The New South Wales Court of Appeal in Wormald v Maradaca Pty Ltd [2020] NSWCA 289 found that a failure to disclose financial and commercial information prior to a sale of shares in Broadreach Services Pty Ltd (BRS), did not amount to misleading or deceptive conduct pursuant to s 18 of the Australian Consumer Law (ACL) in the circumstances.

A Ms Kaliviotis was the principal of two companies, Maradaca Pty Limited and Electroboard Solutions Pty Ltd (ELB). In late 2014, Ms Kaliviotis conducted due diligence prior to submitting two offers to acquire the shares of BRS, during which she became aware of BRS’ weak financial position.

Optus, the parent company of BRS’ major customer, was also interested in acquiring BRS. On 25 November 2014, a senior executive of Optus communicated to BRS’ majority shareholders that Optus would terminate BRS’ master services agreement if there was an unpermitted change in control through the sale of shares to one of Ms Kaliviotis’ companies. Ms Kaliviotis was informed of the substance of this both orally and in writing by BRS’ majority shareholders, and while Ms Kaliviotis confirmed in writing that she was willing to take this and other risks, BRS’ shareholders subsequently rejected Maradaca’s offer.

Negotiations between Optus and BRS continued, but eventually faltered.

During a telephone call on 19 January 2015, BRS’ majority shareholders re-enlivened discussions with Ms Kaliviotis regarding the share sale. BRS’ majority shareholders told Ms Kaliviotis that given the urgency of the sale Ms Kaliviotis’ due diligence completed up to November 2014 would have to be sufficient, and that BRS would set aside $200,000 from the sale price “to deal with any problems”.

On 23 January 2015, Maradaca and BRS finalised a share sale and purchase agreement. Maradaca and BRS also signed a side letter in which BRS agreed to provide Maradaca’s solicitors with $200,000 in an escrow fund to satisfy any claim for a breach of warranty. The escrow funds were to be released back to BRS if no such claim was made within 90 days.

After the sale was finalised, Maradaca assigned its newly acquired shares in BRS to ELB.

On 22 February 2016, BRS’ majority shareholders commenced proceedings against Maradaca and ELB for the release of the escrow funds. Maradaca and ELB brought a cross-claim for misleading or deceptive conduct.

The primary judge at trial found that BRS’ majority shareholders had contravened s 18 of the ACL by failing to disclose particulars of Optus’ purchase offer, and associated legal and commercial developments which it found differed materially from the position at the time of Ms Kaliviotis’ 2014 due diligence. In addition, the primary judge dismissed BRS’ claim for return of the escrow funds. BRS appealed the whole of the decision.

The Court of Appeal noted recent authority recognising that commercial parties dealing at arms’ length are not automatically obliged to volunteer information to the others with whom they are dealing. Something more is required for a failure to disclose information to be misleading or deceptive. The key question was whether Ms Kaliviotis could demonstrate circumstances giving rise to a ‘reasonable expectation’ that certain matters would have been disclosed to her prior to the 23 January 2015 sale of BRS to Maradaca, such that the failure to disclose was misleading or deceptive.

In favour of BRS, President Bell (Chief Justice Bathurst and Justice of Appeal Payne agreeing) found that:

•   BRS stated during the 19 January 2015 telephone call that there was no time for further due diligence, but did not represent to or assure Ms Kaliviotis that there was no need for it;
•   in light of the information made available during the 2014 due diligence, and the circumstances in which BRS reopened the sale on 19 January 2015, it should have been apparent to Ms Kaliviotis that the urgency of the sale related to BRS’ deteriorating financial position;
•   BRS’ refusal on 19 January 2015 to allow or entertain further due diligence before the sale, would have made clear to Ms Kaliviotis that she should not expect to receive further disclosure of any material developments, rather, it was ‘buyer beware’; and
•   therefore, BRS’ conduct did not amount to misleading or deceptive conduct by silence. Rather, as a matter of common sense causation, any loss that ELB or Maradaca sustained was the result of a calculated risk taken by an experienced commercial businessperson.

This decision is a reminder that in cases of misleading or deceptive conduct by silence, context is highly relevant. Here, the sophistication and risk appetite of Ms Kaliviotis, and the commercial context of the arrangement were, amongst other things, factors which indicated that there was no misleading or deceptive conduct.

The full decision of Wormald v Maradaca Pty Ltd [2020] NSWCA 289 can be found here.