- Notable Unreported Decision
SUPREME COURT OF QUEENSLAND
Balnaves v Neil Clifford Smith & Anor  QSC 192
NEIL RICHARD BALNAVES
NEIL CLIFFORD SMITH
ACN 060 759 382 PTY LTD
Supreme Court, Brisbane
17 July 2012
7, 9, 10, 11, 15 November 2011 and 8 May 2012
The economic loss is assessed at $250,000.00
DAMAGES – MEASURE AND REMOTENESS OF DAMAGES IN ACTIONS FOR TORT – MEASURE OF DAMAGES – PERSONAL INJURIES – LOSS OF EARNINGS AND EARNING CAPACITY – LEGAL PRINCIPLES – where plaintiff seriously injured in accident – where plaintiff was executive chairman and major shareholder of company – where company was the subject of takeover – whether plaintiff would not have facilitated takeover had the accident not occurred – whether plaintiff would have continued as executive chairman of company and earned income through salary and other payments – whether plaintiff entitled to damages for capital loss in connection with value of shareholding – whether plaintiff entitled to damages for loss of earnings – whether plaintiff entitled to damages for income loss
Civil Liability Act 2003, ss11(3)(b), 54, 55(4)
Attard v James Legal Pty Ltd  NSWCA 311, cited
Baiyai Pty Ltd v Guy  NSWCA 65, cited
Balnaves v Smith & Anor; Malone v Smith & Ors  QSC 39, cited
McCracken v Melbourne Storm Rugby League Football Club Limited & 2 Ors  NSWCA 353, cited
McCrohon v Harith  NSWCA 67, considered
Matar v Jones  NSWCA 304, cited
Montemaggiori v Wilson  WASCA 177, considered
Neal v Ambulance Service of New South Wales  NSWCA 346, cited
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, cited
Thomas v D’Arcy  1 Qd R 666, cited
Zorom Enterprises Pty Ltd v Zabow (2007) 71 NSWLR 354, cited
M Stewart SC and S Given for the Plaintiff
G Diehm SC and C Harding for the Defendants
MacGillivrays Solicitors for the Plaintiff
Cantwell Lawyers for the Defendants
- On 23 February 2002, the plaintiff was seriously injured in a collision between boats, one of which was under his control. At a separate trial, liability was apportioned against him to the extent of 65%.
- In the accident, the plaintiff sustained a comminuted fracture of the right pelvis, including the acetabulum. The other boat “smashed”, he said, his right leg into his abdomen and “imploded” his pelvis. More than 40 bones were broken.
- The parties are agreed on special damages and the quantification of the components of general damages other than economic loss.
- The plaintiff, who was born in May 1944, is a resolute, energetic individual, aptly described by the occupational therapist, Mr Hoey, as “driven and very successful”.
- As a child, the plaintiff suffered poliomyelitis. That illness left him with a considerably weakened right arm. It did not affect his hip or back.
- Despite his polio-related disabilities, before the boating accident, the plaintiff was an active man. He routinely worked long hours: sometimes, seven days a week. Leisure pursuits included squash and tennis once a week and a few hours gardening on Saturdays. In those days, he also played golf about once a fortnight for recreation; and when away on his 5-6 overseas business trips a year, he often played golf with business associates and others he encountered through his work.
- The plaintiff had considerable experience in business.
- By his early 30s, he was the managing director of a corporation with a studio in Sydney that produced animated cartoons. He took the studio into live action, making television shows that were successful, in Australia and overseas. In that era, he started a distribution business that involved selling programs made at his studio as well as rights to other programs that had been purchased.
- When aged about 37, the plaintiff began to manage the Australian interests of a large book publisher. After a while, he was employed to start a theme park. He continued to be involved with a manufacturing plant and a distribution business.
- The plaintiff, as he put it, “founded and built” Southern Star Group Ltd (“SSG”). Importantly, he controlled about 32% of its shares and voting power.
- By the late 1990s, SSG dominated the Australian market for shows produced for domestic television. There was no real capacity for growth in that business, mainly because the free-to-air stations were concerned that SSG was also producing shows for competing stations.
- By 2000, SSG had several businesses, mostly operated by four wholly owned subsidiaries.
- Southern Star Entertainment Pty Ltd was Australia’s major independent creator and producer of television programming, producing shows that included dramas, game shows, children’s programs and documentaries.
- Southern Star Duplitek Pty Ltd was the nation’s largest manufacturer of video cassettes, music CDs and DVDs.
- Southern Star Circle plc, based in the United Kingdom, had a 40% stake in Carnival (Films and Theatre) Limited (“Carnival”), a leading drama production company. It owned the Oxford Scientific Films library. Carnival also produced natural history programs and documentaries. Brian Eastman, who ran Carnival’s business, owned the other 60% of Carnival.
- Southern Star Sales Pty Ltd attended to global sales of television, theatrical, video and ancillary rights to television programs and feature films. Its distribution network extended into dozens of overseas countries. Its library held thousands of hours of television programming.
- Southern Star Endemol Pty Ltd was a joint venture with Endemol Entertainment, a Dutch company. Its entertainment formats included the reality show, Big Brother. The Australian version of that show was to achieve considerable success and generate substantial profits for this SSG subsidiary.
- SSG also had a minority shareholding in Darrall Macqueen Limited, a UK corporation that produced children’s programs.
- In early 2002, aged 57, the plaintiff’s ambition was to remain as Executive Chairman of SSG for as long as he was effective and had his Board’s “blessing to remain” in that role. He enjoyed his demanding work, and had no retirement plans.
- In 2000 and 2001, SSG was heavily in debt and under pressure from its bank, as Mr Sullivan, an SSG senior executive and board member testified, and as SSG’s non-payment of dividends in those years attests.
- In his Executive Chairman’s report to shareholders for the 2001 year, the plaintiff discussed “strategic” decisions taken by the Directors to secure SSG’s growth and improved profitability, including the Endemol joint venture. The report also spoke of reduced staffing and infrastructure costs across the group, particularly in management and administration. It described SSG’s core businesses as strong, despite a tight market in Europe, and announced that generation of cash and reduction of debt would remain core objectives.
- The Directors’ Report for the 2001 year explained the Board’s decision not to declare a dividend in that year or the previous year as being appropriate, given the relatively high level of debt and a focus on improved cash flow and debt reduction for the 2002 year.
- SSG’s Board decided to sell the Duplitek subsidiary.
- The Duplitek sale had been agreed by 2001 and was completed a few weeks after the plaintiff’s accident. The disposal generated more than $60 million. SSG’s bank debt was retired, and SSG was left flush with cash.
- After developing a paralytic ileus and contracting pneumonia at a Gold Coast hospital, the respondent was transferred to Brisbane on 1 March 2002 where, after a few days in intensive care, he underwent multiple surgical procedures.
- The first meeting of the Board of SSG after the plaintiff’s accident took place on 1 March 2002. The minutes of the meeting record that it was agreed that there was no need to inform “the market” of the plaintiff’s absence, “but that this would be reviewed at a later date”.
- On his discharge from hospital in mid-March 2002, the plaintiff, who ordinarily resides in Sydney, went to live at his Gold Coast house. There he received round-the-clock nursing care.
- SSG’s 2002 Annual Report recorded increased returns from its businesses. A dividend could now be paid. The Executive Chairman’s Report mentioned that the Directors had declared a one-off special dividend of 10 cents per share, fully franked, as well as resumption of a fully franked, ordinary dividend of 3.5 cents per share.
- In his Report, the plaintiff wrote:
“Three years ago, the company adopted the strategic plan to improve its businesses and reduce debt. The sale of Southern Star Duplitek at year end completes that process. Following the sale of Southern Star Duplitek, which generated a net profit of approximately $63 million, the company has retired all of its bank debt and has substantial cash reserves.
The challenge facing the company is to maximise returns to shareholders whilst building the company. With available funds of approximately $22 million for investment, the Board has been reviewing opportunities with a view to improving returns to shareholders.
The Board is using both internal and external resources to identify potential strategic acquisitions, investments and opportunities to enhance the benefits from this sale…”
- The accompanying Directors’ Report referred to opportunities presented by the Duplitek sale:
“strategic acquisitions, investments and opportunities in order to improve future returns to shareholders and increase the Group’s overall size and shareholder liquidity”.
- The Board met on 3 May 2002. The plaintiff participated by phone. By that time, SSG had almost $40 million on deposit as a result of the Duplitek sale. It was expected that, after debts were repaid, there could be as much as $30 million surplus cash available. This prompted the Board to discuss SSG’s future. The minutes record that a possible use of the cash was acquiring or merging with another business, the Board noting its reluctance to take on significant debt. The minutes record that:
“… action taken should be aimed at broadening the shareholder base, and attracting the larger fund managers, thus creating more liquidity for shareholders.”
- The Chief Financial Officer was asked to prepare a strategy paper, canvassing issues and alternatives. The Board also anticipated “enlisting the help of an outside financial institution at a later time”.
- One of the directors was Mr Kingston. He was also a director of N M Rothschild & Sons (Australia) Limited (“Rothschild”), an investment bank. Mr Kingston had joined SSG’s Board in September 2000 to fill a skills gap: no other Board member had a merchant banking background. Mr Kingston was also a director of Southern Cross Broadcasting Limited (“SCB”).
- The Board met on 23 May 2002. The plaintiff, still recuperating at the Gold Coast, again participated by phone. A number of strategy options for SSG’s future were discussed. The primary focus was on acquisitions by SSG of businesses to which it could add benefit. The search was not to be limited to Australia because, as the minutes explain, “it would not be possible to double the existing business in Australia alone”.
- The plaintiff returned to Sydney in July 2002. Soon afterwards, despite bilateral hip and right leg pain and mobility restrictions, he returned to his work as Executive Chairman of SSG. His disabilities restricted the scope of the duties he was able to perform and his working hours. He worked part-time in the office. He also worked from home.
- Rothschild sought an exclusive appointment as SSG’s adviser. At an SSG Board meeting on 23 August 2002, Mr Kingston spoke of “complexities” associated with Rothschild’s managing a very broad brief “to bring something to the company or find someone to bid for part or all of” SSG. Rothschild’s fees for facilitating a disposition of 51% to 100% of SSG were canvassed.
- Three days later, SSG announced the appointment of Rothschild to identify potential strategic acquisitions, investments and opportunities, “in order to improve future returns to shareholders and increase the group’s overall size and liquidity”. The press release referred to SSG being well placed to use both cash and shares to make opportunistic acquisitions to grow its business. The plaintiff is quoted as having said that SSG was debt free and able to take a substantial growth strategy.
- Anxious to re-establish connections with SSG’s clients and customers, before October 2002 the plaintiff undertook his first post-accident overseas trip.
- On 1 October 2002, the plaintiff underwent a total right hip replacement. He was away from his office for about three weeks. When he returned, he continued to suffer hip and right leg pain. Symptoms were aggravated by prolonged periods of sitting, standing and walking. Although the pain was relieved by drugs, his concentration and energy levels suffered. The plaintiff could not walk properly for about two weeks. He engaged in attempts at rehabilitation for about two or three hours a day. Gradually, he began to spend more time at work.
- The first meeting of the Board after the plaintiff’s hip replacement took place on 24 October 2002. He chaired the meeting. Mr Kingston presented Rothschild’s progress report on “Project Stellar”, as the search for new opportunities was called. The report mentioned four possible outcomes of the investigative process, depending on market circumstances. First, the process might identify good acquisition targets. Secondly, it might reveal “partnering opportunities”. A third prospect was that “overseas parties may initiate take-over discussions”. The fourth possibility was that SSG “may be approached to be taken private” – a reference to a management buy-out or an acquisition of SSG by private equity investors.
- Towards the end of 2002, the plaintiff began to experience lower back problems that he attributes to difficulty in walking. Sciatic nerve injury was, it seems, related to such ongoing problems as a right-sided limp and foot drop.
- Update Three on Project Stellar was before SSG’s Board on 23 December 2002. Mr Kingston spoke to it. The “market”, he said, valued SSG in the $25-$30 million range, excluding free cash. The market did not support small companies. And it did not care for the sector in which SSG was engaged. He thought that the market did not understand SSG’s depth of management or the value of its libraries.
- The 23 December Project Stellar report mentioned a number of possibilities. The top five priorities included advancing discussions that had already taken place with SCB to the point of becoming concrete proposals. Also in prospect was a “possible public to private transaction”.
- Despite a rigorous regime of exercise and extensive physiotherapy, the plaintiff’s progress was slow. As he recuperated, he was determined to work with his pre-accident enthusiasm. By January 2003, he was working about two days a week. Over time, however, he came to appreciate that he would not make a complete recovery.
- In early 2003, the plaintiff expanded his range of interests when he joined the governing council of Bond University.
- When SSG’s Board met on 5 February 2003, almost a year after the accident and four months since the hip replacement, Mr Butler from Rothschild discussed another Project Stellar update. This canvassed six broad options for SSG’s future. These included: acquiring or merging with other production companies, partnerships with larger media companies and a “trade sale to industry player”, involving a 100% disposition of SSG for cash or scrip in the larger entity.
- The February Board minutes record that SCB was a potential buyer. As an SCB Board member, Mr Kingston was familiar with SCB’s operations. Another SSG Director, David Say, was a shareholder in SCB. The minutes record that SCB had been given all publicly available information about SSG, and that SCB’s management was to meet with SSG, “after which we will have a more definite indication of their interest”.
- By letter dated 28 February 2003, Rothschild recorded the terms of its engagement as SSG’s adviser. There were to be two “components” to Rothschild’s responsibilities:
- to assist SSG “in identifying and reviewing acquisition opportunities…in Australia or overseas, and may involve acquiring a partial or whole interest in the opportunity, including joint venture or partnership interests”; and
- to assist SSG “to explore the possibility of a larger group (which may be based in Australia or offshore) taking a part, controlling or full interest in [SSG]”.
- SSG’s Annual Report for the year ended 31 March 2003 contained a report from the plaintiff. It mentioned that SSG had about $31 million “available for acquisitions, investments or capital returns”. His report continued:
“For more than a year, the Board and Management have been actively exploring acquisitions and investments both nationally and internationally, and we are now nearing completion of a search for appropriate acquisitions and investments. This search is being led by N M Rothschild & Sons Australia.
While we have not made any final decisions on any particular acquisitions or partnerships, our clear aim is to build upon our strengths as Australia’s largest independent production and distribution company and expand the breadth and depth of our creative production base and our international distribution network.
The Board has determined to maintain the payment of a normal dividend of 3.5 cents per share fully franked.”
- Another Rothschild report was available to the Board when it met on 15 April 2003. Four proposals were under consideration. One involved something in the nature of a merger; another, an acquisition by SSG in the United Kingdom. Of the other two “preferred options”, one was an acquisition of SSG by SCB. By this time, discussions with SCB management had indicated that SCB was likely to offer scrip to acquire 100% of SSG. The minutes reveal that the plaintiff was to meet the SCB Chairman to address a concern that SCB might not “understand asset values” and that, as a result, the price offered to acquire SSG would not be acceptable.
- At an SSG Board meeting on 27 May 2003, Mr Butler recounted his discussions with SCB. The Board authorised him to present a counter-proposal to SCB. Other irons were kept in the fire: “It was further agreed that the limited discussions continue with the four other parties that remain interested”, according to the minutes.
- Rothschild prepared a discussion document dated 10 June 2003. Among other things, this report canvassed the takeover negotiations with SCB. The document included information concerning movements in the SSG share price in the previous seven years or so: in the first half of 2001, the share price had fluctuated between about 30 and 45 cents; in August 2002, it had risen to about 90 cents; and by May 2003, SSG’s shares were trading at about 45 cents.
- The plaintiff continued to be involved personally in negotiations with SCB. At the 28 July Board meeting, as the minutes record, “The Chairman updated the meeting on the progress being made with [SCB]”. “Due Diligence was proceeding on two levels, being financial and legal”.
- The Board met on 25 August 2003. The minutes record that SCB was “anxious to make an announcement”. Before that could be done, however, there were “several crucial commercial issues that” SSG “first had to resolve”. The plaintiff was to be instrumental in this exercise. According to the minutes, he “advised that he would do his best to expedite the outstanding issues”.
- On 3 September 2003, Balnaves Foundation Pty Ltd was registered.
- As an SCB takeover was not certain, the Board continued to explore other ways in which to take advantage of the surplus cash.
- At the 22 October 2003 Board meeting, the plaintiff mentioned that SSG might acquire a greater interest in Carnival. Mr Eastman, who was about 60, had identified a successor. According to the minutes:
“Our alternatives would be to increase our equity from 40% to 51% and take control, or for him to buy us out. His preference is currently to buy us out, but on his valuation of £6M, this may not be an acceptable option for us…”
- It did not seem very likely that SSG would expend its surplus cash on increasing its stake in Carnival.
- On 22 October, the Board was informed that SCB was keen to proceed with a takeover of SSG. The plaintiff was appointed to facilitate moving “forward on the same parameters that had previously been discussed”, as the minutes record things.
- At a Board meeting on 25 November 2003, there was further discussion about acquiring Mr Eastman’s shares in Carnival. The plaintiff reported that he was still in discussion with Mr Eastman but expected that the chances of a favourable resolution were less than 50/50. Once again, discussions turned to SCB’s acquisition of SSG. The Board decided that SCB should be informed that its offer to acquire SSG was not acceptable because it did not recognise a fair premium for control.
- A takeover of SSG continued to be on the minds of the Directors.
- In a 12 December 2003 Project Stellar update, Rothschild recommended acceptance of a new proposal from SCB. The Board, except for Mr Kingston, met the following day and approved the initiative.
Southern Cross takeover
- On 15 December 2003, SSG announced to the Stock Exchange and the media that an offer had been received from SCB to acquire all SSG’s shares. According to this release:
- the proposal valued SSG at 89 cents per share, which represented a 31% premium over the last closing price of 68 cents and a 20% premium to the volume weighted average SSG share price of 74 cents over the previous month;
- a special, fully franked dividend of $10 million would be paid to SSG shareholders if SCB’s offer succeeded;
- SSG’s directors unanimously supported the SCB proposal;
- benefits for shareholders included significant premiums over the last closing price and over the value of the underlying Southern Star business (excluding free cash), offered in recognition of the quality of Southern Star’s business and its growth potential; and
- the plaintiff would join SCB’s Board “and will continue to manage” SSG’s business so that “there will be no operational or management changes within Southern Star as a result of the offer.”
- SCB wanted the plaintiff to stay on as Executive Chairman of SSG. His service agreement was to be for an initial term of 18 months, starting on 1 January 2004. It envisaged the prospect of extensions for three more consecutive six monthly terms. Under the service agreement, the plaintiff would continue to manage the business and operations of SSG and its subsidiaries. He was to train someone to become the full-time general manager of the SSG businesses. And he was to provide his services for so many hours each week as was reasonably necessary to perform the services. The agreement acknowledged that it was expected that that commitment would require about two and a half days work weekly.
- When the Board met on 22 December 2003, the plaintiff addressed other possible initiatives. In respect of Carnival, the minutes record:
“Discussions were continuing with Mr Eastman, who had rejected our latest suggestion. The Chairman felt that there was only a 25% chance of an agreement being reached.”
- By Christmas 2003, the SCB proposal was, the plaintiff said, the “only deal on the table”. In his assessment, it offered a reasonable premium on the share price of the company. He considered that “it would have to be seen as being an offer that would be in the interests of the shareholders”.
- Because Mr Kingston was also a director of SCB, SSG commissioned Horwath Investment Services Pty Ltd to furnish an independent expert report on SCB’s takeover offer.
- The Horwath report recorded that SCB’s offer comprised one SCB convertible preference share (“CPS”) with a face value of $12.50 for every 16 SSG shares and a fully franked special dividend of $10 million in aggregate, representing $0.087 per SSG ordinary share, to be paid by SSG on 1 April 2004. The CPS, which would be listed on the Stock Exchange, were to mature on 31 March 2006 or on the occurrence of a “trigger” event such as a takeover offer for SCB. The shares could be sold, held until maturity or converted before or at the maturity date at the election of the shareholder.
- Horwath had assessed the value of a CPS at $11.28. Taking into account an assumed dividend stream, the special $10 million dividend and other considerations, Horwath assessed the value of the SCB offer at 91 cents per SSG share.
- Horwath reported that the offer exceeded the value of SSG in the range 24.7% - 40%, allowing for a premium for control. The report gave several reasons for concluding that SCB’s offer was in the interests of SSG’s shareholders. These included:
- The offer represented a 33.8% premium to the last traded share price before announcement of the offer;
- SSG’s top five shareholders held about 55% of its shares, and trading in the shares had suffered from a lack of liquidity. Acceptance of SCB’s offer would enable SSG shareholders to “unlock substantial value”.
- “No alternative acquirer has been identified”, and there were unlikely to be other prospective acquirers because all the other comparable Australian listed public companies were substantially smaller than SSG and “accordingly are not likely to be acquirers”;
- SSG’s earnings had experienced “a degree of volatility” and were subject to such risks as:
“(a)dependence upon having to achieve successful television productions and reinvest. One of Southern Star’s key asset’s (being Southern Star Endemol Pty Limited) profitability is…highly dependent upon one television program. Southern Star Endemol Pty Limited’s medium to long term success is highly dependent upon its ability to successfully implement its strategy of diversifying its business;
- substantial foreign exchange risks due to the level of Southern Star’s United Kingdom operations; and
- regulatory risk, particularly as, currently, there is a requirement to source some 55% of total programming from Australia. Australia is under pressure from the United States to freeze the level of Australia content.”
- SSG “has had a relatively volatile dividend policy history” whereas SCB had a “sound history of paying dividends”;
- SCB’s commercial activities were diverse - involving a number of media businesses around Australia, well established, well branded, and with reasonable market share;
- SCB was well managed and had a competent board of directors;
- SCB’s shares were well traded and had a reasonable degree of liquidity; and
- Acceptance of SCB’s offer would let SSG shareholders participate “in a more diverse, well-managed and well-traded security”.
- The Horwath report touched upon “personnel risks”, saying that SSG’s creativity and success,
“is largely dependent upon its key people. Clearly, the long-term viability of [SSG] is dependent upon those persons remaining with the company and, of course, finding successors…”.
- The SSG Board authorised a “Target’s Statement” dated 6 February 2004. This document set out a detailed description of SCB’s offer and discussed its value, saying:
“The Special Dividend will be fully franked. The franking credits will potentially represent up to approximately 3.7 cents per Southern Star Share in value depending on the tax status of the shareholder. However, this value has not been incorporated into the Independent Expert’s calculation of the assessed Offer value of $0.91 per Southern Star Share because such value depends on personal circumstances which may differ between shareholders.
In summary, the total value of the Offer per Southern Cross CPS, or for every 16 Southern Star Shares, is estimated to be approximately $14.50 (inclusive of the value of the Special Dividend) for every 16 Southern Star Shares, which represents a value per Southern Star Share of $0.91. This is illustrated in the table below, extracted from section 4.27 of the Independent Expert’s Report:
Assessed Value of Offer
Present Value amount of $12.82$11.28
Present value of Southern Cross CPS dividends to March 2006$1.10
Option value of CPS$0.73
Value per CPS $13.11
Special Divided (per 16 Southern Star Shares)$1.39
CPS value plus equivalent Special Dividend Component $14.50
Value per South Star Share$0.91”
- The directors informed shareholders that they all intended to accept SCB’s offer and gave their reasons for their recommendation to shareholders to accept:
- Horwath’s assessed offer value of $0.91 cents per share was at a significant premium to the price at which SSG shares had traded before the offer was announced and was also 13 cents above the highest closing price at which SSG shares had exchanged hands over the year;
- SSG’s stock was relatively illiquid: more than half its shares were held by the directors. And it had a market capitalisation before the offer of only about $75 million;
- Although it was difficult to assess the liquidity that the CPS would have, SCB was a much larger company, with a market capitalisation before the announcement of about $642 million and higher trading liquidity;
- SCB had a significantly higher level of coverage by research analysts and institutional investors than SSG, and without the offer, “it is unlikely that any significant increase in liquidity of share trading would be realised in the near future”;
- If capital gains tax “scrip-4-scrip” rollover relief was available to a shareholder, any taxable gain upon disposal of shares in SSG would be disregarded; and
- CPS holders would share in the anticipated benefits of the combined SSG and SCB entity while retaining a continuing interest in SSG’s businesses through SCB’s shareholding.
- The Directors summarised the key advantages and disadvantages identified by Horwath in this way:
“Potential key advantages
- In the absence of the Offer it is likely the market price of Southern Star Shares will fall.
- The Offer implies a 34% premium to the closing share price on 12 December 2003, being the last trading date prior to the Announcement Date.
- Possible improvement in liquidity of investment.
- Provides an opportunity for Southern Star Shareholders to realise their investment in Southern Star. No alternative offer has been made that presents a similar opportunity.
- Provides an opportunity to (a) reduce exposure to Southern Star, which has experienced historic earnings volatility and (b) participate in a more diverse business.
- Southern Cross is a larger and more diversified business, which is not as reliant on key personnel for its success.
- The Southern Cross CPS are structured so that holders will be entitled to receive a minimum amount of $12.50 for each Southern Cross CPS at the Maturity Date with upside. The Offer, therefore, provides some protection against a diminution in value of Southern Cross Ordinary Shares.
- Southern Cross has had more stable dividend history than Southern Star.
Potential key disadvantages
- Except in limited circumstances, the Southern Cross CPS do not have voting rights.
- There are limited alternative Australian investment opportunities should Southern Star Shareholders wish continued focussed exposure to the television production and distribution industry, given Southern Star’s brand name and scale.
- The Offer is conditional.
- Shareholders may forego the opportunity to participate in a possible more attractive future offer, that may materialise as a result of the successful implementation of strategies, which may enhance Southern Star’s earnings.
- Southern Cross may not successfully merge Southern Star with Southern Cross, which may impact on the short to medium term earnings of Southern Cross.
- The full synergistic benefits that Southern Cross may derive from acquiring Southern Star may not have been fully reflected in the Independent Expert’s valuation of Southern Star.”
- The Directors reported on “substantial risks in not accepting the offer”:
- SSG’s share price was likely to decline if the offer closed without SCB having reached the 90% compulsory acquisition threshold;
- The “uncertainty” of SSG’s future trading performance, with the directors reporting:
“Much of Southern Star’s current profitability is attributable to the popularity of its programmes with television audiences worldwide. The popularity of any television programme is not assured in the future.
While some of Southern Star’s programmes remain top-rating programmes in Australia, there is no certainty that the popularity of any programme will be sustainable. While a fall in popularity of any particular programme leading to cancellation of that order for that programme will affect a producer’s revenues and profits negatively, new orders can offset those effects. In addition, Southern Star’s business is supported by demand for programming internationally and the size and breadth of its catalogue of English language programming.
In addition, Southern Star Shareholders should note that there is no assurance that the joint venture with Endemol (the Netherlands-based supplier of the very successful “Big Brother” programme) will be renewed at the end of its 3 year term.”
- The directors considered that the SCB offer provided “a more certain and timely realisation” of value, telling shareholders that:
“For Southern Star to create value for shareholders above this level while continuing to operate as a stand-alone entity, Southern Star would have to earn a sufficiently high level of profits in the future or, alternatively, a buyer would have to offer a higher price for Southern Star Shares.
As discussed above, the future trading performance of Southern Star is uncertain and depends in part on the performance of its programmes in terms of popularity with television audiences worldwide. It is possible that Southern Star’s future trading performance will deteriorate if there is a fall in the popularity of its programmes that is not offset by new orders for new programming and other catalogue sales, resulting in a corresponding deterioration in Southern Star’s share price. Successful realisation of profits may take a significant period of time and shareholders would be subject to the risks of the production industry and international sales business during that period.
In regard to the possibility of a buyer offering a higher price for Southern Star Shares, Southern Star and its financial adviser, N M Rothschild & Sons (Australia) Limited, have actively explored strategic options, including partnership and merger/trade sale options, over the course of 2003. No alternative offers for Southern Star have been received over this period. In addition, no alternative offers for Southern Star’s business have emerged since the Announcement Date.
At this time, the Directors have no reason to believe that an alternative, superior offer for Southern Star Shares will be forthcoming in the near term.”
- As was to have been expected in view of the substantial benefits for SSG shareholders, an overwhelming proportion of shareholders, in number and value, supported the SCB takeover.
- On 15 April 2004, SCB issued a press release reporting that it has received acceptances for 93.36% of the shares in SSG and so was placed compulsorily to acquire the rest. The release invited readers to contact the plaintiff for further information. It mentioned that he would “continue to manage Southern Star as a division of Southern Cross” and join the SCB Board. The release also attributed these words to him:
“The Offer has delivered excellent value to Southern Star shareholders who will continue to share in the benefits of the company’s future growth as Southern Cross shareholders.
As part of Southern Cross, Southern Star will be able to achieve a stronger growth rate as part of a larger, diversified media group.”
Views of other directors
- Errol Sullivan was Chief Executive of Southern Star Entertainment Pty Ltd. He was 60 years old when the SCB takeover happened. The plaintiff thought of him as his “right hand man”.
- Mr Sullivan believes that the plaintiff made a massive contribution to the success of SSG, praising his vision, energy, leadership and capacities, especially in attracting good senior staff, in cultivating productive client relations, and in pursuing overseas business opportunities. In Mr Sullivan’s assessment, it would have been very difficult to have found a replacement for the plaintiff.
- By 2003, Mr Sullivan recalls, the plaintiff had returned to work full-time, and he continued to bring “considerable” energy and application to SSG’s businesses. But the plaintiff seemed not to be the same man. He appeared to be “losing a bit of capacity to manage people fairly” and was more impatient. It was more difficult for him to travel too. Mr Sullivan, who does not recall any Board member having expressed a concern that the plaintiff might not “return to his former state”, thought that he would not ever be as effective as he had been pre-accident. For that reason, in Mr Sullivan’s view, there were “risks on the horizon” for SSG.
- As Mr Sullivan saw things, by 2003, there were few, if any, opportunities for growing SSG’s businesses in Australia. He favoured overseas acquisitions by SSG, including taking at least a majority stake in Carnival.
- Mr Sullivan was asked about the motivation for commissioning Rothschild to explore acquisitions by and of SSG. That plan was, he indicated, unconnected with the plaintiff’s injuries: it was driven by an anxiety to identify the best deal for shareholders.
- In Mr Sullivan’s view, acceptance of the SCB offer was in the best interests of shareholders. No other opportunities on the horizon could have delivered comparable benefits.
- Mr Sullivan testified that the plaintiff’s injuries had no impact upon the Board’s advice to shareholders concerning the SCB takeover offer. Indeed, he cannot recall the topic having been discussed at Board level. He does, however, suspect that the Board may have felt differently about future prospects when SCB’s offer emerged had the plaintiff not been injured. But he is not sure about that, describing the prospect as “hypothetical”.
- Mr Sullivan indicated that he would not have accepted the SCB offer if the plaintiff had been fully fit. He believes that there were opportunities for SSG growth in the UK market, despite the Rothschild reports. He did not, however, identify any of them, let alone discuss the chances that they may have eventuated.
- David Say is another former director of SSG. An accountant by vocation, Mr Say achieved prominent positions in business. He had been Managing Director of James Hardie Industries Limited and had held a number of other directorships, including as chairman of the board of a large international bank. He joined the SSG Board in 1993. He remained a Non-Executive Director until the takeover.
- Mr Say testified to the Board’s approach to the likely opportunities in 2003. He spoke of the sale of SSG as being increasingly attractive to acquisitions by the company because the plaintiff lacked his pre-accident energy and could not travel as he used to. This, Mr Say suspects, may have affected the plaintiff’s ability to make contacts that might have detected opportunities for overseas acquisitions by SSG that neither he nor Rothschild discovered. However, Mr Say accepts that the plaintiff tried to find overseas businesses for SSG to acquire and had not done so. And he accepts that there was nothing in the information available to the Board to suggest that other acquisition opportunities existed.
- Mr Say characterises the SCB offer as “good” and in the best interests of shareholders.
- By early 2003, Mr Kingston had concluded that the plaintiff would not return to his pre-accident work habits: in particular, the 70 hour working weeks and the “huge amount of travel and entertainment”. This perception affected his approach to SSG’s prospects.
- The Board’s outlook was to use the cash to progressively move to “an expansionary platform”, as Mr Kingston puts it. A sale of SSG had been considered. The preferred option, however, was to pursue growth opportunities by taking advantage of the “huge” surplus of cash.
- Mr Kingston, taking the view that the plaintiff was not going to recover his pre-accident dynamism, thought that the best outcome for SSG was to merge with, or to be sold to, a larger company. As it happens, he was a director of just such a company: SCB.
- Mr Kingston’s assessment is that the plaintiff, had he not been injured, would have remained as full-time Executive Chairman until his mid-60s.
- The plaintiff realised in 2003 that fulfilling the role of SSG Executive Chairman was “getting beyond my grasp”, he said. He could no longer work 70-80 hours a week and felt that he lacked the mental acuity and energy to perform his duties “properly”. He continued to travel overseas, maintaining business friendships and contacts, but accepted that he could not function at his pre-accident level.
- The plaintiff testified that, in early 2003, the Board of SSG had said that they thought that “it isn’t going to work for you and we believe that we should find some way out of the company”. It was apparent to the other directors, he maintains, that he was not in a position to run the business as effectively as formerly he had. The Board proposed, he testified, that it “should start a process of looking at how we sold the company” and other options to preserve shareholder value, including a merger or getting a “new management team in to take it over”. He said that the Rothschild engagement to, as he put it, “look at some way of merging the company, selling the company, or finding some sort of partnership with management” was an early 2003 initiative taken because of a Board assessment that he would not be able to continue in his former role.
- The plaintiff characterised the commission to Rothschild as “pretty much an update on a roving brief they’d had for the previous five years”, with the emphasis “more acquisition than it was disposal”. He regards the February 2003 Rothschild engagement letter, with its references to acquisition of SSG, as representing a shift of position by the Board attributable to a recognition of the uncertainty surrounding his recuperation. The Rothschild engagement, to the extent it required searches for would-be purchasers of SSG, is said to be a recognition that the plaintiff might not be rehabilitated to the point where he could continue to work as he had before his accident. Indeed, he testified that the Rothschild investigation would not have been undertaken had he not been injured, describing the exercise as a “parallel” process that gave him “a chance to recover”. And he claims that the focus on sale “only emerged as my health issues made that more apparently the best answer for the shareholders”.
- The plaintiff testified that he believed that his inability to function at his pre-accident level was likely to adversely affect SSG’s share price in the long term. This, he accepts, was a “personal view”, not necessarily the Board’s perception. He also maintained that a reason why he regarded the SCB takeover as being in the interests of the shareholders was that his ability to continue working was severely in doubt by the end of 2003 because of his ongoing disabilities.
- Asked whether he would have been interested in selling SSG to SCB in 2004 had he not been injured, the plaintiff answered:
“No. It was never on the horizon. We got offers for most of the prior ten years from people at various times trying to buy the company, and never did we find that we felt a sale was in our best interests…whilst we were growing the company. You might have been selling out your long-term for a short-term gain.” SSB was “in another phase of growth”, “well cashed up” and “in good shape”. Uninjured, over time, he could have built a bigger business, worth more. His priority was acquisitions by, not of, SSG.
- The plaintiff relied on a number of considerations to support the idea that other opportunities presented greater value to shareholders than the takeover. In that context, he mentioned: acquiring the remaining 60% of Carnival and the rest of Darrel Macqueen; establishing a cable television channel devoted to Australian productions; and the revenue stream that Big Brother could have generated in the ensuing years.
- Among the plaintiff’s reasons for asserting that he would not have accepted SCB’s bid had he not been injured is that the takeover would have meant subsuming SSG into another business, with the risk that his “creation” would get “lost inside a much larger company”. He maintains that the furthest thing from his mind was to sell his creation or to work for somebody else. He enjoyed making decisions that he felt were best for SSG; and he “very seriously believed in the new expansion of the business”, which he could superintend in what would otherwise have been “the prime of my life”.
- There is often reason for caution in evaluating the evidence of a plaintiff who testifies that he would have acted differently had he not been injured, and:
“inferences from surrounding circumstances, other objective facts and the probabilities may be a more reliable guide on questions of causation than ex post facto evidence from an interested party”.
- Here, there are particular reasons to conclude, as I do, that a deal of the plaintiff’s testimony is unpersuasive.
- The notion that the Board considered selling SSG only because by early 2003 it was apparent that the plaintiff would not be restored to his pre-accident capacities is not correct. Board minutes from as early as August 2002 show that sale was then in prospect. It was not the preferred outcome: the Board was looking to grow the businesses rather than to dispose of SSG. But if shareholder value could best be achieved by sale, the Directors were always open to that course.
- I do not accept that Board members informed the plaintiff – in early 2003 or at any other time – that his condition was a reason to opt for the sale of SSG rather than to pursue acquisitions.
- Rothschild’s retainer required SSG to furnish information relevant to the assignment, and Rothschild was never told that the Board entertained reservations about the plaintiff’s capacities or that his condition mattered to the options that SSG should explore for its future. Moreover, the Board minutes present as comprehensive. Yet they contain just one reference to the plaintiff’s health: at the meeting that took place within days of his accident, where it was decided that there was no need to tell “the market” of his absence. That minute aside, none of the contemporaneous company documents mentions the plaintiff’s health or reflects on his ability to perform his duties: not correspondence; not Board papers or minutes; not “Project Stellar” reports; not the Horwath Report; not the Target’s Statement; not releases to the media and Stock Exchange to inform shareholders and the investing public. Nor, it seems, was the topic discussed among the Directors after March 2002: certainly not in any formal setting.
- Restrictions on the plaintiff’s capacities were of some concern to other directors. He could not sustain a 70-80 hour week nor travel overseas with the same level of intensity as before the accident. Still, post-accident, the plaintiff was performing with enthusiasm. And that the Boards of both SSG and SCB wanted him to remain in charge of SSG indicates that his performance was assessed as satisfactory, and as likely to remain so for the foreseeable future.
- Rothschild’s investigation of a sale of SSG was not actuated by Board concerns about the plaintiff’s health. Apart from my reservations about the reliability of the plaintiff’s testimony, several factors combine to show that. These include:
- In August 2002, at which time the extent to which the plaintiff would recover could not be predicted with any confidence, SSG’s Board was asked by Mr Kingston to consider the fee to be paid to Rothschild for a disposition of 51% - 100% of SSG.
- The late October 2002 Board meeting raised the prospect of a takeover of SSG: Endemol seems to have been in contemplation.
- A takeover of SSG was discussed with SCB before Christmas 2002. Not even the plaintiff suggests that his condition had settled by then.
- Mr Sullivan, whose evidence on the point is preferable to the plaintiff’s, testified that Rothschild’s engagement was unconnected with the plaintiff’s injuries.
- Proud of his achievements at the helm of SSG, the plaintiff would not have relished the subordination of his influence that the post-takeover arrangement could have involved. No concerns of that kind were aired at the time, however. To the contrary, the Board informed shareholders in December 2003 that there would be “no operational management changes” if SCB’s bid succeeded.
- The plaintiff’s preference – shared by the other Board members – was to grow SSG’s operations through acquisitions rather than to dispose of the company. However, investigations by merchant banks, especially Rothschild, and the best efforts of SSG’s directors, including those of the plaintiff, had not identified any promising prospect for the useful exploitation of the cash surplus arising from the Duplitek sale.
- Acquiring the rest of Darrall Macqueen would have made little impact on the surplus cash or the fortunes of SSG. Darrall Macqueen was not a large operation. SSG eventually spent $4,500,000 buying another 50% of its issued capital to take SSG’s stake to 75%. Acquiring the rest of Carnival may have cost slightly more than twice that. Together, those acquisitions would have absorbed somewhat more than half the surplus cash. In any event, the chances that Mr Eastman could be prevailed upon to sell his 60% of Carnival were estimated by the plaintiff himself in December 2003 at just 25%.
- None of the contemporaneous documents – not Board minutes, Rothschild reports, media and ASX releases, Target’s Statement’s nor Horwath report – mentions that SSG had other options for its future, such as a cable channel or acquiring the rest of Carnival and Darrall Macqueen. Those possibilities were not ventilated publicly, presumably because no Board member, including the plaintiff, considered them worthy of serious consideration by shareholders. The omission is understandable if no one in SSG’s management thought that such things held out a real chance of a better deal for shareholders than SCB’s takeover presented.
- One other matter touching the reliability of the plaintiff’s testimony should be mentioned – not because it is significant: it is not – but because Mr Diehm SC made such a point of it.
- The plaintiff signed a document that the defendant contends is inconsistent with the notion that he believed that his accident had detrimentally affected his financial situation.
- On 13 February 2004, the plaintiff signed a Notice of Claim. Section E of the form concerned “Economic Loss”. Questions 26 - 46 inquired about any “loss of income” from the accident. A note explained “that the injured person may have suffered loss of income to their business or from their employment or a combination of both”.
- Question 28 inquired: “Has the injured person lost or will the injured person lose wages, salary or business income because of the incident?”
- The plaintiff, who takes a broad view of what “business income” encompassed in that context, and who regards his current claim for economic loss as one for loss of “business income”, answered “No”.
- The defendant seeks to make much of this response, arguing that it acknowledges that the claim for economic loss is groundless.
- When he completed the form, the plaintiff believed, or so he testified, that he would not lose “business income” because of his injuries. At the time, he was trying to rehabilitate himself so that he could continue as Executive Chairman. He also said that, when he signed the form, he was being paid the same salary and benefits as before the accident. That explanation, however, is unacceptable. The pre-accident remuneration package was maintained until the end of 2003. But the new service contract meant that his salary was halved from 1 January 2004.
- The omission to refer to a loss of “business income” arising from premature sale of the shares could, I suppose, be explicable on the basis that he had not realised that the law might accord a right to compensation for such a loss. That cannot be said for his significantly reduced salary.
- In the circumstances, the absence of reference to economic loss in the Notice of Claim involves, I suppose, at least these possibilities:
- carelessly, the plaintiff gave no thought to economic loss; or else
- he did advert to the issue and considered that he had not suffered economic loss because the sale of his shares and the diminution in his remuneration were not caused by the accident.
- Having formed a less than favourable view of the plaintiff’s attention to detail and powers of recollection, it seems to me most unlikely that his assertion that there had been no loss of “business income” reflected a belief that he had not been economically disadvantaged by his injuries. His response, which was written out by someone else, was more probably attributable to lack of care.
- It is very much an outside chance that the plaintiff would not have accepted the SCB takeover offer had the accident not occurred.
- Although emphasising that his voting power meant that “unless I want to do the deal, it isn’t really going to happen”, the plaintiff spoke of his sense of corporate responsibility. He said, and I accept, that he thought it important in making a decision about SSG’s future – merger, acquisition, partnership or sale – to do what was best in the interests of all shareholders.
- SCB’s offer was obviously attractive to shareholders. And the plaintiff is not a selfish man. He is a philanthropist who has given tens of millions of dollars to the Balnaves Foundation to support the arts and medical research. He is not the kind of man to have thwarted a takeover that he knew offered very substantial benefits to the many other shareholders keen to accept it, especially as the takeover presented him with an appealing package:
- More than $3 million in fully franked dividends;
- Scrip in SCB which was saleable and worth considerably more than his holdings in SSG;
- A seat on the Board of SCB;
- Continuing as Executive Chairman of SSG, potentially for three more years, with a lowered expectation of the hours he would need to commit to the position; and
- About to turn 60, with plenty of other things to occupy his time, he could pursue other business ventures in which he was closely involved, leisure activities he enjoyed and other pastimes he found satisfying.
- There was an increased inclination on the part of the Board to favour sale because of the plaintiff’s health and related restrictions. The evidence of the other three directors reveals that. Ultimately, however, his condition was not influential in the Board’s decision to promote the takeover. SCB’s bid was supported because SSG had no capacity for domestic growth and, despite diligent investigation, no opportunities for overseas acquisitions that were nearly as attractive as the advantages to be secured through the SCB takeover.
- The plaintiff’s injuries and related restrictions were just another reason, of no great moment in the result, to embrace the SCB takeover – a choice which, to a very high degree of probability, the plaintiff would have made had he not been injured.
- The plaintiff’s case is that as a result of the SCB takeover, he lost opportunities to:
- continue to work as SSG’s Executive Chairman and to earn income through the salary and other payments he would otherwise have received; and
- obtain an increase in the value of his 31.03% shareholding in SSG by building up its businesses.
- As expressed in the third further amended Statement of Claim delivered in late October 2011, the claim was:
“l.Had the accident not occurred, the Plaintiff would have continued as Executive Chairman and major shareholder of SSG and lost the opportunity to receive the benefit of the development of SSG and the subsequent purchase of SGG by MMG as a stand-alone entity in 2007, particular of which are as follows –
- loss of income as Executive Chairman and major shareholder of SSG (as per Vincents report: 24.7.07) $4,423,730.00;
- loss of opportunities to develop SSG as a stand-alone entity and have SSG available for purchase by MMG (as per report Vincents; 20.7.10) - $3,500,000
- That case was abandoned at the outset of the trial.
- The new case is that, but for the plaintiff’s accident, SSG would now be, and until the plaintiff turns 70 in 2014 would remain, in the same ownership and control as before the SCB takeover. On this approach, he would have continued as Executive Chairman, successfully running SSG, on full remuneration, with his shareholding remaining at about 31% of the ordinary shares, until 2014.
What the future held
- Much uncertainty attends a prediction of what the future may have held for the plaintiff’s connection with SSG if the SCB takeover and his accident had not happened.
- To the end of 2003, SSG continued to remunerate the plaintiff at his pre-accident level.
- From January 2004, the plaintiff’s salary roughly halved, consistently with the arrangements under the new service agreement that had been negotiated as the SCB takeover discussions proceeded.
- Thereafter, the plaintiff worked about 2.5 days per week as SSG’s Executive Chairman until he retired on 30 September 2005.
- In 2005, SSG acquired Mr Eastman’s 60% shareholding in Carnival.
- The next year, it increased its holding in Darrall Macqueen to 75%.
- The plaintiff remained a member of SCB’s Board until a takeover of SCB in 2007.
- In 2007, Macquarie Media Group (“Macquarie Media”) announced a bid to acquire all the ordinary shares in SCB that it did not already own. Under the scheme of arrangement, SCB shareholders would get $17.41 cash for each share, which included a fully franked dividend of 36 cents. Shareholders were also to receive a fully franked dividend of 37 cents per share for the period ended 30 June 2007. Following implementation of the scheme, Fairfax Media Limited (“Fairfax Media”) was to acquire some SCB assets from Macquarie Media. The assets to pass to Fairfax Media included SSG.
- An expert’s report was obtained from Grant Samuel & Associates in connection with the scheme. The report valued SSG in the range of $140-$155 million. SSG was said to have performed strongly in 2006 and 2007. Grant Samuel considered that SSG’s prospects appeared generally positive, “although there is an element of unpredictability in relation to the production business”. The UK production business was thought to offer significant opportunities.
- In discussing the approach to valuing SSG, the Grant Samuel report said:
“There are no direct peers against which to benchmark the valuation of Southern Star…given the limited Australian market evidence, Grant Samuel has considered valuation evidence based on share prices from a number of international production companies.”
- The report continued:
“Southern Star has a strong market position as the largest film and television production and distribution company in Australia, and is a strategically attractive asset.
Southern Star’s earnings have historically experienced a degree of volatility. Profitability depends in part on the number and successes of productions completed each year. Therefore, the outlook for Southern Star’s production business is difficult to predict with any certainty.
The performance of Endemol Southern Star continues to be heavily dependent on the Big Brother reality production, which has significantly boosted the profitability of the joint venture over the past seven years. However, Big Brother’s ratings in 2007 were significantly poorer than in prior years. The future ratings, profitability and longevity of Big Brother are inherently uncertain. On the other hand, a number of new productions are in pre-production and development. The Endemol Southern Star joint venture is due for renewal in 2009. While there is a risk that it will not be renewed, Southern Cross management believes that the joint venture will continue.
Southern Star Entertainment UK is expected to continue to perform strongly, particularly in children’s production through the Darrall Macqueen and Carnival subsidiaries.
The outlook for the global distribution business of Southern Star is positive, although earnings are exposed to movements in the Australian dollar. Given Southern Star’s extensive library of film and television programming and its access to new Australian programming (it represents the majority of the Nine Network’s production), the business is well positioned to take advantage of continued strong global demand for television content.”
- There is no evidence of the activities or fortunes of SSG after the Macquarie Media takeover other than one press release issued by Fairfax Media in January 2009, which announced:
“the sale of the Southern Star television production and distribution business to Endemol of $75 million plus an earn-out…Fairfax Media will retain ownership of Southern Star Factual, the UK-based natural history, science and factual producer previously known as Oxford Scientific Films, and its 75% stake in leading UK children’s and interactive producer Darrall Macqueen.
Combined with the recent sale of Carnival…to NBC Universal, Fairfax Media will receive total net cash proceeds of approximately $120 million. The sale agreements for the transactions also provide for additional earn-out payments due in three years contingent on business performance. Fairfax Media acquired the Southern Star group, including Carnival, for $150 million…”
- If SSG had not been acquired by SCB in 2004, it might, I suppose, have been acquired by SCB before the Macquarie Media takeover in 2007; or SSG might have been acquired by Fairfax Media in 2007 as a stand-alone acquisition; or Endemol might have acquired SSG at some stage. Those possibilities by no means exhaust the ways in which the plaintiff’s future with SSG may have been altered by circumstances. No other acquirer of SSG was in sight in 2004. But, as Mr Sullivan said, entertainment businesses frequently involve takeovers, mergers or acquisitions. The Macquarie Media acquisition of SCB in 2007 and Endemol’s 2009 intervention illustrate that tendency.
- The future might otherwise have witnessed a different course of events. SSG may itself have embarked on acquisitions of, or ventures with, other entertainment businesses.
- Sooner or later, it looks as though SSG would have acquired Mr Eastman’s 60% shareholding in Carnival, and what happened in 2006 indicates that Darrall Macqueen was probably destined to fall under its control. Beyond that, SSG’s future had the SCB takeover not eventuated is doubtful – a proposition that is particularly true of the period after the 2007 SCB takeover.
Valuation as at 2007
- Accountants assessed the value that the plaintiff’s shares in SSG would have had in September 2007 had they not been sold to SCB in 2004. The exercise assumed that:
- The plaintiff would not have accepted the SCB takeover bid had he not been injured;
- A similar bid to Macquarie Media’s bid for SCB would have been made for SSG as a stand-alone entity at the same time as the bid for SCB was made in late 2007;
- SSG would have acquired the 60% of Carnival and 75% of Darrall Macqueen that it did not already own at the same time and price as SCB eventually acquired them;
- The trading performances of SSG under the management of the plaintiff would have been similar to the actual trading performances while the businesses were under SCB’s control;
- SSG’s operations would have been more diversified through the complete acquisition of Carnival and Darrall Macqueen, which would have made its profits less volatile;
- There would not have been any significant differences in dividends the plaintiff received from 2005 to 2007 from the dividends he got from SCB and the dividends that he would have derived from SSG had it remained under his management.
- It is agreed that, based on the accountants’ assumptions, $3,818,000 is the difference, before tax, between the consideration received on the sale of SCB for the interest equivalent to the 31.03% of SSG shares the plaintiff owned or controlled at the time of the SCB takeover and the value those shares would have had in September 2007 had they not been sold to SCB.
Paucity of information about post-2007
- Although the accountants reported in 2010 and in 2011, they did not assess the economic loss on assumptions that SSG had not been taken over in 2007 and that the plaintiff would have retained his shareholding and remained as Executive Chairman of SSG. They did not investigate facts that could bear on the value of the foregone opportunity to have retained the SSG shares after September 2007: they did not, for example, analyse such things as the fortunes of SSG’s businesses post-2007 to trial; SSG’s prospects for the future; or the chances that SSG or its businesses might have been sold.
- Nor was any other evidence - except the 2009 press release about the Endemol takeover - adduced to point to the profitability of SSG’s businesses after late 2007 or that shows either what happened to them or what their fate may have been had the SCB takeover not supervened. And there was:
- in evidence, no analysis of the information in the press release; and
- in argument, no attempt to show how that information might indicate what value the plaintiff’s SSG shares may have had if he retained them until 2009 or later.
- Instead, the new damages case is advanced on the basis that the circumstances in 2007 afford some evidence of the value of SSG and its likely share price since then and into the future.
- But in the flimsy state of the evidence, it is a serious question whether the plaintiff’s shares in SSG would have been worth more after 2008 – the year of the onset of the global financial crisis – than the value he extracted from disposing of them in the SCB takeover.
Approach to assessment of capital loss
- In principle, mere difficulty of assessment of a loss is no impediment to an award of damages: the Court must do the best it can. And although information concerning the activities and profits of SSG and its subsidiaries after 2007 might have been expected to have been adduced in support of the case now propounded, the absence of such information, although it would not sustain an indulgent approach to the assessment, does not necessarily preclude an award for the lost economic opportunities.
“…the assessment of damages for personal injuries in an action for negligence is not an exact science. The process of assessment must be governed by considerations of practical common sense in the context of the facts of the particular case. In a similar vein, in Paul v Rendell (1981) 34 ALR 569 the Privy Council observed:
… the assessment of future economic loss involves a double exercise in the art of prophesying not only what the future holds for the injured plaintiff but also what the future would have held for him if he had not been injured.
The plaintiff who seeks damages has the legal onus of proving loss of earning capacity and the extent to which that loss produces, or might produce, financial loss: Todorovic v Waller  HCA 72; (1981) 150 CLR 402, 412; Medlin v State Government Insurance Commission  HCA 5; (1995) 182 CLR 1, 3. If it is determined that there has been a loss of earning capacity it is then necessary, having regard to the established facts of the past and the probabilities of the future, to determine the damage that will flow from the loss of that capacity: Medlin v State Government Insurance Commission (19). As the plurality pointed out in Malec v J C Hutton Pty Ltd  HCA 20; (1990) 169 CLR 638, 643, when the law takes account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. Unless the chance is so low as to be speculative or so high as to be practically certain, the court will take that chance into account in assessing damages. The inquiry – the process of estimation of probabilities – is thus an imprecise and indeterminate one to be carried out within very broad parameters: State of New South Wales v Moss  NSWCA 133; (2000) 54 NSWLR 536, 553. Accordingly, damages for financial loss likely to result from personal injury can only be an estimate, often a very rough estimate, of the present value of the prospective loss: Todorovic (413).
Whilst it is desirable for a plaintiff to call precise evidence of what he or she would have been likely to earn but for the injury, where earning capacity has unquestionably been reduced the failure to call such evidence, particularly in relation to future loss, does not mean that the plaintiff is not entitled to damages or is entitled only to nominal damages: State of New South Wales v Moss (552, 554). But where evidence ought to have been available, it is hard for a plaintiff who fails to call evidence, or calls incomplete evidence, to complain of a low award: State of New South Wales v Moss (552); Minchin v Public Curator of Queensland (93).”
- Those concepts also inform the assessment of the capital loss claimed in connection with the value of the plaintiff’s shareholding in SSG.
2007 financial circumstances and the future
- The state of affairs in September 2007 is not a satisfactory basis for a conclusion about what the value of the plaintiff’s shares might otherwise have been at trial, let alone a foundation for predicting what they might have fetched in 2014.
- First, there was no evidence to suggest that the 2007 circumstances had continuing relevance.
- Secondly, the SSG share trading price had varied considerably over the years. In late 1996, a share fetched $1.90. In the first half of 2001, the price had fluctuated between about 30 and 45 cents. By May 2003, the price was about 45 cents.
- Thirdly, the Horwath and Grant Samuel reports emphasised the volatility of the markets in which SSG’s businesses operated and the associated risks for the company’s future performance and share price.
- Fourthly, it is notorious that the global financial crisis in 2008 adversely influenced the share prices of a large proportion of corporations listed on the ASX. And there was no attempt to show that that SSG’s fortunes would have been untouched by that broad market impact.
- In the circumstances, especially given the volatility of SSG’s productions and the regularity of mergers and acquisitions involving entertainment ventures in Australia, the paucity of evidence concerning post-2007 values and prospects means that the assessment of the value of the lost opportunity for the plaintiff to have retained his shares in SSG is essentially a speculative exercise.
No capital loss established
- In short:
- the evidence does not sustain a conclusion that the plaintiff was worse off – after 2007 at any rate – because he had disposed of his shares in the SCB takeover; and
- as the case was conducted at trial, this means that no loss associated with his shareholding has been proved.
- Mr Diehm contended that the damages sought to be recovered for the plaintiff’s loss of the opportunity to have retained his shareholding in SSG is too remote. Mr Stewart SC asserted the contrary. No case or commentary in point was cited on either side.
- In view of my conclusion that no loss of the character claimed has been established, it is not necessary to decide the question. But there is no harm in addressing the point.
- It is notorious that many an individual uses a corporation to conduct a business or carry on a vocation. It is, therefore, reasonably foreseeable that personal injury may adversely affect the value of shares in a corporate vehicle the fortunes of which depend to an appreciable extent on a plaintiff’s personal exertion. So the loss related to the shares is not too remote.
Section 54 Civil Liability Act 2003
- The parties are agreed that, for the purposes of the ceiling imposed by s.54 of the Civil Liability Act 2003, three times average weekly earnings is $3,786.06.
- Mr Stewart contended that the cause of action in respect of the claim relating to the shares accrued on the day of the accident. Mr Diehm did not suggest otherwise.
- So, as the matter was argued, it may be taken that the “period of loss of earnings” begins with the accident even though there was no loss of remuneration before 1 January 2004.
- Had the plaintiff not been injured and not sold his shares in the meantime, it seems reasonable to approach the assessment on the footing that he would have retired as SSG chairman, and sold his shares, by the end of the financial year in which he turned 65. That accords with Mr Kingston’s impression that he would have worked to his mid-60s. It also acknowledges the incentives to retire before 70 associated with the many other interests in his life: in business and at leisure.
- On that approach:
- the “period of loss of earnings” may be taken to have ended on 30 June 2009;
- the s.54 cap is $1,446,815.78.
- The next consideration is the component of the award for diminution in earning capacity. It is to be assessed on the assumption mentioned: that, uninjured, the plaintiff would have left SSG on 30 June 2009.
- The amount of remuneration foregone depends on the level of remuneration the plaintiff would have received had he continued as SSG’s full-time Executive Chairman.
- The report of Mr Thompson, one of the accountants, has a calculation that assumes notional pre-tax earnings of $1,050,000 p.a. That assumption is not unrealistic. It broadly accords with remuneration paid to the plaintiff’s successor. Although the remuneration the plaintiff might have received may have been more or less than $1,050,000 annually, that figure presents as a reasonable basis for assessing lost income.
- On that approach, the after-tax amount of lost remuneration between 1 January 2004 and 30 June 2009 is $2,376,560.
- In my judgment, there was roughly a 1-in-10 chance that the plaintiff would not have facilitated SCB’s takeover in 2004 had he not been injured.
- On this basis, rounding up to reduce any risk of under assessment of fair compensation, the economic loss is assessed at $250,000.
- I will hear the parties in respect of interest, costs and the form of order.
 Balnaves v Smith & Anor; Malone v Smith & Ors  QSC 39.
 Mr Hoey’s report of 20 August 2007, p.2.
 Creating and maintaining effective personal relations with business associates in Australia and overseas, particularly in the USA and the UK, was important to the success of his business ventures.
 Initially a 50/50 venture; by late 2003, SSG owned 49% of the shares in the company.
 SSG’s financial year ended on 31 March.
 Even now, he cannot play tennis or squash and is obliged to use a cart for mobility when playing golf.
 As the minutes record the deliberations.
 The agreement was not dependent on the takeover.
 It was not objected that evidence from the plaintiff as to what might have happened had he not been injured was inadmissible: cf s.11(3)(b) Civil Liability Act 2003; Attard v James Legal Pty Ltd  NSWCA 311, -.
 The plaintiff testified that, if he had not been injured, SSG would have acquired Mr Eastman’s shares by December 2004.
 cf McCrohon v Harith  NSWCA 67, -.
 McCrohon v Harith at , citing Baiyai Pty Ltd v Guy  NSWCA 65, ; Neal v Ambulance Service of New South Wales  NSWCA 346, -.
 Recuperation prospects could not have been confidently predicted as early as August 2002.
 The plaintiff attempts to explain the absence of reference to his health in the Rothschild reports, press releases, ASX releases, Target’s Statement and the Horwath report as related to a perception by him that such a disclosure would impact negatively on SSG’s share price if the SCB bid did not succeed. He does, however, accept that the rest of the Board may not have considered that public knowledge of his condition would have resulted in a reduction in the trading price of SSG shares.
 That SCB was content with the plaintiff’s service agreement shows that its management, including Mr Kingston, believed that the plaintiff was still up to the job.
 See .
 The terms of the service agreement were confirmed in a letter to the plaintiff dated 22 December 2003, which he counter-signed on 17 April 2004.
 The evidence does not disclose when the lost opportunity to retain shares claim was first advanced. The current Statement of Claim is a “third further amended” version. It reveals that the contention that the plaintiff sold his shares in SCB only because he was injured in the boating accident was raised by amendment. But the history was not explored. So the course of pleading sheds no light on the plaintiff’s perceptions in February 2004.
 SSG could not be sold without the plaintiff’s approval as he controlled about 32% of the ordinary shares and voting rights.
 To him, his companies and trusts.
 In October 2001, he had been appointed Chairman of the Board of Macquarie Leisure Management Limited, which changed its name to Ardent Leisure Management Ltd. Ardent owns the Dreamworld theme park near the Gold Coast, the top of Q1 Tower at the Gold Coast, many gymnasiums, marinas in Victoria and New South Wales, and AMF bowling alleys around the country.
 Such as his work on the Council of Bond University and spending time with his grandchildren.
 The accountant’s report assumed that Macquarie Media would have acquired all the shares in SSG in 2007 when it successfully bid for SCB.
 The defendant does not contend that the plaintiff should not be permitted to maintain the new case until the statement of claim is further amended.
 Exhibit 16, -.
 See also the report of the accountant, Dr Green, dated 17 March 2001.
 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 349; cf Zorom Enterprises Pty Ltd v Zabow (2007) 71 NSWLR 354, 375-376.
 Harold Luntz, Assessment of Damages for Personal Injury and Death, 4th ed (2002), p121, [1.9.23].
  WASCA 177.
 At , -.
 It was not suggested that this low price was related to the plaintiff’s condition.
 cf Matar v Jones  NSWCA 304, .
 It was not suggested that the claimed loss is irrecoverable on the footing that it is but reflective of a loss incurred by SSG: cf Thomas v D’Arcy  1 Qd R 666; Luntz p.338, [5.55-6].
 cf Montemaggiori at ; McCracken v Melbourne Storm Rugby League Football Club Limited & 2 Ors  NSWCA 353, -.
 Not that it matters in view of my conclusion concerning the loss claimed in respect of the shareholding but it is common ground that the s.54 cap applies to both the claims for reduced remuneration and for loss attributable to premature sale of the shares: see s.55(4).
 See s.54(2).
 A number of things may have led him to retire as Executive Chairman of SSG or to sell his shares well before turning 70, including his strong inclination to engage in philanthropy; cf para .
- Published Case Name:
Balnaves v Smith & Anor
- Shortened Case Name:
Balnaves v Smith
 QSC 192
17 Jul 2012
- White Star Case:
No Litigation History