Part 1 - McKerlie v Drillsearch created new law

My fight as a director against a recalcitrant board and lessons for whistle-blowers.??

Some years ago I was a director of a mid-market oil and gas company that was the result of a merger of two smaller ASX companies. Two boards had to become one and I was suddenly a co-director with a group of people I had not dealt with previously. They had the majority of the board and the Chair. Pretty soon it became evident this group had a shadow agenda aimed at enriching other parties. The management team was not happy as their sound and considered recommendations were dismissed out of hand ending up with the CEO ultimately resigning. It just didn’t smell right.?

Another director, who was appointed to the board as part of a capital raising the other guys did just prior to the merger and who represented a group of new money shareholders, showed increasing concern. One day he asked me if I was part of what the Cowboys were doing - I realised I had an ally!?

And so the process started of us working together to try to stop inappropriate behaviour by a board where the Cowboys had a majority and control… and had a native cunning from years of operating in and beyond the grey zone and getting away with it.??

Governance and directors’ compliance must satisfy several requirements. There is the contract between the company and the director, the Corporations Act, and standards imposed by various regulators such as ASIC, ASX, APRA and so on. The Companies Act specifically imposes a fiduciary duty on each director to act in the best interests of the company but I can assure you it is much easier to enforce on paper than it is in the hard cold world. It can be even worse for whistleblowers who are deeper within their organisation.???

I tried approaching the board directly but all that did was put them on notice that I was watching, so they went further underground and did their planning outside formal board meetings. I voiced my concerns and voted against certain resolutions so I was on the record.??

I approached the regulator and it seemed I would have to deliver full evidence of wrongdoing before the regulator would look at it. And in any event, they didn’t have the resources to look at all the complaints lodged by smaller ASX companies!!!?

At this stage I considered resigning from the board and leaving them to it, but if you want to lie straight in bed at night you must come to terms with your duty as a director which is to ensure the best interests of the shareholders are being met. If that job gets tougher then you just had to toughen up and deal with it. And this is where whistleblower protection is critical. (I still am amused at Donald Trump wanting the whistleblower inside the FBI to be identified.)???

So I approached my ally who represented a substantial number of shareholders and we decided to call an EGM to remove the Cowboys as we calculated that we probably had the support of sufficient shareholders. This involved me personally sending a letter to all shareholders, at my own cost, outlining my concerns and putting it all out there, including putting my reputation on the line and risking defamation proceedings.?

The response was very interesting. I got abuse, ridicule, defamation demands from their lawyers and physical threats (yes threats of violence!). I also got an incredible amount of support from shareholders, advisors and lawyers - good people who saw the importance of doing the right thing.??

Then things took an interesting twist.? The Chair of the board, one of the Cowboys, announced that he had decided to adjourn the EGM for over six weeks to allow for “board renewal” which was a front for getting rid of my ally and me from the board.?

We could not risk this delay and so I drew a very deep breath and sought an urgent Supreme Court hearing at even more personal expense and huge personal legal risk. Fortunately, the learned judge accepted my QC’s submissions and ordered the EGM to go ahead.??

The other guys then had the Company seek a Federal Court injunction in another state to defeat the Supreme Court orders. Things were heating up considerably with me on one side and the Cowboys, using the Company’s resources, on the other. In for a penny, in for a pound so at even more personal expense and legal risk I returned to the Court with the original judge who upheld his decision. The EGM was to be held and Cowboys were unsuccessful.?

The Supreme Court established what is regarded as new law by ruling that the Chair of a company can only adjourn a meeting for administrative reasons (such as a fire hazard in the meeting room) but otherwise cannot adjourn a meeting (e.g. to avoid being removed from office at that meeting).??

In the middle of this chaos, and with the Company being very vulnerable, a hostile takeover bid was launched by a much larger company. Once again, the Chair seemingly put personal interest ahead of shareholders and tried negotiating with the hostile party to maintain his role. The Supreme Court judge (almost literally) threw the hostile bidder out of the courtroom saying they had no part to play in the governance issue of the Company.??

I sat in those courtrooms with numerous senior counsel and lawyers representing the multiple parties involved. I was very gratified that, in the end, the meeting would not be adjourned and good governance would prevail. The thought of possibly having to pay for not just my lawyers, but all the others if I Iost the case, was never out of my mind.?There is a real cost to being a whistleblower.

For the record, we held the EGM, a fiery affair, and 2 of the 3 Cowboys were removed and the last one resigned a few months later when, being outnumbered on the new board, he couldn’t get any of his schemes approved. I was appointed Chair and the Company continued on with substantial growth and very good returns to shareholders well into the future.?

I was an unprotected whistleblower director and this lengthy, stressful, and high risk experience gave me the resolve to think about governance in a much more robust way. Over time, in my career as a professional director for large and small listed companies, I developed a strong contemporary approach to governance in its widest application.?

In addition to complying with the rules, two principles are critical. The board process must have less clutter and provide more insights to what is happening in the organisation AND there needs to be alignment between the board and the executive.??

These are the core drivers of a SaaS product called Kendo of which I am a founder. Please contact me if you would like to learn more about Kendo or visit www.thekendoway.com. As you are no doubt aware by now, I am passionate about governance and the role of directors in successful businesses, and very happy to be a sounding board for any issue you have.?

My next edition of Reflections, Part 2 of this woeful tale, will focus on the digital transformation necessary to improve governance.??

Jim McKerlie ?FAICD FCA

Executive Chair at Kendo ?

?