Note: Where any of the barristers were involved in a case reported below and the matter is still running, or potentially so, the other correspondents have taken the role of reporting that case.

Vasco Investment Managers Ltd v Morgan Stanley Australia Ltd [2014] VSC 455 17 September 2014

Confidential information – plan for corporate recapitalisation – subsequent development by recipient and completion of the transaction without further recourse to discloser – whether elements of confidentiality made out – whether equitable compensation payable

The plaintiff (Vasco) is a “multi-boutique real estate investment management firm” providing advisory services relating to various types of managed funds, but does not itself manage funds.  The principals of Vasco are former employees of Orchard Funds Limited, the holding company of the Orchard group of companies (Orchard).  The defendant (Morgan Stanley) is the Australian arm of the well known international investment bank.

Orchard was a funds management business that was squeezed hard by the GFC, such that it was forced to sell down assets to reduce leverage.  In 2008, Morgan Stanley had considered Orchard to be a juicy prospect for acquisition through one of its affiliates, but after due diligence decided not to proceed.  Nor was Morgan Stanley interested in Orchard’s subsequent call for potential buyers to help recapitalise, although it kept abreast of the relevant suitors and their proposed acquisition structures.

By April 2011, Orchard had come to be viewed by its stakeholders as something of a lemon. By that stage, the principals of Vasco had leveraged their experience with Orchard’s funds into a relatively developed plan as to how Orchard could be successfully recapitalised (the Vasco Plan). Between April and June 2011, Vasco presented to Morgan Stanley a recapitalisation plan for Orchard and provided information, assistance, advice, calculations and drafts of documents, including the expression of interest subsequently sent to Orchard.  The parties did not agree any terms as to Vasco’s remuneration, notwithstanding Vasco pressing the issue on a number of occasions and receiving assurances from Morgan Stanley.  Justice Vickery found that had Morgan Stanley indicated that it would not remunerate Vasco for its services, Vasco would not have shared with Morgan Stanley the details of the Vasco Plan.

In January 2012, Morgan Stanley successfully concluded “Project Citrus” (being the recapitalisation of Orchard), a transaction worth just over $200m.  It did not have further dealings with Vasco in the period from June 2011, nor pay Vasco for its services.  Vasco sued for an account of profits or equitable compensation for what was said to be a misuse of Vasco’s confidential information, or payment on a quantum meruit basis.

Vickery J held that the Vasco Plan was sufficiently developed for the purposes of invoking confidentiality.  Notwithstanding that there was some subsequent refinement, this was “a case where a unique combination of ideas, which may have given rise to a future commercial transaction, in combination were sufficiently novel, in the sense that they were the product of intellectual input applied to a particular commercial structure using commonplace methods, so as to attract the necessary quality of confidence”.  Further, the Vasco Plan had that quality of confidence, and incorporated elements not considered by any of Orchard’s other suitors, including Morgan Stanley in 2008.

The Vasco Plan had been communicated in circumstances that plainly and objectively imported an obligation of confidence.  If nothing else, a non-disclosure agreement sent by Vasco to Morgan Stanley in advance of their first meeting should have made that clear, especially as Morgan Stanley then assured Vasco that it was “not in the business of breaching confidentiality agreements” or “stealing ideas”.

Finally, the confidential information had been misused.  Even though Morgan Stanley undertook extensive development work after June 2011, the Vasco Plan was used by Morgan Stanley as the starting point for Project Citrus, and key elements from that plan had been cherry-picked and used, without Vasco’s consent or acquiescence.

Vasco failed to persuade the judge, however, that it was entitled to equitable compensation, because its evidence did not address the question of what a willing buyer would pay for the confidential information (as opposed to Vasco’s services generally).  His Honour also held that the alternative remedy of an account of profits faced an insurmountable causation issue given the extra work put into Project Citrus by Morgan Stanley.  Ultimately Vasco succeeded only on its quantum meruit claim, to the tune of just over $1,000,000, or a 0.5% success fee.

This final aspect of the decision serves as a reminder that even where the case for breach of confidence appears relatively clear cut, to enjoy the fruits of one’s labours it is still necessary to be able to assess and quantify the value of that information.