This case concerned a joint venture company, Digital Cinema Network Pty Ltd (DCN), which negotiated with film studios and cinema owners in preparing Virtual Print Fee (VPF) agreements with regards to US film studies providing financial assistance to cinema owners converting movie projections from analogue to digital.
Mr Michael Smith, a director of DCN, conducted negotiations with a number of Hollywood film studios with a view to them entering into VPF agreements with DCN. Mr Smith purported to represent DCN and represented to the studios that in conducting the negotiations he had the support of the Independent Cinemas Association of Australia (ICAA). However, in his dealings with ICAA, Mr Smith purported to represent MGS Group Pty Ltd, a company which he owned or controlled, and which was only 1 of the 2 joint venturers that owned DCN.
ICAA indicated to Mr Smith that they wished instead for Omnilab Media Pty Limited (Omnilab), a rival company of DCN, to be the nominated entity for VPF agreements. Later, Mr Smith then handed over to Omnilab 2 draft VPF agreements in which DCN was listed as the nominated entity. Mr Smith further handed over to Omnilab considerable knowledge on digital cinema.
The primary judge found against Mr Smith for breach of fiduciary and statutory duties owed by him to DCN. The primary judge also found against Omnilab (and another company) (Omnilab Parties) for accessorial liability, determining that the rival company was knowingly involved and assisted in Mr Smith's breaches of fiduciary and statutory duties.
The Full Court of the Federal Court of Australia dismissed the appeal. The Court agreed that:
- Mr Smith, without the consent of DCN, diverted to a rival (ie the Omnilab Parties) a business opportunity which belonged to DCN;
- Mr Smith was dishonest in that he played off one entity against the other and that he failed to make full and true disclosures;
- the facts plainly demonstrated Mr Smith's actions in assisting a rival company to obtain the benefit of the role of "digital integrator" in circumstances which included provision of a board seat for Mr Smith in a new Omnilab entity and possible financial benefits to him;
- Mr Smith provided this assistance without securing any binding agreement between Omnilab and DCN for the Omnilab Parties to acquire the shares or assets of DCN; and
- Omnilab had actual knowledge of all of these elements of Mr Smith's breaches of duty and of the absence of consent of the other DCN owners.
Parties engaging in negotiations with others must ensure that information passed on is honest and accurate. Company directors have a fiduciary and statutory duty to ensure that the company leaders are kept fully informed of negotiations with other companies.
Other parties must be aware of and avoid assisting in or contributing into a director's breach of fiduciary and statutory duties as they may also be at risk of liability.