4575/00 YOLARNO PTY LTD v TRANSGLOBAL CAPITAL PTY LTD & ORS (No 2)
JUDGMENT
1 Yolarno Pty Ltd is a highly resilient family company that has operated in the meat processing industry since 1981. Yolarno has meat-processing works at Inverell, Orange and, through an associated company, at Murgon in Queensland. It trades through a subsidiary, Bindaree Beef Pty Ltd. In 1999 it had a turnover of approximately $232 million. This represented approximately 25% of the New South Wales meat industry.
2 It is an accepted fact that the meat industry is not attractive to financiers and the raising of debt finance has been difficult.
3 Garry Charles Taylor is the managing director of TransGlobal Pty Ltd. It offers corporate consulting services to companies wishing to attract investment capital. TransGlobal entered into an agreement with Yolarno to provide services. Both TransGlobal and Yolarno purported to terminate the agreement. Yolarno claimed damages for breach of contract, for breach of the Trade Practices Act 1974 (Cth), s 52 and for breach of the Corporations Law (Cth), s 780 and s 781.
4 Andrew John McDonald, known as AJ, was the managing director of Yolarno. His father, John Ronald McDonald, known as JR, who had founded the company, held a majority shareholding in Yolarno. JR and his wife, AJ, JR's two daughters and their husbands were each involved in senior positions in the company. Decisions affecting Yolarno were made by family consensus.
5 Yolarno had acquired a non-operating abattoir at Orange, had refurbished its boning room and had obtained Orange City Council approval to expand the abattoir to 1,500 head per day over two shifts. In 1998 the company was seeking finance for this project.
6 The New South Wales Department of State and Regional Development organised a tour of regional New South Wales for members of the financial and investment community. Mr Taylor was a member of that party. Following a tour of the Orange facility, AJ explained Yolarno's position and its desire for funds for its expansion programme. Mr Taylor was introduced to AJ and explained that TransGlobal was in the business of assisting clients to seek development capital.
7 Mr Taylor met with AJ in Sydney in early February 1999. In correspondence, TransGlobal pointed out that investors did not have a good perception of the meat industry and a back door listing was probably the most appropriate strategy. In early March 1999, TransGlobal estimated the cost of an initial public offering of $30 million at $2.485 million.
8 Yolarno had retained Ernst & Young to prepare a proposal for finance. In June 1999 it produced an equity investment memorandum. It stated that the capital cost of an upgrade of the Orange Abattoir to 1,500 head per day had been estimated at $30 million. It offered a 35% equity stake in Yolarno for $17.5 million. The document contained a detailed analysis of the meat industry and Yolarno's place in it. In its overview of the industry, Ernst & Young indicated that, historically, the experience of lending to the meat processing industry had not been a good one for financiers.
9 Letters written to Yolarno by TransGlobal during August and September 1999 were highly encouraging. TransGlobal said:
"Our initial view on the capital raising prospects of Bindaree Beef, having had the opportunity to study the financial data you left with us, is that it is well suited to an IPO - if the whole of the assets and operations at all locations are included."
"The information requested in 1, above, will make any plans we develop more accurate. In general, however, we believe we can come up with 2 or 3 strategies to put to you, from which we can decide upon a final approach to capital structure and strategic corporate development of Bindaree Beef as a publicly listed company."
"Rather than present you with several choices of direction, we have decided upon a single strategy that, in the current market, will give you (the Vendors) maximum post-float control and which is "saleable" to the institutional investors that are fundamental to a successful promulgation of an IPO."
"We will need to move very swiftly thereafter to take advantage of the 'ground-swell' of interest we have already developed with institutional investors."
"Further to our fax to you dated 25 August 1999, and based upon the financial data that you supplied us that were prepared by Ernst & Young, we have established a model for the corporate structure of Bindaree. We believe it will support a capital raising in the desired order of $25 million (net of float expenses), while simultaneously maximising vendor equity and appealing to institutional investors and underwriters."
"We have, on a "no-names" basis, approached certain institutions and brokers known to us and have received a very positive response to such a proposal."
10 Stuart Murray was contacted by Mr Taylor in November 1998 and asked if he could assist Yolarno in borrowing funds. Mr Murray contacted AJ who confirmed that Yolarno was seeking to borrow $15 million. Mr Murray said that would be pretty difficult because Yolarno was an abattoir.
11 Having visited the Inverell premises, Mr Murray made inquiries of several banks and private lenders without success. He subsequently advised AJ that it was unlikely that Yolarno could raise debt finance because it was undercapitalised. Mr Murray closed his file. He was subsequently asked by Mr Taylor to accompany him to Inverell on 22 September 1999 where a meeting took place between members of the McDonald family, Mr Taylor and Mr Murray.
12 Estimates of the length of the meeting varied between one and half hours and four hours. The recollections of the witnesses as to what was said at the meeting differed. Mr Taylor did most of the talking. He spoke about PE ratios.
13 At the conclusion of the presentation, JR said he asked one question: "I only have one question for you - this is the meat industry". He said that Mr Taylor gave a lengthy answer to the effect that when you were raising capital in a public offer, success or failure was determined by the PE ratio and not the type of industry involved.
14 Mr Taylor denied that he said anything to indicate that the meat industry did not matter. On the contrary, he said he informed the meeting that the meat industry was a difficult sector of the economy, at that time especially, from production, export and investment viewpoints. But as Yolarno had informed TransGlobal that it was profitable and had most of its sales arranged under formal contract, it was in a better position than many participants in the meat industry at that time. Mr Murray did not recall JR asking the question.
15 AJ remembered the question and answer. He said it was a defining moment in the meeting. His sister, Leigh Anne Belbeck recalled her father asking a question along the lines: "We're the meat industry and nobody wants to put any money into the meat industry" to which she said Mr Taylor responded that it did not matter so much what the business was. It did not matter that it was the meat industry. It was all about how you marketed and presented it that made it an attractive option for people to purchase shares. Mrs Belbeck regarded that exchange as the main part of the meeting.
16 Jayant Parshotam, an accountant employed by Yolarno, was at the meeting. He recalled JR saying: "I only have one question for you - this is the meat industry" to which he said Mr Taylor responded: "It does not matter what industry you are in. It all revolves around capital markets, the raising of capital in these markets, the power of the P/E ratio multiple and how this multiple increases significantly once a company is listed".
17 Keri Anthony Brown, a solicitor retained by and subsequently employed by Yolarno, also recalled JR asking the question to which he said Mr Taylor responded: "When you are raising money on the capital market by way of public offer, the particular industry is not relevant. The important issue which determines the success or failure is the P/E ratio."
18 It was submitted that the differing versions of what was said at the September 1999 meeting might indicate that all too often what is actually remembered is little more than an impression from which plausible details are then, often subconsciously, constructed (Watson v Foxman (2000) 49 NSWLR 315 at 318-319). It was submitted that it followed that the court must feel an actual persuasion of the occurrence of the impugned event in the context of the nature and consequence of the facts to be proved, the seriousness of the allegation made, the inherent likelihood of the occurrence and the gravity of the consequences flowing from a particular finding.
19 AJ had the letter from Mr Taylor of early February 1999 that contained the observation that investors did not have a good perception of the meat industry. He also had the Ernst & Young memorandum reporting that the experience of lenders to the meat processing industry had not been a good one for financiers. It was submitted that if Mr Taylor made the alleged representation, AJ would have said something in response. In cross examination he agreed he said nothing. But the tone of the TransGlobal correspondence had changed dramatically since early February. The optimism of the letters of August and September 1999 was consistent with a change in view.
20 In cross examination it was put to Mrs Belbeck that Mr Taylor said at the meeting words to the effect that the meat industry was a difficult sector of the economy at that time from a production, export investment viewpoint. But Yolarno having informed TransGloblal that its profit and most of its sales were arranged under formal contract, Yolarno was in a better position than many in the meet industry at that time. Mrs Belbeck said word for word she did not recall the statement. It was put to her that Mr Taylor may have said those words. She said he may have.
21 On the other hand, Mrs Belbeck was quite convinced that Mr Taylor had responded to JR by saying it did not matter so much what the business was. It did not matter that it was the meat industry. It was all about how you marketed and presented it that made it an attractive option for people to purchase shares.
22 It was submitted that if JR regarded the proposal as "Disneyland time" he would have questioned Mr Taylor's response to his question. He did not question the two gentlemen from Sydney. He said he was an uneducated person and was out of his league. He said he kept his mouth shut because he did not want to put his big foot in it. Mrs Belbeck said Mr Taylor gave the impression he was very very successful: "Very confident. Yeh, he was a very very good salesman doing his job very well".
23 I do not regard the differences in recollection of the precise words used by Mr Taylor as giving rise to a doubt that the recollections of those present are suspect. Nor do I regard the absence of comment by AJ and JR as significant.
24 It was submitted that since Yolarno had not called all the people present at the September 1999 meeting, I should draw an inference in terms of Jones v Dunkel (1959) 101 CLR 298 that their evidence would not have assisted Yolarno.
25 Five participants at that meeting were called. Each gave evidence of the question asked by JR and the answer given by Mr Taylor. The rule in Dunkel does not require a party to give cumulative evidence. It does not compel time to be wasted in calling unnecessary witnesses (Cubillo v Commonwealth (2000) 103 FCR 1 at 120).
26 I do not accept Mr Taylor's denial of the conversation. It was an important matter to the McDonald family who had experienced difficulties in raising debt finance. For AJ it was a defining moment. For Mrs Belbeck the answer was crucial. Had Mr Taylor not said these words, she said she would not have supported the proposal.
27 Following the presentation, the family met to discuss the matter. JR was sceptical. But other members of the family wanted to go ahead and he did not stand in their way.
28 Mr Murray had no direct relationship with TransGlobal. He was an employee of an accounting firm on a salary and commission basis. The accounting firm had an arrangement with TransGlobal that if it raised any funds under a prospectus for Yolarno, it would receive a commission from TransGlobal. Mr Murray was likely to promote the prospectus on behalf of the accounting firm and, if he was successful in obtaining finance under it, he would receive a bonus from the accounting firm.
29 Mr Murray denied that he attended the September 1999 meeting to assist Mr Taylor in the presentation. He said he went with a view to obtaining Yolarno's accounting work for his firm.
30 Mr Murray had provided Mr Taylor with information to enable Mr Taylor to construct a curriculum vitae of Mr Murray. In early March 1999, Mr Taylor had provided AJ with CVs for "all members of the TransGlobal team." A CV of Mr Murray was included in that material. Mr Murray was aware that Mr Taylor would use the information for purposes associated with TransGlobal. He placed no restrictions on the use of the information. Mr Murray assumed that a CV of him had been provided to the McDonald family for the September 1999 meeting.
31 Mr Murray failed to indicate to the members of the McDonald family that he attended the September 1999 meeting in an individual capacity. Mr Taylor had represented that Mr Murray was associated with TransGlobal. Mr Murray assumed that this had been done. He took no steps to correct the impression he assumed Mr Taylor had created.
32 The evidence of Mr Murray's involvement in the meeting varied. He said he was asked at the end of the meeting whether he wanted to make any comments and he said that if the McDonald family was not committed to going public, they should not do it because it involved a lot of hard work on their part to which they would need to be fully committed to the objectives and not just involved in the process. He gave a humorous analogy: "In the production of bacon and eggs, the pig is committed and the hen is involved". He said the McDonald family would have to assist with the fundraising. If they were to go public, they would have to assist with the promotion of the prospectus and assist with its compilation. Most of the witnesses present at the meeting recalled Mr Murray's analogy.
33 AJ said that Mr Murray had said: "To the overseas market, the industry you are involved in is irrelevant" and that Mr Murray has also responded to JR's question saying something about PE ratios. This evidence was supported by Mr Brown in a second affidavit produced in reply. Mr Brown said that Mr Murray also answered JR's question: "In my experience with capital raisings here and overseas, the industry that a company is involved in is irrelevant, only the price to earnings ratio is important to investors." No other attendees at the September 1999 meeting recalled Mr Murray making these observations.
34 It was submitted that I should not feel satisfied that Mr Murray made any representation about the irrelevance of the beef industry.
35 I accept that submission. Furthermore, if Mr Murray made any such observation it had little impact upon those present. It was the statement made by Mr Taylor that caught their attention.
36 The representation that in a capital raising the fact that Yolarno was in the meat industry was irrelevant, was wrong. No attempt was made to establish its accuracy. Indeed, it was subsequently disavowed by Mr Taylor.
37 On 28 February 2000, Mr Taylor sent an email to AJ with a copy to Mr Parshotam reporting that Morgans, stockbrokers of Brisbane, had declined to underwrite the capital raising. He said:
"The short story is that they have said "No", based on the alternative market demand they must service for the ".COM" sector, plus the traditional ignorance/trepidation of the market to the beef industry".
38 This drew a response from Mr Parshotam the next day: "Please advise what other issues are of concern at this stage (apart from dot com) and the meat industry (which was never an issue, in your own words)".
39 Mr Taylor responded on the same day:
"This is also a topic for the IPO Committee Meeting. However, your quoting to me of words that I would never have said in a pink fit indicates a certain organisational approach inclined towards blame and preparation of scapegoats. I have always said that the beef industry was a problem and that our greatest challenge would be to differentiate Bindaree's management expertise as the reason it was different from the norm. This is the consistent approach we have taken to brokers."
40 The IPO meeting took place on 2 March 2000. One of the representatives of TransGlobal said words to the effect: "The difficulty we are having in finding support is that the investment is in the meat industry. We can't get anyone to support it". Mr Brown turned to Mr Taylor and said: "That was the only question JR asked at the presentation at Inverell. And you replied: 'It's got nothing to do with the industry you're in'". Mr Taylor responded: "No, I didn't. I never said that. I would never make such a stupid statement". AJ said: "We can't deal with you anymore Garry". Paul Murray, one of the TransGlobal representatives, said it seemed appropriate that he should take the lead role. This evidence was not controverted by Mr Taylor.
41 My satisfaction that Mr Taylor did make the representation of irrelevance of the meat industry at the September 1999 meeting is not only based upon the weight of evidence to the contrary of his denial. Notwithstanding his statement early in February 1999 that, generally speaking, investors did not have a good perception of the meat industry, the hyperbole present in the correspondence of August and September 1999 is consistent with his answering JR's seminal question in the way those present at the meeting recalled it. Furthermore, the immediate reaction of Yolarno representatives to the first mention by Mr Taylor that the meat industry was a problem, tends to confirm the making of the representation.
42 The principles applicable to the operation of the Trade Practices Act 1974 (Cth), s 52 are usefully set out by Hill J in Equity Access Pty Ltd v Westpac Banking Corporation (1989) 16 IPR 431 at 440-441.
43 First, in order for impugned conduct to be misleading or deceptive it must convey, in all the circumstances, a misrepresentation. That what was said at the September 1999 meeting amounted to a misrepresentation is established by the subsequent conduct of Mr Taylor and the difficulty TransGlobal experienced in obtaining anyone to underwrite the issue.
44 Secondly, there is no contravention of the Trade Practices Act 1974 (Cth), s 52(1) unless error or misconception results from the conduct of the corporation and not from other circumstances for which the corporation is not responsible. That requirement is satisfied in the instant circumstances. Mr Taylor was the managing director of TransGlobal.
45 Thirdly, conduct is likely to mislead or deceive if there is a real or not remote chance or possibility of misleading or deception regardless of whether that is more or less than 50%. The question whether conduct is misleading or deceptive or is likely to be so, is an objective one to be determined by the court itself. Evidence that persons of the relevant class were misled, although admissible, is not determinative although in some cases it may be highly persuasive. In light of the clear dichotomy between the representation and the fact, there can be no doubt that the conduct of Mr Taylor on behalf of TransGlobal was misleading or deceptive.
46 Fourthly, conduct of a corporation causing mere confusion or uncertainty in the sense that the public may be caused to wonder whether two products may have come from the same source is not necessarily co-extensive with misleading or deceptive conduct. That aspect has no application in the instant circumstances.
47 Fifthly, in certain cases the applicant must establish that it has acquired a relevant reputation in a name that has become distinctive of its business in a particular country or geographical area. That aspect, also, has no application in the instant circumstances.
48 Finally, the Trade Practices Act 1974 (Cth), s 52 is not confined to conduct that is intended to mislead or deceive and a corporation that acts honestly and reasonably may, nonetheless, engage in conduct that is likely to mislead or deceive. That aspect is also inapplicable in the instant circumstances.
49 In my view, Mr Taylor's representation that the meat industry did not matter to a capital raising constituted misleading and deceptive conduct on the part of TransGlobal on whose behalf the representation was made in terms of the Trade Practices Act 1974 (Cth), s 52.
50 While I am not satisfied that Mr Murray made any representation himself, the question remains whether he is within the Trade Practices Act 1974 (Cth), s 75B(1)(a) or s 75B(1)(c).
51 The Trade Practices Act 1974 (Cth) s 75B(1)(a) provides that a person is involved in a contravention of, relevantly for present purposes, s 52 if the person has aided, abetted, counselled or procured the contravention. The concept of aiding, abetting, counselling or procuring is taken from the criminal law and there is nothing in the context of the Trade Practices Act 1974 that requires the concept to be given a different meaning. A person falls within the concept only if he or she intentionally participates in the impugned conduct. To form that requisite intent the individual must have knowledge of the essential matters that make up the contravention in question (Yorke v Lucas (1985) 158 CLR 661 at 666-668).
52 The Trade Practices Act 1974 (Cth) s 75B(1)(c) provides that a person is involved in a contravention of, relevantly for present purposes, s 52 if the person has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention. The word "knowingly" significantly confines the operation of the provision. For Mr Murray to fall within it, it must be shown that he had knowledge of the misleading nature of the statement made by Mr Taylor.
53 Mr Murray attended all but one of the IPO meetings. He said this was for purely educative purposes. When a prospectus issued he could inform clients of the activities of the Yolarno group. Mr Murray was aware that it was notoriously difficult for abattoirs to borrow substantial funds. Yet he knew little about capital raisings and it has not been established to my satisfaction that he should have been concerned at Mr Taylor's response to JR. Significantly, he was not cross examined to suggest that he knew the statement of Mr Taylor to be false.
54 In my view, Yolarno has failed to establish that Mr Murray was involved in the contravention of the Trade Practices Act 1974 (Cth) s 52 by TransGlobal.
55 As for Mr Taylor, however, I am satisfied that he knew his representation to be false but made it nonetheless and intentionally. In my view he was involved in the contravention of the Trade Practices Act 1974 (Cth) s 52 by TransGlobal in terms of s 75B(1)(a) or s 75B(1)(c).
56 The Trade Practice Act 1974 (Cth), s 82(1) provides that a person who suffers loss or damage by conduct of another person done in contravention of s 52 may recover the amount of the loss or damage by action against that person or against any person involved in the contravention. The use of the word "by" connotes causation (Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525).
57 It was submitted that there was no direct evidence of reliance upon Mr Taylor's representation. AJ did not say he relied on the representation and JR thought the proposal was "Disneyland time". Mrs Belbeck said she relied upon what Mr Taylor had said and assumed that it must be true. She saw the proposal as a means to extinguish family debt. It was objected that she was not a director or shareholder. Her husband was as was her brother in law, but neither of them gave evidence. JR held a majority of the shares in Yolarno.
58 JR and his wife, their son, their two daughters and their husbands were at various times directors. Each was involved in a senior role within the company. Decisions on its behalf were made as a matter of consensus within the family. While JR was sceptical of the proposal, the other members of the family wanted to go ahead with it. He did not stand in their way. A family decision was made that Yolarno would proceed with a public float and engage the services of TransGlobal.
59 Causation does not have to be established by direct evidence of reliance. It is open to the court to determine the effect that the representation had (Hanave Pty Ltd v LFOT Pty Ltd (1999) 43 IPR 545). In my view the representation was intended to have the effect of placating family concerns that raising funds for a meat industry operation was difficult. The making of the representation, the significance placed upon its reception by the family, their meeting immediately following the presentation to discuss the matter, the consensus that they should go ahead with the proposal notwithstanding the scepticism of JR and the fact that an agreement was reached with TransGlobal within a short space of time, lead to the inevitable inference that the representation caused Yolarno to proceed with the proposal.
60 The plaintiff relied upon three other representations. It was alleged that at the September 1999 meeting, Mr Taylor and Mr Murray said that if Yolarno entered into an agreement for investment banking services with TransGlobal, TransGlobal would be able to raise $30 million by way of a public share offering on the Australian Stock Exchange so as to enable Yolarno to finance expansion of the Orange abattoir.
61 There was no evidence of any statement in these terms. It was submitted on behalf of the plaintiff that this was a summary of the proposal to the September 1999 meeting.
62 If the conduct relied upon as being misleading or deceptive is an oral representation, there must be some precision in pleading the impugned representation. A summary of the effect of an impugned representation is not, in my view, sufficient. Serious consequences flow from misleading or deceptive conduct and a party against whom a claim is made under the Trade Practice Act 1974 (Cth), s 52 is entitled to know precisely what is alleged to have constituted the misleading or deceptive conduct. That is not the case with the plaintiff's further amended statement of claim.
63 An agreement for investment banking services dated 1 October 1999 was executed by Yolarno and TransGlobal. It was alleged that on or about 1 October 1999, Mr Taylor on behalf of TransGlobal said that TransGlobal had the knowledge, expertise and qualifications to comply with the terms and provisions of the agreement within the time period specified in the agreement.
64 There was no evidence that any such statement was made. It was submitted that such a representation was plain from the manner in which the agreement was executed at an IPO meeting. The pleading was of an oral representation and not one constituted by conduct. In any event, there was a lack of causation between any such representation and execution of the agreement. Yolarno had decided before 1 October 1999 that it would enter into an agreement with TransGlobal.
65 Finally, it was alleged that on or about 1 October 1999, Mr Taylor said that in the event that TransGlobal did not comply with the terms and provisions of the agreement within the time period specified, Yolarno would not be liable to pay fees.
66 The agreement specified a number of milestones. Milestone 5 was the presentation to underwriters to gain agreement in principle to establish a capital raising timetable. The target date for it was nine weeks from execution of the agreement. The agreement also provided that Yolarno would pay TransGlobal a fee of $300,000 at the rate $25,000 per month. The first payment was to be made on the execution of the agreement.
67 AJ gave evidence that shortly before executing the agreement Mr Taylor said to him:
"There are already clauses in the contract, as the milestones set out the weekly performances. The figure of $50,000 relates to milestone no 5 such that if the underwriters say it's not feasible then you have effectively got an exit clause because you don't have to proceed and won't need to pay TransGlobal any further fees."