Key points for boards and activist shareholders from Perpetual’s loss to Brickworks and Soul Patts

Articles Written by John Keeves (Partner), Karina Marcar (Partner)

Key takeaways

The Federal Court has released its judgment in favour of Brickworks Limited and Washington H. Soul Pattinson and Company Limited, in its proceedings with Perpetual.1

Perpetual’s claims of oppression were dismissed.

Although the case has some unusual facts – the cross shareholdings in question could not be implemented today – there are some key points for boards and for activist shareholders.

The decision

The importance of this decision for directors relates to evidence of the exercise of independent judgment. While boards need to be careful to get advice and exercise independent judgment, the Court will grant them considerable leeway when applying the test of what a reasonable director should have done. The Court will not review directors’ business decisions in a picky and technical way. That is, the Court will assess business decisions in an oppression case in a similar manner to how the statutory business judgment rule – and its general law antecedents – should be applied.

Despite the possible conflicts of interest, it was not proven that the directors failed to properly exercise their duties. They considered the impact of the cross shareholdings from time to time. In addition, the companies performed well.

The main point for activist shareholders is that the bar is set high for an oppression claim, both in terms of the evidence required but also the Court’s apparent approach to the “reasonable director”. As a result, the oppression claim may have quite limited application in the activist’s tool kit.

Moreover, activist shareholders who believe they can unlock value in companies by agitating for structural change should also note that oppression may be difficult to argue after entry into an investment where the particular issue is well known and long standing.  Caveat emptor.


Perpetual contended that the directors of Brickworks and Soul Patts were acting unfairly and oppressively against minority shareholders as a result of a cross-shareholding of 40% between the two companies. This cross-shareholding dates back to the 1960s and is unique among ASX listed companies. The creation of the cross-shareholding would no longer be permitted under the Corporations Act, and any increase in the 40% cross shareholding is prohibited.2

The case arose in the context of Perpetual seeking to force the unwinding of the cross-shareholdings of Soul Pattinson and Brickworks. Perpetual claimed that the sole reason to maintain the cross-shareholding was to entrench the position and influence of the Millner family on the boards of Brickworks and Soul Patts. 

Perpetual argued that the cross-shareholding depressed the price of the shares of both companies and entrenched the boards.

Perpetual had put various (unsuccessful) proposals to the directors, including proposing candidates for appointment as independent directors and proposals to remove the cross-shareholding by way of nil premium merger. 

Why Perpetual could not prove oppression

Perpetual failed to satisfy the court that there was evidence of oppression, including any agreement, arrangement or understanding between the Millner directors, or between the Millner family and other directors of the boards, to entrench the incumbent boards and therefore the control of the Millner family.

The Court tested whether there had been oppression on the basis of whether reasonable directors would consider the conduct oppressive or unfairly prejudicial to or unfairly discriminatory. The Court was reluctant to second guess the decision of directors.

Justice Jagot was of the view that:

“…it is not possible to be satisfied on presently available material that any proposed dismantling of the cross-shareholding will yield material longer term financial benefits to shareholders of either company…”3

A feature of the judgment was the inability of Perpetual to satisfy the court of evidence of oppression, including a lack of evidence of failure of the directors to act independently of the Millner family interests or failure of the directors to perform.

In particular:

  1. While one of the primary reasons for the cross-shareholding being implemented was to resist takeovers, the cross-shareholding also reduced volatility in earnings and diversified risk.
  2. There appeared to be some impact on the companies from the composition of the boards and on their approach as a result of the cross-shareholding. However, market views varied. Some said this depressed the share price, while others saw this as positive, in that it leads to stability and a long term view. The extent of any contribution to depression of the share price was unknown.
  3. The cross-shareholding had been in place since 1969, making it unlikely that any minority shareholders on the register were not aware of the structure at the time of their investment.
  4. Brickworks and Soul Pattinson had spent considerable time and funds in considering the dismantling of the cross-shareholding and determined not to proceed on each relevant occasion.
  5. It could not be known if a merged entity would perform as well in terms of dividends or share price.
  6. There was no evidence of related party transactions adversely affecting the interest of minority shareholders as a result of the cross-shareholding and board relationships. (Of course, if there were such transactions, Chapter 2E of the Corporations Act would have applied.)
  7. There was no evidence of underperformance caused by the boards or resulting from the cross-shareholdings – to the contrary, the companies were considered “well managed”4, with good historical performance.
  8. Given the historical performance of the two companies, there was no evidence of a negative effect of oppression or unfairness in the treatment of shareholders. 
  9. As a result, it was reasonable for directors to maintain the cross-shareholding to date.

1 RBC Investor Services Australia Nominees Pty Limited v Brickworks Limited [2017] FCA 756. Note that RBC is nominee for RBC Investor Services Trust in its capacity as custodian for Perpetual Investment Management Limited.
2 Section 259D of the Corporations Act 2001
3 [2017] FCA 756 at p. 761 para. 3(7)
4 [2017] FCA 756 at p. 873 para. 380(7)

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