Plaintiff v Defendant [2021] VSC 145 | Case summary

Plaintiff v Defendant [2021] VSC 145 | Case summary | Zoe

[122]

(a) As a result of the company's breaches of the SHA KSG suffered loss, to be assessed on the basis of two alternative scenarios. Under "scenario 1" the claim was to be assessed on the basis that KSG would have participated in each relevant share issue, subscribing for all of the shares it was entitled to purchase under the SHA (that is, 9.5% of the total number of issued shares), and it also would have purchased any "shortfall shares", namely all of the shares that Open Markets issued during the relevant period to new shareholders, on the premise that had Open Markets complied with the SHA all of those shares ought to have been first offered to existing shareholders, and as it happened, no existing shareholders in fact subscribed for them. The shares would therefore have been available to KSG in its counterfactual world, and it would have subscribed for them. Alternatively under "scenario 2", the claim was to be assessed on the basis that KSG would have participated in each share issue in the same way, but would not have purchased any shortfall shares. On "scenario 1" it would have acquired 142,920 additional shares[13] by March 2016 and on "scenario 2" it would, by then, have acquired 16,205 additional shares.

(b) On the termination of the SHA on 11 March 2016 KSG would have sold all of the shares it held in Open Markets. A price of $95.70 was adopted, by reference to an off-market sale of shares to BMY Group Ltd that in fact occurred on 29 August 2016 at that price. On an assumed sale price of $95.70 KSG would have received total consideration of the sale of its "total actual shares[14] and additional shares", of $14,688.419 (on scenario 1) and $2,561,793 (on scenario 2).

(c) From the imputed consideration KSG deducted in each case the cost that it would have incurred to purchase the additional shares, calculated at the actual issue price for each bundle of shares, plus the interest KSG would have paid on funds borrowed to make the purchases (at ATO Division 7A interest rates, as a proxy for market rates).

(d) KSG therefore calculated its loss as the proceeds of the hypothetical sale of the shares it says it would have purchased (plus the proceeds from the sale of the shares it actually held), less the cost of acquiring those shares. On its scenario 1, KSG's total claim amounted to $9,964,506 (plus interest). On its scenario 2, KSG's total claim for loss amounted to $2,077,896 (plus interest).

[231]

(a) As noted earlier, Mr Galtos wrote to Open Markets on 8 April 2013 relevantly stating that KSG had historically accepted payment of 50% of its invoices in cash and 'converted' the remainder in order to take up shares during capital raising, however, KSG would not accept shares in lieu of cash for invoiced amounts or for amounts paid in settlement of Mr Galtos' termination from Open Markets.

(b) On 16 April 2013, KSG issued its statutory demand. Open Markets issued an application to set aside the statutory demand and before that was heard, the parties commenced negotiations.

(c) In the course of a telephone call between the parties' solicitors on 10 May 2013, Open Markets' solicitor Mr McNamara said to KSG's solicitor Mr El-Hissi, that Open Markets was keen to do a deal to buy out Mr Galtos' shares. Mr El-Hissi asked him to get instructions and put Open Markets' position in an email (Mr El-Hissi gave evidence to this effect and was not cross-examined).

(d) The parties' solicitors exchanged letters on 15 May 2013. It was not possible to discern which letter preceded the other, but that was not material. Mr El-Hissi set out what KSG was prepared to accept in relation to the moneys the subject of the statutory demand. He also said that KSG had contributed two payments, the second being the sum of $19,988.89 "by way of share capital" in respect of which KSG had not received shares, as a result of which Open Markets was indebted to KSG in that amount and payment was sought accordingly. Separately, he said in respect of KSG's 10% shareholding in Open Markets that "Our client is willing to discuss the sale/transfer of these shares for valuable consideration. In that regard our client is inviting your client to make an offer on these shares". On the same day, Open Markets' solicitors made an offer to resolve KSG's claims on the basis of a payment of part of the moneys sought by KSG and a purchase within 14 days of KSG's shares for the price of the remainder of the moneys sought by KSG.

(e) On 3 June 2013 Open Markets offered in relation to KSG's moneys paid in anticipation of an allocation of shares, that shares could be issued or alternatively monetary payment made, provided a reasonable time was allowed.

(f) On 3 June 2013, KSG's solicitors offered to accept a settlement comprising five elements, namely payment of the full amount of moneys owed in respect of the employment entitlements that had been claimed in the statutory demand; repayment of the sum of $19,988.89 (the capital contributed in anticipation of a share issue); that a reasonable offer be made to KSG for the shares it held in Open Markets, to be paid contemporaneously with the other moneys; the provision of guarantees; and that a deed of settlement and release be prepared to give effect to the settlement.

(g) On 4 June 2013, Open Markets' solicitors wrote confirming that the parties had agreed in respect of the principal amount of money payable (in the full amount claimed by KSG in respect of the termination dispute). On the same day, KSG's solicitors wrote also confirming agreement to that effect. On 5 June 2013, KSG's solicitors again wrote to Open Markets' solicitors asking them to forward the "offer on the shares for our client's consideration" and asking them to draft a deed of settlement.

(h) It is apparent that by this stage the parties had reached agreement on terms of settlement in respect of the dispute as to KSG's entitlements consequent upon the termination of its relationship with Open Markets, but were separately negotiating in relation to KSG's shareholding. In the context of the 3 June letter, the offer to which the 5 June email referred was an offer in respect of the proposed purchase of KSG's shareholding. On 12 June 2013, KSG's solicitors again wrote saying that they were awaiting an offer for KSG's shareholding in Open Markets.

(i) On 18 June 2013, Open Markets' solicitors told KSG's solicitors that Open Markets believed it could obtain an offer of $30,000 for the remaining shares and asked for confirmation that that was acceptable to KSG.

(j) On 18 June 2013, Mr Galtos told Mr El-Hissi by email that the $30,000 offer was "to [sic] low", but it should be addressed after the debts were sorted. He said he was happy to keep the shares "and my SHA rights" and preferred not to tie the two matters together.

(k) The parties formally settled the termination dispute by a deed of settlement executed in June 2013 and by payment of the sum of $89,770.07 to KSG. That settlement did not deal with KSG's shareholding in Open Markets.

[318]

(a) KSG sought to persuade me on its primary case, that it would have paid in excess of $4 million during the period mid-2013 to mid-2016, to acquire a very substantial stake in Open Markets. On its alternative case, it sought to persuade me that it would have raised in excess of $400,000 within a period of just under three years; funds that on either case, it needed to raise by borrowing or persuading others to invest.

(b) KSG and Mr Galtos could not fund the purchase of Open Markets shares with their own money. KSG and Mr Galtos had no history of investing in shares. They had no history of borrowing money to make investments.

(c) KSG did not establish that it otherwise had the means to acquire the shares it says it would have acquired on either of its claim scenarios and did not seek to establish a different case, concerning the acquisition of a smaller number of shares at any time during the period.

(d) Even if my conclusion on that issue were wrong, the fact was, KSG was not in a position to 'write a cheque' for the acquisitions. On KSG's own case Mr Galtos would have had to expend time and effort to obtain significant funding for KSG's acquisitions, even if some funding was available from his father. The case that KSG would have done so, was implausible. That case was that KSG would have invested substantial sums in a company whose contemporaneous financial information it did not read, whose senior personnel it did not like, and in whom it made no effort whatsoever to invest in the three year period in question. Its case that had Open Markets complied with the shareholders agreement things would have been materially different, was not made out.

(e) KSG retained its shares after Mr Galtos left Open Markets, and in April and June 2013 Mr Galtos told Open Markets that he wanted to receive information about it, and its financial statements. At that time KSG did not want to acquire more shares in exchange for the moneys Open Markets had retained in its accounts. KSG's case was that Mr Galtos was effectively ruling a line under its entanglement with Open Markets so that he could make fresh choices. That position was a rational one and in theory was not by itself necessarily inconsistent with a later choice to make further major investments in Open Markets. There was however, no evidence to support the existence of a positive intention to invest further, in mid-2013, or subsequently. Moreover, nothing that Mr Galtos did in the three years that followed, evidenced the degree of interest in Open Markets that he professed.

(f) Mr Galtos knew that Open Markets was in need of substantial capital in mid- 2013 and that its need and desire for capital investment which it sought by issuing both shares and convertible notes, continued throughout the whole of the period. He received publications from Open Markets throughout 2014, 2015 and 2016 that advised shareholders of capital raising and opportunities to invest. In his evidence in chief he was not candid about what he knew.

(g) Mr Galtos read some of the material sent to him but on his own admission he read much of it superficially. He paid no real attention to Open Markets' financial statements when he did receive them, and didn't seek them out. His claims that the material that he received did not alert him to the fact that Open Markets was seeking to raise capital by investment by new shareholders and note-holders were not credible.

(h) Mr Galtos (and KSG) did not once, after January 2013 (when Mr Galtos was employed by Open Markets), take any positive step to seek to acquire shares in Open Markets.

(i) Mr Galtos offered three explanations for not having done so:

[320]

(j) Mr Galtos, for KSG, complained to Open Markets in January 2014 and again in September 2016 that the company had not complied with the shareholders' agreement in respect of capital raising. The focus of KSG's engagements with Open Markets was the assertion of legal rights and a perceived need for Open Markets to resolve matters with Mr Galtos, and not the pursuit of opportunities to invest.

(k) Throughout the whole period, Mr Galtos had no other direct engagement with Open Markets nor any visibility of how the company was being run. He had a poor opinion of Mr Klink's management ability. Mr Galtos and Open Markets witnesses both considered his departure from Open Markets to have been acrimonious. Mr Galtos took no steps to re-engage thereafter.

(l) Shortly after leaving Open Markets Mr Galtos moved overseas. He pursued many interests while there, both personally and professionally. In his own words, he was very busy. He had also, in his own words, moved on, to new ventures.

(m) Mr Galtos' evidence that had KSG received offers conforming with the shareholders agreement things would have been very different because he would have been "triggered" to consider investing in Open Markets, was not capable of supporting an inference that he would have then gone on to take the steps necessary to make a substantial investment in Open Markets. And even on the face of it, no subjective basis for the potency of an SHA compliant offer was proffered, save that Mr Galtos was otherwise very busy and distracted. Mr Galtos also posited in the counterfactual world, he would have been a very substantial shareholder in Open Markets and would have been able to dominate the company's board. In the circumstances that proposition was speculative. Those claims were insufficient to overcome the substantial cumulative weight of the surrounding circumstances including KSG's own behaviour in the period 2013 to 2016.

(n) In mid-2013, when negotiating with Open Markets, Mr Galtos took a straightforward commercial attitude to his shareholding - he would have been prepared to sell his shares for the right price, had Open Markets made a suitable offer. It did not, so he kept the shares. KSG's counterfactual case, in contrast, exhibited little sense of commercial reality. It asserted that it would have done everything in its power to take up all shares available for subscription, without seeking to establish a substantive commercial reason to justify such an investment. Mr Galtos pointed only to his attraction to Open Markets business model based on his experience in 2013, without having tested that belief against any objective fact concerning Open Markets' progress during the period after he departed its employ.

(o) As to the counterfactual case itself, Mr Galtos, perhaps not consciously, put a different case in his evidence in cross examination, than that put in his evidence in chief. When pressed, his case was that he would have "done his darnedest"; tried as hard as he could, to invest as much as he could. Even had the alternative been pleaded (it was not) or if it ought to have been considered to have been 'in the ring' on the ground that the parties contested the case on that basis (the 'case' only emerged in Mr Galtos' cross-examination), it did not provide the building blocks from which to determine causation. The degree of effort that could or would have been applied to the posited investment was neither quantified nor described qualitatively in a way that would have permitted sensible evaluation.

(p) Returning to the pleaded counterfactual case, for the reasons explained, it was unsupported by the objectively ascertainable facts. The evidence given in support of it was inconsistent and incoherent in the ways discussed.

[348]

(a) KSG contended that the fair value of its shares for the purposes of determining its entitlement to damages for loss of opportunity (and also for compensation under s 233) was $95.70 per share. That value was fastened upon by reference to the sale of 50,004 shares by Iron Mountain Pty Ltd and Financial Market Infrastructure to BMY Group Pty Ltd that occurred on 29 August 2016, at a total price of $4,785,382.80.

(b) Open Markets' shares issues, during the relevant period and subsequently, were as set out in Schedule 1 to these reasons, which identifies the number of shares issued, the total price paid, the purchaser and any relevant associated person. It also sets out the share sales (transfers) that occurred during and after the relevant period.

(c) Open Markets published, during the period, material of the kind described earlier, such as investor 'pitch decks' and associated memoranda. Open Markets accepted that that material recorded the assessments made from time to time by Open Markets and by the authors of the documents, of the value or potential value of the company (as the context of those documents indicated) based on the projected earnings calculations and assumptions set out in those documents.

(d) Open Markets expected that investors would assess that material in order to ascertain whether they should invest. Pitch documents projected share prices as 'first offers' or invitations to negotiate. The price at which shares were in fact issued was often different from the initially proposed price.

(e) Open Markets' Board approved the content of its pitch decks and like memoranda before they were circulated amongst potential investors. Emlyn Scott and the Board would satisfy themselves that each document was accurate and reliable before circulating it.

(f) Emlyn Scott accepted that Open Markets' pitch decks and like memoranda contained Open Markets' best assessments of its expected financial performance at the relevant times.

(g) Mr Scott agreed that the value of Open Markets in 2016 and 2017 was "almost entirely intangible value"; he said it was "a loss-making business" with "no tangible value".

(h) Andrea Marani accepted that the financial information, both historical and projected, contained in pitch decks and like memoranda prepared by Open Markets and tendered in the proceeding, had a reasonable basis.

(i) Open Markets relied on three reports by Michael Smith, a director of CFAS Advisory. In his first report, Mr Smith performed an arithmetic calculation of KSG's projected loss based on an assumed share price of $95.70. Those calculations were reflected in KSG's amended statement of claim. Mr Smith did not perform a valuation of the company as such, but in his second and third reports, responded to Open Markets' expert report, substantively reiterating the calculation of loss made in his first report on the assumed share price of $95.70. Mr Smith examined Open Markets' own valuations contained in its material published to potential investors, and deduced from that material, and from the sale of shares to BMY Group Pty Ltd in August 2016, that there was an inherent value in both the shares and the intangible assets of Open Markets at that time. He did not consider Open Markets' expert's opinion that a hypothetical purchaser would attach no value to the intangible assets owned by Open Markets to be reasonable. Conversely, in his opinion, it would not be considered unreasonable to apply a revenue multiple approach to value Open Markets, as Open Markets had done in its investor material.

(j) Open Markets relied upon an expert report from Dawna Wright of FTI Consulting. Ms Wright was asked to determine the fair value and the market value of Open Markets' shares as at 1 April 2016 and to express an opinion about whether there was a market for Open Markets' shares as at that date. Ms Wright was unable to provide an opinion as to the value of Open Markets' shares because she did not consider she could do so without an identified buyer for KSG's shares. It was her opinion that Open Markets should be valued by applying a net asset methodology. Her opinion was provided on a "limited scope valuation engagement" basis which, in accordance with the Australian Professional and Ethical Standards 225 - Valuation Services (APES 225), applies when "the member is not free, as the member would be but for the limitation or restriction, to employ the valuation approaches, valuation methods and valuation procedures that a reasonable and informed third party would perform taking into consideration all the specific facts and circumstances of the engagement or assignment available to the member at that time, and it is reasonable to expect that the effect of the limitation or restriction on the estimate of value is material".

[367]

(a) In respect of each of the relevant share allocations Open Markets did not comply with the requirements stipulated by clause 11 of the SHA, by which new securities were to be first offered to original shareholders by written notice, and nor did it comply with the requirement that the issue of new securities be the subject of a major shareholders' resolution (clause 8.1), or the requirement that the grant of new securities to a new shareholder must not occur unless the proposed new shareholder delivers to each existing shareholder and the company, a deed of accession (clause 18.1).

(b) KSG did not receive the offers by written notice that it ought to have received under clause 11 of the SHA, and neither did any other original shareholder.

(c) It would have been a straightforward exercise for Open Markets to send any relevant communications to KSG, which remained a shareholder throughout the period.

(d) Processes for share offers adopted by Open Markets evidenced by proposed resolutions in early 2013 and early 2014 expressly contemplated that the requirements of the shareholders agreement in respect of the issue of new securities must be complied with unless varied.

(e) Open Markets required working capital throughout the period and was actively and publicly raising capital, and sought to attract new investment by its key personnel seeking to persuade their own contacts to invest and by widely publishing material promoting investment in the company through its networks. Its allocations of new shares were not directed to or concerned with the prospect of 'diluting' KSG's shareholding.

(f) Some of Open Markets' marketing material was sent directly to existing shareholders. Mr Galtos and KSG did not receive that material in the period of about seven months from July 2013 to late January 2014. After that time, throughout the period, KSG periodically received Open Markets' marketing material. It is not possible to determine whether KSG received all of the material that went to other shareholders but KSG did receive sufficient information to alert it to the fact that Open Markets was engaged in capital raising by issuing new shares and convertible notes. It paid scant attention to the material it did receive. Mr Galtos placed little value on Open Markets' financial statements and related information; he regarded its promotional material as propaganda.

(g) Although KSG's case is concerned with 17 particular allocations of shares, the circumstances attending each allocation were not relevantly different from one another.

[522]

[39] Crown, [9] (Buchanan JA); Sellars, 353 (Mason CJ, Dawson, Toohey and Gaudron JJ). Buchanan JA said that the observations of the plurality in Sellars were echoed by those of Lord Hoffman in Gregg v Scott [2005] UKHL 2; [2005] 2 AC 176, where Hoffman LJ said at [83] that, "[t]he fact that one cannot prove as a matter of necessary causation that someone would have done something is no reason why one should not prove that he was more likely than not to have done it. So, for example, the law distinguishes between cases in which the outcome depends on what the claimant himself ... or someone for whom the defendant is responsible ... would have done, and cases in which it depends upon what some third party would have done. In the first class of case the claimant must prove on a balance of probability that he or the defendant would have acted as to produce a favourable outcome. In the latter class, he may recover for loss of the chance that the third party would have so acted. This apparently arbitrary distinction rests on grounds of policy". In Allied Maples Group Ltd v Simmons & Simmons [1995] 1995 I WLR 1602, at 1609-11, Stuart-Smith LJ distinguished between the situation where proving that the defendant's breach caused a loss requires the plaintiff to establish what they would have done in the hypothetical past and where proving that the defendant's breach caused a loss requires the plaintiff to prove whether a third party would have conferred a benefit on the plaintiff, but for the defendant's breach. In the former, Stuart-Smith LJ said that the plaintiff must prove what it would have done, hypothetically, on the balance of probabilities. In the situation where the plaintiff is required to prove what a third party would have done, Stuart-Smith LJ found that all that was required to be proven was that there was a "substantial chance rather than a speculative one" that the third party would have acted to confer a benefit on the plaintiff. That distinction was rejected by the High Court in Badenach v Calvert [2016] HCA 18; (2016) 257 CLR 440, at 255 [41] (French CJ, Kiefel and Keane JJ) and at 467 [98]-[99] (Gordon J), who found that it is always incumbent on the plaintiff to prove, on the balance of probabilities, that an alleged loss was caused by the defendant's breach.

Plaintiff v Defendant

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