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On Monday (18 December), the Appeals Court of the Supreme Court of Victoria released its ruling on three separate appeals linked to the 2022 judgment from the ongoing Connective shareholder court case.
The court case, Dickensian in its duration and scope, involved a shareholder dispute covering a period of 19 years between the three main shareholders: Millsave Pty Ltd (controlled by chief executive Glenn Lees and formerly also by his brother Murray Lees), Mark Haron (executive director of Connective), and Slea (controlled by Connective co-founder and former director Sofianos Tsialtas).
The case has primarily examined the restructuring and sale of Connective Connective Services Pty Ltd (Services) and Connective OSN Pty Ltd (OSN), placing emphasis on the conduct of its directors throughout.
At the core were the 2011 restructuring of the Connective entities and the purported sale of a 25 per cent share to Macquarie in 2013 for $5 million, allegedly without Mr Tsialtas’ knowledge. Additionally, it was argued in the trial that intentional actions by the plaintiffs resulted in financial difficulties for Mr Tsialtas – thereby constituting “oppression”.
Last year, the trial judge put forward orders calling for the Macquarie transaction to be unwound and gave Slea the option of selling its shares to the majority shareholders or purchasing shares if it wished to do so. It determined that a majority buyout order would be an appropriate remedy given the “oppressive” conduct.
But following the appeal, Justices Mcleish, Macaulay, and Lyons from the Supreme Court of Victoria noted insufficient evidence supporting the trial judge’s early finding of a “financial pressure” strategy.
The Appeals Court has therefore altered some original orders, stating: “We conclude that the effect of the oppression is appropriately undone by an order that Millsave and Mr Haron have the option of acquiring Slea’s shareholding for a fair value.
“In our view, such an order strikes a balance between relieving Slea of the oppression and enabling Glenn Lees and Mr Haron to continue to operate the business they have developed.”
If Millsave and Mr Haron do not exercise the option within a specified time, Slea will have a corresponding option to acquire their shares for a fair value.
The Appeals Court added: “[I]f Millsave and Mr Haron exercise the option, but default in payment, this too should trigger the option for Slea to acquire their shares instead.”
Expenses and costs will also need to be paid to Slea.
The parties now have until 29 January to confirm draft orders in line with the court’s decision by 29 January 2024, including the costs of the appeals.
Questions that need to be answered
The judgment for the appeals process ties together a long-awaited court case. But, as is often the case, many more questions now need to be answered.
Firstly, if Connective was valued at $120 million in 2019 (when it was looking at merging/selling to AFG), then the cost of buying out shares would surely be in the tens of millions. Finding the money for this bill will be a burden for all shareholders – so, where will it come from?
As part of the court case, orders have been made to rescind the 2013 sale of shares to Macquarie (equating to a 25 per cent interest in the group) – and reimbursing the Connective companies for associated costs, expenses, and interest – so some money will likely come from that.
Or perhaps it could come from another aggregator. Indeed, Liberty (which already has aggregator Liberty Network Services) and AFG have both voiced interest in purchasing the aggregation group in the past (with Slea having entered into an agreement back in 2010 that would have seen them purchase its shares in the Connective companies and AFG looking at a merger or acquisition in 2018).
So, could it be that we will see a new aggregator super group form in the near future?
And, if the money can’t be found – what happens to the company?
Moreover, what happens to the directors?
The Appeals Court did not overturn the trial judge’s claims that CEO Glenn Lees and executive director Mr Haron were “unfit to act as company directors”. However, even though the court noted that this would not pose a serious risk to the public (and that they had built substantial value in the years they had led the group), does this mean that new leadership needs to be appointed at the aggregator?
And lastly – and perhaps most importantly – what happens to the 4,500 brokers operating under Connective?
According to the aggregator, brokers can be assured that the aggregator remains focused on supporting their brokers’ growth success.
A note sent to brokers (and seen by Mortgage Business) on Monday read thus: “A decision was handed down by the Appeals Court of Victoria on 18 December 2023 regarding an appeal essentially between the shareholders of Connective and its directors. This decision has found in favour of the majority Connective shareholders, Glenn Lees and Mark Haron, in a number of important respects.
“This appeal does not impact the continued operations and success of Connective or your business and the focus of the Connective team remains on supporting you for your continued growth and success.
“Over the last 20 years Connective has grown to be the leading aggregator in Australia, with a membership of over 4,500 brokers.
“We’re proud of this growth and of our strong and longstanding relationships with you and all our members and we’re grateful for your ongoing support.”
With final orders set to be established over the coming weeks, the year 2024 will likely kick off with a bang for the aggregation giant.