United we fall: Sinking a float, responsibly
A company’s claims against its lawyers and non-executive chairperson after a failed attempt to list have been dismissed. The case offers a unique insight into a float which sunk and the gruelling hours worked by the company’s advisors, and stands as a testament to the judgment exercised by the company’s non-executive directors, who were placed in an invidious position.
Under the auspices of private companies, two founders established United Petroleum, an independent fuel distribution business operating throughout Australia. The two founders decided to make an initial public offering. They engaged Herbert Smith Freehills (HSF) to advise on the listing.
After initial attempts, the founders pursued a listing with a scheduled completion date in December 2016. United Petroleum Holdings Ltd (United) was incorporated in July 2016 for that purpose. Along with the founders, three relevant non-executive directors were appointed, of whom one was the chairperson (the Chairman).
As part of the process, a draft prospectus was to be prepared for release to analysts (the Pathfinder). It was contemplated that the Pathfinder would be released to analysts on 24 October 2016, which was the last day for this to occur if the float were to take place in 2016. However, the Pathfinder was not released and the float did not take place.
HSF subsequently commenced proceedings to recover its outstanding fees (a total of about $1.111m, excluding interest). It obtained judgment on a summary basis for about $463,000, leaving its claim for the remaining $648,000 to be determined at trial.
In return, United and related parties commenced proceedings against HSF and also against the Chairman. It was alleged that the failure of the float was attributable to breaches of various obligations said to be owed by HSF and the Chairman to United and the related parties.
After a trial involving three silks and five junior counsel occupying 17 sitting days, Elliott J published a 234 page judgment a bit over a month and a half later, giving judgment for the amount claimed by HSF, and dismissing United’s claims against HSF and the Chairman: United Petroleum Australia Pty Ltd v Herbert Smith Freehills  VSC 347.
The judgment reveals the extraordinary time pressures United’s advisors and non-executive directors were under to facilitate the float. This note focuses on the claim against the Chairman.
As noted, the non-executive directors (including the Chairman) were appointed in July 2016. Another of the non-executive directors was to chair the audit and risk committee (the Audit Chair).
From United’s incorporation, the board met regularly. Typically, the meetings commenced with one of the founders giving a high-level oral presentation of the recent trading performance of the business. Interestingly:
- no written analysis was provided to the board to show how the business was tracking against budget;
- the board was never provided with monthly management accounts, a business plan or a budget; and
- the founders (and not the non-executive directors) remained in charge of all financial and operational matters affecting the part of the business that was to be the subject of the float.
By mid-September 2016, United’s external advisors were starting to question whether a listing in 2016 was realistic. The relevant partner of HSF told one of the founders that the founder needed to focus on the financials, otherwise United was not going to meet the timetable – the partner was told to stay out of the financials.
On 23 September 2016, a meeting of the board was held at which it was noted that it was critical to avoid further time slippage, and that the aim was to have the Pathfinder completed for circulation to the due diligence committee and directors at meetings to be held in early October 2016.
However, by early October there had been slippage and it was then contemplated that the board would approve the Pathfinder by mid-October. Even then, the Audit Chair considered that this put an unreasonable timeline on the board.
By mid-October there was still no final draft of the Pathfinder. Instead, a 1 October draft was sent to the Chairman, who gave evidence that this was the first time he had seen any financials. The company secretary, in conjunction with the Chairman, arranged for the board meeting to take place on either the weekend of 22 to 23 October, or on 24 October, to give the directors at least two clear days for review – the Chairman had insisted upon this to enable him to be able to talk with the other non-executive directors and also to raise matters with management before being called upon to make a final decision.
Throughout the critical week commencing 17 October, the external advisors continued to push United for financial information in connection with the finalisation of the draft due diligence report and Pathfinder. During that week, the Audit Chair requested a meeting with some of the members of the executive, to understand a draft due diligence report about which he had questions. He was told that requests by directors for access to United executives should be made either to the Chairman or one of the founders, and was asked to outline the purpose of the meeting and the topics to be covered, so that the founder could understand who should attend the meeting.
On the evening of 20 October, the Chairman sent an email to the effect that a board meeting on Sunday 23 October was fine with him, provided that the directors had the complete suite of documents by Saturday morning, with no left-overs.
At 4.28am on Saturday 22 October one of the investment banks advising United circulated an updated draft of the financial section of the Pathfinder to management (though none of the directors), which was said to remain a work-in-progress that would be progressed that day. Throughout the day, one of the founders worked through the document, making some significant changes, though without sourcing all the required information. Unsurprisingly, the external advisors came back with a number of queries.
However, the non-executive directors were not included in any of these communications and they were becoming increasingly concerned. That morning, the Audit Chair and the Chairman discussed the situation and the Audit Chair told the Chairman that he was not going to act dishonestly or be misleading by approving the Pathfinder – consequently, unless there was a way that they could properly consider matters, he would have no option but to offer his resignation. The Chairman said that he was in exactly the same situation; his Saturday morning deadline had been missed, with no explanation as to why. The Chairman and the Audit Chair decided to await the outcome of the external advisors’ work before making any decision.
Throughout the course of the evening on Saturday 22 October and on the morning of Sunday 23 October, the directors were emailed the draft reports. At 1.36am on Sunday, they were sent the “current draft” of the financial section of the Pathfinder, which still contained more than 50 drafting notes. Unsurprisingly, Elliott J observed that this gave the non-executive directors no opportunity to properly consider the drafting notes and confer with management to assess their significance:  and .
During the morning of Sunday 23 October the wheels fell off, despite everyone’s best efforts. Shortly after 7.00am the Chairman sent an email to the Audit Chair in response to the latter’s emails (including one sent at 6.52am) stating “Just ridiculous that we be expected to read, digest and approve for distribution material with as many open issues as are still in what we got overnight!”. One of United’s investment bankers (who was on the due diligence committee) emailed the Audit Chair, saying “I am going through the materials now … but with a 55 page financial section [of the Pathfinder], 181 page [due diligence report] 37 page analyst presentation and 117 page prospectus [the Pathfinder] … I am not sure how we are expected to be comfortable in 12-24 hours.”
The non-executive directors met in the early afternoon of Sunday 23 October and the Audit Chair said that he was not prepared to approve the release of the Pathfinder. The other non-executive director said that they were out of time. The Chairman agreed that the non-executive directors were in no position to sign off on the Pathfinder that day: -. The Chairman then called one of the founders to inform him before the scheduled meetings. The founder said that he would call the Chairman back when he got closer to the city – he never returned the call.
During the trial the founders gave evidence that when they went to HSF’s offices for the board meeting on Sunday 23 October they expected it to be a milestone day in their lives. They thought that a signing was about to take place. Perhaps it was a milestone day, but, one suspects, not for the reasons they had anticipated. Apparently no-one had told them that things had gone off the rails – the founders had nominated someone to be their liaison with the external advisors but it seems that the nominee had not updated them. Instead, the Chairman spoke to the founders privately and told them that the non-executive directors had reached a decision that they would not approve the Pathfinder for release to the analysts the following day.
The fact that the Pathfinder would not be approved came as a shock to no-one but the founders. A short meeting “enveloped with tension” then took place, attended by the founders, the non-executive directors, representatives of HSF, the investment bankers and the independent accountants and some of United’s management. The founder with responsibility for the float said that he had been told that the non-executive directors were not prepared to approve the Pathfinder, that the meeting was not going to happen and that “the IPO was off”: .
Suffice to say the founders were not happy and delivered “a spray or two”. Ultimately, HSF and the Chairman found themselves in the cross-hairs.
United alleged that the Chairman breached his duties under ss 180-183 of the Corporations Act 2001 (Cth) in various respects. Of most interest, it was alleged that the Chairman knew, or ought to have known, that it was in the best interests of United to complete the public offering by Christmas 2016 and to approve the release of the Pathfinder at the board meeting scheduled for 23 October 2016, and that there was no basis to rationally believe that it was in the best interests of United not to approve the release of the Pathfinder: heading G.2, immediately after . Although the judgment does not identify in terms the duty (or duties) thereby allegedly breached, the way in which the allegation is expressed in the judgment suggests that what was alleged was a breach of s 181(1)(a): the directors’ and officers’ duty to exercise their powers and discharge their duties in good faith in the best interests of the corporation.
Justice Elliott summarises the relevant legal principles from . His Honour’s summary of the principles relevant to s 181 commences at . His Honour noted at  that the question whether, to establish a breach of s 181(1)(a), it was necessary to show that the director knew that the relevant decision was not in the interests of the company (a subjective standard) or merely to show that the director had knowledge of facts that made the decision one that was not in the interests of the company (an objective standard) was the subject of conflicting authority. Ultimately, his Honour found it unnecessary to resolve the question: .
Justice Elliott then summarised the circumstances relied upon by United in support of its allegations at , which included the fact that the investigating accountant had informed the Chairman on 22 October of the EBITDA arrived at by the investigating accountant and provided details of changes from a previous number, and the fact that the interim CFO was to provide a presentation to the due diligence committee on the final financial numbers, including the forecast, before the board was to meet to consider the Pathfinder. However, his Honour noted that in identifying what was in the best interests of United, it was necessary to look at all the relevant circumstances, which included those existing on the morning of 23 October, including that:
- the Chairman had been denied a reasonable period of time to review the materials;
- the sheer volume of materials provided at such a late time meant no reasonable non-executive director in the Chairman’s position, taking a diligent and intelligent interest, could have formed the view that there was sufficient time to properly review the materials and address the many issues that still remained outstanding; and
- that the documentation had been prepared under considerable time pressure and was still significantly incomplete: .
Unsurprisingly, Elliott J found that no non-executive director in the Chairman’s position, acting reasonably and intending to act in the interests of United, could have seriously contemplated approving the release of the Pathfinder on 23 October 2016 () and that the allegation that there was no basis to rationally believe that it was in the best interests of United not to approve the release of the Pathfinder was “entirely without merit”: .
Whilst the dismissal of the claim against the Chairman has an air of inevitability about it, the case serves as a valuable reminder that directors should fearlessly exercise their own independent judgment, including if necessary by insisting on a meaningful chance to consider matters put before them when commercial dictates may otherwise deny them that opportunity. Justice Elliott’s judgment vindicates the brave decision made by the non-executive directors of United. Further, it is clear that United’s executive officers did it no favours by failing to provide regular management reports to the non-executive directors and by depriving them of direct access to company officers, though it is unlikely that things would have been any different had they done so.
Daniel Lorbeer is a barrister at the Victorian Bar practising in commercial law, including in insurance, professional negligence and directors’ and officers’ duties litigation. In the interests of transparency, he was a senior associate at HSF until 2014.
Liability limited by a scheme approved under professional standards legislation.
 As an aside, disappointingly few unguarded comments surfaced in the documents during this intense period, though perhaps Elliott J was mercifully selective. They included: “a QC could rip us apart” – how prophetic.
 See at  and , the latter being the possible subject of proceedings for contempt of court.
 Subjective: Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373, 402  (Brereton J); Australian Securities and Investments Commission v Warrenmang Ltd (2007) 63 ACSR 623, 629 , 630  (Gordon J); Australian Securities and Investments Commission v Macdonald (No 11) (2009) 256 ALR 199, 304-305 , - (Gzell J). Objective: Mernda Developments Pty Ltd v Alamanda Property Investments No 2 Pty Ltd (2011) 86 ACSR 277,  (Warren CJ, Mandie JA and Judd AJA).
 Australian Securities and Investments Commission v Healey (2011) 196 FCR 291, 320  (Middleton J).
 The HSF partner’s ‘list of lessons’ at  may be of interest.