Pacific Equity Partners Pty Ltd v Kerwick

Factual background

1. The evidence before me was largely documentary. A number of affidavits were sworn on PEP's behalf by Mr Sam Kong, who is the Chief Financial Officer of PEP. Mr Kong gave evidence before me and was cross-examined.
2. PEP qualified Mr John Brakey as an expert witness. He has 19 years' experience in private equity, primarily as the head of various private equity teams. He presented a report describing the private equity investment market in Australia. The defendants qualified Ms Judith Smith, an expert with over 25 years' experience in private equity. Ms Smith presented a report in response. She was not required for cross-examination. Mr Brakey was cross-examined before me.
3. The term "private equity" refers to investment in businesses (referred to in the evidence as "target companies") which are private, in the sense that they are not conducted through vehicles whose securities are listed on the Stock Exchange.
4. The basic idea is to buy target companies (or substantial stakes in such companies), to try to build the target companies' businesses up, and then to sell the investments in the target companies at a profit. The businesses may be built up by providing further funds in the form of equity or loan finance, or by management assistance, or both.
5. Private equity investment of the type under consideration in this case takes place through funds managed by private equity fund managers such as PEP. Typically, the fund manager establishes a fund (usually under a limited partnership structure) and seeks to raise funds for investment. The funds are usually raised from fund managers, or from individual investors, with the typical minimum investment being $5 million or more. Once sufficient funds have been made to make the fund viable, the fund is said to have reached its "first closing". The fund will remain open for new investment until the limit which is sought is reached. The fund is then said to reach its "final closing".
6. Once sufficient funds have been raised, the fund manager begins the process of investing the fund in suitable target companies. Typically, once an investment is made, executives of the private equity fund manager will be appointed as directors or executives of the target company to facilitate control by the fund manager and, it is hoped, to build up the target company's business.
7. The fund has a predetermined life, usually five years or more. When the fund reaches the end of its life, the assets, to the extent not already liquidated, are liquidated and the proceeds returned to the investors. It is possible that, rather than being sold, a particular investment may be "rolled over" into a new fund. Over time, a fund manager may take a number of funds through the investment cycle from raising funds, investment in target companies, management of the target companies, and then winding up. Since its inception, PEP has raised five funds. Funds II, III and IV are still in the management phase. Fund V reached final closing in 2016, but it appears the fund is not yet fully invested.
8. The fund launched by Adamantem in October 2016 which was the subject of the AFR article is the first fund launched by Adamantem. Adamantem seeks to raise $600 million in total. Towards the end of 2016 it was reported that Adamantem was expected to have $300 million by its first closing, taking place at the end of that year. It apparently made its first investment in February or March 2017.
9. The critical skill in private equity fund management is obviously to identify appropriate target companies in which to invest and then manage them effectively so as to increase their value. But before this can happen, it is essential to raise sufficient monies from investors to make the fund viable.
10. An important, if not essential, requirement for this is to be able to point prospective investors to previous success in managing private equity funds. Apparently, the term "track record" is widely used among private equity fund managers and investors for this purpose. I will say something more about the scope of this term below, but PEP identified a private equity fund manager's "track record" as consisting of two parts.
11. The "tangible" part of a fund manager's "track record" consists of financial measures of return on funds managed by the private equity fund manager. Two measures were quoted in the evidence of this case, namely, "multiple of money" ("MOM") and "internal rate of return" ("IRR"). Both are measures of return on funds employed calculated as over time.
12. PEP's second element of "track record" was described by it as the "intangible" part. This consists of the steps taken by the fund in order to build up the businesses of its target companies. Thus, according to PEP, the "track record" of a private equity fund manager would include, for each target company, a history of the steps taken in managing that investment and the effect of those steps on the target's business.
13. In Australia, investment in private equity funds is only open to sophisticated investors and a prospectus is not required for the soliciting of investments. Nonetheless, it is common practice to prepare an information memorandum for each new fund which sets out the case for investment in that fund. The information memorandum for PEP Fund V, which is dated March 2013, was a confidential exhibit before me in this case. It contains macro-economic information designed to make the case for private equity as an appropriate asset class for investment, in Australia and New Zealand in particular. It contains figures for the performance of PEP's previous funds, including figures for MOM and IRR as they stood at the time the memorandum was issued. It also contains generalised descriptions of PEP's management systems and biographies of its leading executives, and is supported by reference to previous successful investments, including specific examples of techniques said to have been used on some of the investments to improve their performance. It thus includes, in PEP's terms, aspects of both the "tangible" and "intangible" "track record" of PEP.
14. Private equity fund management operates in an atmosphere of confidentiality. Because investment funds are raised privately, and the businesses purchased are privately held, there is no requirement of disclosure as such. However, the activities of a private equity fund manager, and in particular aspects of its "track record", may become public in a number of ways.
15. Information about investments may become public because PEP discloses it for promotional purposes. The private equity "industry" now boasts journals, professional organisations, and awards. In particular, the PEP Fund V information memorandum referred to various awards that PEP had received from private equity industry observers such as "Fund Manager of the Year". I assume that PEP co-operates with the industry bodies which make such awards, and that PEP may need to provide information about its activities in order to be eligible for them. The AFR article about the launch of Adamantem's fund is also an indication of the sort of self-promotion in which PEP no doubt itself engages.
16. It may also be that if a target company is floated or otherwise involved in a transaction which requires disclosure under the Stock Exchange listing rules, then aspects of its management may need to be disclosed. This happened with one of the investments of PEP, Spotless, which was subsequently floated on the Stock Exchange. As part of the float, it was necessary for Spotless to disclose in its prospectus details of its business and its trading activities during the period when it was controlled by PEP.
17. It appears that the MOM of certain PEP investments was published in half-yearly and annual reports issued by a company known as IPE Limited (formerly ING Private Equity Access Limited), an investor in PEP. Mr Kong's evidence was that IPE Limited had not obtained the consent of PEP prior to publishing the information. However, PEP has taken no action against IPE Limited in this regard.
18. There is also an information service dealing with private equity known as "Preqin". Preqin provides information about private equity funds, including those operating in Australia, such as PEP, and contains figures for MOM and IRR for each fund and other information describing the nature of the fund manager's business and the key personnel. According to Mr Kong, a subscription to Preqin costs approximately US$40,000 per year. I discuss below whether the information obtained by way of subscription from Preqin can be seen properly as being part of the "public domain". However, it seems plain that even if information on Preqin is not itself in the public domain, it is a source from which information may reach the public domain.
19. The AFR article relevantly stated: The pair [Mr Koczkar and Mr Kerwick] are well-known in listed and unlisted investment circles for their roles in PEP deals, including Veda Group, Energy Developments and Spotless Group, where they initiated investments, represented PEP's interest on boards and worked with management teams. … While the focus is firmly on the fundraising, Kerwick and Koczkar will already have some targeted investments in mind. And looking at the pair's past deals gives some indication as to where they may show up next. Kerwick says one of his favourite investments while at PEP was credit reporting business Veda, acquired before the credit crisis and launched back into public markets as a $1.05 billion, much larger and faster growing story in December 2013. Veda was acquired by US giant Equifax soon after, in a deal valuing the company at $2.4 billion. Koczkar points to Energy Developments as one of his best deals. It was an unusual one in terms of Australian private equity. PEP tried to privatise the ASX-listed Energy Developments but was caught short. Instead, it sat with an 84 per cent stake on the listed company's register, helping fund and roll-out an expansion plan. It eventually saw Energy Developments taken out by DUET Group in a $1.4 billion deal last year, and PEP returned about 2.5-times money to investors.
20. As I have mentioned, following the AFR article PEP wrote to the defendants to raise the question of disclosure of confidential information. The PEP letter relevantly stated: We were disappointed to see reference to transactions that the PEP Funds executed and returns delivered to its investors while you were part of the team at PEP. Also, of concern was reference to when you commenced work on this venture having regard to your respective restraints of trade. In the circumstances, we want to remind you of your ongoing obligations of confidentiality to Pacific Equity Partners. As you know, it is critically important to PEP's ability to conduct its business that you continue to observe your ongoing obligations of confidentiality to PEP. Disclosure of PEP's confidential information, either directly or indirectly (for example by arranging reference interviews with past and present executives of PEP Funds' portfolio companies which discloses PEP's confidential information such as track record or returns), would irreparably harm its business and no amount of compensation would make up for that. Given the importance of ensuring that PEP's confidentiality remains intact, and our desire to continue our amicable relationship with you both, we ask that you provide us copies of any marketing materials you are using in connection with your fundraising (including any information or product placement memorandum). This would allow us to satisfy ourselves that no PEP confidential information (including track record) has been used and avoid the need for us to engage lawyers to get to the same place.
21. In reply, Mr Kerwick and Mr Koczkar wrote on Adamantem's letterhead. The letter relevantly stated as follows: Both of us are fully aware of our obligations to PEP and we will continue to comply with them. Neither of us provided confidential information to the AFR relating to the relevant PEP transactions referred to in the article (including the returns achieved). It is worth noting (and as you no doubt fully appreciate), there are a variety of public sources where such transaction information could be sourced including material released by PEP and the annual reports of IPE Ltd.

Potential claims

1. As I have mentioned, counsel for PEP presented a case of potential breach of contract. Counsel for the defendants accepted that for present purposes all I needed to be satisfied of was that the claims so propounded were sufficiently plausible ones. Accordingly, I do not finally have to determine the questions of construction which might arise on those claims.
2. Mr Kerwick's employment contract included the following provisions concerning the disclosure of confidential information and dealings with the media: 12. Confidentiality 12.1 Executive's obligations The Executive must: (a) keep all Confidential Information secret and confidential, except to the extent that the Executive is required by law to disclose it; (b) take all responsible and necessary precautions to maintain the secrecy and prevent the disclosure of any Confidential Information; (c) not use, copy or record the Confidential Information except as is strictly necessary in the ordinary and proper course of the Executive's employment with the Company or after first obtaining the written consent of the Board; (d) not disclose Confidential Information to any third party except as is strictly necessary in the ordinary and proper course of the Executive's employment with the Company or after first obtaining the written consent of the Board and having first ensured that the third party agrees to keep the Confidential Information confidential in terms no less restrictive than those set out in this clause; (e) not remove any Confidential Information from the Company's premises except as is strictly necessary in the ordinary and proper course of the Executive's employment with the Company or after first obtaining the written consent of the Board; and (f) immediately notify the Board if the Executive becomes aware of any suspected or actual unauthorised use, copying or disclosure of the Confidential Information by any person and provide such assistance as requested by the Company in relation to any action taken by the Company, and at the Company's expense, or any member of the Group to prevent any suspected or actual unauthorised use, copying or disclosure of the Confidential Information by any person. 12.2 Media Communications The Executive must not communicate with the press, broadcasting or other media regarding the Company, any Group Company or any Portfolio Company except in the ordinary and proper course of the Executive's employment with the Company or after first obtaining the written consent of the Board. 12.3 Survival of Obligations The Executive's obligations under this clause 12 survive the termination of the Executive's employment with the Company except in respect of information that is part of the Executive's general skill and knowledge.
3. The "Company" is defined as PEP. Relevant further definitions are: "Confidential Information" means any information in respect of the business and affairs of the Group and the clients of the Group which is not in the public domain (other than as a result of a breach of confidentiality by the Executive), whether known by the Executive before or after the date of execution of this Agreement. For the avoidance of doubt, this information includes (but is not limited to) information concerning: (a) current and proposed projects (including potential investments); (b) the identity of the investors in the Funds and potential investors; (c) strategies; (d) budgets and business plans; (e) financial models; (f) market research data (including both qualitative and quantitative reports); (g) information relating to the Portfolio Companies; (h) proposals; (i) information relating to the structure of the Funds, the investment structure and the structure by which carry and management fees are distributed to the Company's employees and directors; (j) track records of each of private equity fund managed and advised by the Company; (k) data and research on competitors and private equity investments managed by the Company; and (l) finances of the Company or any Group Company. … "Group" means the Company and all of its Related Entities and Associated Entities but excluding Portfolio Companies and "Group Company" means each of them. … "Portfolio Company" means a company in which one or more of the private equity funds managed and advised by the Group, other than the Future Funds, have invested capital.
4. It was accepted that Mr Koczkar's employment contract was relevantly in the same terms.
5. Each of Mr Kerwick and Mr Koczkar, on termination of his employment with PEP, entered into a deed styled "Deed of Release". There may be room for argument about whether the terms of that Deed qualify the obligations imposed on Mr Kerwick and Mr Koczkar in their employment contracts. However, counsel for the defendants accepted that it was arguable that the Deed of Release left those obligations unaffected and I will proceed on that basis.
6. In support of the application, counsel for PEP propounded two claims, or potential claims, of breach of contract. The first potential claim was of breach of the obligation to cl 12.1 to maintain the secrecy of "Confidential Information". The definition of Confidential Information is set out at [30] above. It requires that the information is not "in the public domain".
7. There was some debate before me as to the meaning of the term "in the public domain". Counsel for the defendants suggested that if information was available in Preqin, which claims to have 47,000 subscribers, it could not be regarded as confidential. I am not so sure of this. In my opinion, ordinarily, "public domain" would refer to material which can be obtained at no or minimal cost by any member of the public who seeks to do so. A subscription which costs over US$40,000 a year would not, in my view, necessarily satisfy that requirement. Counsel for the defendants suggested that many, if not all, of the participants in the private equity investment market would have access to Preqin. There is no evidence to support this, and, in my opinion, it is far from self-evident. As I have said, the evidence establishes the minimum investment is approximately $5 million. That is a substantial sum of money, but I would not expect that every private investor who had that amount of money to invest would necessarily be prepared to spend US$40,000 a year for a subscription to Preqin. In my opinion, it is open to PEP to contend, for the purposes of this application, that information held in proprietary databases such as Preqin is not "in the public domain" for relevant purposes.
8. In March 2013, when PEP Fund V was in contemplation, Mr Kerwick and Mr Koczkar had announced that they did not propose to continue with PEP because they could not commit themselves to managing a further fund over its full investment cycle. This announcement had been made before the information memorandum for Fund V was issued, and there is no evidence that Mr Kerwick or Mr Koczkar had anything to do with Fund V or the preparation of the information memorandum associated with it. Nevertheless, Mr Kerwick and Mr Koczkar may be expected to retain in their memories at least some details of their activities at PEP which form part of PEP's "track record".
9. PEP did not contend that the evidence demonstrated that any information which had originally been confidential to PEP had in fact been released by the defendants. PEP accepted that the disclosures about PEP's investments in the AFR article of October 2016 were matters which were already in the public domain. However, PEP pointed to the possibility that in trying to raise monies for the Adamantem fund, the defendants might have relied upon, and disclosed to prospective investors, aspects of PEP's "track record" which were confidential. PEP pointed to the fact that Adamantem has apparently raised $300 million. According to PEP, the raising of an amount of this magnitude for a new private equity fund manager was unprecedented, or at least extremely rare, in the Australian market, at least if the fund did not have backing from an overseas parent or some other source. PEP suggested that, in order to raise funds of this magnitude, I should infer that substantial disclosure of the previous "track record" of the PEP funds with which Mr Kerwick and Mr Koczkar had been involved would have been necessary, or at least likely.
10. It was common ground between the experts that a strong corporate "track record" in successful fund management was a useful, and, perhaps in many cases, an invaluable, tool in raising money for private equity funds. That stands to reason and would probably be something that I would have inferred even without expert assistance. But, as the defendants' expert emphasised, and as the plaintiff's expert accepted in cross-examination, a strong corporate "track record" (defined in PEP's sense) is not the only factor at work.
11. In the first place, I think it must be recognised that, in this field, a corporate executive may generate his or her own personal "goodwill", independent of the corporate reputation of his or her employer. A corporate fund manager can only act through its individual executives, and it is inevitable that, in so acting, the executives will develop their own reputations.
12. This means that a significant element in an investor's decision to invest in a particular private equity fund may be the investor's confidence in the individual executives who will be responsible for running that fund. Such confidence may be engendered by previous dealings between the investor and the executives, or third party recommendation, or the executives' general reputations. It may also be engendered by personal friendship or relationships which have no necessary connection with the fund manager's business at all. Mr Brakey accepted that, as a result of their period of employment with PEP, Mr Kerwick and Mr Koczkar have a high profile and a strong reputation in investment circles. They are believed in those circles to be skilled private equity operatives who have made large amounts of money for themselves and for their investors. In my opinion, one cannot simply conclude from the apparent success of Adamantem's capital raising that those who invested did so because of the corporate "track record" (in PEP's sense) of the PEP funds previously managed by Mr Kerwick and Mr Koczkar. Furthermore, it appears that Mr Kerwick and Mr Koczkar have been very financially successful in their own right, and it is possible that some of the monies invested in Adamantem's new fund come from Mr Kerwick and Mr Koczkar themselves.
13. Evidence was presented by PEP that there had been very few successful "first time funds" of comparable size to Adamantem, anywhere in the world. In response, the defendants pointed to evidence in the form of articles in journals that some investors (albeit a minority) are at least open to investing in first time funds. In any event, I do not think that Adamantem can be classified as a "first time fund" in any meaningful way, if that connotes a venture which is entirely new. The evidence suggests to me that, owing to the reputation in the market of Mr Kerwick and Mr Koczkar and their previous experience with PEP, Adamantem is unlikely to be seen as a novice or untried private equity fund manager. In this field, the success or failure of a manager must depend on the manager's own characteristics and comparison with the experiences of other managers in other circumstances is rarely, if ever, useful. In the end, I do not think that the evidence concerning the experience of "first time funds" elsewhere in the world, or even in Australia, is of any real assistance in resolving the questions in this case.
14. But quite apart from this, there is another essential element to the inference which PEP asks to be drawn. The defendants must not only have used PEP's "track record" as part of their fundraising efforts, but they must have done so in such a way as to disclose information from that "track record" which was confidential. I am prepared to accept that Adamantem would have prepared an explanatory memorandum to promote its fund, but the form of such a memorandum is not fixed by any legislation or rule of practice. So long as Adamantem's disclosures were not misleading or deceptive, it was up to Adamantem to decide how to present its offering to prospective investors. There was no obligation to include a corporate "track record" and it would have been perfectly possible for Adamantem, to the extent it was unable to refer to PEP's "track record" without breaching confidentiality, to emphasise other perceived strengths.
15. Moreover, it is clear that the "track record" of the PEP funds (as PEP defines it) contains a number of matters which are in the public domain. It is obvious from the AFR article of October 2016 that some of the investments managed by Mr Kerwick and Mr Koczkar at PEP have been successful and that such success is known in investment circles.
16. It must be remembered that there is nothing secret or confidential about the techniques which can be used to improve a target company's performance. PEP may, for instance, have improved a target company's performance by identifying a gap in the market and steering the company towards filling that gap; or by improving a company's marketing of its existing products; or by providing a company with more capital to allow it to expand on an already successful business; or by putting executives into a company who took a rigorous attitude to cost cutting and improved its profitability in that way. All these steps are part of PEP's "track record"; but that does not mean that the techniques themselves are in any way confidential.
17. It seems to me that the art, and skill, of a private equity fund manager lies in choosing the right management technique to use in the circumstances. The fact that a manager has achieved successful outcomes in the past is, in my opinion, likely to be the key factor on which an investor would focus, rather than the minutiae of what was done, or even the particular techniques which were used.
18. The AFR article suggests to me that, should the defendants have wished to emphasise previous successful investments in which they were involved at PEP, they would have had plenty of material in the public domain which could have been referred to without disclosing matters of detail which remained confidential.
19. In its explanatory memorandum, PEP referred to internal management systems which it uses to try to ensure that its investment and management processes are successful, such as procedures for sharing information among its executives and the like. In its case before me, PEP pointed to these systems as important factors in the success of its funds and (presumably) as a drawcard for potential investors. But at times PEP's case seemed to tip over into assuming that these systems were themselves confidential material which were part of PEP's "track record". I am not sure that such management systems and practices are properly seen as part of PEP's "track record" at all. They are not specific to any particular target company. But even if they are part of PEP's "track record", they are not themselves trade secrets. There was nothing to stop Mr Kerwick and Mr Koczkar from adopting them at Adamantem, and to the extent that they had done so, referring to that fact in any information memorandum issued by Adamantem. To do so would not have involved disclosure of any confidential information of PEP.
20. PEP did not submit that there was any particular piece of confidential information which I should infer had been disclosed in Adamantem's information memorandum. I see no reason to think that an attractive information memorandum could not have been presented to potential investors in Adamantem's new fund by reference to information solely in the public domain which was selected and presented in a way likely to emphasise the apparent success of Mr Kerwick and Mr Koczkar as private equity fund management executives.
21. The critical question is how strong the possibility of breach of cl 12.1 by the defendants needs to be. In Hatfield v TCN Channel Nine Pty Ltd (2010) 77 NSWLR 506, McColl JA, giving the judgment of the Court of Appeal, made the following observations about this element of UCPR r 5.3(1): [47] First, "[i]n order for it to 'appear' to the Court that the applicant 'may be entitled' to make a claim for relief, it is not necessary for the applicant to show a prima facie or pleadable case": Morton v Nylex Ltd (at [25]). [48] Secondly, while "the mere assertion of a case is insufficient … [i]t will be sufficient if there is reasonable cause to believe that the applicant may have a right of action against the respondent resting on some recognised legal ground": Morton v Nylex (at [25]). [49] Thirdly, "belief requires more than mere assertion and more than suspicion or conjecture. [It] is an inclination of the mind towards assenting to, rather than rejecting a proposition. Thus it is not sufficient to point to a mere possibility. The evidence must incline the mind towards the matter or fact in question. If there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action": St George Bank v Rabo Australia Ltd [2004] FCA 1360; (2004) 211 ALR 147 at 154 26, per Hely J, referring in turn to John Holland Services Pty Ltd v Terranora Group Management Pty Ltd [2004] FCA 679 at [13], [14], [17] and [73], per Emmett J. The use of the word "may" indicates the court does not have to reach "a firm view that there is a right to relief": Telstra Corporation Ltd v Minister for Broadband, Communications and the Digital Economy (2008) 166 FCR 64 at 79 [58]. [50] Fourthly, the requirement that the matters set out in r 5.3 of the Uniform Civil Procedure Rules "appear[s]" to the court to establish an entitlement to an order under the rule may be wider than the requirement in the Federal Court Rules, O 15A, r 6 that there "is reasonable cause to believe": see Panasonic Australia Pty Ltd v Ngage Pty Ltd [2006] NSWSC 399; (2006) 69 IPR 595 at 598 [22] per Young CJ in Eq; Papaconstuntinos v Holmes à Court [2006] NSWSC 945 at [17] per Simpson J; Hornsby Shire Council v Valuer General of NSW [2008] NSWSC 1179 at [33], per Adams J. Nevertheless Hely J's statement in St George Bank (at 154 26] remains apposite, namely that "whilst uncertainty as to only one element of a cause of action might be compatible with the 'reasonable cause to believe' required by subpara (a), uncertainty as to a number of such elements may be sufficient to undermine the reasonableness of the cause to believe".
22. In Viljoen v Hayes [2017] NSWSC 801 (at [39]), I noted that the phrase quoted in Hatfield at [49], concerning "belief" being "an inclination of the mind", derives from the former version of the Federal Court Rules. The term "belief" does not appear in UCPR r 5.3(1), which refers only to a person who "may" have a claim.
23. As I have noted, there was no suggestion that the material disclosed in the AFR article was confidential. In fact, counsel for PEP accepted that there was no evidence before the Court that there had in fact been any release into the public domain of information of PEP which was confidential, or arguably confidential, where the release could plausibly be attributed to Mr Kerwick or Mr Koczkar. Nor is there any evidence of any effect on PEP's business. In this regard, the comparison with the decision in McCarthy v Dolpag Pty Ltd [2000] WASCA 106 is instructive. That case concerned a potential breach of a restraint of trade clause by former employees who had left the plaintiff's employment. An order for preliminary discovery was sustained on appeal. There was no direct evidence that the former employees had diverted referrals from the customers with whom they had been dealing to their new business. But there was evidence that referrals from the relevant sources had effectively dried up. In the present case, unless and until PEP launches another fund (and that is not currently planned), PEP is not in competition with Adamantem for investment monies. PEP and Adamantem are in competition for target companies in which to invest, but there is no evidence that the launch of Adamantem's fund has had any deleterious impact on PEP's business.
24. In Viljoen v Hayes (at [48]-[49], [53]), I suggested that it was important that there was no evidence in support of the application then before me (in a family provision case) of any financial need of the applicant. I likened the case to where a person had been involved in a car accident and sought discovery in aid of a potential claim without demonstrating that in fact he or she had suffered any injury. In making this comparison, I had in mind that a possible test for the application of UCPR r 5.3(1) was whether the applicant had established the gist of the claim in question. The present case is one of potential breach of contract. Breach would be established if information made confidential by cl 12.1 had been disclosed; it would not be necessary to prove damage. The gist of the claim could thus be seen as the release of confidential information.
25. In the present case, there is no evidence of this. It is possible that such disclosure has taken place, and that it has happened in breach of the defendants' obligations. But this is a mere possibility, one of the unlimited number of possible situations consistent with the known facts as disclosed by the evidence before the Court. It is in no sense a likelihood. The defendants have denied any breach and there is nothing to contradict that denial. The defendants assert that they have always been alive to their confidentiality obligations, and, as I have pointed out, there is every reason to think that if they had been, they would have been able to raise funds without necessarily making any disclosure of confidential information. I am left with the bare possibility of a breach, unilluminated by any specificity as to what information may have been disclosed.
26. In my opinion, the evidence presented by the Court falls short of creating an "inclination of the mind" towards the defendants having breached their obligations under cl 12.1. Although I have referred to the possibility that the test under UCPR r 5.3(1) does not require that level of persuasion, I do not think, sitting at first instance, that I should apply a less stringent test. Counsel for the defendants submitted that, whether or not the "inclination of the mind" test originally derived from the Federal Court, in Hatfield the Court of Appeal imposed a requirement of something similar under UCPR r 5.3(1) as a matter of interpretation. I accept that submission and on that basis I consider that PEP has failed to demonstrate a sufficiently plausible case of breach of cl 12.1.
27. The second potential claim propounded by counsel for PEP was of breach of cl 12.2. For this purpose, all that is necessary to prove is that Mr Kerwick or Mr Koczkar disclosed to the media information relating to PEP or a Portfolio Company without the consent of the board of PEP. It is not necessary to demonstrate that the information so disclosed was confidential.
28. Counsel for PEP contended that the AFR article itself demonstrated a breach of cl 12.2. He contended that the information in question related to a Portfolio Company, and there was uncontradicted evidence from Mr Kong that neither Mr Kerwick nor Mr Koczkar had sought the approval of PEP before making the disclosures quoted in the article.
29. I accept that this discloses a sufficiently arguable case of breach of cl 12.2, so that UCPR r 5.3(1) is engaged. In fact, according to the contention of counsel for PEP, it already has the necessary elements to commence proceedings in relation to the disclosures associated with the AFR article. But if Mr Kerwick and Mr Koczkar breached their employment contracts by disclosing material to one media outlet without obtaining the necessary clearance from PEP, it may reasonably be supposed that they may have committed similar breaches in dealing with other media outlets. It follows, in my opinion, that PEP has established a sufficient basis to entitle it to preliminary discovery in support of potential claims for breach of cl 12.2.
30. Clause 12.2, however, applies only to media organisations. The relief claimed by PEP is directed not to disclosure to media organisations but disclosure to potential investors. Orders are sought in the Summons for the discovery of two classes of documents, defined as "Disclosed Documents" and "Internal Documents". A "Disclosed Document" is a document provided to, or prepared for the purpose of being provided to, potential investors. An "Internal Document" is a document prepared by Mr Kerwick or Mr Koczkar "in connection with their employment by" Adamantem "including without limitation" speaking notes prepared for presentations to potential investors or documents prepared in connection with a "Disclosed Document". The category "without limitation" is too broad and the two specific examples given are limited to disclosure to potential investors. The alternative orders provided after the hearing are similarly confined to documents used for fundraising purposes.
31. The Court's power to order the discovery of documents under UCPR r 5.3(1) is confined to documents that relate to the question of whether or not the applicant is entitled to make the claim for relief in question; in this case, a breach of cl 12.2. The documents sought do not meet that description. PEP's application, to the extent based on alleged breach of cl 12.2, must be rejected.
32. In case I am wrong in my conclusions, I will deal with the other matters which were debated.
33. I have already quoted the initial correspondence between PEP and the defendants. After a gap of several months, PEP's solicitors became involved for the first time. On 10 March 2017, Mr Leon Zwier, a partner in the solicitors' Melbourne office, wrote a letter to the defendants. The letter included the following: Breach of law 12 You have recently started a new fund, Adamantem Capital (Adamantem), and are currently fundraising for that fund. 13 On 24 October 2016, an article titled "Adamantem a new breed of private equity" was published in the Australian Financial Review, in which both of you are quoted. The article directly refers to transactions executed by PEP and returns delivered by PEP to its investors. 14 In the course of your fundraising activities, you have disclosed, and may further disclose, PEP's Confidential Information, including but not limited to, financial information about PEP and/or its Portfolio Companies, PEP's track record and details of actions undertaken by PEP in its Portfolio Companies. The disclosures made by you also include compilations and summaries of PEP's practices, ideas and know-how and which compilations and summaries are not in the public domain. 15 Such conduct constitutes a breach of the Deeds, the Shareholder Agreements, the ESAs, and your statutory and equitable duties. These breaches would cause significant damage to PEP's business. Initial demand 16 I am instructed to demand that you: (a) deliver up: (i) any marketing or fundraising materials prepared or used by you and/or Adamantem that refer to PEP; and (ii) copies of any talking points or other notes used by either of you in the course of your marketing and fundraising activities and which refer to PEP or elaborate on the written materials concerning PEP used for the purposes of Adamantem's marketing and fundraising; (b) make full disclosure, in writing, of all breaches of confidencecommitted by you, including the following details for each breach: (i) the date and time of the breach; (ii) the confidential information disclosed; (iii) the person(s) to whom you disclosed the confidential information (to the extent that those names are confidential, we are willing to discuss a confidentiality regime to govern the provision of these names); (c) provide a written undertaking that you will desist from any further breach of your contractual, equitable and statutory obligations of confidence owed to PEP; (d) agree to an assessment of damage suffered by PEP as a result of your breaches, which amount is to be paid by you. 17 If either of you fail to comply with the above demand by 12pm on 17 March 2017, PEP proposes to take action against you without further notice.
34. Counsel for the defendants seized on this letter. He submitted that (as is correct) the letter betrayed no uncertainty on PEP's part about its rights. The letter asserted that breaches had occurred and made peremptory demands on that footing. It did not speak of the possibility of breaches. Counsel's submission was that at the time the letter was sent, PEP had already decided that there had been a breach and was intending to commence proceedings. He confirmed, through cross-examination of Mr Kong, that that was indeed PEP's position at the time.
35. In my opinion, however, the impact of this must be considered in the light of what has happened since. The defendants' solicitors responded to Mr Zwier's letter by letter dated 17 March. The response included the following: Further information required Your letter makes some high level yet serious allegations of breaches of duty by our clients. Given the seriousness of the allegations made, it is important that our clients understand exactly when the breaches are alleged to have occurred and exactly what form the alleged breaches took. Your letter is wholly lacking in any such detail. So that our clients might properly consider and respond to your letter, please provide the following further information concerning the breaches alleged in paragraphs 13-15 of your letter. For each alleged breach, please identify:- 1. The date(s) of the alleged breach; 2. The facts, mattes and circumstances relied upon with respect to each alleged breach. In providing this information, please include details of the Confidential Information, compilations and summaries of PEP's practices, ideas and knowhow said to have been wrongfully disclosed; 3. The specific contractual, statutory and/or equitable duties alleged to have been breached; 4. The amount of loss and damage said to have been suffered by your client as a result of each alleged breach; and 5. Whether Mr Kerwick or Mr Koczkar (or both) are responsible for the alleged breach. Once our clients have the above information, they will be in a better position to respond to your letter. Threatened proceedings We note your threat to commence proceedings. Given the entirely inadequate detail provided in your letter, it would be premature to commence proceedings prior to the provision of the information required above and a reasonable timeframe for our clients to respond to the serious allegations made. Should your client commence proceedings as threatened, we will bring this letter to the attention of the court and seek an order for indemnity costs against your client. It is also worth noting that were proceedings to be commenced without the information provided above, there may be questions around whether there was a proper basis for making the allegations contained in your letter.
36. PEP did not reply to this letter and Mr Kong's affidavit, somewhat cheekily, referred to the need to answer the questions in it as a reason why orders for preliminary discovery should be made. At the hearing before me, counsel for PEP made its position quite clear. Counsel did not submit that the evidence demonstrated that there had in fact been a breach of the defendants' confidentiality obligations as Mr Zwier had asserted. Rather, the case was put on the basis that PEP did not know and needed further information to decide.
37. On the information presented to me in this case, Mr Zwier's allegations in his letter may have been somewhat extravagant. Be that as it may, I do not think that I must treat PEP as forever fixed with those allegations. The letter was immediately followed by a sharp rebuke which pointed out the unsubstantiated nature of the allegations and challenged PEP on the propriety of bringing proceedings on the basis of such allegations. It appears that PEP has reacted by drawing in its horns and proceeding in the temperate and responsible fashion in which it has proceeded before me. I do not think PEP should be penalised for this.
38. Counsel for the defendants also referred to the following passage from Mr Kong's initial affidavit: 67. Allegations of breach of confidential information are extremely serious allegations to make in our industry. In my opinion, commencing proceedings alleging breach of confidential information against Kerwick, Koczkar and Adamantem could have a devastating effect on Adamantem's ability to raise funds (regardless of the ultimate outcome of the claim). Because of the seriousness of those kinds of allegations in our industry, and their potential consequences for Kerwick, Koczkar and Adamantem, PEP and its directors do not want to commence proceedings against Kerwick and Koczkar and Adamantem making such allegations unless: (a) the extent of breaches by them are significant; or (b) irrespective of the number of breaches, the combined effect of the breaches means that the nature of the damage caused to PEP, and the amount of damages PEP might be awarded for those breaches, justify the time and expense and risk of reputational damage to all parties of commencing such proceedings; (c) PEP is satisfied that it has a realistic prospect of obtaining orders restraining Kerwick, Koczkar and Adamantem from using confidential information about PEP's Track Record.
39. Counsel submitted, by reference to media reports concerning these proceedings, that PEP's allegations were now out in the open and the damage adverted to by Mr Kong had been done. He contended that if PEP had been motivated solely by the considerations mentioned in the affidavit then there was no point in any further secrecy and accordingly, so he submitted, the application should be refused and PEP should be left to proceed if it wished to do so.
40. For reasons I have already given, I do not treat PEP as having made a fixed decision to sue. The application has been presented before me only on the basis that PEP requires information. So far as I can see, that is consistent with the media reports, but, even if the media had exaggerated the position, I do not think that should alter the way the Court approaches the matter.
41. The fact is that PEP did not need to justify its position in terms of concern for Mr Kerwick's and Mr Koczkar's reputations. The questions before the Court are whether PEP has shown that it has a sufficiently strong potential claim, whether PEP has made reasonable enquiries for information but still lacks sufficient information on whether it may bring a claim, and whether there is a sufficient likelihood that the defendants have documents which could assist in determining whether PEP has a claim. If it turns out that PEP has a claim, then it is entitled to commence proceedings against the defendants whether or not that would be embarrassing to Mr Kerwick and Mr Koczkar and whether or not PEP would recover any substantial damages (although, in that event, PEP might be at risk for costs). If there were a sufficient legal basis to assert breach but not to establish damages, and PEP were nevertheless to pursue proceedings against the defendants, in the light of Mr Kong's affidavit PEP might be accused of hypocrisy. But that would not prevent the Court from making orders in PEP's favour if the requirements of UCPR r 5.3(1) were satisfied.

Conclusion and orders

1. For these reasons, I have concluded that: (1) PEP has failed to demonstrate to a sufficient level of plausibility that it "may" have a valid claim for breach of cl 12.1 of the employment agreements to entitle it to preliminary discovery in support of such a claim; (2) PEP has a sufficiently plausible claim for breach of cl 12.2 of Mr Kerwick's and Mr Koczkar's employment agreements, but this does not justify the particular discovery sought; (3) the discretionary reasons put forward by the defendants would not otherwise have been a sufficient basis for refusing the relief sought.
2. On the face of it, costs should follow the event and PEP should be ordered to pay the costs of the proceedings. Should either party seek any different order, there will be liberty to apply for a variation.
3. The orders of the Court are:
4. Order that the Summons be dismissed.
5. Order that the plaintiff pay the defendants' costs of the proceedings.
6. Grant liberty to the parties to apply with respect to costs, such liberty to be exercised within 14 days of today's date.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 September 2017