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FEDERAL COURT OF AUSTRALIA Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098 File number: VID 1449 of 2018 Judge: BEACH J Date of judgment: 31 July 2020 Catchwords: CORPORATIONS – directors’ duties – domestic broadcast rights for the Australian Open – information flow and reporting to the board of Tennis Australia – negotiations with the Seven Network – renewal of rights agreement – existence of competitive tension – potential rival bids – relevance of exclusive negotiating period – loss of opportunity to go to tender – directors’ failure to present information to board – role of directors in negotiations – secret dealings between a director of one party with a representative of the counterparty – failure to exercise due care and diligence as a director – improperly misusing position as a director – improperly misusing information gained as a director – alleged contraventions of ss 180(1), 182(1) and 183(1) of Corporations Act 2001 (Cth) – declarations of contraventions under s 1317E – civil penalties under s 1317G – disqualification orders under ss 206C and 206E Legislation: Australian Securities and Investments Commission Act 2001 (Cth) ss 19, 77, 79 Corporations Act 2001 (Cth) ss 180, 182, 183, 189, 1317S, 1318 Criminal Code (Cth) s 12.3(6) Evidence Act 1995 (Cth) ss 135, 136, 140 Federal Court of Australia Act 1976 (Cth) s 46 Cases cited: Australian Securities and Investments Commission v Adler (2002) 168 FLR 253 Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 336 ALR 209 Australian Securities and Investments Commission v Healey (2011) 196 FCR 291 Australian Securities and Investments Commission v Mariner Corporation Ltd (2015) 241 FCR 502 Australian Securities and Investments Commission v Rich (2003) 174 FLR 128 Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 AWA Ltd v Daniels t/a Deloitte Haskins & Sells (1992) 7 ACSR 759 Briginshaw v Briginshaw (1938) 60 CLR 336 Cassimatis v Australian Securities and Investments Commission (2020) 376 ALR 261 Chew v The Queen (1992) 173 CLR 626 Daniels v Anderson (1995) 37 NSWLR 438 Doyle v Australian Securities and Investments Commission (2005) 227 CLR 18 Grove v Flavel (1986) 43 SASR 410 Jones v Dunkel (1959) 101 CLR 298 Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563 Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465 The Queen v Byrnes (1995) 183 CLR 501 Vrisakis v Australian Securities Commission (1993) 9 WAR 395 Weissensteiner v The Queen (1993) 178 CLR 217 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 Wyong Shire Council v Shirt (1980) 146 CLR 40 Date of hearing: 4, 6 to 8, 11 to 15, 18 to 22, 27 November 2019, 2, 3, 5 and 6 December 2019 Date of last submissions: 13 December 2019 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 2025 Counsel for the Plaintiff: Mr MR Pearce SC, Mr AJ Weinstock and Ms JP Kretzenbacher Solicitor for the Plaintiff: Norton Rose Fulbright Australia Counsel for the First Dr MJ Collins QC and Mr NP De Young SC Defendant: Solicitor for the First Gilbert + Tobin Lawyers Defendant: Counsel for the Second Mr NJ Young QC, Mr P Flynn SC and Mr KA Loxley Defendant: Solicitor for the Second Herbert Smith Freehills Defendant: ORDERS VID 1449 of 2018 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff AND: HAROLD CHARLES MITCHELL First Defendant STEPHEN JAMES HEALY Second Defendant JUDGE: BEACH J DATE OF ORDER: 31 JULY 2020 THE COURT ORDERS THAT: 1. The proceeding as against the second defendant be dismissed. 2. ASIC pay the second defendant’s costs of and incidental to the proceeding including all reserved costs, to be taxed in default of agreement. 3. Within 14 days of the date hereof, ASIC file and serve proposed minutes of orders to give effect to these reasons and short written submissions (limited to five pages) dealing with the making of declarations against the first defendant, the further conduct of the penalty phase and as to costs. 4. Within 14 days of receipt of ASIC’s proposed minutes of orders and submissions, the first defendant file and serve responding proposed minutes of orders and submissions (limited to five pages). 5. Liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT BEACH J: 1 ASIC has sued two former directors of Tennis Australia Ltd (TA), Mr Harold Mitchell and Mr Stephen Healy. It says that Mr Mitchell contravened ss 180(1), 182(1) and 183(1) of the Corporations Act 2001 (Cth) and that Mr Healy contravened s 180(1). ASIC seeks declarations under s 1317E, civil penalties under s 1317G and disqualification orders under ss 206C and 206E. 2 TA is the peak body for the sport of tennis in Australia. Its members are each of the State and Territory tennis associations. It is a company limited by guarantee. Mr Healy was the president of TA. He is a solicitor and former professional tennis player. Mr Mitchell was a vice president of TA. He is through various corporate vehicles the owner of a media buying business. 3 TA stages a number of tennis tournaments in Australia, notably the Australian Open (AO) at Melbourne Park in the searing heat and brilliant sunshine of January each year. One of TA’s major sources of revenue is the fees that it earns from the licensing of rights to broadcast its tournaments both domestically and internationally. In 2012 the rights to broadcast within Australia, which I will refer to as the domestic broadcast rights, had been held for 40 years by Seven Network (Operations) Ltd or its predecessor entity (Seven), the operator of the Channel Seven television network. The then most recent agreement was due to expire in July 2014 (the Seven agreement). Pursuant to the Seven agreement the broadcast fees payable by Seven were $100.75 million over the five years of that agreement, being 2010 to 2014, including $20 million for 2013 and $21 million for 2014. Under the Seven agreement, Seven did not have a right of last refusal in respect of any renewal of the rights, but it did have an exclusive negotiating period with TA from 1 April 2013 to 30 September 2013 (the ENP). 4 The genesis of ASIC’s proceedings arises out of the unanimous decision of TA’s board of directors on 20 May 2013 to accept the recommendation of TA’s then CEO, Mr Steven Wood, to approve a $195.1 million domestic broadcast rights deal with Seven. This was to achieve the renewal of the domestic broadcast rights for a further five years. The domestic rights fee negotiated with Seven was a very substantial increase over the Seven agreement. 5 TA achieved most of its commercial aims in its domestic broadcast rights negotiations with Seven, including importantly the assumption of the host broadcast role, increased exploitation of digital and streaming coverage, and control over archive footage. Further, by TA becoming - 2 - the host broadcaster it enabled it to tailor the coverage of the AO into individual international markets, thereby unlocking increased revenues in the form of international rights fees and higher sponsorships. 6 On 29 May 2013 TA executed a new long form five year agreement with Seven to broadcast in Australia the AO and other Australian tennis tournaments staged by TA. 7 Now ASIC alleges that in the internal deliberations by TA in respect of that agreement, and in its negotiations with Seven for the agreement, the defendants failed to exercise the degree of care and diligence that a reasonable person in their position would exercise. Further, it is said that Mr Mitchell improperly misused his position as a director of TA and improperly misused information gained from that position to gain an advantage for Seven during the course of its negotiations with TA. 8 In summary, I would reject all of ASIC’s case against Mr Healy. But I would accept some parts of its case against Mr Mitchell. Let me make these general points at the outset. 9 First, much of ASIC’s construction of its evidence displayed confirmatory bias. 10 Second, the various cover up and conspiracy theories that it floated turned out to lack substance. 11 Third, when one analyses the evidence, the Seven deal with TA procured largely through the efforts of Mr Wood and his executive management team was anticipated to be and was very advantageous for TA. The directors of TA were entitled to take that deal, as against the risks of rejecting it and going out to competitive tender after the ENP had elapsed. Further, in my view they had the information necessary to make such an informed choice. 12 Fourth, although I am applying a retrospective lens, one modification to the focus that can be made to diminish the effect of hindsight is to endeavour to perceive the events as they were unfolding in real time appreciating the speed and concurrent conflicting themes and actors at work with different roles, skills, motivations and objectives. And when one does this, personality differences of board members, dissension and diverse styles can all be seen in a more positive light as part of the robust dynamics necessary to achieve the best outcome. But an observer without that perspective may only observe board dysfunction and then seek to identify and condemn the culprit. I say all of this because once one adopts the appropriate perspective, the board processes of TA that I have had to scrutinise can be seen in a much more favourable light than ASIC would have it.