Australia: Court Finds Breach Of Obligations By Broker And Underwriter To IPO

Last Updated: 10 August 2007

The Supreme Court of New South Wales last week found in favour of OzEcom Limited (in liquidation) (OzEcom) and its liquidator against the Hudson Investment Group Limited group of companies (Hudson), and found that Hudson, who acted as sponsoring broker and underwriter to OzEcom's failed IPO, had breached its obligations under contract and under its duty of care to use its "best endeavours" to procure minimum shareholder spread for OzEcom. In the course of the judgement, the concept of "best endeavours" was examined.


In 1999, Hudson agreed to underwrite a $10 million IPO of shares in OzEcom, a 'dot com' company that provides outsourcing services. Hudson's related entity also agreed to act as sponsoring broker to manage the listing and "use its best endeavours to procure the minimum shareholder spread as may be required by the ASX Listing Rules".

By the time the offer was on the market, the enthusiasm for 'dot com' shares had waned. By the closing date as stipulated in the prospectus and the underwriting agreement, the offer was clearly undersubscribed and OzEcom did not have the necessary spread. Despite this the offer remained open and discussions between OzEcom and Hudson continued up to three weeks after the closing date, in relation to finding alternative arrangements to subscribe for the shortfall, when OzEcom served a copy of a shortfall notice and a closing certificate to Hudson in accordance with the underwriting agreement. The notices purported to trigger Hudson's obligations to fund any shortfall and to provide spread.

Hudson sought to terminate its obligations under the underwriting agreement, claiming, amongst other grounds, that there was no agreed extension of the offer period and no shortfall notice was served to the underwriter on time (by the closing date).


The Court found that despite the ongoing contact and relationship between Hudson and OzEcom after the documented closing date, there was insufficient evidence to show that there was any extension of both parties' obligations under the underwriting agreement. The Court could not imply new terms or extend the meaning of a term in the underwriting agreement as the parties did not turn their mind to the procedure set out under the agreement.

The Court however did find that Hudson had breached its obligations under contract and under its duty of care to use its best endeavours to procure minimum shareholder spread for OzEcom. The facts show that Hudson:

  • had minimal experience in underwriting IPOs;
  • had no systematic process of planning or management to promote and sell the IPO;
  • failed to follow up lists of and referrals to prospective investors and sub-underwriters provided to it by various parties; and
  • made little attempt to promote the IPO to their individual clients.

The Court found that OzEcom is entitled to damages from Hudson for wasted expenditure incurred on the faith of Hudson's promises in the underwriting agreement.

Lessons to be learned

When considering whether an underwriter had used its "best endeavours" in performing its duties, it is important to note that:

  • an obligation to use best endeavours to achieve an outcome is neither an unqualified obligation to achieve that outcome nor a warranty that it will be achieved;
  • the extent of the obligation to use best endeavours must be measured with the agreement as a whole and the factual contexts surrounding the contractual obligation; and
  • in considering whether a body had used its best endeavours, a court is likely to consider the expected qualifications, abilities and responsibilities of the person obliged to exert those endeavours.

This case also enforces the importance of parties performing their contractual obligations strictly in accordance with the procedure set out in the contract. The Court found that it would be a mistake to assume that simply because the parties behaved as if the agreement was still in place, that they were in fact varying the original agreement by extending its term.

OzEcom & Anor v Hudson Investment Group & Ors [2007] NSWSC 719: click here to view the full text of the judgment.


Charles Cowper

t +61 2 9931 4724


Clive Cachia

t +61 2 9931 4797



Alan Eden

t +61 7 3114 0229


Michael Owens

t +61 7 3114 0146


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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