Critics of the corporate regulator ASIC have long held the view that it needs to take on more big fish. For instance, how on earth did listed companies branded Babcock & Brown blow up more than $10 billion for investors and lenders after the global financial crisis without a single ASIC charge being laid, either civil or criminal?
However, tackling the big boys doesn’t mean you should pick the wrong case — which is exactly what ASIC did when it wasted tens of millions of dollars in a six year battle from 2006 and 2012, taking on Fortescue Metals and Andrew Forrest over their allegedly super-bullish Australian Securities Exchange (ASX) announcements about Chinese contracts in 2004-5.
The subsequent campaign Fortescue ran against ASIC set the regulator back years in terms of government credibility and funding. And it was indeed once bitten twice shy in terms of cases brought after the GFC.
So where does ASIC sit after Justice Beach’s 400 page judgment on Friday, which largely exonerated rich-lister Harold Mitchell from charges that he breached his Tennis Australia director duties by favouring Seven Network when it came to renewing the television rights contract in 2013?
The judgment is a racy read which clearly spells out that Mitchell is a man not to be trifled with. And in keeping with this picture, Mitchell came out swinging against ASIC after the judgment was released, telling The Australian Financial Review yesterday that ASIC was “totally naive in understanding the commercial world”.
Similarly, Bruce McWilliam, the Seven Network commercial director who had extensive — and at times inappropriate — dealings with Mitchell throughout the rights renewal process, also got on the front foot on Sunday, posing for a photograph at his home for the AFR and telling the paper that ASIC’s action comprised of “tearing off at the behest of some board dissidents whose own evidence was discredited”.
Interestingly, the PR representative used by Harold in his post-judgment media dealings was Tim Allerton, the long time Kerry Stokes fixer, and the AFR journalist that he and McWilliam chose to speak to was Aaron Patrick, who took the strongest pro-Seven line of any reporter during Seven’s battle with Amber Harrison (the disgruntled former executive assistant and lover of Seven’s chief executive Tim Worner).
With a final cost to taxpayers of more than $15 million, it would be easy to conclude the four-year battle with Harold Mitchell was one of ASIC’s biggest mistakes, up there with the Fortescue folly.
However, there was also a strong public benefit. The judgment does provide fascinating insights into how business is done and the murky world of negotiating television rights.
Unlike with the Fortescue matter, ASIC had multiple former Tennis Australia directors co-operating against Mitchell and the evidence certainly paints a picture of Mitchell playing a very aggressive game to secure a new contract for Seven without an open tender, something which is not generally regarded as good corporate practice.
This is also the second major case where Justice Beach, who is believed to be under consideration for appointment to the High Court, has effectively said “technically guilty but no real harm done so no meaningful penalty to apply”.
The first was a class action brought against Myer where the judge concluded the company had breached the ASX’s continuous disclosure rules, but the market was already aware of this so no meaningful loss was incurred. The class action funders and lawyers missed out on a pay day and the parties ended up walking away with each paying their own costs.
Similarly, Mitchell was found to have breached his directors duties on just three of the 44 instances alleged by ASIC, and Justice Beach indicated he will cop a small fine and be free to remain on boards — such as Crown Resorts.
What happened here is that the board split on personality grounds, partly driven by personal ambition.
The judgement reveals just how toxic the environment was, with votes of no confidence led by Harold’s supporters forcing some of the dissident directors off the board. No wonder they went to ASIC alleging conflicts of interest against Harold, as he demonstrated what was clearly a very strong bias in favour of renewing with Seven and not taking the rights to market.
After a four-year process, ASIC doesn’t have much to show for their endeavours (although Friday’s media statement was pretty bullish) and will probably end up paying for much of Harold’s costs, which will likely be in the order of $2-3 million.
However, Justice Beach’s judgment, which took eight months to write, is a cracker which reveals important information about how business is done.
As a general rule, big contracts should go to tender and when any decision is made not to do that, boards should ensure that all of the directors and decision-makers are completely independent of the counter-party.
Mitchell was way too close to the Seven-Stokes camp as he drove the contract renewal process, and it would be nice if both he and Bruce McWilliam acknowledged that they would do things very differently if they had their time again.
Instead, they appear to be embarking on a regrettable campaign to discredit ASIC which, faced with director whistleblowers making strong allegations, did the right thing investigating the actions of this particular big fish.
The fact the Tennis Rights were not put up for open tender stinks.
An open tender gives all interested parties equal opportunity to bid, and the highest bid normally wins.
What precisely did Tennis Australia have to gain by not using the open tender method?
The government should demand that all sporting bodies use a transparent tender process when selling rights.
Two things.
First. The existing contract with 7 gave them the right to negotiate exclusively with TA for a period of some months before TA could go to tender or offer them to anyone else. That clause required TA to attempt in good faith to reach an acceptable deal with them; merely going through the motions with no intention of reaching an agreement would have been a breach of contract.
Second. There’s more to negotiating a broadcasting contract than simply accepting the highest bid. 10 dangled a large number in front of TA, but 10 had no experience broadcasting that sort of sport and were financially very wobbly and in fact went broke a couple of years later. TA and 7 had a long and mutually beneficial relationship, and that’s worth something. 9 had the cricket that would clash with the tennis.
One size does not fit all.
I am confused.
Why is selling the rights for a sum potentially $millions less than competing offers,
better than selling the rights for $millions more?
1. There were 3 potential buyers, 7, 9 and 10. (There was some possibility of a fourth, IMG, but they were unsuitable for a number of reasons.)
2. Of those 3, 10 had dangled a range ($40-$50 million per year for 5 years), but was poorly run and financially unsound, as shown by the fact that it went broke a year or two later.
3. TA did not only want money; it wanted maximum exposure for its tournaments, especially the the Aus Open. 9 had the cricket rights and would not guarantee the same level of exposure as 7. Plus TA wanted to control the actual broadcast itself, to maximise the appeal of its product internationally as well as in Australia.
4. 7 was therefore always a better fit than 9 or 10. Also 7 had exclusive first negotiating rights.
5. The charge was that Mitchell gave 7 the rights because he was really trying to benefit 7, not TA. There was zero evidence to support that. The only real argument that ASIC could advance was yours, ie, that if they had gone to tender they might have got a better deal. In fact the court found that the deal TA got, largely through Mitchell, was as good as any they were ever likely to get.
A very valiant effort at salvaging something for ASIC, but ultimately what you’re saying is that it was worth all that money, and worth putting Harold Mitchell through years of public shaming, to get a detailed look at how business is done in the world of televised sport.
ASIC yet again failed to exercise common sense. It paid little or no regard to the fact that the figure that Mitchell got out of 7 was right up there in the range floated before Tennis Australia’s eyes by Network 10; nor did it ask itself exactly what motive Mitchell could possibly have for pushing 7’s interests ahead of TA’s, as ASIC alleged. ASIC concerned itself, as so often, with form rather than substance.
That’s something you tend to do yourself, Stephen, actually.
Maybe not completely vindicated. It looks like Steve Wood managed to deliver $70m extra in the five year TV Broadcast rights than Harold Mitchell was urging TA to agree to with Channel 7 (note s 277).
I think that Mitchell does not come out of it looking squeaky, and all the advantage of the decisions does not make them right, which is what the courts are supposed to decide in my book. The judge also makes strange judgements, the end justifies the means apparently.
What is the inevitability of all this too big to tackle stuff?