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NZX (Clear Grain Exchange) decision

by Stephen on November 17th, 2016

The High Court has upheld civil claims brought by NZX against the former owners of Clear Grain Exchange (an Australian on-line grain trading business) the assets of which NZX purchased in 2009.

The outcome is a sort of nil-all draw as Dobson J. also upheld one of the vendors’ counterclaims against NZX.

NZX claimed the vendors had misrepresented the growth potential of Clear Grain Exchange in the Australian grain sales market and that aspects of the transaction breached the Fair Trading Act.

In response, the vendors made a series of counterclaims, including that NZX had breached its own contractual obligations by failing to adequately resource the business – after its acquisition.

After a lengthy hearing, Dobson J. found the NZX had proven four out of its 5 alleged misrepresentation claims against the vendors – but found no compensation was payable to NZX because it could not demonstrate losses flowing from its reliance on those  misrepresentations.

On the other side of the draw, although the vendors succeeded in their claim that NZX had not met its contractual obligations with respect to resourcing, no damages were awarded because the vendors had been unable to demonstrate that better resourcing would have meant that the vendors would have been able to meet their earn-out targets.

Of particular note in the judgment (and accompanying media release) is the statement from Dobson J. that:

Both sides were exceptionally keen to consummate the deal.  It was a case of a very willing seller, and a very willing buyer.  This probably contributed to both sides materially overstating their position in pro-contractual dealings with the other.

Costs lie where they fall

On the question of costs, Justice Dobson expressed the provisional view that costs ought to lie where they fall, given the outcome on damages (i.e. the nil-all draw).


 At the time the transaction took place the assets acquired by NZX comprised two businesses:


  • Clear Interactive – which employed an IT team with expertise in designing and writing software for applications such as the operation of an electronic market for buying and selling commodities; and
  • Clear Commodities – an embryonic electronic grain exchange.

The fallout from the purchase and the subsequent litigation was obviously fairly willing and has been the subject of some fairly breathless reporting by the mainstream media.

From the buyer’s perspective, the judgment notes that NZX’s CEO, envisaged the grain exchange as at cornerstone of a much larger new venture for NZX in the provision of data and facilitation of trading in agricultural commodities.

Central to NZX’s claims was the allegation that the vendors had misrepresented the prospects for the grain exchange to increase the volume of grain that could be traded on it.  The Court found misrepresentations relating to:


  • the volume of grain that the vendors represented were likely to be traded on the exchange in the ensuing season;
  • the extent of support the grain exchange enjoyed in the Australian grain industry;
  • the positive features of an alliance that had been entered into with a company dominant on the Australian east coast in the bulk-handling of grain; and
  • representations on the level of expenses likely to be incurred by the businesses in the current financial year,

had been proven by NZX.


NZX also alleged that the some complaints amounted to misleading and deceptive conduct under the Fair Trading Act, and breaches of contractual warranties.


NZX also sued a group of directors and shareholders of the vendor under personal guarantees in the SPA (as well as a wider group of shareholder/employees – as assignees of the benefits provided for in the SPA).


The vendors pursued counterclaims against NZX alleging breaches of contractual obligations under the SPA as to how NZX would resource and finance the businesses, post-acquisition.  The SPA provided for a substantial earn-out, in the event that the businesses reached certain targets.  The vendors claimed that NZX’s breach of the resourcing obligation caused loss to the extent of the earn-outs that were not triggered, or alternatively the loss of the chance to qualify for those payments.


The vendors also claimed that NZX made pre-contractual representations about the extent of resources it would commit to the businesses – on the basis that they constituted misrepresentations under the Contractual Remedies Act and misleading and deceptive conduct under the Fair Trading Act.


In addition, counterclaims were also pursued against the ZNX’s CEO in his capacity as CEO and a director of NZX attributed with personal responsibility for the financing and resourcing decisions of the businesses once they were owned by NZX.


Dobson J. found that NZX breached its contractual obligation to consider the resources required to commit to the businesses in order to provide them with a reasonable opportunity of achieving the targets which would trigger the earn-outs.  None of the other causes of action under the counterclaims against NZX or its CEO were made out.


Counterclaims against the CEO


Regrettably, the mainstream media seems to have taken some sort of delight in the fallout in the personalities in this case.  Clearly the fallout was personal in the sense that the primary directors and shareholders of the vendors were the founders of the business and the CEO of NZX drove the acquisition and oversaw aspects of the post-acquisition steps.

 However, it is important to note that the vendors’ counterclaim again the CEO (alleging either being knowingly involved or aiding and abetting the making of representations which contravened the Fair Trading Act) failed.  The vendors also alleged that the CEO’s “participation” rendered him a sort-of joint action, with NZX, in respect of the alleged negligent misrepresentations.


This cause of action depended on the vendors making out its counterclaims (against NZX) for misleading and deceptive conduct, or negligent misrepresentations – which the vendors failed to do.  As a result, the (dependent) claim of “knowing involvement” against the CEO also failed.


Despite this, Dobson J. did not accept that the inclusion of the CEO in his personal capacity was entirely misconceived.  Whilst the judge had the benefit of hearing all of the evidence and submissions, his reasons for this (ultimately discomforting) conclusion are a little on the skinny side.  He notes that, as matters unfolded at trial, NZX made no attempt to distance itself from any of the CEO’s acts or omissions – but the vendors could not be certain of NZX’s stance on the point when the counterclaims were pleaded.  From where I sit, I think that there would need to be something much more concrete to point to a concern (that ultimately the company would literally – “throw its CEO under the bus” and seek to distance itself from either or both of the acquisition or the post-acquisition integration) to sustain a personal claim against a CEO in these circumstances.


As a result, I am left with the concern that would-be claimants might take this as a signal that it is a suitable litigation strategy to seek to apply pressure to the CEO to settle by suing them in their personal capacity.


For this reason, I am left puzzled about the statements about costs.  Dobson J. effectively said that if the CEO was indemnified by NZX then his provisional view is that NZX should also absorb the CEO’s defence costs as part of a larger nil-all draw.  Surely this question was an integral part of any decisions to allow a separate claim against the CEO?  Again, from where I sit, only where there was a (serious) question about an absence of such an indemnity should a separate counterclaim against the CEO have been allowed to proceed.


Further information


If you would like more information about any of the matters discussed in this note, please contact me.

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