Acehill Investments Pty Ltd v Incitec Ltd (No 2) No. Scciv-02-1703

ACEHILL INVESTMENTS PTY LTD v INCITEC LTD
[2002] SASC 406
Civil

DEBELLE J Orica Investments Pty Ltd applies to be joined as a defendant in this action. I set out the events leading to the application.
A Minority Shareholder
Incitec Ltd (“Incitec”) is a public company registered in Queensland. Its registered office and principal place of business is at Paringa Road, Gibson Island, Murarrie, Queensland. Its shares are listed on the Australian Stock Exchange.
The plaintiff, Acehill Investments Pty Ltd (“Acehill”), is a substantial minority shareholder in Incitec. Acehill holds some 20.8 per cent of the issued capital of Incitec. Orica Investments Pty Ltd (“Orica”) holds some 7.7 per cent of the shares. Orica is in turn a wholly owned subsidiary of Orica Ltd. The remaining 2.8 per cent of shares are held by some 1400 other shareholders.
Orica Ltd is able to control Incitec not only through its shareholding but also through the board of directors of Incitec. Five of the seven directors of Incitec are nominees of Orica Ltd through its control of Orica.
Acehill Alleges Oppression
In this action, Acehill claims that the affairs of Incitec are being conducted in a manner which is contrary to the interests of the members of Incitec as a whole. It alleges that the conduct of the affairs of Incitec is oppressive to, unfairly prejudicial to, or unfairly discriminatory against Acehill. It therefore seeks orders pursuant to s 232 of the Corporations Act 2001 (Cth). In para 5 of the prayer for relief Acehill seeks:
“Orders regulating the conduct of the affairs of Incitec Ltd in the future including orders that the existing directors cease to hold office and there be appointed directors in their place as set out in the Schedule hereto.”
The Schedule seeks orders that the existing directors cease to hold office and that a minimum of three other persons be appointed directors in their place to assume the duties and responsibilities of directors for a period of 12 months. The Schedule sets out the means of effecting and securing that change in control. It also directs the new directors to examine the advantages and disadvantages to Incitec of proposals for the restructuring of Incitec. I will refer to the proposed restructuring in a moment.
Orica applies to be joined as a defendant on the ground that the relief sought by Acehill, and in particular in para 5 of the prayer for relief, affects its interest in Incitec. I will return to the grounds of Orica’s application.
A Proposed Restructure of Incitec
This action is another step in the strained relationship between Acehill and Incitec arising mainly out of the proposal to restructure Incitec.
The business of Incitec has two principal activities. One is a fertiliser business that imports, manufactures and distributes a broad range of fertilisers in all states of Australia, except Western Australian and Tasmania. The other is an industrial chemicals business whose main product is ammonium nitrate for use in the manufacture of explosives. I will refer to these businesses respectively as the “fertiliser business” and the “industrial chemicals business”.
On 29 August 2002 Incitec announced a proposal for a major restructuring of its business activities. On 20 September Incitec obtained orders in the Supreme Court of Victoria approving the Explanatory Statement to be sent to shareholders and convening meetings of shareholders on 22 October 2002 to consider the proposal. On or about 22 September Incitec sent the Explanatory Statement to its shareholders.
The proposed restructuring of Incitec had three aspects. They were:
(1)A proposal to separate the fertiliser and industrial chemicals business of Incitec. This involved a reduction of capital and a scheme of arrangement so that the industrial chemicals business would be owned by an unlisted public company called Industrial Chemicals Ltd. The shareholders of Industrial Chemicals Ltd would be the existing shareholders of Incitec in the same proportion as their existing shareholders in Incitec. Thus, Orica would control Industrial Chemicals Ltd.
(2)The proposed acquisition of Industrial Chemicals Ltd by Orica by means of a selective cancellation of the shares in Industrial Chemicals Ltd held by all shareholders other than Orica in exchange for cash. In the jargon of the financial advisers, this has been called “the buyout” and in the points of claim filed by Acehill in this action is called “the IC buyout”.
(3)the proposed merger of Incitec’s fertiliser business with a company called “Pivot Ltd”.
Acehill had concerns whether the proposed restructuring was in the best interests of the members of Incitec as a whole.
On 8 October Acehill applied in this Court for an order pursuant to s 247A of the Corporations Act authorising named persons to inspect certain books and documents of Incitec. On 14 October the application was granted.
At the meeting of shareholders on 22 October, Acehill opposed the first step in the proposed restructuring, namely, the reduction of capital and scheme of arrangement. However, the members voted in favour of the resolutions to give effect to the proposal. The approval of the reduction of capital and scheme of arrangement was listed for hearing in the Supreme Court of Victoria on 23 October. Acehill opposed the application. After several interlocutory hearings, the application was listed for hearing on 6 November. On 6 November Incitec applied for an order dismissing its application. Hansen J made orders dismissing the application and ordering Incitec to pay Acehill’s costs.
Incitec intends to proceed to restructure its business. On 6 November 2002 it announced its intention to make an alternative proposal to restructure its business. On 15 November Orica Ltd announced a proposal to proceed with the merger of Incitec’s fertiliser business with Pivot Ltd and to seek orders in the Supreme Court of Victoria convening meetings to consider the proposal.
On 18 November 2002 Acehill instituted this action seeking the orders under s 232 of the Corporations Act. Acehill alleges that the board of directors of Incitec has not conducted the affairs of Incitec in the interests of the company as a whole. In large part, the allegations concern the proposed restructuring of the business of Incitec. Underlying the claim for oppression is the allegation that five of the board of seven directors of Incitec have a conflict of interest and duty in that four of them have been appointed by Orica and are employed by Orica Ltd and the fifth director was appointed by Orica Ltd and is a former executive of Orica Ltd. Incitec admits the facts on which the conflict of interest is alleged to exist but denies that such a conflict does in fact exist.
Acehill alleges that aspects of the proposed restructure of the business and affairs of Incitec were not in the best interests of the company as a whole. It is unnecessary for the purpose of this application to list all of the grounds on which Acehill makes that contention. They are mainly concerned with that part of the proposals which concern the industrial chemicals business and allege, among other things, that the business has been substantially undervalued so that the cash consideration for the acquisition of the shares by Orica in the so-called “IC buyout” is too low. In relation to the conduct of the industrial chemicals business, there are further allegations that Incitec has failed to commence construction of the third nitric acid plant so as to minimise the price payable by Orica for the purchase of the shares in Industrial Chemicals Ltd and that Incitec has failed to renegotiate arrangements for the supply of ammonium nitrate pending the acquisition of the shares of minority interest in Industrial Chemicals Ltd, again for the purpose of minimising the price payable by Orica. Finally, it is alleged that the proposed restructure has not been subject to an appropriate independent scrutiny.
Orica Applies to be Joined
Orica has applied to be joined as a defendant in this action on the ground that the relief sought by Acehill affects its interests. In essence, Orica relies on three contentions in support of its application. The first refers to para 5 of the prayer for relief. Orica contends that such an order directly affects its capacity to control the appointment of the directors of Incitec. The second is that, if oppression is established, one of the orders which the court is empowered to make is an order authorising the purchase of shares by any member of Incitec which, in this case, could effectively only be Orica. Finally, Orica contends that the affidavit filed in support of the application discloses that Acehill intends to make a number of allegations against Orica which justify Orica being joined in this action. I will deal with each of these grounds in turn.
It is unnecessary to stay with the second contention as Acehill does not in terms seek an order that its shares be purchased and, through its counsel, expressly disavows any intention to apply for such an order.
Relief Sought Against Orica
I deal next with the first of the contentions on which Orica relies. There is no doubt that the relief which Acehill seeks directly affects Orica’s interests as the major shareholder holding about 77 per cent of the shares in Incitec. It directly affects its power to appoint directors to the board of Incitec. However, for the reasons which follow, I do not think that means that Orica should be joined so that it may participate in the conduct of the action at this stage.
It is apparent from the summary of Acehill’s allegations that they are made only against Incitec and allege an improper stewardship by the directors of the affairs of Incitec. The allegations of oppression are made against Incitec, not against Orica. It may be necessary for Incitec to call evidence from Orica but that does not require Orica to be joined as a party. In short, there is nothing which justifies the joinder of Orica at this stage.
If Acehill succeeds, the appropriate course for the court to adopt would be to refrain from ordering any relief until all those affected by the orders which Acehill seeks are before the court. Orica may then, if it wishes, renew its application to be joined. Alternatively, an order may be made at this stage that Orica be joined but only be heard on the relief which should be granted to Acehill if it should succeed. The latter appears to be the preferred course. I will hear the parties on the order which Orica might seek to give effect to these reasons.
A Usual Practice?
Ms Gordon, who appeared for Orica, submitted that the joinder of Orica would accord with the usual practice and relied on the following five decisions, Hassall v Johnden Engineering Pty Ltd [2001] QSC 211; Aqua Max Pty Ltd v MT Associates Pty Ltd (unreported, 19 June 1998, Supreme Court of Victoria, Gillard J); Hurley v BGH Nominees Pty Ltd (1982) 31 SASR 250; Catto v Hampton Australia Ltd (1998) 12 ACLC 1691; Coombs v Dynasty Pty Ltd (unreported, von Doussa J, July 1994). In Hassall the majority shareholders had been joined as a party at an earlier stage. The decision dealt with an application for amendment so that the reasons for joinder do not appear. In Aqua Max, the nature of the litigation required that there be several parties including the major shareholders. In that case, the judge proposed to set aside a share issue. The intended order was going to affect a shareholder not a party to the proceedings. The judge decided to join that shareholder after publishing his reasons for holding that oppression had occurred but before making the orders. In Hurley, all shareholders were parties but the issues the subject of the reported decision concerned the standing of the plaintiffs. In Catto and in Coombs, the shareholders were parties but there is nothing which indicates whether they were all original parties or were joined at some later stage.
In my view, there is no established practice that majority shareholders should be joined to an action claiming oppression and there are sound policy reasons why there should be no established practice.
First, the essence of the action is that the affairs of the company are not being managed in the interests of the members as a whole. Thus, in the ordinary course, the parties will be the plaintiff shareholder or shareholders and the company. While the determination of the question whether there has been oppressive conduct requires the court to weigh the interests of different shareholding interests within the company: Thomas v HW Thomas Ltd (1984) 1 NZLR 687 at 694; Reid v Bagot Well Pastoral Co Pty Ltd (1993) 61 SASR 165 at 173, it is not necessary that all the shareholders be joined. The action is between the plaintiff shareholder and the company and it is for the plaintiff to show that the conduct offends s 232. At the close of the plaintiff’s case the company will decide whether it is necessary to defend its conduct and, if it is, it may lead the necessary evidence. That may include evidence demonstrating that it is having due regard to all interests. It may, if it wishes, call shareholders to assist it in that task. The shareholders may be witnesses but there is no requirement that they be parties. Section 232 does not contemplate that all shareholders will be parties to an action for oppression. If that were so, all actions under s 232 would require all shareholders to be joined. There will be cases when it is appropriate to join other shareholders because their interests will be affected. But this is not such a case.
Next, the court retains a discretion whether a party should be joined. The circumstances in which a party should be joined are listed in Rule 27.05. The first is if a party claims an interest in the subject matter of the proceedings. A commercial or a legal interest may suffice: Acre Development Pty Ltd v NCSC (1987) 46 SASR 238; JN Taylor Holdings Ltd (in liq) v Bond (1994) 62 SASR 605. It is not a condition of joinder that the person who seeks to be joined is a necessary party: Acre Development Pty Ltd v NCSC. But these two considerations do not mean that the court must yield to every application by a party who seeks to be joined. If that were so, the court would have no discretion. In my view, the court retains a discretion whether it is appropriate to join a party. It will approach that task bearing in mind that Rule 27.05 is grounded on the overriding principle that multiplicity of proceedings is to be avoided: JN Taylor Holdings Ltd (in liq) v Bond (1993) 59 SASR 432 at 442 and the interests of justice and, as well, the due administration of justice.
In reaching this conclusion, I do not overlook that Rule 27.05(a) is more liberal in its terms than Rule 27.05(e) which permits a party to be joined if his presence before the court is necessary for all matters in the dispute to be effectively determined. Notwithstanding the more liberal terms in which Rule 27.05 is couched, I think that the general rule still is that a plaintiff who conceives that it has a cause of action against a defendant is entitled to pursue his remedy against that defendant alone and cannot be compelled to proceed against other persons he has no desire to sue: Atid Navigation Co Ltd v Fairplay Towage & Shipping Co Ltd [1955] 1 All ER 698 at 699; Leaver v Transport (Nelson) Ltd [1960] NZLR 44. Expressed more simply, the general rule is that a plaintiff is entitled to select his defendant and should not have a defendant foisted upon him unless the interests of justice so require or that it is necessary to avoid a multiplicity of proceedings.
In Atid Navigation at 699, Wynn Parry J pointed out that the basis of the jurisdiction to add defendants is that there is a cause of action by the plaintiff not only against the existing defendant but the person who would be joined if the application were successful. Notwithstanding the more liberal terms of Rule 27.05 which were introduced subsequent to that decision, I think that principle as a general rule is still sound. There will, of course, be other occasions which justify joinder. This case provides an instance in that it will be necessary to join Orica before the orders for relief are made should Acehill be successful.
In this case, Acehill complains of the conduct of the Incitec board. Its cause of action is against Incitec, not Orica. Acehill has no claim against Orica. In my view, Orica seeks to be joined so it can support Incitec by making submissions and calling evidence. But, to apply the reasoning of Dawson J in Australian Tape Manufacturers Association Ltd v Commonwealth of Australia (1990) 94 ALR 641 at 645, even if the witnesses Orica intends to call are essential to the case for Incitec, it may make them necessary witnesses but it does not make Orica a necessary party. In that case, His Honour was, of course, considering a rule which required that the parties be necessary parties in order to be joined: cf. Rule 27.05(e). But, in my view, the reasoning applies with equal force to Rule 27.05(a). Incitec is able to call such witnesses from Orica as it chooses.
Although Orica as the major shareholder clearly has a commercial interest in the outcome of this action, that interest does not require that it be entitled to lead evidence and be heard on the question whether the business and affairs of Incitec has been conducted in an oppressive manner. The already high costs of litigation should not be increased by the addition of parties who have nothing other than an indirect commercial interest in the outcome: JN Taylor Holdings Ltd (in liq) v Bond (1994) 62 SASR 605 at 610. In parenthesis, it might be noted that in some instances the addition of parties and the resultant cost could constitute another kind of oppression. I do not suggest that is the position in this case.
Do Acehill’s Allegations Require Joinder?
I turn to the third ground on which Orica relies. Ms Gordon submitted that Orica should be joined because of the allegations Acehill makes as to the conduct of Orica. The submission was based on material contained in some paragraphs of an affidavit sworn in support of Acehill’s application by Mr Sadlon, the secretary of Acehill. Ms Gordon’s submissions were based on what Orica asserts is stated in Mr Sadlon’s affidavit. Examination of the paragraphs in Mr Sadlon’s affidavit that are relied on by Orica establishes that Ms Gordon’s submissions are unfounded. It will be seen that in almost all cases the allegation by Acehill is misstated.
According to Orica, Acehill makes five allegations which justify Orica being joined as a party. I list each of Orica’s five assertions as to the content of the allegations by Acehill and then examine the true nature of the allegations.
Orica first asserts that Acehill alleges that Orica controlled not only the composition of the board of Incitec but also the decisions of the board. An examination of the paragraphs relied on shows that Acehill does not allege that Orica controls the decisions of the board. Instead, it merely alleges a conflict of interest and duty on the part of the board. That is an issue which does not require Orica to be joined as a party. It is an allegation which can be answered, if necessary, by Incitec.
Secondly, Orica asserts that Acehill is alleging that Orica endeavoured to ensure that the first scheme was structured to benefit Orica to the detriment of minority interests in Incitec and the members of Incitec as a whole. That is not what is alleged. Instead, Acehill alleges that Orica considers the industrial chemicals business to be of key strategic importance to its business and, for this reason, it wishes to acquire all of the assets of the business. Acehill also alleges that Incitec was aware of that fact. There is no dispute that Orica wishes to acquire the assets of the Incitec business. The issue is whether the board of Incitec, when recommending the valuation of the industrial chemicals business, was acting in the best interests of the members of Incitec as a whole. There is no allegation either in Mr Sadlon’s affidavit or in the points of claim that Orica endeavoured to structure the scheme for its benefit. Instead, Acehill asserts that the majority of directors on the board of Incitec had a conflict of interest. These are issues which do not directly concern Orica. Instead, it is an issue only between Acehill and Incitec.

Thirdly, Orica asserts that Acehill alleges that Orica vetoed the third nitric acid plant. The actual words used by Mr Sadlon in para 87.8 of his affidavit are:
“87.8The directors of Incitec have failed to act so as to safeguard and advance the singular interests of Incitec, instead preferring the advancement of the interests of Orica, including by:
87.8.1Permitting Orica to ‘veto’ the third nitric acid plant pending the IC buyout so as to minimise the price payable by Orica to the Incitec minority shareholders.”
The points of claim filed by Acehill do not contain this allegation but assert that Incitec failed to commence construction of the third nitric acid plant pending completion of the acquisition of minority interests in the business so as to minimise the price payable by Orica to Incitec. If Acehill seeks to establish that Orica interests in some way vetoed the third nitric acid plant, it will have to establish that by evidence. The mere assertion of the allegation does not justify the joinder of Orica. If Acehill leads evidence on that issue, Incitec also has the capacity to lead evidence which might include witnesses from Orica. There is, therefore, no issue in this respect between Acehill and Orica and hence no need for Orica to be joined.
Fourthly, Orica asserts that Acehill alleges that Orica has in a related party dealing improperly entered into arrangements with Incitec for the supply for ammonium nitrate at prices substantially below prices paid in the Australian market. That is not the allegation which Acehill makes. Instead, it asserts that the board of Incitec have advanced the interests of Orica in preference to those of the members of Incitec as a whole by:
“Failing to investigate the ammonium nitrate supply arrangements between Incitec and Orica and other related party dealings with a view to ensuring that the value of Incitec is maximised, in circumstances where it is apparent that ammonium nitrate has been and is supplied by Incitec to Orica at prices substantially below prices paid in the Australian market.” (Para 87.8.4 of Mr Sadlon’s affidavit.)
The question whether the prices are substantially below the prices paid in the Australian market will have to be established by objective evidence. The question then remaining is whether the board of Incitec has preferred Orica to the interests of the members of Incitec as a whole. When this issue is examined, it is plain that it is an issue only between Acehill and Incitec and does not require the joinder of Orica.
Finally, Orica asserts that Acehill alleges that Orica did not pursue the renegotiation of the arrangements for the supply of ammonium nitrate pending the acquisition of the minority interests in the industrial chemicals business so as to minimise the price paid by Orica. Acehill does not make that allegation. Instead, it alleges that Incitec failed to engage in these negotiations for that purpose. Acehill will have to lead the evidence relating to the facts on which this allegation is based. Incitec may then lead whatever evidence it believes is necessary in answer. Like all of the previous four matters, this is an issue between Acehill and Incitec and does not require Orica to be joined.
Ms Gordon also relied on paras 40 and 44 in Mr Sadlon’s affidavit. In para 40 Mr Sadlon alleged that Mr Witcombe, the managing director of Incitec, prepared a memorandum relating to the proposed third nitric acid plant for presentation at the board meeting of Orica on 16 April 2002 and that memorandum was based on a price for ammonium nitrate substantially higher than that paid by Orica Ltd. In para 44 he relies on a memorandum from a Mr Surman prepared following a board meeting of Orica Ltd in July 2002 asserting conduct at that meeting. These allegations do not raise an issue between Acehill and Orica. They are merely part of Acehill’s case against Incitec. Incitec may, if it chooses, call a witness from Orica but there is no requirement for Orica to be joined as a party.
The effect of the application is that Orica should fully participate in all aspects of the defence of Acehill’s claims. However, while there are a few allegations concerning the conduct of Orica, and they are a small few, these are all essentially matters of evidence. One keeps returning to the fact that there is no issue joined between Acehill and Orica.
Orica’s application to be joined was supported by Incitec but only on the ground that persons from Orica might be called as witnesses and Orica might have different interests in the third nitric acid plant. The fact that Orica’s decision in relation to that plant has been called into question was also relied on. But these are all matters of evidence only. Incitec may lead evidence from directors or officers of Orica. But it does not justify joining Orica. It was also asserted that Incitec may seek to recover costs from Orica but that does not justify joinder.
Conclusion
When beginning her submissions, Ms Gordon identified three grounds on which Orica relied. The first was that Orica had a direct and tangible interest in these proceedings. As is apparent from the above, Orica’s direct interest is limited to the issues raised in para 5 of the relief sought by Acehill and, if Acehill succeeds in establishing its claims, that interest can be protected by enabling Orica to be heard and to adduce evidence, if necessary, on the issue of the proposed relief to be ordered. In every other respect, Orica has only an indirect interest as a shareholder in Incitec in the outcome of the proceedings. The second ground was that the interests of Orica differed from those of Incitec. That may be so, but it does not justify joinder. The submission assumes that Orica’s interests are directly affected. The third was that Orica’s interests cannot be protected by Incitec. That ground also assumes that Orica’s interests are directly affected. Except for the relief claimed in para 5, they are not.
The only matter which gives rise to an issue on which Orica should be heard is the question of the relief sought by Acehill, a question to be considered if, and only if, Acehill should establish that oppression has occurred. There is no other ground which justifies making an order that Orica be joined.
For these reasons, I dismiss the application by Orica to be joined at this stage as a defendant to participate in the action. I will hear Orica on the question whether it may renew its application if and when Acehill has established that Incitec has acted oppressively within the meaning of s 232 or whether it should now be joined for that limited purpose.

[2002] SASC 406

4 December 2002