However,Jobs Minister Michaelia Cash said the withdrawal of charges was"absolutely not"an embarrassment for the trade union royal commission,and was a matter for Victoria police.

"At the end of the day,royal commissions provide evidence. The government responds to that evidence by way of implementing policy,"Senator Cash said,citing the Turnbull government's restoration of the building and construction watchdog and Registered Organisations Commission. However,sources connected to the prosecution were joined by union insiders questioning the conduct of Boral and its legal advisers,including the failure to provide material to the committal in a timely manner.

The decision of the Director of Public Prosecutions and police to withdraw the charges,announced on Wednesday morning,was partly based on the performance of two witnesses from construction company Boral during sustained cross-examination in a committal hearing that has been running for several days.

Police had alleged that Boral managers Paul Dalton and Peter Head were blackmailed by Mr Setka and Mr Reardon during a meeting at a café in April 2013,which was arranged by Boral.

The meeting came after the concrete firm had become the subject of a secondary boycott linked to the union’s fight with developer Grocon.

During the committal hearing,Mr Dalton faced intense questioning by defence barristers over his decision to destroy his original handwritten record of the meeting. Mr Dalton produced a scanned copy of his notes but faced intense scrutiny in court about why he had failed to retain the original version. A prosecution source described Mr Dalton's evidence as a'"train wreck."

Mr Head was grilled about whether he knew if Boral had called the meeting with the CFMEU in an attempt to strike a deal to end the union's targeting of Boral’s concrete trucks.

Outside court on Wednesday,the two union leaders were joined by their high-profile lawyer and Western Bulldogs president Peter Gordon.

Mr Gordon said the 2013 meeting had been distorted by Boral and its legal team,who,he said,deserved to face possible legal action themselves.

"It’s been exposed that neither of Boral’s men took the coffee shop conversation as any kind of threat at the time,did not view it as any kind of threat for over a year and after a year their recollection got changed,” Mr Gordon said.

“It got changed only after various lawyers got involved,lawyers for Boral,lawyers for the ACCC,lawyers for Dyson Heydon’s royal commission … all of these lawyers were given their riding instructions by men who were on a mission for the extreme right of our politics.”

Boral declined to comment.

Mr Gordon paid tribute to Victoria’s Director of Public Prosecutions for “bringing to a final end this farcical prosecution”.

Police sought advice from prominent QC Paul Holdenson before sending the brief of evidence to the DPP in 2015.

The Office of Public Prosecutions did not seek costs from the two former accused.

It is understood that authorities believed that aspects of the involvement of Boral’s law firm Freehills in the case weakened the prosecution. Freehills played a key role in assisting the company deal with the union royal commission,including in helping to redraft witness statements that prompted the later decision to begin a criminal investigation into blackmail.

Police subsequently sought fresh statements from the Boral witnesses and are understood to have been surprised at the role of Freehills in drafting the earlier royal commission statements of the Boral witnesses. A Freehills source insisted that it had not significantly altered the parts of the witness statements that were aired in the criminal prosecution.

The withdrawal of the charges will mean that Boral’s fiery chief executive Michael Kane will not get a chance to testify in the case. Another witness for the prosecution,former CFMEU official Danny Berardi will also not get a chance to testify.

The CFMEU and the wider union movement are certain to seize on the withdrawal of the charges to ramp up their long-held claim that the royal commission and associated police investigations were vindictive.

It is also possible that Mr Setka and Mr Reardon may seek to launch a wrongful prosecution action against authorities,or pursue civil action against Boral.

Outside court,Mr Setka said it had been tough on him and his family,including his children,to have been publicly accused of blackmail and to have the threat of jail hanging over his head.

“But you know what,probably not as tough as those families whose loved ones never came home that night."

The CFMEU would have much more to say about the “conspiracy” in coming days,he said.

The royal commission into the union movement was called by the Abbott government,with its findings later pushed by the Turnbull government. In his interim report in December 2014,Commissioner Dyson Heydon said that Mr Setka and Mr Reardon should be considered for the criminal charge of blackmail. In the final report,released in 2015,the CFMEU was a key focus,and Commissioner Dyson Heydon said the union acted in"wilful defiance of the law".

The CFMEU's association,with the Australian Labor Party has been used to attack Opposition leader Bill Shorten and other ALP leaders.

But the union movement has used the case against the CFMEU chiefs to prosecute its own campaign against the coalition,with tens of thousands of members and union supporters blocking the centre of Melbourne recently in support of Mr Setka and Mr Reardon.