The legal row between Aconex shareholders – Hawthorn Glen Pty Ltd v Aconex Pty Ltd – is set to reach court in Melbourne, Australia on 9 October (see Aconex in Australia shares court row, 22 August 2007). The trial, likely to last around seven days, is likely to have an impact on the running of the fast-growing business – it claims to be “the world’s largest provider of online collaboration for construction and engineering projects… managing over $160bn worth of schemes”. The litigation has also affected a planned listing of Aconex on the stock market.
The dispute is focused upon the rights of one of Aconex’s major shareholders, Hawthorn Glen, to participate in a new share issue earlier this year. Preliminary hearings were held on 21 and 22 August and 12 September, and some of the claims and counter-claims have already been outlined.
An application seeking “the joinder of Messrs Phillpot and Jasper” to the action was made on 21 August (“joinder”, see Wikipedia, is a legal term referring to the inclusion of additional defendants in a court case where allegations are based on the same facts); Hawthorn Glen’s counsel sought to “outline a case of breach of fiduciary duty against these two gentlemen”: Rob Phillpot and Leigh Jasper are joint MDs of Aconex.
Dates: the key issue
The share issue was only open to existing convertible preference shareholders and up to 1,153,847 convertible preference shares, at an issue price of AU$26, were apparently on offer. Neither Rob Phillpot nor Leigh Jasper were convertible preference shareholders, and so had no rights to acquire any of the new shares unless the offer, made on 15 March, was undersubscribed. Hawthorn Glen intended to subscribe for the maximum number of shares available to it (460,000) but, it is claimed, was prevented from effectively exercising its rights.
At the very hub of the case is a key issue: did Hawthorn Glen’s rights to subscribe expired on 30 April – as it claims – or on 16 April – as Aconex claims. If the court ruled in Hawthorn Glen’s favour on these facts, then the directors’ behaviour would, in the judge’s words, amount to “a gross dereliction of duty”, but on the other hand, if Aconex’s version of events was held to be true, then there would be “no dereliction at all”. Accordingly, Justice Goldberg ruled that if these critical issues are decided in Hawthorn Glen’s favour, then the directors will become defendants in the case.
Documents discussed on 22 August suggest that, while Aconex contended that any reference to 30 April was an obvious mistake, it had considered offering Hawthorn Glen an additional 14 days in which to apply for shares in its fund-raising round. Hawthorn Glen’s counsel, Mr Bick, went on to suggest:
“there is a good case that the directors at all times knew that they’d given the extra 14 days to the plaintiff [Hawthorn Glen]…. They didn’t want the plaintiff to increase its shareholding significantly. Rather they wanted to have those shares available for themselves, Mr Jasper and Mr Phillpot, and about 25 associates, direct or indirect associates, of theirs and some employees. As a result, Hawthorn Glen was cut out of the fourth round….”
Negative business impact
Both sides are keen to expedite proceedings, particularly as the company has undertaken not to issue the disputed shares until the case is resolved, thus potentially delaying a planned public listing of Aconex. Aconex’s counsel, Mr Collinson, was also clear about the ongoing impact of the litigation:
“It is extremely disruptive to a business which is in the channel for a listing in a relatively short time frame, … to have the key players, the joint managing directors, have to be distracted by this litigation, as they would, over another month, and of course, the chairman as well, Mr Hosking, who is a witness as well. It is immeasurable what the loss might be to the company from the distraction of litigation.”
I invited Rob Phillpot to comment on the case and received the following statement:
An investor is litigating to increase the size of their investment in the Company. The Company rejected their investment subscription as it arrived late and the Company does not require the additional investment capital. The litigation does not impact on the company’s operations in any way.
The Chairman, Mr Martin Hosking, has noted that “these things happen with highly successful companies where investors would like to increase their stake in the company”. He went on to note that the Company expects to win the litigation but, should it loose, the likely impact would only be an increase in the capital base of the company at the fair market price set in April.
Update (28 September 2007): Rob Phillpot and Leigh Jasper have become, respectively, the second and third defendants in the case.