Allmere Pty Ltd v Burbank Trading Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL LIST

F6058
No. 2100 of 2006

ALLMERE PTY LTD (Subject to deed of company arrangement)	Plaintiff
v
BURBANK TRADING PTY LTD	Defendant

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JUDGE:	HOLLINGWORTH J
WHERE HELD:	Melbourne
DATE OF HEARING:	26-29 November, 4 December 2007
DATE OF JUDGMENT:	2 May 2008
MEDIUM NEUTRAL CITATION:	[2008] VSC 139

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Contract – Shareholders agreement – Shareholder proposing to transfer shares – Nature and extent of other shareholder’s pre-emptive rights – Appointment of administrator to one shareholder – Whether an “ultimate change of control” such as to trigger pre-emptive rights – Whether offer notice valid – Whether offer price validly disputed – Whether consent to transfer unreasonably withheld.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr J Elliott S.C. Mr J Graham	Robert James Lawyers
For the Defendant	Mr C Scerri QC Mr P Nicholas	Mallesons Stephen Jaques

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TABLE OF CONTENTS

The issues............................................................................................................................................ 1

Change in ultimate control.......................................................................................................... 3
Validity of the offer notice........................................................................................................... 3
Disputing of price......................................................................................................................... 4
Withholding of approval............................................................................................................. 4

Clause 10.............................................................................................................................................. 4

Background facts................................................................................................................................ 8

Corporate ownership and control.............................................................................................. 8
Before the offer notice................................................................................................................. 10
After the offer notice................................................................................................................... 16

General principles of construction................................................................................................ 18

Was there a change in ultimate control?...................................................................................... 19

Key events.................................................................................................................................... 20
There was a change in control................................................................................................... 21
Was there a change in ultimate control?.................................................................................. 23
Time for responding to a deemed offer notice....................................................................... 25

Was the offer notice valid?............................................................................................................. 26

Was there a proposal to transfer?............................................................................................. 26
Was the offer notice clear and unambiguous?....................................................................... 27
The bona fide, arm’s length price arguments......................................................................... 30

Must the purchase price be an arm’s length price?.................................................................. 31
Was the price an arm’s length price?........................................................................................ 33

Were the necessary details stated in the offer notice?........................................................... 33
Was the offer notice given too soon?....................................................................................... 36

Has Burbank disputed the price?.................................................................................................. 36

Must a dispute under clause 10.3(d) be communicated in writing?................................... 38
Did Burbank in fact dispute the price?.................................................................................... 41

The “without prejudice” issues................................................................................................ 41
What was said at the 17 November meeting?........................................................................... 42

Has Burbank unreasonably withheld approval?....................................................................... 45

The competing arguments......................................................................................................... 45

Burbank’s case.......................................................................................................................... 45
Allmere’s case........................................................................................................................... 47

Relevant principles..................................................................................................................... 47
Godfrey Hirst’s interests as a manufacturer........................................................................... 51

Burbank’s concerns.................................................................................................................. 51
Godfrey Hirst’s position............................................................................................................ 52
Forcing of carpet supply........................................................................................................... 55
Warehousing arrangements...................................................................................................... 56

Trading difficulties with other suppliers................................................................................ 58
The relationship between Godfrey Hirst and Burbank......................................................... 58

Supply of products................................................................................................................... 59
Personal relations..................................................................................................................... 61

Long term commitment to the Carpet Call business............................................................. 63
The terms and conditions of the proposed transfer............................................................... 64
Burbank’s refusal was unreasonable....................................................................................... 65

Conclusion......................................................................................................................................... 66

HER HONOUR:

The issues

The plaintiff (“Allmere”) and the defendant (“Burbank”) are the only shareholders of Carpet Call Holdings Pty Ltd (“Carpet Call”). Each owns three shares. They are parties to a shareholders agreement dated 7 February 1997 (“the shareholders agreement”).

Allmere wishes to transfer its shares in Carpet Call to Godfrey Hirst Australia Pty Ltd (“Godfrey Hirst”). Burbank seeks to prevent Allmere from doing so, on the basis that clause 10 of the shareholders agreement gives Burbank certain pre-emptive rights to acquire Allmere’s shares.

Allmere’s case is that:

(a)Allmere sent an offer notice to Burbank on 19 October 2006, under clause 10.3(a) of the shareholders agreement (“the offer notice”);
(b)Burbank did not, within 30 days of receipt of the offer notice:
(i)Accept the offer made by Allmere and purchase the whole of the shares for the consideration and upon the terms and conditions disclosed in the offer notice; or
(ii)For the purpose of clause 10.3(d), dispute the price at which Allmere offered to sell the shares;

(c)Accordingly, Allmere may now transfer the shares to Godfrey Hirst upon no more favourable terms and conditions than those disclosed in the offer notice, subject to Burbank’s approval of Godfrey Hirst as transferee; and
(d)Burbank has unreasonably withheld its approval of Godfrey Hirst as transferee, contrary to clause 10.3(f).

Allmere seeks a declaration that Burbank has unreasonably withheld its approval to Godfrey Hirst as transferee. It seeks an order that subject to the transfer to Godfrey Hirst being upon no more favourable terms and conditions than those disclosed in the offer notice, Burbank approve Godfrey Hirst as transferee and procure Carpet Call board approval of the transfer.

Burbank’s defence[1] contends that Allmere may not transfer its shares to Godfrey Hirst, because:
[1]References to “the defence” are references to Burbank’s further amended defence and counterclaim dated 24 September 2007.

(a)On 21 September 2006, before Allmere sent the offer notice, there was a “change in ultimate control” of Allmere within the meaning of clause 10.2, as a result of which:
(i)Allmere is taken to have given an offer notice in respect of the whole of its shares in Carpet Call at a price to be determined by an expert under clause 10.3(d); and
(ii)The offer notice could not be sent under clause 10.3 any earlier than 30 days after such an expert determination;

(b)The offer notice is invalid, such that the pre-emption procedure under clause 10 was never engaged;
(c)Alternatively, if the offer notice is valid, Burbank:
(i)Has disputed the price at which Allmere offered to sell the shares, in which case the dispute must be resolved by an expert determination under clause 10.3(d); and/or
(ii)Has reasonably withheld its approval of Godfrey Hirst as a transferee of Allmere’s shares.

Burbank seeks declaratory relief by its counterclaim.

The principal areas of dispute between the parties are:

(a) Whether there was a “change in ultimate control” of Allmere, within the meaning of clause 10.2;

(b) Whether the offer notice is valid;
(c) If the offer notice is valid:
(i)Whether Burbank disputed the price at which Allmere offered to sell the shares, for the purposes of clause 10.3(d);
(ii)Alternatively, whether Burbank unreasonably withheld its approval of Godfrey Hirst as a transferee of the shares.

In its opening submissions, Burbank said that the “principal issue” in this case is whether the consideration in the offer notice is required to be bona fide and at arm’s length. By the time of its closing submissions, Burbank was asserting that “the most important issue” of the case is the unreasonableness of its refusal to approve Godfrey Hirst as transferee.

Change in ultimate control

The only issue is whether the appointment of administrators to Allmere and two other companies on 21 September 2006 constituted a “change in ultimate control” of Allmere, within the meaning of clause 10.2, such that the pre‑emption procedure under clause 10 was engaged.

Validity of the offer notice

As to the validity of the offer notice, several issues arise.

The first is whether, at the time the offer notice was sent to Burbank, Allmere had already accepted Godfrey Hirst’s offer and thereby agreed to dispose of its shares to Godfrey Hirst, or had made a commitment that went beyond a proposal, within the meaning of clause 10.3.

Secondly, was the offer notice clear and unambiguous in its meaning, as it was undoubtedly required to be?

Thirdly, Burbank says that the offer notice was invalid because it put an offer from Godfrey Hirst that did not reflect a bona fide, arm’s length price for the shares.

The fourth issue is whether, on a proper construction of clause 10.3(b), Allmere’s obligation “to give details of the proposed transfer” required it to give details of all dealings affecting the proposal to transfer or otherwise dispose of the shares.

The final issue is whether, on a proper construction of clauses 10.2 and 10.3, where the pre-emption procedure under clause 10 has been engaged by operation of clause 10.2, an offer notice may be given under clause 10.3 earlier than 30 days after the expert determination of the price for the purposes of the deemed offer notice under clause 10.2.

Disputing of price

There is a dispute as to whether Burbank did in fact dispute the price put by the offer notice, for the purposes of clause 10.3(d), at a meeting on 17 November 2006.

If Burbank did dispute the price, Allmere contends that the disputing was ineffective because it was not in writing.

Withholding of approval

The issue is whether Burbank has reasonably withheld its approval to Godfrey Hirst. Burbank raises a number of grounds on which it says that Godfrey Hirst is not a suitable or satisfactory transferee. They include claims that Godfrey Hirst’s interests as a manufacturer put it in conflict with Carpet Call’s interests as a retailer, and that the relationship would be unworkable and harmful to Carpet Call for several reasons.

Clause 10

This case primarily concerns the construction of clause 10 of the shareholders agreement.

It is common ground that, by operation of a deed of adoption dated 19 May 1997, all references to “Shaw” in clause 10 are to be read as references to Allmere.

Clause 10 provides:

10.      PRE-EMPTION RIGHT ON TRANSFER OF SHARES
10.1Neither Burbank nor Shaw may directly or indirectly Transfer[2] or otherwise dispose of any legal or beneficial interest in Shares[3] except in accordance with this clause.
[2]“Transfer” means:
(a)transfer, assignment, sale, distribution, pledge or other disposition of Shares voluntarily or involuntarily, with or without consideration;
(b)the appointment of a receiver or other legal custodian of the property of a Party unless no Shares are included in the property subject to the appointment;
(c)the taking of possession by an encumbrancer or trustee of the property of any Party;
(d)declaration of trust;
but shall not include:
(e)a bona fide mortgage, pledge, charge or other encumbrance given in accordance with clause 9. (clause 1.1)
[3]“Shares” means shares in the capital of Carpet Call from time to time issued. (clause 1.1)
10.2If there shall be any change in ultimate control of either Burbank or Shaw, the respective party shall be taken to have given an Offer Notice[4] in respect of the whole of its Shares at a price to be determined under paragraph 10.3(d). It is acknowledged that Mr Jim Smith controls Burbank, and that Shaw Industries Inc. of the United States controls Shaw.
[4]“Offer Notice” means a notice under clause 10.3 by the Transferring Party to the Offeree. (clause 1.1)
“Transferring Party” means a party to the shareholders agreement who Transfers or proposes to Transfer Shares which it then holds. (clause 1.1)
“Offeree” means whichever of Burbank or Shaw is not the Transferring Party under clause 10.3. (clause 1.1)
10.3(a)      If Burbank or Shaw proposes to Transfer an interest in Shares, the Transferring Party must send an Offer Notice to the Offeree. A Transfer of less than 10 per cent of the issued share capital is not permitted.
(b)The Offer Notice shall give details of the proposed Transfer         including, but not restricted to:
(i)the number of Shares to be Transferred;
(ii)the terms and conditions of the Transfer including the consideration per Sale Share,[5]
[5]“Sale Shares” means the number of Shares specified in an Offer Notice. (clause 1.1)
and shall contain a warranty that the Sale Shares are and will     at completion be the sole legal and beneficial property of the          Transferring Party.

(c)Upon receipt of the Offer Notice, the Offeree shall have 30 days within which to purchase the whole of the Sale Shares for the consideration and upon the terms and conditions disclosed in the Offer Notice.
(d)If the Offeree disputes the price the dispute shall be referred to an expert to be agreed or in default of agreement nominated by the President for the time being of the Institute of Chartered Accountants in Australia. The person shall be acting as an expert and not an arbitrator. His decision shall be final and binding. The parties must bear their own costs of submitting the dispute to the expert.
(e)Upon receipt of a notice of acceptance, the Transferring Party shall have 30 days from the date of the notice within which to deliver unencumbered title, and in particular to deliver:
(i)a certificate representing that number of the Shares covered by the Offer Notice; and
(ii)an instrument of transfer in registrable form,

in return for payment of the consideration for the Sale Shares.
(f)If Offeree fails either to:
(i)accept the Offer Notice within 30 days of receipt of the Offer Notice; or
(ii)tender the consideration when the Transferring Party delivers the certificate and transfer instrument pursuant to sub-clause (c) [sic],[6]

the Transferring Party may Transfer the Sale Shares to any person approved by the other Shareholder (which approval shall not be unreasonably withheld) upon no more favourable terms and conditions than those disclosed in the Offer Notice.
(g)The Transferring Party may only Transfer Shares pursuant to sub-clause (e) [sic][7] if the transferee enters into an agreement with the Offeree covenanting to assume all obligations under and to be bound by this agreement as if it were a party.
(h)The parties shall procure that the [Carpet Call] Board approves a Transfer under these provisions.

[6]The parties agree that the reference to sub-clause (c) should in fact be (e).

[7]The parties agree that the reference to sub-clause (e) should in fact be (f).

Clause 10 is poorly drafted,[8] which has led to many of the disputes in this proceeding.
[8]Some words are clearly missing and there are patent errors in some of the cross-references. The clause is also silent about a number of matters, some of which will be discussed later in these reasons.

An evident purpose of clause 10 is to give one shareholder (the offeree) the right to acquire the interest of the other shareholder (referred to in these reasons as the transferring party or offeror), in the event that the transferring party intends to dispose of its shareholding to another person, or undergoes a major corporate transformation. The offeree may decide, within 30 days, to acquire the shares at the price stated by the transferring party in its offer notice, or at a fair and reasonable price determined by an independent expert.[9] If the offeree does not acquire the shares, clause 10 permits a sale of the shares to proceed on terms and conditions no more favourable than those contained in the offer notice, unless the offeree (acting reasonably) does not approve the proposed transferee.
[9]Clause 10.3(d) does not actually specify the price which is to be determined by the expert, but the parties agree that it is to be a fair and reasonable price.

The parties agree that clause 10 confers benefits on both shareholders. Accordingly, it is common ground that each party may look after its own interests when it comes to a sale of the shares, the transferring party having the right to try to maximise the price for its shares, and the offeree having the right to try to acquire the shares for the lowest possible price.

An offer notice may arise in two contexts. First, if there is any change in ultimate control of a shareholder, clause 10.2 provides that that shareholder shall be taken to have given an offer notice in respect of the whole of its shares. Secondly, if a shareholder proposes to transfer an interest in shares held by it, clause 10.3(a) requires that shareholder to send an offer notice to the other shareholder. Both types of offer notice are relevant in this case.

Clause 10.3(b) specifies what an offer notice must contain, namely:

(a) Details of the proposed transfer including:
(i) The number of shares to be transferred;
(ii)The terms and conditions of the transfer, including the consideration per share to be transferred; and

(b)A warranty that the shares to be transferred are and will at completion be the sole legal and beneficial property of the transferring party.

In this way, clause 10.3(b) provides that the offeree is able to consider whether to accept an offer to acquire the shares for the specified price, with some confidence that they are unencumbered.

Clause 10.3(b) contemplates that there may be “terms and conditions of the proposed transfer” other than price per share included in the offer notice. If there are any such other terms and conditions, they do not affect the transferring party’s obligation to deliver unencumbered title to the shares within 30 days of acceptance by the offeree, in return for payment of the consideration for the shares (clause 10.3(e)).

Any such other terms and conditions will fall to be considered in the event that the offeree fails to accept the offer notice or tender the consideration, because, under clause 10.3(f), a transfer of the shares to another person may only occur “upon no more favourable terms and conditions than those disclosed in the offer notice”.

Background facts[10]
[10]The facts set out in this section are not contentious, save where otherwise indicated. They have been largely reproduced from Burbank’s outline of submissions dated 26 November 2007, with which Allmere substantially agreed in para [7] of its outline of closing submissions. Both sides provided very high quality written submissions, which were of great assistance to the court, particularly in summarising the parties’ arguments.
Corporate ownership and control

The Carpet Call business was established in Queensland in 1975. Carpet Call was incorporated on 31 March 1978. Carpet Call is now the largest retailer of floor coverings in Australia. It sells a range of floor coverings and brands in carpet, cork, vinyl, rugs, timber and laminate. In addition to its retail business, it wholesales floor coverings to its network of Solomons Carpets franchise stores.

The Carpet Call business was originally wholly-owned by Burbank, a company controlled by Mr James Leslie (“Jim”) Smith. However, in 1996, the business needed money to purchase the Solomons Carpets business. To facilitate the purchase, Shaw Industries Australia Pty Ltd (“Shaw”) lent Carpet Call $2.55 million. In return, Shaw was given an option over 50% of the equity in Carpet Call. These arrangements were contained in the shareholders agreement between Burbank, Shaw and Carpet Call dated 7 February 1997.

Shaw was a wholly-owned subsidiary of Shaw Industries Inc (“Shaw USA”), a large American carpet manufacturer. Shaw USA supplied its carpets to retailers in Australia, including Carpet Call. When Shaw exercised its option to buy 50% of the equity in Carpet Call, it nominated Allmere to hold the shares on its behalf.

On 19 May 1997, Carpet Call, Burbank, Shaw and Allmere executed a deed of adoption, by which Allmere agreed to be bound by the terms of the shareholders agreement as if it were originally a party to that agreement.

In 2000, Feltex Carpets Limited (“Feltex”) acquired Shaw, which was re-named Feltex Australia Pty Ltd (“Feltex Australia”), and thereby gained control of Allmere’s shares in Carpet Call. Feltex manufactured carpets in New Zealand, and also supplied its carpets to Carpet Call and other retailers in Australia.

At all relevant times, Feltex Australia was a wholly-owned subsidiary of Feltex Australia Holdings Pty Ltd (“Feltex Australia Holdings”), which in turn was a wholly-owned subsidiary of Feltex.

The current shareholders of Allmere are Russell Martin and Michael Feeney, who do not hold those shares beneficially. They hold the shares on trust for Feltex Australia. Mr Feeney was a director of Feltex Australia and Feltex Australia Holdings. Both Mr Martin and Mr Feeney have been directors of Carpet Call.

The current directors of Carpet Call are Jim Smith, Barry Cook and Michael Feeney. Messrs Smith and Cook are Burbank’s nominees to the Carpet Call board. Mr Feeney is Allmere’s nominee.[11]
[11]Each party is entitled to one half of the votes at a board meeting, irrespective of the number of its nominated directors: clause 6.1(d).

Before the offer notice

In a letter to Burbank dated 25 May 2006, Peter Thomas, the then managing director of Feltex, outlined a process of Feltex’s “proposed sale of its interest in Carpet Call”. At this time, Feltex proposed to call for expressions of interest from prospective buyers of its interest in Carpet Call.

By a letter to Feltex dated 8 June 2006, Godfrey Hirst offered to purchase the assets and undertakings of Feltex and its subsidiaries for NZ$135 million, on the assumption that Feltex had a “consolidated net working capital position for the business of NZ$80 million.” The offer expressly excluded Allmere’s shares in Carpet Call, which, the letter noted, Feltex valued at NZ$10 million. Feltex did not accept the offer.

By a letter to Feltex dated 17 July 2006, Godfrey Hirst made another offer to purchase all of Feltex’s assets and undertakings for NZ$136 million, on the same assumption on which the 8 June offer was made. The offer now included all of the issued shares in Allmere. Allmere’s only asset was its shareholding in Carpet Call, so the effect of this revised offer was to add Feltex’s interest in Carpet Call into the deal. There is no dispute that had Feltex accepted this offer, Allmere would have been deemed to have given an offer notice in respect of the whole of its shares in Carpet Call, and the pre-emption procedure under clause 10.2 would have been engaged. However, Feltex did not accept the offer.

On 21 September 2006, Simon Wallace-Smith and Tim Norman were appointed as administrators of Allmere under Part 5.3A of the Corporations Act 2001 (“Corporations Act”). On the same date, administrators were also appointed to Feltex Australia and Feltex Australia Holdings.

The following day, ANZ Banking Group Ltd (“the ANZ”) appointed receivers and managers to Feltex, Feltex Australia Holdings and Feltex Australia (“the Feltex receivers”), but not to Allmere, as the ANZ had no security over Allmere or its assets.

At a meeting with Allmere’s administrators on 26 September 2006, Mr Smith was told that the administrators intended to offer for sale Allmere’s shares in Carpet Call. That was confirmed in writing to Burbank on the same day.

On 28 September 2006, Michael Humphris and Laurence Fitzgerald replaced the original administrators appointed to Allmere, Feltex Australia Holdings and Feltex Australia. Mr Fitzgerald was the administrator with the principal role for our purposes.

On the same day, by a letter to the Feltex receivers, Godfrey Hirst made an offer to buy all of the assets and undertaking (with certain exclusions) of the Feltex group. The consideration included a cash payment of A$122 million and a payment of A$500,000 towards the Feltex receivers’ fees. The offer specifically included Allmere’s shares in Carpet Call. In relation to those shares, the letter proposed:

(a)“Receiver to assist in “pre-emptive rights” process with JV partner if so required”;
(b)“If JV partner duly acquires the 50%, receiver will remit full proceeds to Godfrey Hirst”;
(c)“Allocation of A$10 million of consideration to Carpet Call shares.”

On 2 October 2006, Burbank wrote to Allmere’s administrators. Burbank asked whether Allmere claimed beneficial ownership of its shareholding in Carpet Call, as Burbank understood there may be a competing claim from Feltex Australia. The question of legal and beneficial ownership was said to be relevant to Burbank’s rights of pre-emption consequent upon any “change in ultimate control” of Allmere. Burbank attached a copy of its letter dated 28 September 2006 to Mr Wallace-Smith, one of the original Allmere administrators, and asked for a response. The Burbank letter of 28 September 2006 asserted that the appointment of the original administrators had in fact constituted a change in ultimate control. Burbank said that, whilst it had not made any final decision, its inclination was not to pursue its right of pre-emption consequent upon that change.

Mr Fitzgerald replied to Burbank’s letter on 3 October 2006. He asked for a copy of the shareholders agreement and details of “any pre-emptive rights issues”. Around 16 October 2006, Burbank provided Allmere’s new administrators with a copy of the shareholders agreement and the deed of adoption.

On 3 October 2006, the Feltex receivers announced publicly that they had accepted an offer from the Godfrey Hirst group ”to acquire the Feltex business as a going concern …”.

In a letter to Burbank dated 4 October 2006, the Feltex receivers said:

We have received an offer from Godfrey Hirst in relation to the whole of the Feltex business and assets including a specified amount for the interest in Carpet Call. However, as we do not control Allmere, we will request that Godfrey Hirst issue its offer to acquire Allmere’s shares in Carpet Call directly to the administrators of Allmere. We expect that, if an offer is made, Allmere will provide to you an offer notice pursuant to the shareholders agreement in respect of a proposed transfer of the shares it holds in Carpet Call.

Mr Fitzgerald wrote to the Feltex receivers on 4 October 2006. In his letter, he referred to a meeting with Matthew Caddy from the receivers’ staff on 2 October 2006. Mr Fitzgerald said:

In our discussions it was mentioned your intention to include the shareholding of Allmere in [Carpet Call] as part of the transaction with Godfrey Hirst. Mr Caddy mentioned verbally that you would work with me in seeking to ensure this was part of the sale to Godfrey Hirst.
I expect the shares in Carpet Call have not been included in the above sale given Allmere has not been to my knowledge a party to the Godfrey Hirst transaction.

On 5 October 2006, Mr Smith of Burbank met with Mr Kim McKendrick at the Carpet Call store in Mulgrave. Mr McKendrick and his family effectively own and control Godfrey Hirst. It is common ground that Mr Smith showed Mr McKendrick the 4 October letter from the Feltex receivers. Mr McKendrick asserted that Godfrey Hirst had bought all the assets of the Feltex group, including Allmere’s shares in Carpet Call. Mr Smith asserted that Feltex could not sell its Carpet Call shares to Godfrey Hirst, because he had various rights to them.

By a letter to Allmere’s administrators dated 9 October 2006, Godfrey Hirst made a separate offer to Allmere to purchase its shares in Carpet Call for A$10 million (“the Godfrey Hirst Allmere offer”), which included the following:

(a)The offer was irrevocable and would remain in force until 5.00pm on Wednesday 11 October 2006;
(b)Completion was to occur within 60 days from the date of execution of a formal share sale agreement; and
(c)Completion of the sale was subject to and conditional on Burbank “expressly consenting to the sale … or Burbank giving its deemed consent by failing to accept an offer to purchase the shares from Allmere in accordance with clause 10.3 …” of the shareholders agreement.

By a letter from their lawyers to Godfrey Hirst’s lawyers dated 11 October 2006, Allmere’s administrators purported to accept the Godfrey Hirst Allmere offer. I say “purported to accept”, because the letter was really a counter-offer, as the acceptance was subject to the following additional conditions:

(a)The “Feltex Companies” (Feltex, Feltex Australia Holdings[12] and Feltex Australia) and the ANZ must provide their written consent to the proposed sale pursuant to the Godfrey Hirst Allmere offer;
(b)The Feltex Companies and the ANZ must provide Allmere’s administrators with written confirmation that they had and made no claim to have any legal or beneficial interest in the shares; and
(c)The only warranty Allmere’s administrators were prepared to provide in their agreement with Godfrey Hirst was that which was required by clause 10.3(b), namely that the shares are and will at completion be the sole legal and beneficial property of the transferring party.

[12]Although the letter actually refers to “Feltex Holdings Pty Ltd”, it appears that should be a reference to Feltex Australia Holdings Pty Ltd.

In his report to creditors dated 11 October 2006, Mr Fitzgerald said:

Since mid 2005 up until the appointment of the receivers the directors of the Feltex Group were involved in discussions with various parties, including [Godfrey Hirst] pertaining to, inter alia, the sale of the shares in the Australian based entities of the Feltex Group, the sale of the New Zealand based businesses and assets, or alternatively, the business and assets of the Feltex Group in their entirety which may have included [Allmere’s] interest in Carpet Call.
This process has attracted extensive media interest in New Zealand and Australia. Given the sale of the Feltex Group’s assets to Godfrey Hirst and the requirements of the shareholders’ agreement I do not propose to advertise the interest in Carpet Call for sale.
Subsequent to my appointment I was informed by the receivers that Godfrey Hirst would submit an offer to me for [Allmere’s] interest in Carpet Call. On Monday 9 October 2006 I received a formal offer for [Allmere’s] interest in Carpet Call.

In an email sent on 11 October 2006 to the lawyers for the Feltex receivers and the ANZ, Mr Fitzgerald said:

The only other aspect of the sale of Allmere’s stake in Carpet Call that may be an issue is the value.
Whilst I have reviewed the financials of Allmere as well as the identified carrying value of the investment in the accounts of [Feltex], I have not openly tested the market.
As the only identified stakeholders in the ultimate realisation & proceeds are Feltex Australia through its receivers & managers, and the ANZ Bank by virtue of its guarantee & indemnity claim, I seek confirmation from these two parties that the offer of $10 million is acceptable to them in their capacity as creditors of Allmere and thus beneficiaries of the proceeds. Thus I do not seek an indemnity nor the like rather a response that the sum is ‘acceptable’ or ‘fair’ or some such description.
In my view this would obviate any requirement for the administrator to have gone through a public and exhaustive advertising process, as the only likely affected parties are agreeable to the value of the transaction.
The only other party involved being [Burbank], has its rights governed and thus protected through the shareholders agreement.

By an email sent to Mr Fitzgerald on 11 October 2006, the Feltex receivers’ lawyers confirmed that “the offer of $10 million is acceptable“ to the Feltex receivers and the ANZ in their capacity as creditors of Allmere.

On 13 October 2006, the lawyers for Allmere’s administrators confirmed to Godfrey Hirst’s lawyers that the administrators would provide a warranty that they had been validly appointed as administrators of Allmere.

On the same date, the Feltex receivers and the ANZ separately confirmed that the Godfrey Hirst Allmere offer was acceptable to them, and they had no claim to any legal or beneficial interest in Allmere’s shares in Carpet Call.

Burbank wrote to Mr Fitzgerald on 16 October 2006, asking for a response to its letters of 28 September 2006 and 2 October 2006 about the “change in ultimate control” issue.

Godfrey Hirst’s lawyers said on 17 October 2006 that their client had no concerns with the first two conditions in the administrators’ 11 October letter, but required a further warranty that the administrators were validly appointed and will still be appointed at completion. The email also said that a draft contract for sale of shares would be forwarded shortly.

In a letter to Burbank dated 19 October 2006, Mr Fitzgerald said:

I have received an offer from [Godfrey Hirst] for the company’s shareholding in Carpet Call. Pursuant to the requirements of clause 10 of the shareholders’ agreement I will under separate cover serve an “offer notice” as defined and stipulated by the shareholders’ agreement upon [Burbank].
I do not accept that any change in ultimate control of the Company has occurred as a consequence of our appointment … However … I agree that Burbank has certain rights under the shareholders’ agreement in relation to the company’s shares in Carpet Call, and I will respect those rights.

Late in the afternoon of 19 October 2006, Burbank received the offer notice. A copy of the Godfrey Hirst Allmere offer was attached to the offer notice, and was said to form part of the offer notice. As the offer notice was sent after 4.00 pm, it is treated as having been served on 20 October 2006.[13] In accordance with clause 10.3(b), the offer notice noted that the purchase price equated to a consideration of $3,333,333.33 per share, and contained the necessary warranty.
[13]By reason of clause 15.2 of the shareholders agreement.

Burbank did not accept the offer notice within 30 days of 20 October 2006, and has not purported to accept it since.

After the offer notice

By an agreement made on 20 October 2006 (“the Feltex sale agreement”) between the Feltex receivers, Feltex Australia (as seller), Feltex and Feltex Australia Holdings (as sureties), Feltex Carpets Pty Ltd (“Feltex Carpets”)[14] (as buyer) and Godfrey Hirst (as guarantor of the buyer’s obligations):

(a)Feltex Australia was identified as “the owner of the business and assets” (as defined);
(b)Feltex Australia agreed to sell to Feltex Carpets the assets and the right to conduct the business as a going concern for the purchase price of A$53,211,000; and
(c)The assets were a package of assets, which included Allmere’s shares in Carpet Call, the consideration for which was expressed to be apportioned at A$10 million of the total purchase price.

[14]Feltex Carpets is a company in which Godfrey Hirst is a shareholder and with which it has common directors.

Allmere was not a party to the Feltex sale agreement.

Clause 23 of the Feltex sale agreement provided for the establishment of an escrow account for the $10million, which was described as the Carpet Call consideration. The Carpet Call consideration was to be kept in the escrow account pending completion of the proposed agreement between Allmere and the buyer of the Carpet Call shares. There would be an adjustment to the purchase price if the proposed agreement was not able to be completed within 150 days of the completion date for the Feltex sale agreement.

In a letter sent to Mr Fitzgerald on 24 October 2006, Burbank maintained the view that there had been a change in ultimate control of Allmere, by reason of the appointment of administrators. Burbank said that it seemed that what should happen next was the expert procedure under clause 10.3(d), but asked the administrator what he thought.

Burbank followed up its letter of 24 October 2006 with a letter to Mr Fitzgerald dated 3 November 2006. The administrators responded on 13 November 2006, saying that they did not regard there as having been any change in ultimate control. The administrators also said they saw nothing to be gained in appointing an expert, unless Burbank was prepared to submit an offer in excess of $10 million.

Burbank sent another letter to Mr Fitzgerald on 3 November 2006, concerning the offer notice. Burbank disputed that the offer notice was a proper one under the shareholders agreement, and asked for certain information to be provided.

In a letter to Mr Fitzgerald dated 14 November 2006, Burbank said that “we would not approve [Godfrey Hirst] as a transferee of Allmere’s shares”, even if the offer notice was valid. It said there were “numerous serious reasons” for refusing its approval, but did not give details of any such reasons. It asked Mr Fitzgerald to confirm that he did not wish to be involved in discussions about the appointment of an expert. There was no response to that letter.

On 17 November 2006, Mr Smith and Mr Michael Naphtali met with Mr Fitzgerald and his assistant, Mr Ahmed Bise, at the offices of Hindal Corporate, where Mr Naphtali worked. Mr Naphtali, a former Allmere-nominated director of Carpet Call, attended the meeting as an adviser to Mr Smith and Burbank. The dispute as to exactly what was said at the 17 November meeting and, in particular, whether Mr Smith disputed the price in the offer notice, will be considered later in these reasons.

In a letter to Burbank dated 27 November 2006, Mr Fitzgerald said that Allmere intended to transfer its shares in Carpet Call to Godfrey Hirst, as Burbank had not accepted the offer notice within 30 days. He sought confirmation of Burbank’s approval of the proposed transfer by close of business on 30 November 2006.

In a letter to Burbank dated 15 December 2006, the lawyers for Allmere’s administrators requested that Burbank state by 20 December 2006 whether it approved Godfrey Hirst as transferee of Allmere’s shares, and that, if it did not approve, it provide its reasons for not approving.

Burbank responded on 20 December 2006. It declined to give reasons for refusing to approve Godfrey Hirst as transferee, asserting that reasons had already been given at the 17 November meeting. Burbank otherwise maintained its earlier attitude.

On 22 December 2006, Allmere commenced this proceeding.

Although a draft formal share sale agreement between Allmere (as seller), the Allmere administrators and Godfrey Hirst (as buyer) was prepared, it has not been executed.

General principles of construction

A number of the issues in the proceeding involve questions of construction of the shareholders agreement or the offer notice. There was no dispute between the parties as to the general principles of contractual interpretation, which were conveniently summarised by Allmere in its closing submissions.

The general principles are well settled.[15] The approach was recently summarised by Hargrave J in Allstate Explorations NL v QBE Insurance (Aust) Ltd[16] as follows:

This requires the Court to consider what reasonable persons in the position of the parties would have understood the words to mean by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose or object of the transaction. In interpreting the words and resolving any ambiguity, the Court should proceed in a common sense and non-technical way and give the agreement a commercially sensible construction. The Court should have regard to all of the words used in the agreement “so as to render them all harmonious with one another” and to ensure the “congruent operation of the various components as a whole”.[17]

[15]See eg MLW Technology Pty Ltd v May [2005] VSCA 29 at [76]–[81]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-2 per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; Toll (FGCT) Pty Limited v Alphapharm Pty Limited & Ors [2004] HCA 52 at [40], per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ.

[16][2007] VSC 380.

[17]Ibid at [23]. Citations omitted.

Accordingly, where a word or clause is capable of more than one construction, the construction which will achieve a reasonable result is to be preferred.[18]
[18]Di Dio Nominees Pty Ltd v Brian Mark Real Estate Pty Ltd [1992] 2 VR 732; Varangian Pty Ltd v OFM Capital Ltd [2003] VSC 444 at [118].

The interpretation of contractual notices is approached in a similar way. In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd[19], in applying an objective approach in considering notices served by a tenant under lease termination clauses, Lord Steyn stated that the “issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene.”[20]
[19][1997] AC 749.
[20]Ibid at p767.

In MLW Technology, in considering the validity of a contractual notice,[21] Gillard AJA (with whom Winneke P and Buchanan JA agreed) adopted Lord Steyn’s approach.[22] His Honour said that that approach was the proper approach and accorded with authority of the Victorian Court of Appeal, and referred to the following statement of Brooking J (as he then was) in Catley & Anor v Watson & Anor:[23]

… a notice … is not valid unless it is, in relation to its essential features as required by [the relevant] condition, clear and unambiguous. By this I mean, not that its import must be clear beyond the slightest peradventure, but that its terms must be such that a reasonable person, having given it fair and proper consideration, would be left in no doubt as to its meaning.[24]

[21]A notice sent by a licensor under an exclusive licence agreement requiring the guarantors of the licence to acquire certain shares.

[22]Op cit at [76]-[83]. See also Finishing Services Pty Ltd v Lactos Fresh Pty Ltd [2006] FCAFC 177 at [25].

[23] (1983) V Conv R para 54-003.

[24]Ibid at p62,115.

The reasonable person the subject of the inquiry “is a layman, not a lawyer, but the doubt must be a reasonable doubt”.[25]
[25] Central Pacific (Campus) Pty Ltd & Anor v Staged Developments Australia Pty Ltd (1998) V Conv R para 54-575 at p66,909, per Callaway JA (Buchanan JA agreeing, Ormiston JA similar).

Was there a change in ultimate control?

The pre-emption right conferred by clause 10 arises in two situations. One situation is where a shareholder proposes to transfer its shares. In that case, the transferring party must give to the other shareholder an offer notice under clause 10.3.

The other situation is where there is no proposed transfer of the shares themselves, but where the control over those shares will necessarily change, as a result of a “change in ultimate control” of the shareholder. The change in ultimate control triggers clause 10.2, and the shareholder, the ultimate control in which has changed, is taken to have given an offer notice in respect of the whole of its shares at a price to be determined under clause 10.3(d).

Burbank contends[26] that there was a change in ultimate control of Allmere on 21 September 2006, by reason of the appointment on that date of administrators to Allmere, Feltex Australia and Feltex Australia Holdings, under Part 5.3A of the Corporations Act. The administrators are said to have assumed ultimate control of Allmere to the exclusion of Feltex and the intermediate shareholders in the Feltex Group. Burbank says that Allmere is therefore deemed to have given an offer notice on that date, such that the pre-emption procedure in clause 10.3 was engaged.
[26]Part D of the defence.

Key events

Immediately before the appointment of the administrators:

(a) The shareholders in Allmere were Messrs Martin and Feeney. Each held his share on trust for Feltex Australia;

(b) Feltex Australia was a wholly-owned subsidiary of Feltex Australia Holdings;

(c) Feltex Australia Holdings was a wholly-owned subsidiary of Feltex;

(d) Feltex was the ultimate holding company of each of Feltex Australia and Feltex Australia Holdings.

Administrators were appointed to each of Allmere, Feltex Australia Holdings and Feltex Australia on 21 September 2006.

Importantly, the appointments of 21 September 2006 are the only facts relied upon by Burbank in its defence and its closing submissions.

The Feltex receivers were appointed the following day. Feltex Australia and Feltex Australia Holdings went into liquidation on 22 November 2006, with the administrators, Messrs Fitzgerald and Humphris, appointed as liquidators. The directors of Allmere resigned on 22 September 2006 and 18 October 2006, respectively.

The current Allmere administrators, Messrs Fitzgerald and Humphris, replaced the original administrators on 28 September 2006.

On 8 November 2006, Allmere entered into a deed of company arrangement (“the DOCA”). The deed administrators are Messrs Fitzgerald and Humphris. Clause 2.2 of the DOCA provides for the administrators to continue their control of Allmere until the termination of the DOCA.

The stated purpose of the DOCA is to sell the Carpet Call shares owned by Allmere, maximise the return to creditors, and provide that excluded creditors (being the directors of Allmere) shall not share in any proceeds of the DOCA.

Burbank does not plead that any of the events after 21 September 2006 gave rise to a change in ultimate control. For example, it does not plead that the coming into operation of the DOCA effected a change in ultimate control.[27]
[27]Contrary to such an assertion in its 20 December 2006 letter to the Allmere administrators.

Whether or not there was a change in ultimate control is a matter for the court to determine. The attitude of the administrators is not determinative either way.[28]
[28]The current Allmere administrators have never accepted that there was a change in ultimate control. Burbank suggests that the original administrators took a different view.

There was a change in control

There is no dispute about the following legal consequences which flow from the appointment of an administrator.

The provisions governing voluntary administration are found in Part 5.3A of the Corporations Act. There is an initial phase (usually referred to as a voluntary administration), commencing upon the appointment of the administrator, followed by a second phase involving a number of possibilities. The second phase may involve voluntary liquidation, a return to the company’s position prior to the voluntary administration without any change, or (as occurred with Allmere) the entry into a deed of company arrangement with creditors.[29] Voluntary administration is therefore a temporary phase only.
[29]See ss 435C(2) and 439C. This is not an exhaustive list of the possible scenarios that may arise when a company is placed into adminsitration.

The main object of the procedure[30] is to maximise the chances of the company, or at least as much as possible of its business, continuing in existence. Part 5.3A is concerned to regulate the control and distribution of the company’s assets in the interests not only of the company and its members, but also its creditors.
[30]Section 435A.

The appointment of an administrator does not involve any change in ownership of the company’s assets.

Section 437A(1) provides that:

While a company is under administration, the administrator:
(a) has control of the company’s business, property and affairs;
…
(d)may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.

The administrator may also carry on the business and manage the property and affairs of the company, or terminate or dispose of the business or any property. When the administrator performs any function or exercises any power that the company or any of its officers could have performed or exercised, the administrator does so as the company’s agent.[31] The powers of other officers are suspended during the administration.[32]

[31]Section 437B.

[32]Section 437C.

The control exercised over a company by an administrator may be subject to supervision by the court and may, in some circumstances, be subject to some direction by the creditors. However, it is not subject to the will of the shareholders or the directors of the company, none of whom have any say in how the company’s business, property or affairs should, or will, be dealt with during the period of the administration.

It is therefore common ground that the appointment of an administrator involves a change in control of the affairs of a company and that the administrators, upon their appointment to Allmere on 21 September 2006, assumed at least temporary control of Allmere.

Was there a change in ultimate control?

The real point of dispute is whether the appointment of administrators amounted to a change in “ultimate” control.

The shareholders agreement does not define the expression “change in ultimate control” or any of the terms contained in it.

There is an express acknowledgement in clause 10.2 that, as at the making of the shareholders agreement on 7 February 1997, Mr Smith “controls” Burbank, and Shaw USA “controls” Shaw. Allmere says that the acknowledgment reflects the ultimate ownership of each shareholder (and also, in the case of Burbank, the shareholder’s sole director). In fact, as Shaw USA is itself a company, it also has shareholders, who would be the “ultimate” shareholders of Shaw. I agree with Burbank that the expression “ultimate control” could not have been intended to have exactly the same meaning as “ultimate shareholding”.

It seems to be common ground that the “ultimate control”, for the purposes of clause 10.2, is exercised by the person who or which has the ultimate decision-making power in respect of the company’s business, property and affairs. Normally, but not inevitably, that person will be the ultimate holding company of the company.

It is also not disputed that immediately before the appointment of administrators, the ultimate control of Allmere rested with Feltex, as the ultimate holding company of Feltex Australia, for which the issued shares in Allmere were held on trust by Messrs Martin and Feeney. However, Burbank says that this ultimate control was severed by the appointment of the administrators.

As part of its argument that there has been a change in ultimate control, Burbank seeks to look ahead to what may eventually happen to Allmere. It says that the combined effect of clause 12 of the DOCA, s 445C of the Corporations Act and clause 12 of Schedule 8A of the Corporations Regulations 2001, is that the DOCA will terminate upon the deed administrators lodging a notice with ASIC to the effect that the objects of the DOCA have been achieved. At that stage, Allmere would be a corporate shell, without any assets, without any directors, with a beneficial shareholder in liquidation and, presumably, destined for deregistration.

Those events may or may not come to pass at some stage in the future. But the question of whether there was a change in ultimate control on 21 September 2006 (the date nominated by Burbank) has to be determined by the facts in existence at that date, not by subsequent or future events or possibilities. The DOCA is not relevant to that determination, as it was not entered into until early November 2006, and whether and how the stated purposes of the DOCA may be achieved is still unknown.

Allmere argues that the language used in clause 10.2 and the surrounding provisions makes it clear that the appointment of administrators is not what is contemplated by clause 10.2.

The term “insolvency event” is defined in clause 1.1 of the shareholders agreement to include the appointment of an administrator. Allmere points out that clause 12 of the shareholders agreement provides that “Burbank or Shaw may terminate this agreement if the other suffers an insolvency event.”[33] So, one consequence of the appointment of administrators is expressly covered in the shareholders agreement.
[33]See also clause 2.3. The reference to clause 11 is clearly an error and should read clause 12.

I agree with Burbank that the mere fact that party A has a right to terminate the agreement if party B suffers an insolvency event, does not automatically preclude party A from also having other rights consequent upon that event.

But it does not follow that the fact the parties have chosen to use a defined term in some clauses, but not in others, is completely without significance. Clause 10.2 does not use the term “insolvency event”, or refer to the appointment of an administrator or other insolvency procedure as constituting a “change in ultimate control”; it could easily have done so. Nor does clause 10.2 refer to “transfer”, which is defined in clause 1.1 to include “the appointment of a receiver or other legal custodian of the property of a party …”. By comparison, clauses 10.1 and 10.3 do refer to “transfer”.

Most importantly, clause 10.2 refers to a change in “ultimate control”, not merely “control”. This points to an “upstream” control concern, to do with the identity of the person or company who is the real joint venture partner and decision-maker. That seems to be concerned with long-term, “big picture” issues, rather than the appointment of administrators, or some other means by which control of the shareholder may be temporarily lost.

For these reasons, I conclude that the appointment of administrators on 21 September 2006, whether to Allmere, Feltex Holdings or Feltex Holdings Australia, did not constitute a “change in ultimate control” under clause 10.2.

Time for responding to a deemed offer notice

There having been no change in ultimate control, it is not necessary for me to consider Allmere’s alternative argument[34] that the right to appoint an expert to determine price under clause 10.3(d) had to be, but was not, exercised within 30 days of becoming aware of the change in ultimate control and the deemed offer notice.
[34]Which was not raised in any of the pleadings, but which Allmere sought to raise in submissions.

Was the offer notice valid?

Burbank’s case is that Allmere is not entitled to transfer its shares in Carpet Call to Godfrey Hirst or any other person, because it has not sent a valid and effective offer notice under clause 10.3(a). There are a number of separate grounds upon which Burbank claims that the offer notice was invalid.

Was there a proposal to transfer?

Clause 10.3(a) applies if a party “proposes to transfer” an interest in shares.

Burbank alleges[35] that as a matter of proper construction, a proposed transfer means a transfer intended to be done, not a transfer that has already been committed to be done.
[35]Paras 20 to 22 of the defence. The argument was raised by Burbank in its opening submissions, but not mentioned in its closing submissions.

Burbank pleads that by the time the offer notice was sent to Burbank on 19 (or 20) October 2006, Allmere had already accepted the Godfrey Hirst Allmere offer and thereby agreed to dispose of its shares to Godfrey Hirst, or made a commitment that went beyond a “proposal” within the meaning of clause 10.3. The offer notice is therefore said to be invalid.

This argument involves a complete change of Burbank’s position.[36] In its letter to the administrators dated 3 November 2006, Burbank had asserted that there could not be a proposal to transfer the shares unless the administrators had accepted the Godfrey Hirst Allmere offer.
[36]The change of position was not explained.

I agree with Allmere that it had not in fact entered into a binding agreement by 19 or 20 October 2006, to dispose of its shares to Godfrey Hirst. The Godfrey Hirst Allmere offer was expressed to be “subject to and conditional on” Burbank consenting to the transfer of the shares to Godfrey Hirst, or not exercising its pre‑emptive rights to acquire the shares under clause 10. That condition was not altered or waived at any time prior to 20 October 2006, or since.

In any event, even if a party to the shareholders agreement did enter into a binding agreement to dispose of its shares prior to sending an offer notice, on a proper construction of clause 10, that would not render the offer notice invalid.

A sale and transfer in contravention of pre-emption provisions may confer on the purchaser, in addition to contractual rights, equitable proprietary rights which bind the vendor of the shares. However, such a purchaser has no rights as against the company and, in so far as there is a conflict between the purchaser’s equitable proprietary rights and the rights of another shareholder wishing to enforce the rights of pre-emption, it was common ground that the equitable rights of the other shareholder would almost certainly prevail.[37]
[37] Rathner v Lindholm (2005) 194 FLR 291 at 311.

That means that, even if, contrary to the present position, Allmere had entered into a binding agreement to sell its shares, Burbank’s position would be protected as against the proposed transferee, without the need to read clause 10 in the manner suggested by Burbank.

Finally, to render an offer notice invalid in those circumstances may only serve to deprive the other shareholder (in this case, Burbank) of the opportunity to exercise its pre-emptive rights.

Was the offer notice clear and unambiguous?

There is no dispute that an offer notice under clause 10.3 must:

(a)Be clear and unambiguous, so as to give a reasonable recipient no doubt as to its meaning; and
(b)Conform with the shareholders agreement.

The Godfrey Hirst Allmere offer was expressly incorporated by reference into the offer notice. There is no dispute that it formed part of the offer notice.

It was an express term of the Godfrey Hirst Allmere offer that the offer was irrevocable and would remain in force only until 5.00 pm on Wednesday 11 October 2006.

It was also an express term of the Godfrey Hirst Allmere offer that completion was to occur within 60 days from the date of execution of a formal share sale agreement.

Burbank pleads[38] that the offer notice did not comply with clause 10.3 because:

(a)It was not clear and unambiguous in its meaning, in that it posited an offer from Godfrey Hirst which, on its own terms, had already lapsed; and
(b)It did not conform with the shareholders agreement, in that in positing that completion was to occur within 60 days from the date of execution of a formal share sale agreement, it conflicted with clause 10.3(e) which provides for completion to occur within 30 days.

[38]Part B of the defence, especially para 32.

I agree with Allmere that the terms of the offer notice were clear and unambiguous, and in conformity with the shareholders agreement, for the following reasons.

The offer notice summarised the effect of the Godfrey Hirst Allmere offer as being:

1.Godfrey Hirst has offered to purchase Allmere’s shares for $10million (Purchase Price);
2.The Purchase Price is to be paid by Godfrey Hirst to Allmere on completion of the sale and purchase of Allmere’s Shares; and
3.Completion is to occur within 60 days from the date of execution of a formal share sale agreement for the purchase by Godfrey Hirst of Allmere’s shares.

The offer notice then noted that the Godfrey Hirst Allmere offer was subject to several conditions, including the requirement that Burbank give express or deemed consent to the sale.

The offer notice referred to clause 10.3(f) and the requirement that Burbank must accept the offer within 30 days or tender the consideration when Allmere delivers the share certificates and transfer form. It said that if Burbank did not do either of those things, Allmere intended (subject to Burbank’s approval) to transfer its shares to Godfrey Hirst.

If Allmere was not able to get an extension of time for acceptance of the Godfrey Hirst Allmere offer, then obviously that proposed sale could not go ahead. But that does not make the offer notice ambiguous, in terms of what Burbank needed to do if it wished to accept the offer.

The irrevocable offer period and the date specified for completion of a transfer to Godfrey Hirst in the attached copy of the Godfrey Hirst Allmere offer did not conflict with clause 10.3(e). They were simply matters as between Allmere and Godfrey Hirst, and the reasonable recipient in the shoes of Burbank could not have had any reasonable doubt in that regard.

Clause 10.3(c) provides that upon receipt of an offer notice, the offeree will have 30 days within which to purchase the shares for the consideration and upon the terms and conditions disclosed in the offer notice.

Clause 10.3(e) requires the transferring party to deliver unencumbered title to the shares within 30 days of receiving an acceptance of offer by the offeree. So, if Burbank had accepted the offer notice, Allmere would have had to deliver unencumbered title to Burbank within 30 days of receiving Burbank’s acceptance. It is not clear why that is said to be inconsistent with the fact that completion under the Godfrey Hirst Allmere offer would occur within 60 days from the date of execution of a formal share sale agreement, if Burbank did not exercise its pre-emptive rights. The different time period relate to two completely different scenarios.

For these reasons, I am not persuaded that the offer notice was invalid on this ground.

The bona fide, arm’s length price arguments

Burbank says that on a proper construction of clause 10, if the transferring party proposes to sell its shares to a third party as part of a package with other assets to be purchased by the third party, the consideration for the shares must be:

bona fide and given at arm’s length as if the shares were being sold as a discrete asset; that is, isolated from and unaffected by other liabilities or obligations or dealings which might affect the terms and conditions, especially price, upon which the third party has offered to purchase the shares.[39]

[39]Para 23 of the defence.

For convenience, I will refer to the pleaded requirement simply as “an arm’s length price.”

It was not always clear what Burbank meant by “bona fide and at arm’s length.” In its opening, Burbank said that a “bona fide or genuine offer ... is really the same thing as saying arm’s length.” In closing, Burbank seemed to use “bona fide” in the more limited sense of there being in existence an actual offer from a third party. By its closing address, Allmere accepted that there has to be a bona fide offer, in the sense of an actual offer from another party,[40] so that an offeror cannot pretend to have received an offer when it has not in fact done so. However, there is no doubt here that there is a bona fide offer in that narrower sense.
[40]In opening, Allmere had seemed to doubt even that requirement.

Furthermore, although Burbank repeatedly described the price as “nominal consideration” (being an allocation from the larger Feltex purchase price), it disavowed any suggestion that the consideration was a “sham” or not the genuine price to be paid for Allmere’s shares.

Burbank says that the offer notice is invalid because the consideration for which Allmere proposed to sell the shares to Godfrey Hirst was not an arm’s length price. Although the offer notice was expressed to be for the shares alone, it implemented or was administered to facilitate an overall deal in which the shares were sold as part of a package with other assets. The price at which Godfrey Hirst offered to buy the shares was not determined as if the shares were being sold as a discrete asset, and was not the subject of separate negotiation. Burbank says that the offer was so affected by the dealings in the Feltex buy-out and the Feltex sale agreement that the consideration stated in the offer notice was not an arm’s length price. It says that the price of $10 million offered by Godfrey Hirst was an artificial figure, intended to either deter Burbank from pre-emption, or cause it to pay too much for the shares.[41]
[41]In support of its argument that $10 million was not an arm’s length price, Burbank relies upon the very extensive matters set out in paragraphs A to K in the particulars under para 25 of the defence.

Allmere denies that clause 10 requires there to be an arm’s length price. In any event, it says that the purchase price was an arm’s length price.

Must the purchase price be an arm’s length price?

Clause 10.3 does not on its face require that the consideration or other terms and conditions of the proposed transfer reflect an arm’s length price.

To try to overcome this, Burbank now couches its contention in terms of the proper construction of clause 10.3. That is not how it was originally put. In Burbank’s original defence and counterclaim, it was pleaded as a term implied “by operation of law”. However, there is no basis for saying such a term ought to be implied as a matter of law; nor could such a term ever satisfy the conditions for implying a term into a contract on the basis of business efficacy. Presumably that is why the original implied term allegation was dropped.

There is simply no scope for construing clause 10.3 as Burbank suggests. Clause 10.3(b) describes what the offer notice must contain. Relevantly, an offer notice must give details of “the terms and conditions of the transfer including the consideration per sale share”. It must disclose the actual consideration, so that one could not, for example, state that the purchase price was $X without also disclosing that there was to be a refund or rebate of $Y (if the true consideration was in fact $X minus $Y). But the clause says nothing at all about the basis upon which the consideration is to be arrived at in a commercial sense.

It is not necessary to read the clause as Burbank suggests in order to protect an offeree’s position, because an offeree is already protected in the following way:

(a)If the proposed price is lower than, or is, a fair and reasonable price, the offeree can choose to buy at that price;
(b)If the offeree thinks the proposed price is too high, it can dispute the price and avail itself of a fair and reasonable price, as determined by an independent expert under clause 10.3(d);
(c)If the offeree decides not to acquire the shares at the price offered by the offeror or as determined by the expert, then a transfer of the shares to another person may only occur if the proposed transferee is approved by the offeree (acting reasonably) and the transfer occurs on terms and conditions no more favourable than those disclosed in the offer notice;
(d)If there is a contravention of the pre-emptive rights of the offeree, the offeree’s rights should prevail over those of the proposed transferee, and the offeree could, absent unusual circumstances, prevent a proposed transfer of shares in breach of its pre-emptive rights or seek relief so as to restore its position after such a transfer.

If, for example, the offeror wanted to sell its shares to a related company for less than a fair and reasonable price, the offeree would have first right to buy the shares for that reduced price. Conversely, if the offeror was able to find somebody willing to pay an inflated price for the shares, the offeree can dispute the price and exercise its rights to buy the shares at the price determined by an expert under clause 10.3(d). In each case, the clause operates to adequately protect the offeree’s position.

Burbank’s construction could operate harshly to deny the offeror the benefit of the clause 10 mechanism for transferring its shares if, for example, the consideration it is offered for its shares is affected by factors or dealings to which it is not a party and of which it is unaware, as is the case here.

Burbank’s construction also introduces a level of uncertainty which may operate against the interests of all parties. On Burbank’s case, unless the price is an arm’s length price, then there is no offer notice at all. That would mean that any offer and acceptance under clause 10 would always be subject to either party alleging, at any time before the transfer, that in fact no offer notice had been given because it was not an arm’s length price. That position could operate unfairly for both shareholders. It could be unfair to the offeree, because it would allow the offeror the possibility of “testing the waters”, by putting a non-arm’s length offer notice to the offeree in order to find out its commercial position, only to undermine the process once the offeree had declared its position.

For these reasons, I reject Burbank’s argument that the proper construction of clause 10 requires the consideration to be an arm’s length price.

Was the price an arm’s length price?

It is therefore not necessary for me to consider whether $10 million was in fact an arm’s length price.

Were the necessary details stated in the offer notice?

Clause 10.3(b) provides that:

The offer notice shall give details of the proposed transfer including, but not restricted to:
(i) the number of shares to be transferred;
(ii)the terms and conditions of the transfer including the consideration per sale share,

and shall contain a warranty that the sale shares are and will at completion be the sole legal and beneficial property of the transferring party.

There is no dispute that it was an implied term of the shareholders agreement, implied by operation of law, that the parties would do all things necessary on their respective parts to enable the other to have the benefit of the agreement.

There is also no dispute that clause 10.3 confers on a shareholder the benefit of:

(a)The opportunity of purchasing the shares proposed to be transferred by the other shareholder for the consideration and upon the terms and conditions disclosed in an offer notice; or
(b)Disputing the price for which the other shareholder proposes to sell its shares, and referring that dispute to an expert determination for a final and binding decision.

Burbank’s case[42] is that the implied term obliges Allmere, under clause 10.3(b), to give details of all dealings affecting the proposal to transfer Allmere’s shares, so as to enable Burbank to consider properly whether or not:

(a)The consideration for which Godfrey Hirst offered to purchase the shares was an arm’s length price; and
(b)To match Godfrey Hirst’s offer and purchase the shares, or to dispute the price at which Allmere offered to sell the shares and refer that dispute to an expert determination.

[42]Part C of the defence.

Burbank says that the offer notice did not comply with clause 10.3(b), in that it did not give any information concerning various dealings relating to the larger Feltex Group sale.[43] These are all matters relied upon in saying that the consideration was not an arm’s length price and include: the terms of the earlier Godfrey Hirst offers to Feltex of 8 June and 17 July 2006; the limited role of the Allmere administrators in relation to the sale of the Carpet Call shares, including the setting of the sale price; the connection between the total price under the Feltex sale agreement and the amount owing to the ANZ; and the terms of the escrow clause and its possible effects on the seller and Godfrey Hirst under the Feltex sale agreement.
[43]Being the matters pleaded in paras A to K of the particulars under para 25 of the defence.

Allmere denies that there was any obligation to give any further information than it in fact did.

I have already explained why I reject Burbank’s argument that the shareholders agreement requires there to be an arm’s length price. It must logically follow that there is no requirement that the offeror give all details necessary for the offeree to determine whether the proposed consideration reflects an arm’s length price.

What details is the offeror required to give? The clause 10.3(a) requirement to send an offer notice is triggered if a shareholder proposes to transfer an interest in shares. Under clause 10.3(b), an offer notice must give “details of the proposed transfer” including the number of shares to be transferred and “the terms and conditions of the transfer including the consideration”. It does not state that “all details” must be given. There is also no express requirement that the offeror give details of any broader sale of assets, notwithstanding that it is reasonable to assume the parties were aware of the possibility that the shares could be included in a broader sale (as Allmere’s shares have, throughout the duration of the shareholders agreement, been held within a larger corporate group structure).

It is unclear how far Burbank says the description of “all dealings affecting the proposed transfer” must go, or how the adequacy of the description is to be assessed by the offeree and by the transferring party.

The construction for which Burbank contends would be impractical and would invite unnecessary conjecture and dispute. That is particularly so in a situation such as this, in which the offeror is not a party or privy to the dealings said to affect the proposed transfer, or the dealings are not agreed at the time the proposed transfer and offer notice are formulated.

Further, there is no need for the offeree to know terms other than those concerned with the proposed transfer of the Carpet Call shares, in order for the offeree to enjoy the benefit of the shareholders agreement. Clause 10.3(b) specifies the information that the offeree needs to know in order to decide whether to purchase the shares at the price offered, or at a fair and reasonable price determined by an expert. The offeree is an existing shareholder, not a stranger to the business. The offeree has access to financial information about Carpet Call, based upon which it can make its own commercial decision as to whether it wishes to buy the offeror’s shares and, if so, at what price.

The offeree’s position is protected by the terms of the offer notice itself, in the event of a transfer being proposed on terms more favourable than those contained in the offer notice.

Once again, if an offer notice was meant to contain such matters, one would expect clause 10.3 to say so, and in very clear terms.

I am not persuaded that the offer notice was invalid on this ground.

Was the offer notice given too soon?

Burbank’s final invalidity argument is that the offer notice is invalid because it was given too soon.[44] It says that on a proper construction of clauses 10.2 and 10.3, where clause 10.2 has been engaged, and an offer notice is deemed to have been given, an offer notice under clause 10.3 cannot be given any earlier than 30 days after there has been an expert determination under clause 10.3(d). Burbank says there cannot be concurrent operative offer notices.
[44]Paras 47-52 of the defence.

Allmere disputes that clause 10 limits or regulates the service of offer notices in the manner Burbank contends. It says that to do so may operate to deny the offeree the opportunity to receive and decide whether to accept other offer notices, possibly on more favourable terms than the deemed offer notice under clause 10.2. Such a construction could therefore tend to undermine the pre-emptive rights, and should not prevail.

For the reasons given earlier, I am not persuaded that there was any change in ultimate control under clause 10.2, therefore it is not necessary to determine whether the offer notice is invalid because it was given too soon.

Has Burbank disputed the price?

Clause 10.3(d) relevantly provides:

If the offeree disputes the price the dispute shall be referred to an expert to be agreed or in default of agreement nominated by the President for the time being of the Institute of Chartered Accountants in Australia.

Burbank says that, if the offer notice was valid, it disputed the genuineness of the price offered by Godfrey Hirst; therefore, clause 10.3(d) requires the dispute to be referred to an expert.

Burbank’s case as to when and how it says it disputed the price has changed over time. In its initial defence dated 19 February 2007, Burbank only pleaded an alleged conversation between Mr Smith of Burbank and Mr McKendrick of Godfrey Hirst on 6 or 7 October 2006; reliance on that conversation has since been abandoned.[45] Its current pleading[46] relies upon:
[45]This was presumably intended to be a reference to the meeting between Mr Smith and Mr McKendrick on 5 October 2006, referred to earlier in these reasons.
[46]Paras 11 and 54 of the defence.

(a) A conversation between Messrs Smith, Fitzgerald and others, at a meeting on 17 November 2006 at the offices of Hindal Corporate. Mr Smith and others gave evidence about the 17 November meeting, which will be considered shortly;

In any event, even though Shaw apparently tried to increase the amount of its products supplied to Carpet Call, the problems of having a manufacturer-shareholder trying to increase or force supply were not sufficient for Burbank to seek to exercise its pre-emptive rights when Feltex took over Shaw.[75]
[75]It is common ground that Feltex’s acquisition of Shaw constituted a change in ultimate control which would have entitled to Burbank to exercise its pre-emptive rights.

Warehousing arrangements

There is also no substance to Burbank’s concerns about Carpet Call being unable to maintain its warehousing arrangements with Godfrey Hirst as co‑shareholder.

Mr Smith’s witness statement refers to a conversation with Mr Garrett in October 2006, in which Mr Garrett said that “he was concerned about Carpet Call building its own warehouse in Brisbane and that Godfrey Hirst would prefer Carpet Call to use Godfrey Hirst’s warehouse facilities”.

Mr Garrett denies having said he was “concerned” about Carpet Call’s warehouses, or that Carpet Call would be required to use Godfrey Hirst’s warehouses. He says:

I have said in substance to Jim Smith, on one or more occasions, that I do not understand why Carpet Call maintains large warehousing facilities in each state. I have said this because other retailers do not maintain large warehousing facilities and bear warehousing costs – they rely on manufacturers’ facilities, like Godfrey Hirst’s, and only hold the products that are required to meet customer orders. I have said in substance that we should each leverage our strengths and not invest in non‑value‑added activities. In that regard I have said in substance that our strength is manufacturing and distribution and his strength is retailing to the consumer, and that by working we could potentially free up working capital to assist in growing the Carpet Call business.

Both Messrs McKendrick and Garrett deny that Godfrey Hirst would in fact require Carpet Call to use Godfrey Hirst’s warehouses.

Even if Mr Garrett had said the things which Mr Smith asserts, that “concern” does not constitute evidence that Godfrey Hirst will try to force Carpet Call to use its warehouses; it merely indicates their preference.

Burbank does not explain how Godfrey Hirst could somehow compel Carpet Call to use Godfrey Hirst’s warehousing facilities, if this was against Carpet Call’s interests and Burbank’s wishes. In view of the provisions of the shareholders agreement and Burbank’s managerial control of Carpet Call, this could never occur.

Clause 6 of the shareholders agreement deals with the composition of the Carpet Call board and the shareholders’ powers. Each shareholder is entitled to nominate half of the directors to the board of Carpet Call.[76] A quorum for a meeting of directors is one director appointed by each of the shareholders.[77] The chairman of a meeting of directors does not have a casting vote.[78] The directors present at a meeting nominated by one shareholder collectively hold the same number of votes as the directors present nominated by the other shareholder.[79] Schedule 2 to the shareholders agreement sets out 25 matters, which could mostly be described as higher level decisions, which require unanimous board approval.
[76]Clause 6.1(a).
[77]Clause 6.1(c).
[78]Clause 6.1(b).
[79]Clause 6.1(d).

If the board fails to pass a resolution supported by the managing director or to support a decision of the managing director of Carpet Call, the shareholders must negotiate in good faith in an endeavour to resolve the position within 30 days after notice from one of the shareholders to the other requiring the matter to be resolved. If the matter is not resolved on the expiration of that period, the decision is not implemented.[80] There is no other mechanism for breaking a deadlock between shareholders. Whilst obviously leaving open the real possibility of deadlocks at board level, these decision-making provisions have been in place since the commencement of the shareholders agreement.
[80]Clause 6.3.

It can thus be seen that Godfrey Hirst would not have the power to force supply on Carpet Call, or insist that Carpet Call use its warehouses, even if (contrary to the evidence) it wished to do so.

Trading difficulties with other suppliers

Burbank pleads[81] that Carpet Call will experience trading difficulties with other suppliers once it is widely known that Carpet Call is part-owned by a competitor in the same market. Carpet Call buys carpet from a number of suppliers who are in direct competition with Godfrey Hirst. Burbank asserts that there is a real risk that those other suppliers will refuse to supply carpet products, or to disclose necessary commercially‑sensitive pricing information, to Carpet Call if it is part-owned by a major competitor.
[81]Para 59(c) of the defence.

Carpet Call currently deals with about eight carpet suppliers. Obviously it seeks to obtain the best range of products, at the best price, because that is the best way to develop its business. Mr Smith expresses concern that his other suppliers will refuse to deal with Carpet Call if Godfrey Hirst becomes a co-shareholder in Carpet Call. It is said that by supporting a Carpet Call which is half-owned by Godfrey Hirst, the other manufacturers would be, in effect, supporting the company that is the dominant carpet manufacturer in the Australian market.

However, there is simply no evidence that Carpet Call will, or even might, experience trading difficulties with other suppliers, as a result of Godfrey Hirst acquiring the shares. Carpet Call has always been owned (directly or indirectly) by a substantial carpet manufacturer; there is no evidence that this has led to other manufacturers being reluctant to supply it. Indeed, Mr Smith said that one of his concerns when he entered into the original deal with Shaw was that this might have an adverse impact in terms of Carpet Call’s other suppliers; there is no evidence that his concern on that occasion came to pass either.

The relationship between Godfrey Hirst and Burbank

Burbank pleads[82] that there “is long standing acrimony … which is unlikely to abate, and which will likely result in disputations and corporate dysfunction”. The acrimony is said to be based on Godfrey Hirst’s failure to supply carpet to Carpet Call for the last 25 years or so, as a result of a dispute about orders and warranty claims. Burbank also pleads that the personal relations between key personnel of Burbank and Godfrey Hirst have become strained, to the extent that co-operative conduct at managerial and Board level is unlikely. Burbank places less weight on the personal relationship problems than the corporate problems.
[82]Para 59(d) of the defence.

Allmere disputes that there is any such acrimony and says there is no evidence that the parties could not pursue a mutually-beneficial relationship as Carpet Call shareholders.

Supply of products

It is common ground that Godfrey Hirst refused to supply Carpet Call with its products for about 25 years. During that period, it supplied them to Carpet Call’s competitors. From time to time during that period, Mr Smith would ask Mr Garrett to supply Godfrey Hirst products, but Mr Garrett refused to do so. The decision not to supply was made by Mr Garrett and is supported by Mr McKendrick, whose family have owned and controlled Godfrey Hirst throughout that period.

Godfrey Hirst stopped supplying Carpet Call in the early 1980’s, after Godfrey Hirst perceived that Carpet Call was making a greater number of claims for manufacturing faults than other retailers. Mr Garrett believed that some of Carpet Call’s claims lacked substance. The parties were unable to resolve their differing perceptions of the propriety of some of the claims.

The fact that Godfrey Hirst did not supply Carpet Call came to suit Godfrey Hirst, as it became a point of differentiation from Godfrey Hirst’s main competitor at the time, Feltex.

Since Godfrey Hirst acquired the assets of the Feltex group, it has continued to supply Carpet Call with Feltex-branded carpets and has begun to supply it on a restricted basis with products from the Godfrey Hirst range. As mentioned earlier, Carpet Call has actually increased its orders for Feltex-branded carpets since Godfrey Hirst took over.

When Godfrey Hirst was acquiring Feltex, Godfrey Hirst representatives made it clear to Mr Smith that they would continue to supply Carpet Call with Feltex-branded carpets and they wanted to develop the relationship.

Godfrey Hirst currently only supplies its own products, as opposed to Feltex-branded products, to Carpet Call to a very limited extent. Of the 2,000 products in its range, Godfrey Hirst currently supplies only about five to Carpet Call; they are re‑badged as Carpet Call products.

Godfrey Hirst’s current intention is that it does not propose to supply a Godfrey Hirst product to Carpet Call unless there is no equivalent product in the Feltex range. It will then consider supplying a Godfrey Hirst product, but re-branded as a Carpet Call product, so the products are not identifiable as Godfrey Hirst products.

Even then, under its selective placement policy, Godfrey Hirst will not supply if that would allow Carpet Call to compete with another Godfrey Hirst retailer. This is a way of protecting the profitability of individual retailers. The fact that Godfrey Hirst does not supply its Godfrey Hirst-branded products to Carpet Call makes Godfrey Hirst’s products more attractive to Carpet Call’s competitors, including Carpet Choice. That position is expected to continue in the future.

I am not persuaded that the fact that Godfrey Hirst does not intend to make available to Carpet Call the full range of Godfrey Hirst carpets makes it an unsuitable shareholder in Carpet Call. Godfrey Hirst does not supply its full range to any retailer.[83] Mr Garrett’s evidence was that Feltex has products which are identical in every respect to the Godfrey Hirst products, except for the label. Mr Smith apparently agrees. If Godfrey Hirst becomes a shareholder, Carpet Call will continue to have available to it the current Feltex range plus some Godfrey Hirst carpets. It may be better off, and will certainly be no worse off, that it currently is.

[83]Whilst the evidence as to other manufacturers is limited, it appears to be industry practice for manufacturers to place their carpet ranges with selected retailers.

Some remarks were made in submissions about clause 7.2 of the shareholders agreement which, as previously mentioned, requires competitive pricing and terms for carpet supplied by Shaw and its successors. However, the scope and meaning of clause 7.2 was neither pleaded nor fully argued. It is not necessary for me to decide whether clause 7.2 would impose an actual obligation on Godfrey Hirst to supply its full range of products to Carpet Call, or whether it merely requires that whichever products are supplied are done so on a competitive basis.

I accept that the scope of clause 7.2 may be a potential source of future conflict between Godfrey Hirst and Carpet Call, depending on what position the parties ultimately take as to its construction, but the mere possibility of such a conflict does not render Godfrey Hirst an unsuitable shareholder. In particular, there was no suggestion that Godfrey Hirst would not honour clause 7.2 if, at some future stage, it was held to impose an actual obligation to supply products which it does not currently supply.

Personal relations

As far as personal relations between key personnel are concerned, Mr Smith sought to characterise them as strained. In particular, he described his dealings with Mr Garrett as “hostile and antagonistic”, although his evidence as a whole did not really substantiate such bald assertions.

There were some initial difficulties when Godfrey Hirst took over the Feltex business, particularly in relation to some trading practices which Feltex had previously employed. However, it seems that the issues were resolved through a process of negotiation. This included Godfrey Hirst agreeing to honour Feltex warranties, even though Mr Smith concedes that it had no legal obligation to do so. That there might have been some degree of angst consequent upon the change of ownership of the Feltex business is hardly surprising. However, it seems that the parties have been able to work through their issues and resolve them successfully.

Whilst I would not necessarily describe their relationship as “warm and friendly”, I am satisfied that the relationship between Mr Smith and Mr Garrett, with whom he deals regularly, is a cordial, productive and workable one.

It seems that Mr Smith has had trouble working with all of his fellow shareholders. Mr Smith himself concedes that he experienced serious personal difficulties working with both Shaw and Feltex. Mr Naphtali also observed these difficulties during his time as the nominee of Shaw, and later Feltex, on the Carpet Call board. Based on all the evidence and his attitude in the witness box, I would not think that Mr Smith would be an easy person for most people to work with.[84]
[84]In saying that, I am not in a position to comment about the extent to which previous Shaw and Feltex personnel may have also contributed to the conflict.

It appears that those historic tensions were due to a breakdown in the personal relationship between Mr Smith and Sam Magill, who was, until about September 2005, Feltex’s chief executive officer, and was managing director of Shaw before that. Mr Smith’s evidence was that he and Mr Magill “just couldn’t get on”, that it was a “constant fight” with “fairly hostile” correspondence between them which “deteriorated into sarcasm and unpleasantness”.

As already mentioned, Burbank could have relied upon Feltex’s acquisition of Shaw as being a change in ultimate control, and thereby severed its relationship, but it chose not to do so. Instead, Mr Smith chose to continue on with Feltex as the new shareholder, notwithstanding the amount of personal conflict he seems to have experienced with Mr Magill, who remained on after Feltex acquired Shaw.

Despite the breakdown in personal relations, when Feltex took over the business, Mr Smith still thought there was a chance that the companies could build a unique relationship that would benefit both shareholders.

Recognising that personnel on both sides can and do change over time, Burbank sought to place less weight on the personal conflicts than on what it described as the structural flaws in the relationship. However, for the reasons given, I am not satisfied that either the personal or the corporate relationships are such that they are likely to result in “such disputations and corporate dysfunction” as to make Godfrey Hirst an unsuitable shareholder.

Long term commitment to the Carpet Call business

Godfrey Hirst does not have an equity interest in any other retailer. Burbank says that Godfrey Hirst does not have any long–term interest in Carpet Call.

There is no doubt that Godfrey Hirst only made an offer for the shares as a component of the acquisition of the Feltex business. In June 2006, when Godfrey Hirst first made an offer for the assets of the Feltex group, it did not want to buy Allmere’s shares in Carpet Call. This was because it did not want the extra expense of buying the shares. Later, Godfrey Hirst’s position was that if the Feltex receivers wanted to sell all of the assets of the Feltex group as a package, and it did not have to pay too much for Allmere’s shares in Carpet Call, Mr McKendrick thought Godfrey Hirst might as well buy the shares.

As far as the escrow arrangements in the Feltex sale agreement are concerned, Mr McKendrick said he was “indifferent” to whether Godfrey Hirst got the shares or the $10m. But there was no suggestion that he would be indifferent to the Carpet Call business if Godfrey Hirst did in fact acquire the shares.

I accept the evidence of Messrs McKendrick, Garrett and Walsh[85] that Godfrey Hirst has made no actual decision as to how long it would hold the shares.
[85]Godfrey Hirst’s finance director.

In any event, even if Godfrey Hirst had in fact evinced an intention not to have a long term commitment to the Carpet Call business, that would not provide a sufficient basis for Burbank to withhold its approval. The shareholders agreement provides that shares may be transferred, subject to the clause 10.3 pre-emptive rights process, and does not require them to be held for any particular duration. There is no basis for reading into clause 10 a restriction that an incoming shareholder must intend to hold its shares for a particular duration.

In fact, it seems that Burbank may not have a long term interest in Carpet Call either. Mr Fitzgerald’s evidence was that Mr Smith told him in their telephone conversation on 1 May 2007 that his plan is to “run up the business and then sell out in a couple of years time”. Mr Smith said only that he could not recall having a conversation about how long he might remain in the business.

The terms and conditions of the proposed transfer

Burbank’s final argument as to why it has not unreasonably withheld its approval is based on the fact that Allmere is said to have proposed to transfer its shareholding on terms and conditions more favourable that those disclosed in the offer notice. This is because the proposed sale to Godfrey Hirst was part of or conditional upon completion of the Feltex buy-out and the Feltex sale agreement.

The allegation that these facts constitute a breach of clause 10.3(b), and thereby invalidate the offer notice, has already been considered and rejected. How these same facts are said to go to the reasonableness of Burbank’s refusal to approve Godfrey Hirst is harder to comprehend.

In oral submissions, it seems that what Burbank is saying is that the fact that the purchase of the Allmere shares was part of a “package deal” is relevant to Godfrey Hirst’s suitability. But that is not how this part of the defence is pleaded, and the argument was not really developed in Burbank’s submissions.

The pleaded argument is premature, as there is no actual agreement in place between Godfrey Hirst and Allmere, pursuant to which the transfer will take place, and therefore no “terms and conditions” available for the court to assess against those disclosed in the offer notice, as required by clause 10.3(f). This also means that if this did constitute a reason for Burbank withholding its approval, it was unreasonable, there being no basis in fact for that position.

In any event, even if the terms and conditions of the transfer had been agreed and were more favourable than those in the offer notice, this would not provide valid grounds for withholding approval. Clause 10.3(f) provides that there may be a transfer of shares to “any person approved by the other shareholder”. The approval therefore goes to the identity of the transferee, not the terms of the proposed transfer. This makes commercial sense and accords with the evident purpose of the approval requirement and the authorities referred to above.

The offeree is protected in the event that a proposed transfer (or even an actual transfer) is on terms and conditions more favourable than those disclosed in the offer notice. This is because of the equitable rights of pre-emptive rights holders, which prevail over a transferee’s, as previously discussed. Therefore, if the transfer is in breach of clause 10, Burbank could seek to prevent the transfer before it occurs, or seek relief to restore its position after the transfer. As a practical matter, Burbank could use its board representation to prevent the registration of a transfer of shares in breach of the pre-emptive rights.

Burbank’s refusal was unreasonable

Burbank formally refused its approval of Godfrey Hirst as transferee in its letter of 20 December 2006. It declined to give reasons for its refusal, asserting that reasons had already been given at the 17 November meeting.

In evidence, Mr Smith said that the reasons he gave at the 17 November meeting were his reasons. But Mr Smith gave no evidence as to what he actually said at that meeting. Mr Fitzgerald’s unchallenged account, discussed earlier, was that Mr Smith pointed only to the following: what he described as an unworkable relationship with Godfrey Hirst; that Godfrey Hirst had not supplied Carpet Call for 20 years; he could not work with Mr McKendrick; and he could not be in business with a supplier. None of the other reasons now relied upon were referred to at all.

Allmere argues that the real reason for Burbank’s refusal lies not in any of the reasons or concerns asserted now on Burbank’s behalf, but in Mr Smith’s strategy to try to engineer a situation where he is the only purchaser of the shares and can acquire them at a discount.

It is clear on the evidence previously discussed that Mr Smith has been keen to engineer a situation in which Burbank is the only purchaser of the shares, and is able to acquire them at the lowest possible price. Mr Smith candidly acknowledged in evidence that his strategy was to “exclude all players in the carpet industry”. Burbank is entitled to pursue its own commercial interests. As mentioned earlier, the mere fact that Burbank may have some collateral purpose does not necessarily mean that the refusal of approval is unreasonable.

Whilst there is much force in Allmere’s submission that Mr Smith’s evidence was unsatisfactory in many respects[86], his credit was not directly attacked. In particular, it was not suggested that he was lying when he expressed the concerns which Mr Fitzgerald says he did at the 17 November meeting. I am therefore not prepared to find that he did not have the concerns expressed at that meeting.
[86]Allmere submitted that I should find that Mr Smith’s evidence was full of “exaggeration, inaccuracy, insincerity, selectivity and patchiness, and was totally uncorroborated by any contemporaneous notes or other documents or by any independent sources or data. In addition he demonstrated an appreciation of what evidence might suit Burbank’s case and he acknowledged that he would just go along with what the lawyers advised him to do.”

But Burbank is not entitled to unfairly prevent Allmere from having the benefit of the shareholders agreement. For the reasons given above, I am satisfied that Burbank has acted unreasonably in withholding its approval to Godfrey Hirst as transferee under clause 10.3(f).

Conclusion

I conclude that:

(a)There was no change in ultimate control of Allmere on 21 September 2006;
(b)The offer notice was valid;
(c)Burbank did not validly dispute the price at which Allmere offered to sell the shares;
(d)Burbank has unreasonably withheld its approval of Godfrey Hirst as transferee.

I will hear from the parties as to the form of orders and costs.

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[2008] VSC 139

2 May 2008