Failing the pub test part two: Investment Bankers and other advisers beware – Lessons from the Victorian Supreme Court in Cargill Australia Ltd v Viterra Malt Pty Ltd

It is not uncommon for business or share sale transactions to involve complex, comprehensive and oftentimes tough negotiations. Advisers to, and executives of, sellers will often seek to raise competitive tension as part of their negotiating strategy to seek to increase the purchase price.

However, the Victorian Supreme Court in Cargill Australia Ltd v Viterra Malt Pty Ltd (Cargill’s Case) appears to have indicated some limits on permissible conduct of negotiations.

We reported in an earlier Insight1, on Justice Elliot’s 1881-page judgment in Cargill’s Case, where the judge looked at a number of claims arising out of the sellers’ failure to disclose a number of unsatisfactory operational practices regularly engaged in by the employees and executives of the sale company, Joe White Maltings Pty Ltd (Joe White).

In seeking to sell Joe White, representatives of the sellers made certain statements to the eventual buyer, Cargill Australia Ltd (Cargill), which Justice Elliot found to be misleading representations in breach of the prohibition against misleading and deceptive conduct in Schedule 2 of the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law):

  1. Close to the end of the negotiation of the main sale document (Acquisition Agreement), a senior executive of Glencore International AG (Glencore) (the ultimate holding company of the seller, Viterra Malt Pty Ltd (Viterra) (together the Viterra Parties)) phoned Cargill’s chief risk officer, and stated that the parties were very close to finalising the terms of the deal, but it was necessary for Cargill to increase its bid by $15 million (to the eventual sale price of $420 million); and
  2. When Cargill’s representatives pressed the Glencore executive as to the rationale for the need to increase the bid by $15 million, the Glencore executive stated that the Viterra Parties had been courting other bidders for the Joe White business, and that the other bidders had offered a similar purchase price to Cargill. Moreover, the Glencore executive asserted that these other bidders had the same surety and speed of closure as Cargill. The Glencore executive then stated that he would be contacting the other bidders (and noted that he would be “making the rounds to the other contestants” and would “like a call within 2 hours to confirm that the deal is done at $420 million”).

As a result of the above representations by the Glencore executive, Cargill increased its bid to $420 million.

The Court found that the Glencore executive’s representations were demonstrably false. The closest bids to Cargill’s original $405 million bid were in fact a bid of $335 million (and another bid of $320 million). Justice Elliot found that the false statements made by the Glencore executive conveyed a misleading and deceptive representation that it was necessary for Cargill to increase its bid by another $15 million in order to secure its acquisition of the Joe White business.

The Court rejected a number of the Viterra Parties’ submissions in respect of the finding of misleading and deceptive conduct.

First, the Viterra Parties contended that the Glencore executive’s statements were not actually false, on the basis that it was not untrue to assert that if Cargill increased its bid, it would secure the acquisition. However, Justice Elliot suggested that while it was true that the highest bidder further increasing the superiority of its bid would result in the highest bidder being the successful bidder, it was false to suggest that the increase of the bid was necessary.

Justice Elliot further rejected the Viterra Parties’ submissions that, by virtue of increasing its bid, Cargill was able to make certain demands as to the terms of the Acquisition Agreement. While a Cargill executive sent an email some 90 minutes after the original phone call to the Glencore executive outlining certain conditions pursuant to which Cargill would increase its bid,2 Justice Elliot held that in all likelihood, without the phone call from the Glencore executive, Cargill would have been the successful bidder, and would not have paid any further sum in arriving at the agreed terms.

Indeed, deliberately creating an atmosphere of exaggerated urgency can result in such conduct breaching the misleading and deceptive conduct provisions of the Australian Consumer Law.

Key takeaway

In this case, the benefit gained by virtue of the Glencore executive’s phone call (being an increased $15 million added to the purchase price) was eroded by Cargill’s successful misleading and deceptive conduct claim, which resulted in Cargill being awarded that $15 million in damages.3

Accordingly, care should be taken to ensure that where a party is:

  • making statements that the other party has no ability to test or verify; and
  • knows that those statements; are likely to be taken seriously and acted upon by the counterparty,

those statements should not be false, lest the negotiation strategy have an unintended and undesirable effect on the negotiated outcome.

If you have questions relating to this case, please contact Addisons’ Corporate Advisory team. For regular insights follow Addisons on LinkedIn and subscribe to our updates.

1 A discussion of the facts of the case, and an analysis of the broader issues arising out of that case (which are particularly relevant for parties involved in a sale process).

2 These conditions included, amongst other conditions, a requirement that the parties would work to execute the transaction documents within the next 6-8 hours, an agreement for a “balanced approach” to the outstanding warranty points, and interestingly, a requirement for immediate exclusivity (a protection against the other competitive bidders who did not in fact exist).

3 Final orders in respect of liability, quantum and costs of all of the other claims in this case are still outstanding.

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