rather than the Pinnacle level.
58. A takeover of WIG would avoid the issues that had arisen in 2012 with obtaining consents from Pinnacle's boutiques, but it would not deliver 100% of Pinnacle's shares unless Mr Macoun and the rest of the majority agreed. A takeover would also leave PAC to deal with Pinnacle's non-boutique businesses.
59. Mr Kennedy's recollection is that this was the first time the board contemplated a takeover of WIG itself. Mr Fitzpatrick said that PAC should look at Pinnacle again and perhaps through a takeover of WIG. The board agreed. Mr Fitzpatrick asked Mr McGill to have another look at a deal involving WIG as a way of acquiring Pinnacle.
60. PAC retained Gresham to advise it about a takeover of WIG. The name of the project was "Project Waltz".
61. Mr McGill's CEO report for the 21 August 2013 board meeting informed the board that management was seeking approval to make a takeover bid for WIG at a price to be approved by the board.
62. At this meeting, Gresham produced its document entitled "Project Waltz - Board Presentation" which stated a number of matters. Let me identify four matters.
63. First, if the takeover was successful, WIG's non-boutique businesses would be sold to a group put together by WIG's most recent former managing director, Mr Andrew Coppin.
64. Second, PAC had already made an agreement with Mr Coppin about WIG's non-boutique businesses.
65. Third, Mr Coppin had said to Mr McGill that he believed he could deliver acceptances for about 19% of WIG shares and he agreed to use his best endeavours to facilitate PAC's acquisition of 19.9% of WIG's shares.
66. Fourth, Gresham valued WIG shares in the range from $0.45 to $0.65 and recommended that PAC bid $0.37 per WIG share and that PAC build up a 19.9% pre-bid holding in WIG.
67. According to Mr Kennedy, the board discussed the pros and cons of making a takeover bid. Reference was made to the risk of Mr Coppin not delivering the 19% acceptances resulting in PAC therefore wasting its time and money again or being stuck with WIG's non-boutique businesses as well as the risk of being caught in a bidding war. He remembers that the positive case for the takeover made in the "Project Waltz" paper was discussed.
68. The minutes of the meeting relevantly record: The board noted the Project Waltz report prepared by Gresham Partners that was circulated separately. Mr Graham spoke to the report advising of the opportunity for Treasury Group ([PAC]) to acquire Pinnacle via a takeover of Wilson HTM Investment Group (WIG). The Board noted that:

• purchasing WIG in its entirety would allow [PAC] to go directly to WIG shareholders and circumvent the WIG Board, use [PAC] scrip in its offer to shareholders, avoid change of control triggers at the Pinnacle boutique level and acquire WIG at an attractive valuation; and
• [PAC] has entered into an agreement with Andrew Coppin under which if [PAC] were to acquire WIG then [PAC] would sell the HTM broking business to Mr Coppin. The Board discussed the tactics, offer structure, timeline and valuation in detail asking questions of Gresham Partners and the CEO. IT WAS RESOLVED to move ahead with the Project Waltz proposal with the CEO requested to put together a pre-bid agreement. It was AGREED that the Board would meet at 10.30pm on Sunday 1 September 2013 via teleconference for an update on progress on this matter.

1. The board anticipated that it would next be updated on 1 September 2013 by Mr McGill concerning the implementation of the above strategy. However, as circumstances quickly evolved, it became necessary for the board to meet by teleconference on 30 August 2013. The minutes record that: Andrew McGill, CEO addressed the Board regarding strategy for the bid on Wilson HTM Investment Group (WIG) advising that WIG is now trading at 38.5 cents so the bid price discussed at the Board meeting of 21 August 2013 will need to be increased. The Board discussed the matter and IT WAS RESOLVED that the bid price be increased to $0.42 cents per share and that Treasury Group acquire a minimum of 12% of WIG shares/shareholder support in order to move forward with this deal, with the CEO delegated to hold the necessary discussions with WIG shareholders commencing this afternoon.
2. Mr McGill commenced canvassing WIG shareholders over the weekend. He spoke on an unsolicited basis with WIG's smaller shareholders, including some WIG employees. Mr Coppin had told Mr McGill that he was close to that group and several employees were likely to be positively disposed to an approach to sell on the basis that there was frustration within employee shareholders as to the performance of WIG and the share price not reflecting its full value.
3. Mr McGill had earlier updated the non-executive directors by email on 31 August 2013.
4. On 1 September 2013 he circulated a table summarising his expectation of the attitude of approximately 25% of WIG shareholders recommended by Mr Coppin to be approached. Mr McGill observed that Mr Coppin did not have the support at WIG that Mr Coppin thought he had because Mr Coppin could not deliver the 15% he said he could. Mr McGill had told the advisers that PAC should pull back.
5. Shortly after Mr McGill had canvassed key WIG shareholders, word leaked to the market that PAC was on the hunt for WIG shares. On 1 September 2013, WIG's shares were trading at $0.52 per share. PAC made an ASX announcement on 2 September 2013 which said that PAC held no interest in WIG and was having no further discussions about WIG.
6. After further canvassing of WIG shareholders, Mr Fitzpatrick and Mr McGill spoke with some members of the WIG board. The WIG share price had materially increased in August and September 2013 to such an extent that the discussions with WIG directors suggested that a bid price per share below $0.80 per share would be unattractive to WIG shareholders.
7. For PAC, a share price of anything like $0.80 was out of the question, not only because that price was way over Gresham's value but also because PAC's appetite for debt did not go that far.
8. Mr McGill's CEO report for the 2 October 2013 board meeting informed the non-executive directors that PAC had been unable to achieve the 12% acceptance threshold which the board had set, WIG would not support a bid below $0.80, and the Pinnacle opportunity had probably now gone for PAC as there appeared to be insufficient upside for PAC shareholders at the prices required.

Hypothetical acquisition of WIG in October 2013

1. Now PAC alleges that had PAC not merged with Northern Lights, then PAC would have made a successful takeover of WIG in about October 2013 for $43.5 million, $60.1 million or $82.8 million, being $0.42, $0.60 or $0.80 per share, respectively.
2. But each of Mr Kennedy, Mr Fitzpatrick, Ms Donnelly and Mr McGill denied those allegations and provided their reasons, which in my view were commercial, clear and cogent.
3. Mr Kennedy gave six reasons.
4. First, he said that once PAC made any takeover bid, WIG would be in play, and from his general business experience when the bid is not negotiated in advance with the target, the target seeks out a competing bid or one often occurs. The ultimate price to be paid where there are competing bids is never certain. The PAC and WIG boards were not in agreement. A takeover at that time would have been hostile.
5. Ms Donnelly made the same point. She said that because WIG had been hostile during the prior 18 months, unless the WIG board, which included Deutsche's representative, Mr Skala, as its chair and Mr Wilson, supported a takeover, she would not have voted to pursue WIG again.
6. Second, Mr Kennedy said there was no way that PAC could fund such an acquisition other than with PAC shares which may not have been attractive to WIG shareholders, especially if a competing cash offer emerged.
7. The evidence was, and I accept, that PAC had difficulty borrowing money because it had no real estate or property it could offer as security. It had minority interests in boutiques. Indeed, access to the US debt market was one attraction of the merger with Northern Lights. Now when it was suggested to Mr Kennedy that PAC could have funded the takeover with cash and PAC shares, he repeated the difficulties PAC had with borrowing and pointed out that using PAC's cash reserves inhibited PAC's ability to pay dividends.
8. Third, Mr Kennedy said the message from the WIG board in August 2013 was that it wanted $0.80 per share. Now leaving to one side that $0.80 per share was significantly in excess of the price advice from Gresham, when considered in the context of almost two years of negotiations, offering $0.42 or $0.60 was a waste of PAC's time and money. He was challenged in cross-examination about $0.80 per share, but fruitlessly.
9. Ms Donnelly gave the same evidence about a bid at $0.42 and $0.60 being a waste of PAC shareholders' money on a bid that was bound to fail.
10. Fourth, Mr Kennedy said PAC could not get 12% acceptances with a price of $0.42 per WIG share in August 2013 and that was based on PAC having negotiated to dispose of WIG's non-boutique businesses, in which PAC had no interest, to Mr Coppin.
11. He said that as far as he was aware, nothing changed between August and October 2013 except that Mr Coppin had proven that his ability to assist in obtaining 20% acceptances had been overstated by him. Mr Kennedy doubted Mr Coppin's ability to put together a syndicate to acquire WIG's non-boutique businesses. Mr Kennedy said he would not have voted in favour of a takeover of WIG in October 2013 unless there was a secure mechanism for the disposal of WIG's non-boutique businesses.
12. Fifth, Mr Kennedy said an offer at $0.60 had to have a secure mechanism for the disposal of WIG's non-boutique businesses and had to have everything go well because that price was close to Gresham's $0.65 per WIG share "best case" valuation, which assumed that all synergies were delivered on time.
13. He said that he would not have voted in favour of a takeover of WIG in October 2013 at $0.60 per share even with a secure mechanism for the disposal of WIG's non-boutique businesses because there was too much depending on the merger of the businesses occurring perfectly.
14. Ms Donnelly gave similar evidence. She said that she would not have voted for a takeover of WIG unless there was a clear way to simultaneously dispose of WIG's non-boutiques businesses, which were loss-making and which did not gel with PAC's exiting business. She said she was not aware of any other person who wanted WIG's non-boutiques businesses at the time.
15. Sixth, Mr Kennedy said $0.80 was significantly higher than the top of Gresham's range allowing for synergies (being $0.65). Based on Gresham's advice, he would not have voted in favour of a resolution to bid $0.80. He said that he might have considered increasing the bid outside of Gresham's advice if everything was perfectly in order, but the history over two years had shown him that there was no ready way to dispose of WIG's non-boutique businesses, Mr Macoun would be difficult to deal with in respect of this. Further, there was his staff's minority interest in Pinnacle. Further, some of the Pinnacle boutiques did not want PAC as their partner.
16. Now Mr Kennedy was cross-examined about Gresham's range. It was put to Mr Kennedy that the top of Gresham's range was $67.3 million and that a bid at $0.80 for WIG equated to $82.8 million, and that the $15 million difference was not material. Mr Kennedy said it was material.
17. Ms Donnelly gave unchallenged evidence that based on Gresham's valuation a bid at $0.80 would have been earnings dilutive and she would not have voted in favour of such a bid. Mr McGill made the same point.
18. Mr Fitzpatrick also made similar points to Mr Kennedy and the other directors.
19. Further, as Mr McGill said, the demise of the takeover of WIG was independent of the advent of the merger opportunity with Northern Lights.
20. In my view, on the balance of probabilities PAC would not have acquired WIG in about October 2013 for $43.5 million, $60.1 million or $82.8 million, being $0.42, $0.60 or $0.80 per share, respectively, even if WIG were still keen to receive an offer from PAC around that time; indeed Mr Fitzpatrick recorded in an email in November 2013 that he was being "harassed … by a WIG man".

Hypothetical acquisition of Pinnacle in July 2014

1. Let me deal with the next possibility raised by PAC.
2. PAC alleges that had PAC not merged with Northern Lights, then in about July 2014 PAC would have acquired 100 per cent of the shares in Pinnacle in or about July 2014 for approximately $43 million.
3. Each of Mr Kennedy, Mr Fitzpatrick, Ms Donnelly, and Mr McGill denied those allegations and provided reasons which again were clear, commercial and compelling.
4. Mr Kennedy repeated his evidence about October 2013 with respect to July 2014, saying that because of PAC's 2012 experience with attempting to acquire Pinnacle and its associated problems of dealing with Mr Macoun's minority shareholding and with obtaining the consents of PAC's boutiques, he did not think PAC would have bothered trying to acquire 100% of Pinnacle again in 2014.
5. Mr Kennedy was asked whether he knew of any reason why WIG could not have sold its non-boutique businesses in 2014, to which he answered that those businesses were losing money and he did not know who would want them.
6. Mr Kennedy was also asked whether he knew of any reason why in 2014 WIG could not have purchased the minority interests in Pinnacle held by Mr Macoun and Pinnacle's other executives. He said that he did not.
7. Mr Fitzpatrick said: The allegation now put by PAC in this proceeding that [PAC] could have acquired 100% of WIG for about $43 million is, with respect, nonsense. There were upwards of 100,000,000 shares issued in WIG in July 2014. At $0.55 per share, this would cost [PAC] upwards of $56 million. Acquiring WIG shareholding on 14 August 2014 would have cost [PAC] approximately $72 million. However, my view at the time was that [PAC] would have had difficulty acquiring WIG for under $100 million. On the basis of my personal involvement with Macoun, Skala and others, I do not believe that there was any way that [PAC] could have acquired WIG for $43 million.
8. Ms Donnelly made much the same point. Her unchallenged evidence was that after wasting significant sums of money pursuing Pinnacle in 2012 and 2013, she would not have voted to acquire Pinnacle unless the following were first in place. First, PAC had the support of WIG's two largest shareholders. Second, WIG had the consents of both Mr Macoun and other minority shareholders in Pinnacle and of Pinnacle's boutiques.
9. Further, the contemporaneous evidence suggests that by July 2014 the asking price for Pinnacle was $100 million. Mr Fitzpatrick had a conversation with Mr Macoun and, according to an email in mid July 2014, Mr Macoun said "They want 100, half stock"; this appeared to be $50 million cash and $50 million in PAC shares.
10. Mr Fitzpatrick later confirmed this in the email when he commented on Pinnacle having expected FY15 revenue of $9 million. He said "[i]f they do 9, 3 of interest on the 50 of debt leaves 6 of earnings over 50 of new shares".
11. Mr Fitzpatrick's email described the $100 million price as "not out of line with the 40 we offered when our shares were 4, but is still high". Mr Fitzpatrick was clearly referring to the offer made on 14 August 2012, the offer being $44 million and the 20-day VWAP for PAC shares then being $4.39288. Mr Fitzpatrick's "in line" comment is clearly referring to Mr Macoun's current proportion of cash to shares being not out of line with the 2012 proportion of cash to PAC shares, not to Pinnacle being for sale at $40 million.
12. Now the fact that Mr Macoun said the price wanted for Pinnacle was $100 million was not put to Mr Fitzpatrick or Mr McGill. Rather, it was put to each of them that "Mr Macoun was indicating, wasn't he, that a purchase price could be around $40 million in July 2014".
13. In any event, although Mr Macoun may have suggested the $100 million price, he himself told Mr Fitzpatrick that he (Mr Macoun) could not deliver on it.
14. The non-executive directors' and Mr McGill's evidence should be accepted. The non-boutique businesses were making losses, so WIG's share price was a proxy for Pinnacle's share price.
15. In October 2013 WIG had indicated that it wanted about $0.80 a WIG share, or $82.8 million. There was no prospect that 9 months later in July 2014 the owners of Pinnacle, which included a sizeable minority led by Mr Macoun, would have accepted $43 million.
16. Further, unless Mr Macoun was satisfied about his employment and other matters, and unless all of Pinnacle's boutiques agreed in advance, the non-executive directors were right to believe another bid was likely to be fruitless as not to warrant wasting time and money in making the bid.
17. Further, I can be more confident in accepting the non-executive directors' and Mr McGill's evidence because PAC called no evidence of its own concerning the market price of Pinnacle which WIG and Mr Macoun were willing to accept.
18. Finally, in an email from Mr Fitzpatrick to Mr McGill dated 17 July 2014 it was stated: Spoke to Ian. They are slowly moving to a deal with an international party which will give them overseas distribution, and I think a partial or total exit from WIG. Wanted to have one more go at dealing with us, for scale and fit. WIG are apparently close to deal on the broker, but for some reason it stays in WIG (tax losses)? So they want to sell Pinnacle… … Price is not out of line with the 40 we offered when our shares were 4, but is still high. …
19. In his evidence Mr Fitzpatrick said that the acquisition of Pinnacle in July 2014 was a "super long shot" but if Northern Lights had walked PAC might have tried again.

October 2015 - the proceeds of the sale of RARE

1. The third scenario pleaded by PAC is that had PAC not merged with Northern Lights, then in about late 2015 PAC would have acquired and continued to hold an investment or investments in seven specific companies listed on the ASX which were comparable to PAC. The relevant investments, so it is said, were to be made with the proceeds of the sale of PAC's interest in RARE.
2. Now in my view, on the evidence it is well apparent that the feature that distinguished PAC from other listed companies was that it bought and held minority interests in boutiques which were not listed and did not have any other major business activity. In my view PAC would not have changed its course to become a company that invested in other ASX listed companies. But I do accept that given the possible sale of RARE, PAC was conscious of not becoming a "cash box".

Summary

1. In my view, none of the hypothetical investment options posited by PAC have been established on the balance of probabilities or even as a loss of a chance in the "no transaction" scenario. In summary, the evidence from the directors was consistent with the proposition that the alternative investments suggested by PAC would not have been made.
2. Further, all of this fortifies what I have said earlier as to PAC's "no transaction" scenario. There were few if any alternatives open to PAC other than the merger.

Sections 1317S and 1318 potential application

1. Given my other findings, it is only necessary to deal with Mr McGill on this aspect.
2. Mr McGill says that he should be excused under ss 1317S and 1318 having regard to the circumstances of the case.
3. In considering whether to exercise my discretion to relieve a wrongdoer from liability, I should consider not only subjective honesty but also the degree to which the relevant conduct fell short of the required standard, the seriousness of the contravention and its actual or potential consequences, any element of impropriety such as deception and personal gain and any contrition of the wrongdoer. The need for general deterrence is also relevant.
4. Now PAC does not contend that Mr McGill acted dishonestly. But it is said that he is a sophisticated individual, who occupied an important position on the board of a publicly listed company, and so shareholders were entitled to expect that he would exercise his duties with appropriate care and diligence in respect of a transaction of this significance.
5. PAC contends that Mr McGill's conduct fell significantly short of the requisite standard. It is said that his failure exposed PAC and its shareholders to significant risk of commercial harm, including by agreeing to the merger without proper consideration of the concerns surrounding whether WHV would make or was required to make a distribution.
6. In the circumstances, PAC says that Mr McGill should not be excused for his contraventions of the Act.
7. Now it is appropriate at this stage to defer my consideration of this question until after the parties have had an opportunity to consider these reasons. It may be that further evidence may be sought to be adduced on this question. And at the least more focused submissions can be made in the light of my specific findings.

Conclusion

1. For all these reasons, PAC's case against all of the non-executive directors including Mr Fitzpatrick will be dismissed.
2. As I say, I have found against Mr McGill on the WHV question. I will hear further from the parties concerning the position of Mr McGill and the future conduct of these proceedings including on the cross-claim, any proportionate liability defence, outstanding questions of causation, loss and damage and any application that Mr McGill be excused from liability. I certify that the preceding two thousand, four hundred and fifty-five (2455) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach.

Associate: Dated: 18 December 2024 SCHEDULE OF PARTIES VID 116 of 2020 Respondents Fourth Respondent MELDA KAY DONNELLY Fifth Respondent REUBERT EDWARD HAYES