One of Australia’s largest tile retailers has survived a $1 million lawsuit from a former director. But the case revealed that the company’s “false and misleading” conduct was not enough to warrant a payout, due to a pandemic-era technicality.
Former director John Selak had his case dismissed by the Court of Appeal, in a ruling handed down last week. His case centred on being ordered to sign a new shareholders’ agreement to acquire 3.2 million company shares at a heavily discounted price of around $393,600, a deal to which he was entitled under a 2016 agreement.
But Selak didn’t want to sign this deal – that he called “draconian” – as he claimed it would hand the company’s founder, Frank Walker, the option to call back the shares at any time, for any reason.
Instead, Selak declined the offer and sued National Tiles for around $1 million in lost profits.
So why did he lose?
The mammoth ruling published by the Court of Appeal, with three presiding judges, detailed the grounds for denial; one of causation. In law, causation refers to a defendant’s conduct and the harm it causes. In this case, the court found that even if it wasn’t for the behaviour of National Tiles and Frank Walker, Selak still would not have purchased the shares.
“This is because, like the judge, we do not consider that Mr Selak established on the balance of probabilities that he would have entered into a shareholders’ agreement which complied with the options agreement and, in particular, the permitted transfer regime, and paid the exercise price,” the ruling read.
“In order to exercise the options, whatever the terms of the shareholders’ agreement, it was necessary for Mr Selak to pay $393,600 as the exercise price, which is not an insubstantial sum of money, at a time when there was a real uncertainty about the financial performance of National Tiles since the valuation, most relevantly because of the impact of the Covid‑19 pandemic.”
During the trial, Selak gave evidence that “National Tiles was in a difficult position, potentially as a result of the pandemic, and… nobody knew what that meant”. It added that “the relationship of trust and confidence” between Selak and Walker had broken down, evidenced by Selak’s removal from the board.
Ultimately, the judges discredited the governance of National Tiles, including finding that its “false and misleading” board records were used to erase the protections for minority shareholders. These findings, and the nature of the “take-it-or-leave-it” agreement presented to Selak, gave the former director a hollow legal victory, one that fell short of the threshold for financial compensation.
