Boardroom wars, ASX announcements and defamation risk: when things go too far

By Ian Bloemendal, Shane Montgomery
31 Mar 2022
Directors should ensure company announcements are made for proper purposes and statements that are potentially defamatory are verifiable and distributed only to recipients who may have a duty or interest to receive that information.

In De Kauwe v Cohen [No 4] [2022] WASC 35, the Supreme Court of Western Australia has reiterated the utility, and limits, of the defence of qualified privilege. The decision serves as a stark reminder of the importance of carefully crafting company announcements, particularly those that are made publicly available or published with the ASX.

Corporate warfare erupts

Dr Brendan de Kauwe brought defamation proceedings against his co-directors, the company secretary and corporate media advisers following multiple publications made between 5 February and 21 March 2018, including various letters, notices, emails, and ASX announcements. The publications arose out of the management of eSense Lab Ltd, a research and development company established in Israel and listed on the ASX, with which Dr de Kauwe and the defendants were associated.

Dr de Kauwe and the first to fifth defendants (Mr Cohen, Mr Saad, Ms Shenhar, Mr Gilboa, and Mr Karasik) were each directors of eSense. The sixth defendant, Mr Pamesky, was eSense's company secretary from early 2018 onwards, and the seventh defendant, Mr Wright, was a media adviser to eSense.

In 2012, Dr de Kauwe joined Otsana Pty Ltd, a corporate advisory firm which provides advice regarding corporate restructuring and recapitalisations. Dr de Kauwe became a director of Otsana in November 2015.

In 2016, the fourth defendant, Mr Gilboa, introduced eSense's board of directors to Otsana and by 1 October 2016 Dr de Kauwe had also been appointed a director of eSense. Shortly afterwards, Otsana's services were engaged by eSense to provide corporate advisory services to the company, including in respect of an IPO and listing on the ASX.

Dr de Kauwe played an increasingly important role in the development of eSense and in February 2017, he was appointed eSense's chairman. He began managing roadshow presentations in respect of further capital raising efforts in late 2017, resulting in the scope of Otsana's services subsequently expanding and Otsana's advisory fees increasing.

By January 2018, the defendant directors appeared to share concerns of a possible leadership spill by Otsana shareholders to remove the first defendant, Mr Cohen, from the board of eSense. The defendants began taking steps to replace Dr de Kauwe as chairman of eSense and minimising his influence in the company.

The Court determined that this conduct included, for example, deliberately excluding Dr de Kauwe from being able to attend board meetings via telephone. Likewise, a defendant director, Mr Cohen, approached the sixth defendant, Mr Pamensky, and offered him the opportunity to take over as eSense's company secretary, replacing the existing secretary who had previously been identified and recommended to eSense by Dr de Kauwe. The Court determined that this was done because Mr Cohen believed Mr Wood was on Dr de Kauwe's side.

Mr Cohen gave evidence that the defendant directors were at "war" with Dr de Kauwe, and the personal and aggressive nature of this inter-director dispute was reflected in both internal and external communications. The defendant directors at various times exchanged emails stating that they should "start to attack", that they needed to "find the way to inform the media", and that after a proposed Notice of Meeting was announced to the ASX, that they should "push aggressively to media/shareholders".

The escalation between the defendants and Dr de Kauwe resulted in multiple publications regarding Dr de Kauwe being published, many of which were found by the Court to be defamatory.

Dr de Kauwe alleged that 10 separate publications were defamatory. He was successful with four of them, and aggravated damages were awarded (in addition to general damages and an award for the pure economic loss he suffered). He was also successful with is injurious falsehood claim, but no separate damages award was given for that. Ultimately, he was awarded a combined total judgment of $530,880 plus interest and costs including:

  • General damages for defamation:
    • 5 February letter: $10,000
    • 15 February letter: $20,000
    • ASX Announcements: $160,000
  • Aggravated damages from ASX Announcement: $30,000
  • Special damages:
    • Loss of opportunity to acquire options for shares $200,000.
    • Lost net income (Directors Fees) $110,880

For the sake of brevity, this article largely compares and contrasts three of the relevant publications: an internal Board communication, an intra company letter and an ASX announcement that was broadcast to the public,

The three publications

On 9 February 2018, Dr de Kauwe incurred a charge of $1,759 on his eSense company credit card, attributed to Qantas Airways. At that time, he was authorised to use debit cards for company business without seeking prior board approval.

On 15 February Mr Cohen wrote a letter to Dr de Kauwe titled "Your Unlawful Use of the Company's Credit Card", copying another director and the company secretary in which he asserted that the purchase was unauthorised, a violation of fiduciary duties, and a breach of criminal law (theft).

On 7 March 2018, a number of the defendants convened an "audit committee meeting", resolving to appoint a third-party investigator into Dr de Kauwe to investigate, amongst other things, his:

  • use of the eSense company credit card;
  • relationship with Otsana; and
  • refusal to follow certain board resolutions.

On 13 March 2018, a number of the defendants facilitated publication of an announcement on the ASX's online web portal, "eSense-Lab Appoints Independent Examiner to Investigate Conduct of Dr Brendan De Kauwe" (First ASX Announcement). The announcement noted the directors' concerns regarding Dr de Kauwe, and the appointment of the independent third-party examiner to investigate his conduct arising out of the 7 March audit committee meeting.

Later, and in advance of an Extraordinary General Meeting to be held later in March 2018, Mr Saad sent a "Position Letter" to eSense shareholders, the defendant directors, and Mr Pamensky. The Position Letter made a significant number of allegations, including that:

  • The majority of the Board believe that Dr de Kauwe has been acting to advance the interests of Otsana and not the company's best interests.
  • Dr de Kauwe refused to transfer funds from eSense's Australian bank account exposing the company to lawsuits.
  • Dr de Kauwe's conduct had become the subject of an independent third party investigation which was expected to cover various aspects of his conduct including his use of the company's credit card.
  • Dr de Kauwe has issued various ultimatums to the board which the company considered were unwarranted.
  • When the board declined Dr de Kauwe's unreasonable demands, he demanded unreasonable and disproportionate remuneration as chairman and for Otsana as brokers.

On 21 March 2018, Mr Pamensky (with the approval of the defendant directors) arranged for a further announcement to be lodged with the ASX online (Second ASX Announcement), entitled "Position Statement". It was in substantially similar terms to the Position Letter, albeit that it was publicly available for download by the general public.

As a result of those statements, Dr de Kauwe pleaded (and the court accepted) that it conveyed that amongst other things imputations such as: he was not a fit and proper person to hold office as a director of eSense, he was a blackmailer and an extortionist, and a person whose conduct was so lacking in propriety as to warrant examination by an independent external company auditor, as well as his subsequent removal.

Qualified privilege revisited

Amongst other defences (eg. replies to an attack), the directors claimed that they published the matters complained of on an occasion of qualified privilege (claiming both common law and statutory qualified privilege). The defence of qualified privilege arises where a person who makes a communication has an interest or a duty, legal, social, or moral obligation, to make it to the recipient and the person to whom it is so made has a corresponding interest or duty to receive it. This reciprocity is an essential element of the defence.

The objective is to enable a person to make frank and uninhibited communications to a recipient without fear of potential liability under defamation. The defence requires an identification of the type of defamatory statements made, by reference to both their content and circumstances – to enable the court to "make a close scrutiny of the circumstances of the case, of the situation of the parties, of the relations of all concerned and of the events leading up to and surrounding the publication".

The tests at common law and statute differ slightly.

The various statutory provisions throughout Australia typically require that:

  • the recipient have an interest or apparent interest in having information on a subject;
  • the publisher must, at the time of publication, believe on reasonable grounds that the recipient has the "apparent interest";
  • the matter is published to the recipient in the course of giving the recipient information on that subject; and
  • the conduct of the defendant in publishing that matter is reasonable in the circumstances.

Common law conversely requires that for a defence of qualified privilege arising out of a reciprocal duty or interest:

  • both parties have an interest in the information being conveyed (generally referred to as a "community of interest"), resulting in the publication being made on a privileged occasion. (The circumstances that constitute a privileged occasion can themselves never be catalogued and rendered exact);
  • the communication in question was related to the privileged occasion; and
  • there was no malice in the publication.

Unlike its statutory equivalent, reasonableness is not an element of the defence of qualified privilege at common law.

Communications in the course of managing a company

Justice Le Miere noted that:

  • the management of a company vests in its directors, not shareholders, who have only a limited role in monitoring a company's managers. In the context of assessing whether a publisher and recipient has a reciprocal interest in receiving information, the requisite threshold will therefore be much higher for publications made to shareholders;
  • the communication by a company director to another director or officer of information concerning maladministration, incompetence and possible dishonesty in management of the company or information about staffing matters may be a communication on an occasion of qualified privilege. However, the communication by a company director to another company director or officer is not an off-the-peg category of qualified privilege, such as the writing of an employment reference or the making of a complaint to a proper authority;
  • a relevant question to ask is whether this publisher had a duty to publish or an interest in publishing this defamatory communication to this recipient;
  • a notification that a chairman of a company was being removed would be something a director could be expected to have a duty to inform shareholders of, and shareholders would have an interest in receiving it. There are, however, limits to this. Neither directors nor shareholders have an interest in receiving gossip or patently untrue information.

The Court found that both the directors and shareholders of eSense would have an interest in receiving information that the plaintiff had been removed as chairman, or alternatively being notified that a director of the company had committed a criminal act, or placed themselves in a position of conflict of duty and interest. However, the ASX Announcement went beyond that, devolving into mere gossip which no director had a duty to inform any recipient of. Furthermore, although shareholders and other directors may be persons who have a common interest in receiving information regarding the company shareholder, the public nature of the ASX announcement significantly exceeds that. The Court determined that it was highly likely that the ASX announcement was a publication that was downloaded and accessed by members of the public, including journalists, who did not share the reciprocity of duty and interest. To the extent the First ASX Announcement was published to individuals other than eSense shareholders, it would not generally attract privilege.

This determination can be contrasted with the finding in respect of the Position Letter, where the common law defence of qualified privilege was found to be available, given it:

  • limited its distribution to shareholders and other directors;
  • was sent in the context of the recipients attending an Extraordinary General Meeting; and
  • was relevant to the business of the upcoming Extraordinary General Meeting, given it related to the re-election of the defendant directors and Dr de Kauwe.

The statutory defence nevertheless failed because the Court did not find that the publication was reasonable, as the allegations made had no proper basis. (This highlights the differences between the common law and statutory and versions of the defence).

Further, while the Second ASX Announcement was substantially the same as the Position Letter (defensible at common law), the court held that it was actuated by malice. This served to defeat the defence of qualified privilege.

In relation to the 15 February letter, the Court found that the allegations were inflammatory, seriously defamatory and advanced with no proper basis in fact. It was no defence to claim that the letter was written by others, when Mr Cohen had made no attempt to verify the accusations in the letter.

Warnings for directors when airing dirty laundry

Most of the court's findings and comments will be unsurprising for directors. Personal or public attacks on credibility and reputation, particularly those made unreasonably and/or maliciously, are likely to deprive a publisher of a defence to a defamation claim.

However, the decision also provides salient examples of where it can have utility for directors. For example, in de Kauwe, the Notice of Convening of Meeting of Board of Directors (5 February Notice), which was sent by email to the members of the board and copied to the company's lawyers was not defamatory. Firstly, the scope of publication went no further than required (ie., it was reasonable). Secondly, it did not convey a meaning that Dr de Kauwe was guilty of the conduct referred to because it simply stated that the directors would be called upon to consider whether there was reason to believe that Dr de Kauwe was guilty of that conduct and if so, whether it warranted terminating his services as chairman and/or appointing a third-party examiner to enquire into his conduct.

At both common law and under statute, the qualified privilege defence can be an effective tool for officers to communicate with other directors and company shareholders, to share important information regarding the management of a business. Reciprocity is nevertheless essential. Publications that involve more than those who have a duty or interest to make or receive the communication will likely lose the protection afforded by qualified privileged.

Directors should therefore ensure that publications, which could otherwise attract liability in defamation, are:

  • published to a limited audience, and only to those who have a corresponding interest or duty to receive that information, noting that the threshold will be different for information distributed to directors compared to shareholders;
  • limited to critical facts and information, and not infected with scandal, gossip, or otherwise coloured by personal opinion or innuendo;
  • verified;
  • not recklessly indifferent to the truth; and
  • published in reasonable circumstances and with a proper basis.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.