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December 2, 2015

DHR International in Australia: the story

Update December 2, 2015: minor typo corrected

This is the story of how DHR’s Australian business went from a position of being highly profitable in August 2012, under the leadership of its founding Managing Director, to being placed under external administration within a year. By reason of the facts, matters and circumstances referred to below, it would appear this happened because DHR International started a deliberate course of action whereby it diverted to its own offshore entities assignments, revenue, dividends, cash and physical assets (all up, almost A$1 million) with the result that DHR International has so far avoided paying employees, tax authorities, creditors and a minority shareholder.

DHR International is unusual amongst large search firms—or indeed professional service firms—in that it is owned by one family, the Hoffmanns of Chicago. Generally, the ownership of large professional service firms is distributed amongst multiple partners or shareholders. The Hoffmann family claims to have assets of US$300 million including their own airline, Air Hoffmann.

In early 2010, DHR International decided to expand its footprint into Australia. DHR conducted a search for a founding Managing Director out of its Hong Kong office, and identified and approached a number of experienced consultants from leading search firms, including Darren Challis. Following a series of phone, videoconference and face-to-face interviews in Sydney and Hong Kong (particularly with Christine Greybe)—as well as videoconferences with David Hoffmann and Geoff Hoffmann in Chicago—DHR made an offer of employment to Challis to join as Managing Director of the to-be-established company, which ended up being called DH International Pty Limited (“DH Australia”).

DHR’s first Australian legal firm, Mackenzie Thomas, prepared a series of agreements, which were executed by the parties on or about 20 May 2010. As a result of these agreements, DH Australia was 72.5% owned by DHR (through a chain of entities) and 27.5% by HDRN Pty Limited, an entity then controlled by Challis. This was an unusual arrangement for DHR, which is used to owning 100% of its subsidiaries. As a result, DHR struggled with dealing with the interests of a minority shareholder. (DHR have now switched to their fourth law firm in Australia).

DH Australia commenced operations in May 2010 and required negligible start-up capital from the shareholders. Challis was paid an annual salary of ~A$28,000 plus commissions. DH Australia was cash flow positive almost immediately to the extent that DHR requested DH Australia provide a loan of A$150,000 to DHR International Asia within DH Australia’s first year of operation, as DHR Asia didn’t have enough liquidity to pay commissions to consultants in other Asian markets. In other words, DH Australia was cross-subsidising other DHR operations in its first year. DHR Asia did not repay the loan to DH Australia on time.

DH Australia was successful under Challis’s leadership and grew to the extent that, according to independently audited financial statements, DH Australia made a profit before tax of over A$1.1 million on revenue of A$2.6 million in 2011, its first full year of operation. According to figures prepared by DHR’s own accountants in Australia, the business was on track as at 31 August 2012 to deliver a 2012 result of an annualised EBITDA of ~A$1.0m on annualised revenue of ~A$3.2 million with almost A$788, in net assets, including over A$475,000 in cash. Accordingly, the Board of DH Australia declared a dividend in August 2012, and DHR received the lion’s share or almost A$400,000, which it quickly sent to Chicago.

The agreements between the parties did not contemplate any “overhead fees” or “management fees”. In fact, the Shareholders Agreement (prepared by DHR’s lawyers) specifically provided that any such arrangements would require the prior written consent of each shareholder (i.e. both DHR and HDRN).

Despite these provisions and because of the large retained earnings accrued by DH Australia, in around July 2012, DHR unilaterally demanded that DH Australia pay DHR an “overhead fee” of over US$155,000 backdated to 2010 and 2011. This was despite the fact that DH Australia had finalized its books for 2010 and 2011; paid its taxes; been audited for 2010 by an independent auditor, and lodged those audited financial statements with the Australian corporate regulator. Despite HDRN asking for more details, DHR was not transparent as to what the “overhead fees” covered or how they were calculated. In the end, DHR nevertheless demanded DH Australia pay DHR a substantive overhead fee.

According to evidence adduced through examinations conducted in the Supreme Court of New South Wales in September 2015, DHR then arranged—behind Challis’s back—for Amanda Bowden, one of DH Australia’s Executive Vice Presidents, to fly to Chicago. DHR offered her the role of Managing Director of DH Australia.

In September 2012, DHR unilaterally terminated Challis without cause as Managing Director and put him on ‘gardening leave’. DHR said at the time through its second Australian law firm, Kennedys, that this was not performance-related, merely that the relationship between the parties had broken down. DHR promised through its lawyers that they “would not nickel and dime” Challis and would pay him his entitlements through the end of his three-month notice period. DHR also represented that they would buy HDRN’s shares in DH Australia in accordance with the provisions of the Shareholders Agreement. This did not occur. While the Shareholders Agreement provided for an independent expert to be appointed to value DH Australia and HDRN’s shares in it, DHR did not follow through. DHR ultimately also did not pay Challis his claimed entitlements and arguably repudiated his employment agreement. DHR also arguably repudiated the employment agreement of another Executive Vice President, leaving Bowden as DH Australia’s only fee earner.

A strong-performing Executive Vice President at DHR might have a team of one Principal (junior consultant), plus a shared Associate (researcher) and shared Executive Assistant. Despite Bowden being DH Australia’s only remaining fee earner, DHR did not “right-size” the business and Bowden had two dedicated Principals, two dedicated Associates and two dedicated Executive Assistants.

In late October 2012, DHR directed Challis to return to work from gardening leave. When Challis duly attended DH Australia’s offices, however, he was immediately instructed to return home by DHR’s law firm.

DHR appointed Bowden as new Managing Director of the Australian business in September 2012 (although she has since remove this from her LinkedIn profile). Yet, according to a recent affidavit from David Hoffmann in the Supreme Court of New South Wales, “In October or November 2012… [he] decided to close the Australia operation”. Rather than closing the Australian operation in an orderly way, DHR then began a course of action to wind down the Australian business and transfer DH Australia assignments and assets to other DHR entities, in which HDRN had no interest. As a result of doing so, DHR has to date avoided paying employees, creditors, tax authorities and HDRN.

Margaret Dillon, an Australian employee of DHR Asia, relocated from Singapore to Melbourne in October 2012 and became a Director of DH Australia in December 2012 i.e. at a point in time after David Hoffmann had “decided to close the Australia operation”. According to Dillon’s one-time DHR bio and LinkedIn profile, she was simultaneously a Director of DH Australia while employed by DHR in Australia i.e. she was working for a competing business with different shareholders at a time when DHR was transferring DH Australia’s assignments and assets to DHR. In other words, it appears that she had a conflict of interest and that DHR was breaching the Shareholders Agreement by competing against DH Australia via its 100% owned DHR Asia subsidiary.

From at least 30 October 2012, DHR began diverting assignments and revenue from DH Australia to other DHR entities, specifically its Hong Kong entity, DHR International Asia. Despite the fact that DH Australia was still trading and actually executing on these assignments, DHR sent new or replacement consulting agreements to Australian clients on the letterhead of its Hong Kong entity and signed by Bowden. These consulting agreements related to searches looking for Australian candidates for Australian-based roles for Australian clients. The face value of these agreements was at least A$168,000 plus sales tax. The liquidators of DH Australia subsequently found that revenue related to Australian work was paid directly into DHR Asia in Hong Kong yet DH Australia suffered the double whammy of still incurring the employment and commission costs for the employees who executed on these assignments. DHR Asia did not transfer the money received by it to DH Australia or remit the sales tax to the Australian Taxation Office.

In November 2012, DHR (without the knowledge or consent of the DH Australia Board or HDRN) unilaterally transferred over A$293,000 offshore to DHR. Before making the transfer, DHR’s Australian accountants emailed DHR and Bowden to say that this amount was not consistent with DH Australia’s accounts, but DHR nevertheless made the transaction potentially causing DH Australia to become insolvent some time in or shortly after that month. The business nevertheless traded for another 6 months until David Hoffmann appointed administrators in late June 2013, seven or eight months after he “decided to close the Australia operation”.

Around the same time in November 2012, DHR sent HDRN through its lawyers, Kennedys, a set of financial statements for DH Australia for 2010, 2011 and part-2012. DHR had somehow forgotten that David Hoffmann had signed off on the 2010 accounts; that these accounts had been audited by an independent auditor, and that these account had been lodged with the Australian corporate regulator. These new purported financial statements for 2010 were materially different from the signed/audited/lodged financial statements for 2010 and the accounts previously prepared by DHR’s external accountants in Australia. This gives rise to the question of whether DHR was keeping multiple sets of accounts for DH Australia.

Accordingly, in November 2012, HDRN directed David Hoffmann and Margaret Dillon (as Directors of DH Australia) to undertake an independent audit of DH Australia for 2011, in accordance with section 293 of the Australian Corporations Act. DHR dragged its heels but, after several letters from HDRN’s lawyers including the threat of court action, DHR eventually complied in March 2013. A reconciliation between the resulting independent audit and DHR’s purported financial statements shows that DHR had unilaterally decreased DH Australia’s revenue in 2011 by 12% (or over A$324,000) and increased its costs by 20% (or over A$300,000) by (among other things) overlaying new sets of “overhead fees”, despite having no entitlement to do so. The impact was that DHR’s purported financial statements understated DH Australia’s actual profit before tax for 2011 by 54% (or over A$597,000). DHR’s purported financial statements also understated DH Australia’s net assets by 42% (or almost A$349,000). If this is the case, DHR has breached section 286 of the Corporations Act, which requires a company to keep written financial records that correctly record and explain its transactions and financial position and performance.

In accordance with section 293 of the Corporations Act, in December 2012, HDRN directed David Hoffmann and Dillon to undertake a further independent audit of DH Australia, this time for 2012. However, DHR did not comply, eventually leading HDRN to commence an action in the Supreme Court of New South Wales in May 2013. These proceedings are still on foot. David Hoffmann successfully avoided a process server in the US. DHR said via its third Australian law firm, Minter Ellison, that DH Australia could not afford to pay the few hundred dollars for an audit. Remember, DHR had taken ~A$400,000 in dividends and over A$293,000 in cash out of the country in the preceding months.

DHR subsequently tried to argue that Challis would not be permitted to work in executive search for as long as HDRN remained a shareholder in DH Australia despite the fact that DHR unilaterally terminated him without cause and did not pay him his entitlements. DHR dragged its heels in buying out HDRN’s shares in DH Australia (and ultimately never did so). Once Challis’s limited restraints expired, he established a new boutique search firm. DHR were aware of this but—presumably because they knew Challis was permitted to do this given the agreements and events—DHR decided not to seek an injunction to prevent Challis from operating.

Despite David Hoffmann and Margaret Dillon each signing a declaration as a Director of DH Australia that the company was solvent in March 2013, less than a month later in early April 2013, Geoff Hoffmann terminated the remaining employees during a conference call, suggesting that DH Australia could not meet its financial obligations. In the same call, Geoff Hoffmann said that DHR intended to soon re-enter the Australian market. This was a disturbing statement for the employees to hear in the same breath as Geoff Hoffmann was terminating them.

DHR did not pay the DH Australian employees their entitlements. Instead, the then DHR Financial Controller, Kevin Kummer, emailed the DH Australia employees and suggested they might get paid by the Australian Government. The Australian Government ended up paying almost A$90,000 under its Fair Employment Guarantee scheme, designed to cover certain unpaid employment entitlements to eligible employees who lose their job due to the liquidation of their employer. Again, recall that DHR had taken out almost A$700,000 in dividends and cash in the months before and the Australian taxpayer had to cough up the A$90,000. The scheme does not cover all entitlements, meaning employees were nevertheless left out-of-pocket.

One DH Australia employee started an action against DH Australia in the Fair Work Commission, but none of DHR, David Hoffmann, Dillon or Bowden attended the hearing in May 2013 and DHR ultimately avoided the claim by claiming to the Commission that DH Australia was insolvent. However, David Hoffmann did not actually appoint an administrator to DH Australia until late the following month. Despite receiving some money from the Australian Government, that employee is still owed around A$40,000 (or around a third of his annual salary), including commission that DHR was due to pay him within two of weeks of his termination.

Between terminating the employees and appointing administrators, DHR flew down an employee from Hong Kong and he arranged to ship all of DHR’s physical assets to a new DHR office in Seoul. These brand new assets had a book value of over ~A$170,000 and DHR has still not paid the liquidators for any of the assets it sent to Korea. Even more alarming is that DHR shipped to Korea all of DH Australia’s computers, and on these were stored all of DH Australia’s records. DHR did this despite the Australian legal requirements to maintain books in the jurisdiction and to hand them over to administrators. In doing so, DHR also removed evidence from Australia while there was ongoing litigation.

The cash and assets that DHR took out of the country are problematic, particularly given the ensuing insolvency. The Australian law does not like majority shareholders, like DHR, to benefit when other creditors are left empty-handed. The taking of the cash and assets by DHR may amount to what are termed “unfair preferences”, “uncommercial transactions”, “insolvent transactions”, “unreasonable director-related transactions” and/or “voidable transactions”. However, the liquidators have been hindered in recovering the assets because DHR took them out of the jurisdiction.

Directors and officers of companies in Australia have a number of statutory and fiduciary duties including:
  1. the duty to exercise their powers and duties with the care and diligence that a reasonable person would have which includes taking steps to ensure they are properly informed about the financial position of the company and ensuring the company doesn’t trade if it is insolvent;
  2. the duty to exercise their powers and duties in good faith in the best interests of the company and for a proper purpose;
  3. the duty not to improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the company; and
  4. the duty not to improperly use information obtained through their position to gain an advantage for themselves or someone else, or to cause detriment to the company.
DH Australia’s liquidators, with the support of the Australian corporate regulator, have been investigating DHR and its directors and officers. Indeed, the Australian corporate regulator has helped fund the liquidators’ investigations to the tune of almost A$38,000 through the Assetless Administration Fund. This Fund finances investigations and reports by liquidators into the failure of companies with few or no assets, where it appears that enforcement action may result from the investigation and report. A particular focus of the Fund is to curb “fraudulent phoenix activity”. As a result, the liquidators served Dillon and Bowden and these individuals were examined by the liquidators’ barrister in the Supreme Court of New South Wales in September 2015. The liquidators decided not to examine Challis, who offered to be examined, as he had ceased to be a director of DH Australia by 12 November 2012 and has been helping the liquidators with their investigations since the time they were appointed as administrators in June 2013.

Under examination, each of Dillon and Bowden claimed the other one was responsible for the governance of the business. They also referred to the involvement of senior DHR leaders including Hong Kong-based President, Christine Greybe. The examinations indicate that Dillon and Bowden may not have discharged the duties that they had as directors and officers of DH Australia, such as ensuring that salaries, pensions, taxes and insurances were paid. On one occasion, for example, Dillon told the Court that she simply saw her role as a Director as signing the occasional paperwork.

The liquidators also attempted to serve Steve Stine, Managing Director of DHR Asia, while he was visiting Sydney on 30 June 2015, trying to convince the Sydney CTPartners consultants to join DHR at the eleventh hour. The Court’s order merely would have required Stine to produce to the Court the documents that DHR removed from the jurisdiction and sent to Korea. However, Stine managed to avoid service by slipping out a back door of CTPartners’ Sydney offices.

Curiously, DHR blames Challis for the downfall of DH Australia, despite the successful position of the business at the time when Hoffmann terminated him without cause and the fact that Challis had been out of the business for around 10 months by the time Hoffmann appointed administrators.

The Australian corporate regulator has been targeting “fraudulent phoenix activity”, which it describes as “the fraudulent act of transferring the assets of an indebted company into a new company to avoid paying creditors, tax or employee entitlements”.

Since (if not before) walking away from DH Australia, DHR has continued to employ—at various times—consultants in Melbourne and Sydney. However, each of these Australian employees has been listed on the DHR web site as being based in Singapore, where it may be thought that they are beyond the reach of action by the Australian corporate regulator and the liquidators. DHR is continuing to operate in Australia, although somewhat undercover: Margaret Dillon is executing on searches for Australian clients out of her Melbourne home, but she is still listed on the DHR website and in her LinkedIn profile as being based in Singapore and, presumably, DHR are still billing these Australian clients from offshore. DHR’s actions have cost the Australian taxpayer around A$128,000 through the Fair Employment Guarantee and Assetless Administration Fund schemes, not to mention unpaid taxes.

The Australian corporate regulator has indicated the following indicators of fraudulent phoenix activity, all of which appear to exist in the current situation.
  • The company fails and is unable to pay its debts”—the appointment of administrators and then liquidators—and their reports to creditors—are evidence of this in this situation.
  • Directors act in a manner which intentionally denies unsecured creditors equal access to the company’s assets in order to meet unpaid debts”—as detailed above, DHR transferred a number of assets ahead of appointing the administrators to DH Australia.
  • Soon after the failure of the initial company (usually within 12 months), a new company commences using some or all of the assets of the former business, and is controlled by parties related to either the management or directors of the previous entity”. In this case, DHR Asia:
  1. commenced using some of DH Australia’s assets starting from in 2012 ie before the failure of DH Australia;
  2. is controlled by the majority shareholder (ie DHR); and
  3. has management who were management or directors of the previous entity. 

December 1, 2015

“Be mindful of foreign laws governing overseas employees"

We came across this 2012 article in the Denver Business Journal with the above headline.  The article extensively quotes Martin Pocs, “vice chairman and managing director for DHR International” and shows a contemplative picture of him sitting next to a globe.

Some extracts from the article:

Companies that open offices overseas should be aware that other countries’ labor laws often differ from those in the United States.”


One common scenario: U.S. companies find that in most foreign countries, employment is not at will, and they must have a concrete reason to fire someone. They’re also required to work with underperforming employees to try to correct their work habits. Otherwise, the U.S. companies can expect large fines.


Martin Pocs knows the international market well. He’s vice chairman and managing director for DHR International, a staffing firm with about 30 U.S. offices and 34 overseas, including in European countries such as Germany and the United Kingdom, Japan, China, Australia and India. [On or about the date the article was published, DHR only showed 22 overseas offices on its web site].

“We’re growing faster internationally than domestically,” Pocs said, ticking off a list of soon-to-open international offices. [Six months later, the number of overseas offices shown on the DHR web site actually declined, leaving us wondering what happened to the “soon-to-open international offices”.]


 “Each country has its own issues. … In certain places in China or Japan, people have to give six to 12 months’ notice.

Pocs also discussed [other issues], referring to what’s commonly called the “social contract,” in which European workers have far more vacation than Americans, and companies must guarantee employment — if a job doesn’t work out, they must pay severance to the departing worker.

It is comforting to know that a senior leader of DHR International—no less, a vice chairman—is aware of the importance of adhering to labor laws in other jurisdictions. However, we think it is interesting to contrast this awareness with DHR International’s apparent track record, including in the following places.

In Australia, former employees of DHR International’s Australian subsidiary lodged A$850,000 in proofs of debt with the subsidiary’s administrators/liquidators. Before David Hoffmann appointed the administrators, DHR removed and sent offshore hundreds of thousands of dollars in cash and the physical assets of the subsidiary. Fortunately, some of the Australian employees were paid some of their entitlements but not by DHR itself but by a taxpayer-funded Australian Government scheme that provides that “Employees who are owed certain employee entitlements after losing their job because their employer went bankrupt or into liquidation may be able to get financial help from the Australian Government”.

At least one Australian employee, a Principal, commenced an action with the Australian employment regulator for unfair dismissal. Despite receiving a notice of listing, neither David Hoffmann nor any of his team turned up to two scheduled conciliations. Instead, Hoffmann eventually claimed to have appointed administrators to the subsidiary some time before he actually did.  The fact that he appointed administrators ultimately stymied the action. That is because the creditors of the subsidiary passed a resolution to wind up the company and appoint a liquidator and the employment regulator decided that, in those circumstances, the action could not continue.  DHR therefore avoided any need to “pay severance to the departing worker”.

In the United Kingdom, it has come to light that one of the CTPartners’ transferring Partners left DHR because she believes (among other things) “that the UK government employment agency were [sic] considering suing DHR at an industrial tribunal for not having paid redundancy costs to CT Partners who were offered to join DHR (and that this could ultimately impact DHR’s ability to trade in the UK)”.

And—closer to DHR’s Chicago home—in California, multiple former DHR employees sued DHR for alleged violation of the California Labor Code, including for DHR’s alleged “wilful failure to pay wages upon separation”. Unlike in Illinois, employment in California is not at will.


DHR love PR and this article is another example of them opining on whatever topic will get them into the media.  On the basis of the information referred to above, we think that prospective employees may want to beware: DHR International don’t always practice what they preach. It is reminiscent of David Hoffmann (and many of his team) squawking about the importance of not embellishing one’s résumé and then Hoffmann doing the same thing.

Whatever happened to DHR International’s "global joint venture"?


We just came across this press release from 1997, where DHR International announced a “global joint venture” with a company called CONEX/InterSearch Inc. The press release said the joint venture was going to trade under the name “DHR­CONEX/InterSearch”, and that the “combined operation will have over 100 offices throughout the world”.

Back in 1997, DHR was claiming to be the “ninth ­largest executive search firm in the United States with 31 domestic offices”. David Hoffmann was excited about the joint venture: “This is a tremendous, global leap for our firm. I feel comfortable and confident that InterSearch can deliver the quality global search our customers demand."

We wonder what happened to this joint venture and the “over 100 offices throughout the world”. A web search for “DHR International” and “Conex” reveals nothing more.

---

CHICAGO--(BUSINESS WIRE)--Dec. 12, 1997--Today marks the announcement of a global joint venture agreement between DHR International Inc. and CONEX/InterSearch Inc.

DHR's frenetic growth continues to push itself to the top of the U.S. search firm charts. DHR is the ninth-largest executive search firm in the United States with 31 domestic offices. David H. Hoffmann, chairman and chief executive officer of DHR, said: "This is a tremendous, global leap for our firm. I feel comfortable and confident that InterSearch can deliver the quality global search our customers demand."

CONEX/InterSearch Inc. boasts representation in over 37 countries with 80 offices and was named number 12 in the 1996 "World's Top 20 Retained Executive Search and Selection Businesses" by Executive Recruiter News. Fred Siegel, founder, board member and U.S. president of InterSearch, said: "This venture gives our worldwide operation added strength and visibility in the U.S. We will now be able to offer services to a broader range of industries, while continuing to provide the highest level of quality, both in the U.S. and abroad."

Under the name DHR-CONEX/InterSearch, the combined operation will have over 100 offices throughout the world.

CONTACT: DHR International Inc.

David H. Hoffmann, 314/725-1191

Fax: 314/725-9286

dhr.intl.com [sic]

or

CONEX/InterSearch Inc.

Fred Siegel, 212/371-3737

Fax: 212/371-3897


CONEXNY@aol.com