Angelis as trustee for the Angelis Family Trust v Pemba Capital Partners Fund I Partnership, LP

[2019] NSWSC 1646

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	Angelis as trustee for the Angelis Family Trust v Pemba Capital Partners Fund I Partnership, LP [2019] NSWSC 1646
Hearing dates:	On the papers; submissions received on 23 and 24 November 2019
Decision date:	25 November 2019
Jurisdiction:	Equity - Commercial List
Before:	Stevenson J
Decision:	Declaration that on the proper construction of cl 9 the 2017 Shareholders Agreement between the plaintiffs and the first, second and sixth defendants, a party seeking an exit under cl 9 must intend to achieve an exit that maximises shareholder value but that cl 9 does not require that such exit maximise shareholder value
Catchwords:	CONTRACTS – construction – interpretation – shareholder agreement – where agreement stated that it was the intention of the parties to achieve an exit that maximises shareholder value – whether an obligation thereby imposed on exiting party to maximise shareholder value
Legislation Cited:	Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited:	Electricity Generation Corporation v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corporation (2014) 251 CLR 640; [2014] HCA 7 Rinehart v Hancock Prospecting Pty Ltd; Rinehart v Rinehart [2019] HCA 13
Category:	Principal judgment
Parties:	James Angelis as trustee for the Angelis Family Trust (First Plaintiff/Second Cross-Defendant on First Cross-Claim/Sixth Cross-Defendant on Second Cross-Claim) Jitendra Dutt (Second Plaintiff/Third Cross-Defendant on First Cross-Claim) Nathan Brown (Third Plaintiff/Fourth Cross-Defendant on First Cross-Claim) Antony Goldsmith (Fourth Plaintiff/Fifth Cross-Defendant on First Cross-Claim) Copiapo Pty Ltd as trustee for FCK Consulting Trust (Fifth Plaintiff/Sixth Cross-Defendant on First Cross-Claim) Pemba Capital Partners Fund I Partnership, LP (First Defendant/First Cross-Claimant on First Cross-Claim/First Cross-Defendant on Second Cross-Claim) Pemba Capital Partners Pty Ltd as trustee for the Castlereagh St (Swan) Co-Investment Trust (Second Defendant/Second Cross-Claimant on First Cross-Claim/Second Cross-Defendant on Second Cross-Claim) Adrian Christopher Kitchin (Third Defendant/Seventh Cross-Defendant on First Cross-Claim/First Cross-Claimant on Second Cross-Claim) Benjamin James Hastie (Fourth Defendant/Eighth Cross-Defendant on First Cross-Claim/Second Cross-Claimant on Second Cross-Claim) Drue Jonathon Giles Castanelli (Fifth Defendant/Ninth Cross-Defendant on First Cross-Claim/Third Cross-Claimant on Second Cross-Claim) Coverforce Holdings Pty Ltd (Sixth Defendant/First Cross-Defendant on First Cross-Claim/Fourth Cross-Defendant on Second Cross-Claim) AUB Group Ltd (Seventh Defendant/Third Cross-Defendant on Second Cross-Claim) Resilium BidCo Pty Ltd (Fourth Cross-Claimant on Second Cross-Claim) Resilium OpCo Pty Ltd (Fifth Cross-Defendant on Second Cross-Claim)
Representation:	Counsel: F Corsaro SC with H Pintos-Lopez and E Olivier (Plaintiffs) R A Dick SC with E Bathurst (First and Second Defendants) M R Elliott SC with D Ratnam (Third to Fifth Defendants)   Solicitors: Mills Oakley (Plaintiffs) Herbert Smith Freehills (First and Second Defendants) Roberts & Partners Lawyers (Third to Fifth Defendants) Allens (Seventh Defendant)
File Number(s):	SC 2019/201647

Judgment

1. I am part heard in these proceedings which concern, among other things, a dispute between the shareholders of the sixth defendant, Coverforce Pty Ltd. Coverforce is Australia’s largest unlisted insurance broker. The business now carried on by Coverforce was founded in 1994 by the first plaintiff, Mr James Angelis.

2. Prior to the events with which these proceedings are concerned, the shareholders in Coverforce were Mr Angelis and the remaining plaintiffs, who are three senior employees of Coverforce, (the “Angelis Parties”) as to 51% and the first and second defendants (together, “Pemba”) as to 49%. Pemba is a private equity investor.

3. There is also dispute as to whether:

1. the third to fifth defendants (the “Kitchin Parties”) are now also shareholders in Coverforce; and

2. Coverforce has, through the Kitchin Parties, acquired from Suncorp Insurance Services Ltd the business of Suncorp’s then subsidiary, Resilium Pty Ltd.

4. I have heard evidence and submissions over 13 days since 28 October 2019. Two further days have been allocated next week for hearing evidence and submissions on a remaining question.

5. That question is, speaking very broadly, the value of the shares in Coverforce. The Court has appointed an independent expert, Dr Hung Chu from Lonergan Edwards & Associates, to express an opinion on that question.

6. It has emerged that to assist Dr Chu to deal with that question it would be convenient for me now, and in advance of delivering a final judgment in the proceedings, to express an opinion about the proper construction of a provision of a shareholders agreement executed by the Angelis Parties, Pemba and Coverforce in November 2017.

The question

7. Accordingly, I have ordered, pursuant to r 28.2 of the Uniform Civil Procedure Rules 2005 (NSW), that the following question be decided separately and in advance of any other question in the proceedings:

“Does compliance with clause 9.1 of the 29 November 2017 Shareholders Agreement require:

a.    the party seeking an Exit to have the intention to achieve an Exit which maximises Shareholder value; or

b.    that the Exit maximises Shareholder value?”

8. The answer turns on the proper construction of the relevant provisions in the 2017 Shareholders Agreement.

Principles relevant to construction of commercial contracts

9. The relevant principles were recently restated by the High Court of Australia in Rinehart v Hancock Prospecting Pty Ltd; Rinehart v Rinehart [2019] HCA 13 at [44] (Kiefel CJ, Gageler, Nettle and Gordon JJ):

“It is well established that a commercial contract should be construed by reference to the language used by the parties, the surrounding circumstances, and the purposes and objects to be secured by the contract [Electricity Generation Corporation v Woodside Energy Ltd; Woodside Energy Ltd v Electricity Generation Corporation (2014) 251 CLR 640; [2014] HCA 7 at [35] (French CJ, Hayne, Crennan and Kiefel JJ)].”

Decision

10. In my opinion, the answer to the question is that compliance with cl 9.1 only requires that the party seeking an Exit have the intention of achieving an Exit that maximises Shareholder value; not that the Exit in fact maximise Shareholder Value.

11. Clause 8 of the 2017 Shareholders Agreement provides that, with irrelevant exceptions:

1. A “Management Shareholder” (that is, any one of the Angelis Parties) cannot dispose of their shares in Coverforce without Pemba’s consent; whereas,

2. Pemba can freely dispose of its shares in Coverforce.

12. Clause 9 gives Pemba a further right.

13. It provides:

“9.1   Proposal to Exit

It is the intention of the parties to achieve an Exit which maximises Shareholder value.

9.2   Condition on Exit

At any time after the date of this agreement, Pemba (Selling Shareholders) may give a written notice (Sale Notice) to the Company and the Management Shareholders [i.e. the Angelis Parties] (Other Shareholders) stating that the Selling Shareholders wish to undertake an Exit.

9.3   Proceeding with an Exit

(a)   Subject to clause 9.4 upon receipt of a Sale Notice, all Shareholders must each use their best endeavours to implement the Exit within the time period specified by the Selling Shareholders.

(b)   Without limiting clause 9.3(a):

(1)   the Other Shareholders must cooperate with, and provide all reasonable access and assistance required by the potential buyer in relation to the sale of the Shares, including access to due diligence materials and personnel involved in the management of the Group and its Business;

(2)   the Other Shareholders must, at the written request of the Selling Shareholders, sell the same proportion of Shares as the Selling Shareholders as part of the Exit at the same price and on the same terms as the Selling Shareholders; and

(3) the Other Shareholders must do all things and execute all documents as may be required by the Selling Shareholders in implement the Exit.

(c)   The Shareholders acknowledge that as part of an Exit the Shareholders may be required to give warranties and indemnities to a buyer of the Company and that in such circumstances all Shareholders must give the same warranties and indemnities on the same basis as one another. Unless all of the Shareholders otherwise agree, the Shareholders must ensure that the liability under any such warranty or indemnity is apportioned between the Shareholders in proportion to their Proportional Entitlement. The Shareholders (other than the Small Shareholders) agree to give on another an opportunity to participate in the negotiation of any such warranties and or indemnities with the buyer.

9.4   Pre-emption right

If the price per Share relating to the Exit values the Group at less than 7.5x LTM EBITDAE, then before completion of the Exit occurs, Pemba must issue a Transfer Notice on the Other Shareholders and the provisions under Schedule 3 will apply, provided that:

(a)   the Selling Shareholders will be considered to be the Transferor;

(b)   the Other Shareholders will be considered to be Purchasing Members;

(c)   the Sale Shares will be all of the Shares held by the Selling Shareholders; and

(d)   the Purchase Price is the price per Share relating to the proposed Exit.”

14. Schedule 3 of the 2017 Shareholders Agreement, referred to in cl 9.4, if enlivened gives the Angelis Parties the right to purchase Pemba’s shares at “the price per Share relating to the proposed Exit”.

15. The agreement defined “Exit” as a “Share Sale or IPO”.

16. Clause 9.3(b)(2) contains what the parties referred to as Pemba’s “Drag Right”. The effect of the Drag Right is that if Pemba wishes to sell its shareholding in Coverforce, it can require the Angelis Parties to sell their shares to Pemba’s purchaser at the same price and on the same terms.

17. Exercise of the Drag Right would enable Pemba to deliver to its purchaser control of Coverforce. That may well enable Pemba to negotiate a “control premium” with its purchaser. Of course, such a premium would enure for the benefit of the Angelis Parties as well as for Pemba.

18. Pemba accepts that cl 9.1 manifests the objective intention of the parties that, on seeking an Exit under cl 9, Pemba must have the intention to achieve an Exit that maximises value for all shareholders in Coverforce.

19. The question is whether it also imposes on Pemba an obligation to achieve that result.

20. In my opinion, it does not.

21. I see the fundamental point to be that the language used by the parties in cl 9.1 is not that of obligation. It is the language of a recital. Clause 9.1 recites what, at the date of the agreement, the parties agreed should be Pemba’s intention if and when it exercised its right under cl 9. Although cl 9.1 refers to the intention “of the parties”, only Pemba’s intention could be relevant.

22. It is obvious that the parties would have the intention that an Exit by Pemba maximise shareholder value. It would be in their mutual interests that it do so.

23. The Angelis Parties contend that cl 9 of the Shareholders Agreement should be construed so that cl 9.1 “conditions” exercise by Pemba of its Drag Right and thereby imposes an obligation on Pemba “to achieve an Exit which maximises Shareholder value”.

24. But that is not what cl 9 says.

25. The only conditions to the exercise by Pemba of its Exit price expressed in cl 9 are the giving of a “Sale notice” in accordance cl 9.2 and the statement in cl 9.3(a) that, once a Sale notice is given, implementation of it is “[s]ubject to clause 9.4”.

26. Clause 9.4 gives the Angelis Parties the right to acquire Pemba’s shares at the same price as Pemba is proposing to sell them if that price is less than a specified multiple of Coverforce’s EBITDAE.

27. The Angelis Parties submitted, by reference to evidence led in the proceedings, that this “is not within the range of reasonable valuations for the company”. That may be what the Angelis Parties now believe. But it is irrelevant to the question of construction.

28. The language used by the parties in cl 9 shows that the protection to which the Angelis Parties agreed in relation to any exercise by Pemba of its Exit right was the pre-emptive right in cl 9.4.

29. If the parties had intended that the Angelis Parties have the further protection of an obligation on Pemba actually to “maximise Shareholder value” they could have said so. Instead, rather than using the language of obligation in cl 9.1, they used the language of subjective intention.

30. The Angelis Parties submitted that the reference in cl 9.1 to “maximis[ing]” shareholder value “imports a requirement to compare the proposed exit with other practical or available exit options” and pointed to an “alternative scenario of allowing the Resilium Venture to proceed to an IPO in two years’ time, as envisaged by the Resilium Transaction” and to Pemba “undertaking a sale without competitive pressure, in the context of an ongoing shareholder dispute”.

31. The first difficulty with that submission is that the words of cl 9 of the 2017 Shareholders Agreement have no relevance to the “Resilium Transaction” which, if it is to proceed at all, cannot proceed under the 2017 Shareholders Agreement, but only under one or other later purported shareholder agreements; none of which contains the Drag Right.

32. In any event, the language used by the parties does not suggest they envisaged the spectre of the potentially complex exercise that this submission suggests.

33. The language used by the parties suggests that they intended that Pemba have in cl 9 a certain path to Exit, additional to that available to it in cl 8 (which relates only to its own shareholding), without the need to engage in “a contentious and complex valuation exercise about whether the proposed Exit maximised Shareholder value compared to other hypothetical alterative Exit pathways” (to adopt the language of Pemba’s submissions).

34. The Angelis Parties also sought to draw in aid evidence that Mr Angelis gave as to his reasons for agreeing to Pemba’s investment in Coverforce under an earlier shareholders agreement, which the 2017 Shareholders Agreement is expressed to amend and restate.

35. But Mr Angelis’s subjective intentions are incapable of relevance to the construction question here.

36. For those reasons I declare that, on the proper construction of cl 9 of the Shareholders Agreement made on 29 November 2017 between the plaintiffs and the first, second and sixth defendants:

1. the party seeking an Exit must have the intention to achieve an Exit which maximises Shareholder value;

2. cl 9 does not require that such Exit maximise Shareholder value.

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Amendments

26 November 2019 - Coversheet amended

Decision last updated: 26 November 2019