The Auckland High Court has rejected a more than $400,000 damages claim in a dispute between the two former directors of Diversified Investment Strategies.
In a ruling handed down last week, Justice Faire said Diversified director, Norm Stacey, had failed to prove a breach of fiduciary duty by former co-director Vicki Watson during the sale of the business to Fisher Funds in 2014.
Diversified, which managed about $30 million via a mix of private clients, unit trusts as well as the Law Retirement super fund and KiwiSaver scheme, was sold in whole to Fisher in June 2014 for just under $320,000.
Under the terms of the sale Watson was guaranteed three years of employment at Fisher with an annual salary of $200,000 plus a 30 per cent bonus. Furthermore, the contract included a clause allowing Watson to buyback the Diversified clients at the original sale price if she was made redundant or unfairly dismissed.
While the buyback clause and Watson’s employment at Fisher were included in the sale document the quantum of her remuneration remained confidential. After agreeing to the sale to Fisher, Stacey later discovered Watson’s remuneration deal prompting him to “pursue a claim for breach of fiduciary duty on the basis that Ms Watson had failed to disclose that she was to receive an above market salary”, the court document says.
Prior to signing the Fisher agreement Stacey had also been pursuing a deal with Devon Funds Management, which had offered a no-strings 1 per cent of funds under management price to purchase Diversified’s assets.
Stacey alleged Watson’s employment deal with Fisher influenced her decision to pursue what he considered a superior sale agreement.
However, Justice Faire said the evidence did not back Stacey’s claims.
“At first glance, Ms Watson’s comment in and email to [Glenn Ashwell, Fisher Funds general manager] that she wanted better employment terms as the current terms did not reflect the cheap sale price seems damning,” the court document says. “However, the suggestion that Ms Watson first suggested a low price in order to later gain better employment terms defies common sense. This would have been a foolish gamble requiring Ms Watson to harm her own interests in the hope that she might be able to achieve another advantage later down the track.”
“… This judgment should not be taken as an endorsement of the conduct of either director in the negotiations. It may be that Ms Watson should have, as a director, disclosed the exact nature of her interests in the transactions in a clearer manner. However, that was not the issue that I was required to determine. The issue in this case was not whether Ms Watson’s conduct was irreproachable but rather, whether there was conduct that was oppressive, unfairly discriminatory, or unfairly prejudicial to the plaintiffs.”
According to the court documents, the Financial Markets Authority (FMA) forced the Diversified sale following a meeting with Stacey and Watson in December 2013. The Diversified directors had approached the FMA to discuss the high total expense ratio (TER) of the Law Retirement KiwiSaver Scheme (LKRS), which peaked at about $5.5 million under management.
“At the meeting, Diversified was effectively given an ultimatum by the FMA; find a solution to LRKS’s high TER by 31 March 2014 or the FMA would take regulatory action by moving to close down the LRKS,” the court ruling says. “This meant that DWML either needed a large influx of new investors, or to divest or merge the LRKS. It seems that the directors accepted that, realistically, the LRKS would need to be sold to another company.”
Early in 2014 Diversified courted a number of suitors including Elevation Capital, Craigs Investment Partners, Devon and broking firm Halifax, the court documents reveal.
In March of the same year the FMA suggested that Stacey and Watson should approach Fisher as a potential buyer of Diversified.
Stacey told Investment News NZ he was disappointed with the finding and would carefully consider his next steps.