Biodiesel Producers Ltd v Stewart
[2007] FCA 722
•16 May 2007
FEDERAL COURT OF AUSTRALIA
Biodiesel Producers Limited (ACN 099 165 876) v Stewart [2007] FCA 722
CORPORATIONS LAW – applicant a start up company with first respondent as company secretary and second respondent effectively as company managing director – incorporated for the purpose of constructing and running a biodiesel plant – sources of funding to be a Commonwealth Government grant and private investor ANZ Infrastructure Services Limited – site for the plant purchased – delays in securing development approval – delays in securing funding – delays in securing plant – dispute between Board members and first and second respondents – second respondent settled with the applicant and took no part in the litigation.
CORPORATIONS LAW – purported issue of performance shares to respondents by directors under a ‘circular resolution’ – performance shares would convert into B Class shares upon the achievement of certain milestones.
CORPORATIONS LAW – breach of fiduciary duty – failure on part of first respondent to fully inform the board of directly relevant legal advice prior to signing of the circular resolution – first respondent owed a statutory duty as an officer of the applicant ss 180(1), 181(1) and 182(1) Corporations Act 2001 (Cth) and common law and fiduciary duties – Board would not have signed the circular resolution if it had known of the advice – circular resolution rescinded.
CORPORATIONS LAW – issue of performance shares which converted into B Class shares created a new class of shares – variation of class rights s 246C(5) Corporations Act – no shareholders’ consent – not done in conformity with s 246B(1) Corporations Act – not done in conformity with company constitution.
CORPORATIONS LAW – failure to obtain shareholders’ consent – whether a procedural irregularity amenable to validation under ss 1322 or 254E Corporations Act – no application made under either section – no substantial injustice.
CONTRACT – circular resolution – on proper construction performance shares issued at the time of the making of the circular resolution – performance shares were to convert in tranches at the achievement of the set milestones – milestones would be required to be achieved within a reasonable time – shares would not convert if the applicant achieved the milestones in the future.
CONTRACT – Executive Service Agreement for services of the first respondent – not executed under authority of a Board resolution – conditions precedent to the agreement were not met – agreement never took effect – whether clause that applicant pay the entirety of the remuneration package for the remainder of the term of the agreement amounted to a penalty.
Corporations Act 2001 (Cth) ss 128(4), 129(5), 208, 210, 228, 246B, 246C, 254E, 1322
Bordman v Phipps [1967] 2 AC 46 cited
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 cited
Broadway Motors Holdings Pty Ltd (In Liq) and the Companies (New South Wales) Code (1986) 6 NSWLR 45 cited
Chan v Zacharia (1984) 154 CLR 178 cited
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 cited
Deputy Commissioner of Taxation v Partinex (2000) 34 ACSR 391 cited
Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79 cited
HIH Casualty & General Insurance Ltd v New Hampshire Insurance Company [2001] 2 Lloyd’s Report 161 cited
Jordan v Avram (1997) 25 ACSR 153 cited
Langton v Forsayth Mineral Exploration NL (1975) 1 ACLR 227 cited
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 cited
Re Insurance Australia Group Ltd (2003) 45 ACSR 702 cited
Re Wave Capital (2004) 47 ACSR 418 cited
Re Westpac Banking Corporation (ACN 33 007 457 141) and Others (2004) 53 ACSR 288 cited
Ring Row Pty Ltd v BP Australia Pty Ltd (2005) 222 ALR 306 cited
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 citedBIODIESEL PRODUCERS LIMITED (ACN 099 165 876) v ANTHONY PAUL STEWART AND DENNIS BARRON
WAD 188 OF 2005
LANDER J
16 MAY 2007
ADELAIDE (HEARD IN PERTH)
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAD 188 OF 2005
BETWEEN:
BIODIESEL PRODUCERS LIMITED (ACN 099 165 876)
ApplicantAND:
ANTHONY PAUL STEWART
First RespondentDENNIS BARRON
Second Respondent
JUDGE:
LANDER J
DATE OF ORDER:
16 MAY 2007
WHERE MADE:
ADELAIDE (HEARD IN PERTH)
THE COURT ORDERS THAT:
1.That the resolution of the Board of directors of the applicant made on 30 November 2004 whereby it was resolved:
(1)to issue 9,000 performance shares to Mr Dennis Barron subject to the receipt of the subscription money;
(2)to issue 5,500 performance shares to Mr Anthony Stewart subject to the receipt of the subscription money;
be rescinded.
2.Subject to the applicant paying to the first respondent the subscription money of $55.00 paid by the first respondent on 29 March 2005, the issue of the performance shares to the first respondent be set aside.
3.The applicant’s register of members be corrected by deleting any reference to the issue of the performance shares to the first respondent on 10 January 2005 (wrongly described in the register as 2004).
4.The cross-claim be dismissed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAD 188 OF 2005
BETWEEN:
BIODIESEL PRODUCERS LIMITED (ACN 099 165 876)
ApplicantAND:
ANTHONY PAUL STEWART
First RespondentDENNIS BARRON
Second Respondent
JUDGE:
LANDER J
DATE:
16 MAY 2007
PLACE:
ADELAIDE (HEARD IN PERTH)
REASONS FOR JUDGMENT
Introduction
This is a claim and a cross-claim which follow upon the termination of the first and second respondents’ involvement with the applicant. The applicant is sometimes referred to in the documents as ‘BPL’.
A Short Statement of the Issues
There are two principal issues in this proceeding. In the claim the applicant seeks a declaration that the respondents, and in particular the first respondent, are not entitled to hold shares, called ‘performance shares’, in the applicant. That raises for consideration the construction of a document called the ‘circular resolution’ and whether performance shares have issued and, if so, the consequences. The issue on the cross-claim is whether the first respondent was employed by the applicant pursuant to an Executive Service Agreement and, if so, the first respondent’s entitlements upon the termination of his employment in June 1995. The claims against the second respondent were settled prior to trial and he took no active part in the trial.
The two issues require a consideration of the applicant’s fortunes over the period between incorporation and at least July/August 2005. The parties tendered voluminous material of documentary evidence in regard to that matter. Of course, that is not unusual in a proceeding where the inquiry is into a company’s affairs over a number of years. Documentary evidence is often the best evidence available in such an inquiry. It is usually not created with an eye to litigation and often tells a story by itself. That is the case here. There is no dispute between the parties as to how the documents show the company’s fortunes and identify the issues to be considered. I propose to examine the proceeding by reference to the documents and then have regard to the oral evidence which the parties adduced.
The History
The applicant was incorporated on 7 June 2002 at the instigation of the second respondent. On that day, the first respondent was appointed company secretary. Shortly after its incorporation, Dr Donald McCully became chairman of directors and the second respondent effectively managing director, although there was never any Board resolution appointing him to that position. On 28 June 2002 Mr Rae Davison and Mr John Pearce became directors.
The first respondent is a Chartered Accountant. He became involved with the second respondent because his partner was a long-standing friend of the second respondent. The first respondent’s position was part-time with the applicant. Indeed, on 10 December 2002 he contracted through his service company to provide business consultancy services to Clinipath (for a period of 12 months commencing on 20 January 2003). He remains a business consultant to Clinipath.
The applicant was incorporated to establish an operating plant in Albury/Wodonga to produce biodiesel from tallow and waste oils for markets in New South Wales, Victoria and the Australian Capital Territory.
Biodiesel is made by using methanol and potassium hydroxide as a catalyst to chemically alter fats and oils. The process is known as ‘transesterification’. It produces an alternative fuel which is cheaper to produce than petroleum diesel and provides better engine lubrication. Ordinarily, it is blended with petroleum diesel to create a biodiesel blend.
The applicant adopted the ideas of the second respondent. It was the intention of the applicant to build an ‘off the shelf’ plant supplied by a European technology supplier, Biodiesel International of Graz Austria (‘BDI’) under licence from that company. That company was able to build a plant which would produce in the order of 56 million litres per annum of biodiesel and, as a side product, 4,000 tonnes of glycerol. By July 2003 the second respondent had identified a suitable site for the construction of the ‘off the shelf’ plant.
Seed capital of in the order of $500,000 was introduced by a number of investors, including members of the Board, to conduct feasibility studies, prepare a marketing plan and to apply for a government grant. It was necessary, of course, for the applicant to raise sufficient funds to purchase a site, build the plant and conduct the business. It was estimated that $14.5 million in equity capital or debt finance would be required.
Two sources of funds, apparently, became available to the applicant in 2003. Some time in 2002 the Commonwealth Government announced it would support the establishment of biofuel industries and announced the availability of $50 million in funding under the Greenhouse Gas Abatement Program for participants in that industry. That announcement was confirmed in the May 2003 Federal Budget.
In August 2003 the second respondent made a presentation to ANZ Infrastructure Services Limited (‘ANZIS’) for the purpose of inducing ANZIS to invest in the applicant either by way of equity or debt or both.
At the applicant’s Board meeting on 22 August 2003 the first respondent advised the directors that he had met with Mr John Clarke, the managing director of ANZIS, who had told him that ANZIS wanted to finance most of the project by either debt or equity. The Chair and Mr Davison expressed concern about ANZIS’ potential control of the applicant. The second respondent wrote to the applicant’s shareholders inviting them to consider making further investment in the applicant.
On 10 September 2003 the managing director of ANZIS, John Clarke and a director, Ross Beames, wrote to the second respondent indicating that ANZIS had undertaken a preliminary review of the applicant’s project and was prepared to undertake a more detailed review in the future. On 17 September 2003 the first respondent instructed the applicant’s solicitors, Hardy Bowen, to draft agreements. On 18 September 2003 the second respondent sent a draft Heads of Agreement, to which ANZIS and the applicant were to be parties, to his fellow directors and to the first respondent. That agreement was executed by the parties on 13 October 2003. Before going to the Heads of Agreement it is worth noting that on the same day the first respondent took advice from Mr Grant Burgess of BDO Consultants (WA) Pty Ltd seeking advice on ‘vendor shares’. The relevance of these kinds of shares will emerge shortly.
Mr Burgess responded on 14 October 2003:
‘Tony
I have used converting preference shares to good effect in the past. As discussed previously, I think they would suit your purposes. You will still need a valuation for tax purposes. The issue of shares at a discount is caught by Division 13A of the 1936 Tax Act.
Under this Division, the Commissioner requires the market value of unlisted shares to be determined by a “qualified person”. A qualified person is defined as a registered company auditor.
Consequently, you will need a valuation of the company done.
The assessable discount that will need to be brought to account will be the market value of the preference shares less anything paid to acquire them.
I will call you to discuss this further.’
Accompanying the Heads of Agreement was a letter dated 13 October 2003 from Mr Clarke who wrote:
‘Dear Dennis
Re: Confirmation of interest in equity investment
ANZ Infrastructure Services Ltd (“ANZIS”) is a specialist equity investment division of ANZ Investment Bank and specialises in investment in the energy sector, including renewable energy.
As part of its core investment mandate, ANZIS is examining the opportunity to invest in a biodiesel project (“Project”) presented by Biodiesel Producers Ltd (“BPL”).
ANZIS understands that the Project is planned to be built in the Wodonga area and to be constructed next year. Subject to finalising due diligence and the finalisation of Project contracts, it is the intention of ANZIS to arrange sufficient funding for the Project including new equity for BPL and debt funding. Our preliminary review of the Project indicates that the project is viable and we are encouraged by the progress being made by PBL (sic).
One key factor for this project is the availability and pricing of raw materials such as tallow. Therefore it is essential that BPL obtains appropriate supply contracts for tallow and this letter is to support is (sic) endeavour.
Should you have any questions, please contact me on 02 9226 6925.’
The Heads of Agreement recited:
‘(a)BPL has been formed to develop, own and operate a biodiesel plant in Albury/Wodonga to produce around 56 million litres per annum of biodiesel from tallow and waste oils for the markets in NSW, Victoria and the ACT (“the Project”).
(b)ANZIS has held discussions with BPL with a view to an investment trust managed by ANZIS (“the ANZIS Fund”) participating in structuring and funding of the Project.
(c)The Parties may also work together through BPL, after the completion of the Project, on other biodiesel plants initially within Australia but later internationally.
(f)(sic)The Parties have agreed to enter into this Heads of Agreement (“HOA”) to set out their initial understandings and intentions pending due diligence of the Project to the satisfaction of ANZIS and finalisation and execution of formal Project documentation.’
The scope of the agreement was to address the basis for ANZIS injecting equity and procuring debt funding to allow the applicant to fund its project. The term of the agreement was until a definitive agreement had been entered into or 30 June 2004, whichever first occurred.
The parties agreed in clauses 2(b) and 2(d):
‘(b)The Parties agree that the ANZIS Fund is the preferred equity provider to the Project and shall have first right of refusal to provide the initial equity capital for the development of the Project subject to BPL having the right to allocate performance based shares (“Free Carry Shares”) to Dennis Gerard Barron and Anthony Paul Stewart (collectively called “Management”) subject to agreed numbers of shares and terms, more fully detailed in clause 5. The Free Carry Shares will be ordinary shares ranking pari passu with other ordinary BPL shares other than as defined in clause 5 and will be issued at no cost to Management.
...
(d)Following execution of this HOA, ANZIS and BPL agree to develop a detailed work-plan (“Work-Plan”) for:
(1) the development of a financial model; and
(2) achieving financial close.’
It can be seen that clause 2(b) contemplated that the applicant would allocate performance based shares to both respondents at no cost to those respondents. The further detail was included in clause 5 which provided:
‘5 Financial Arrangements
Subject to execution of the Definitive Agreements referred to in clause 8 and the finalisation of the financial model:
(a)ANZIS has assumed that the Project will have total costs of around $17 million funded by around $6 million of debt and around $11 million of equity arranged by ANZIS.
(b)The expected shareholding of BPL at financial close based on the assumption in (a) above, prior to the issue of Free Carry Shares, is expected to be as follows:
(1)there are currently 11.5 million shares on issue split between 7.5 million Founder Shares granted to Dennis Gerard Barron at nil cost and 4 million Seed Shares issued at 10 cents per share;
(2)an additional 500,000 Seed Shares at nil cost might need to be issued to Grange Securities for financial advisory services provided to date;
(3)Pledged Shares from the latest capital raising round total 8 million to be issued at 20 cents per share and these include 2 million shares to be issued to acquire land at Albury Wodonga for the Project; and
(4)an additional 48 million shares, or such other number in accordance with the financial model, to be subscribed for by ANZIS or its nominee at 20 cents per share, to complete the equity funding for the Project.
(c)ANZ or the ANZIS Fund will subscribe for the required equity in BPL following agreement with BPL on the financial model of the Project;
(d)BPL will pay to Management, as a bonus, a transaction fee at financial close of A$0.5 million paid at Management’s option either in cash or by the issuance of 2.5 million Free Carry Shares;
(e)BPL will pay to ANZIS a transaction fee for debt arrangement and equity raising at financial close of A$0.5 million;
(f)BPL will issue additional Free Carry Shares to Management at nil cost as follows:
(1)3 million shares when the Project achieves commercial operations date;
(2)4 million shares when the Project achieves a sustainable net profit after corporate taxation in a financial year (“NPAT”) of $4 million in a financial year; and
(3)5 million shares when the Project achieves a sustainable NPAT of $6 million.
(g)The Free Carry Shares described in 4(f) above will only be issued so long as Management continues to be employed by BPL.’
This document speaks of 7.5 million founder shares and a further 14.5 million free carry shares. The latter shares would issue to management in the number and on the occasions provided for in clauses 5(d) and 5(f). There were a total of 14.5 million free carry shares. Clause 5(g) provided that the free carry shares referred to in clause 5(f) (wrongly described as 4(f)) would only issue so long as the respondents continued to be employed by the applicant. Presumably, because no reference is made, that restriction did not apply to the free carry shares referred to in clause 5(d). There may be a reason for that. The first respondent, although he was the company secretary, was not employed at the time the Heads of Agreement was signed. The second respondent was employed by the applicant although his terms of employment were not defined. It was contemplated that the first respondent would be employed when the applicant could afford his services. In those circumstances, there may have been a deliberate discrimination between clause 5(d) and clause 5(f) to allow the first respondent to become employed after financial close. The number of shares that were to issue to the respondents in the event of certain criteria being met never changed but was always 14.5 million shares. The description of the shares and the circumstances in which they might issue did change.
There were other conditions which are unimportant. The transaction fee in clause 5(e) is not better defined in the Heads of Agreement, but nothing turns on that.
The Heads of Agreement was signed by the second respondent on behalf of the applicant. It was tabled at a meeting of the Board on 11 November 2003. Mr Davison indicated that he was ‘unhappy with the fees charged (by ANZIS) and the ongoing charge of $10,000 per month’.
The Heads of Agreement and the parties themselves anticipated a more definitive agreement would be entered into at least before 30 June 2004. To that end, on 11 November 2003, the first respondent prepared a Term Sheet which was to be used to determine a common starting point for negotiation of a shareholders agreement between the parties. It was contemplated that the shareholders agreement would be executed by all of the existing shareholders and ANZIS. The shareholders agreement would provide for terms upon which ANZIS would invest in the applicant.
In relation to performance shares, the Term Sheet provided:
CLAUSE TERM Performance Shares ● Barron & Stewart will be issued the following Performance Shares on execution of the Shareholders Agreement:
● Barron 9,000
● Stewart 5,500● The Performance Shares will be convertible preference shares issued at one cent per share.
● One Performance Share will convert into 1,000 ordinary shares if the performance criteria is met.
● One Performance Share will convert one ordinary share if the performance criteria is not met.
● The performance criteria for the Performance Shares is set out below:
Performance Criteria
Barron’s Performance Shares
Stewart’s Performance Shares
Financial close with ANZ
2,000
500
Construction and completion the Biodiesel Plant
1,000
2,000
Sustainable NPAT of $4 million
3,000
1,000
Sustainable NPAT of $6 million
3,000
2,000
● Reasonable time limits will be agreed to satisfy performance criteria having regard to the project timetable.
● Performance shares convertible in the event that ANZ elects to sell its shareholding within 4 years from financial close
● The Board must not make any decision that will adversely affect Barron’s and Stewart’s performance criteria of the Performance Shares without first adjusting the performance criteria of the Performance Shares to the reasonable satisfaction of Barron and Stewart.
● NPAT calculated in accordance with Australian GAAP providing plant capital expenditure and project development costs written off over 10 years and extraordinary items excluded from NPAT calculation.
It is common ground that the performance shares addressed in the Term Sheet are the ‘Free Carry Shares’ referred to in the Heads of Agreement. The Heads of Agreement had not identified what number of shares each respondent would receive but only identified the total number of shares. The Term Sheet shows how many shares each would receive. The Term Sheet also addressed the respondents’ employment. There were further draft Term Sheets created in that year. A Term Sheet distributed in January 2004 provided for remuneration to the respondents. Relevantly, on that Term Sheet the first respondent would be employed for a term of five years and would receive a remuneration of $140,000 plus 9% superannuation.
On 6 January 2004 Mr Beames, who was a director of ANZIS, emailed the first respondent with comments on the shareholders agreement term sheet. In relation to performance shares he wrote:
‘Performance Shares are automatically convertible if ANZ sells within 4 years (a) why? and (b) we believe that the inclusion of this clause has a –ve [negative] impact on the value of our investment and do not agree’
The first respondent replied to Mr Beames on 7 January 2005:
‘Founders agreed to shares being issued on performance and not up front. As performance shares are issued on performance, we must have opportunity to perform. We assume that a purchaser would be buying on the basis of good returns thus founders should not be disadvantaged in the event of a quick exit.’
Whilst that Term Sheet was still under consideration, the applicant applied to the Commonwealth Government for a Biofuels Capital Grant. The application anticipated a capital structure which included the issue of a further 14.5 million shares ‘upon the attainment of certain milestones’. The proposed milestones were: 2.5 million shares upon financial close; 3.0 million shares upon completion of the operating plant; 4.0 million shares upon achieving a NPAT of $4.0 million; and 5.0 million shares upon achieving a NPAT of $6.0 million.
On 21 January 2004 Hardy Bowen forwarded to the applicant a draft of the shareholders agreement and a memorandum. In the memorandum which addressed ‘Outstanding Issues’ they wrote:
‘9.Performance shares/free carry shares: the understanding of the performance shares/free carry shares to be issued to Baron (sic) and Stewart are inconsistent in the HOA and Term Sheet. Clarification of the intention is required.’
The draft shareholders agreement provided that both respondents were entitled to apply at completion for performance shares. The draft shareholders agreement contained a Schedule 3 which was to address the terms of the performance shares but no terms were included. The document addressed both respondents’ employment. The draft contemplated that the first and second respondents would be paid a $500,000 transaction fee but no provision was made as to how that amount would be divided between the respondents. ANZIS was to receive a like amount.
A Board meeting was held on 26 February 2004 at which all directors and the first respondent were present. There is a reference in the minutes:
‘D McCully expressed desire that an option should be included in the Employment Contract. He said that Employment Contract for Rod Hawkins should be registered for say 3 years after a probationary period of 6 months.’
On 2 March 2004 the first respondent sent a draft employment contract to both Mr Beames and Mr Clarke of ANZIS with copies to Dr McCully, Mr Pearce and Mr Davison. Mr Pearce replied (on 24 March 2004) ‘for good corporate governance (as we have no “remuneration committee” yet) the Board should have its own independent remuneration consultant to confirm that the terms are in line with current market conditions – unless of course Hardy Bowen already qualifies as that – in which case OK’.
On 10 March 2004 Mr Clarke sent the respondents and Mr Beames a marked up copy of an Executive Service Agreement. That document addressed termination. The termination clause is in a similar but unfinished form to the termination clause contained in the executed Executive Service Agreement.
A further draft shareholders agreement was circulated by Mr Clarke of ANZIS on 10 March 2004. In this further draft the proposed payment of $500,000 by way of transaction fee to the respondents was deleted. That draft was sent to Mr Paterson on 14 March by the first respondent. On 16 March Mr Paterson wrote to the first respondent:
‘Dear Tony
Biodiesel Shareholders Agreement
We refer to the marked up Shareholders Agreement which you forwarded to us on 14 March 2004 and to my telephone conversation with you today.
We confirm as follows:
1.We understand that mark ups contained in the Shareholders Agreement forwarded to us have been drafted by you as a result of negotiations with ANZIS Infrastructure Services Limited (“ANZIS”).
2.The document is generally not adequate and not in an acceptable form for execution. By way of illustration the return on investment and distribution policy contained in clauses 12.2, 12.3 and 12.4 in our view does not achieve the stated objectives previously communicated to us. There are numerous other inconsistencies and ambiguities contained in the Agreement which should also be addressed.
3.The Shareholders Agreement does not address the variation of existing shareholders’ rights nor is it capable of creating the new A and B classes of shares. In effect what the Agreement does is alter the rights of the shareholders by contract. An amendment of the Constitution and/or a resolution of shareholders at general meeting are required to vary existing shareholders’ rights and to create a new class of shares. To finalise this procedure we will need to review the Constitution of Biodiesel.
4.There may be tax implications for the shareholders of Biodiesel as a result of the rights to a return on investment and distribution policy as currently drafted. The right as currently drafted may give rise to an assignment of income for tax purposes. We confirm that we have not been requested to give tax advice nor have we given tax advice in respect of the operation of the return on investment and distribution policy contained in the Shareholders Agreement.
5.The Shareholders Agreement contains numerous agreements to agree. For example, clause 4.3(c) provides that the directors of the company agree to amend the performance criteria of the performance shares issued to Barron and Stewart in the event that they make an adverse decision affecting the ability of Barron and Stewart to meet the performance criteria. Generally, agreements to agree are unenforceable at law.
Notwithstanding the above, you have advised us that the Agreement is to be engrossed in its current form for execution by the parties.
Please call me to discuss.’
The shareholders agreement continued to evolve until it was finally executed on 20 April 2004. The drafts and the executed shareholders agreement dealt with both the issue of performance shares to the respondents and the respondents’ employment. There are differences in the documents but I do not discern nor did either party contend that the changes assisted either with the construction of the executed shareholders agreement or any other document.
The parties to the shareholders agreement were the applicant, ANZIS, both respondents and the seed capitalists who, by then, held 4 million shares in the applicant.
Clause 4.1(b) and clause 4.1(c) provide for the second and first respondents to apply to the applicant at completion, in the case of the second respondent, for the issue of 9,000 and in the case of the first respondent, for the issue 5,500 performance shares each at $0.01. ‘Completion’ is defined to be the date that the condition precedents are satisfied. The condition precedents were that ANZIS was satisfied with its due diligence investigations and all final documentation for the acquisition of shares was satisfactory. Clause 4.3 provides that the performance shares would issue on the terms and conditions in Schedule 3 of the shareholders agreement.
Schedule 3 provides:
‘2. Type and price
The Company will issue performance shares to Barron and Stewart which will be known as “Performance Shares” each at the Issue Price as Details (sic) in the table below.’
‘Issue price’ was defined to be $0.01. The performance criteria and the number of shares to be issued to each respondent was contained in the table:
Performance Criteria
Number of Shares to be
issued to Barron
Numbers of Shares
to be issued toStewart
Satisfaction of Conditions
Precedent
2,000
500
Completion of the construction
of the Facility
1,000
2,000
NPAT of $4,000,000
3,000
1,000
NPAT of $6,000,000
3,000
2,000
Each performance share was to convert into 1,000 B Class shares in accordance with clause 5 which reads:
‘5. Conversion
Each Performance Share will convert into 1,000 B Class Shares when the performance criteria in clause 2 are satisfied or in the event that a Drag Along Notice is issued under Clause 18.1.
5.1Statements
As soon as practicable after conversion of any Performance Share, the Company shall dispatch statements or certificates in respect of the B Class Shares issued as a result of the conversion.
5.2After Conversion
The B Class Shares issued on conversion of any Performance Share will as and from 5.00pm (WST) on the date of allotment rank equally with and confer rights identical with all other B Class Shares then on issue.’
‘B Class Shares’ is defined to mean the B Class shares as defined in the shareholders agreement:
‘ “B Class Shares” means shares with the rights of ordinary shares in the capital of the Company with the exception of the rights referred to in clauses 12.2, 12.3 and 12.4 and includes the 7,500,000 ordinary shares currently issued to Barron or associated parties.’
Performance shares have no entitlement to a dividend: clause 3. They are not reviewable: clause 4. The performance shareholders have no right to vote: clause 11. Performance shares are not transferable: clause 9. Schedule 3 contemplated that B Class shares would issue for no consideration: clause 6. Clause 8 of Schedule 3 addresses winding up. It provides:
‘8. Winding up
If the Company is wound up prior to conversion of all of the Performance Shares into B Class Shares then the Performance Shareholders will have the right for each Performance Share held and not converted in B Class Shares to be paid cash for the Issue Price but will have no right to participate beyond the extent specified in this clause 8 in surplus assets or profits of the Company on winding up.’
The Drag Along Notice was addressed in the shareholders agreement itself but is irrelevant for the purpose of this proceeding.
Schedule 2 identified the company’s capital at completion and conversion of performance shares:
‘Schedule 2
Company Capital at Completion and Conversion of Performance Shares
BIODIESEL PRODUCERS LTD PROJECTED CAPITAL STRUCTURE
Shares
No. of Shares
Price
Amount
Fully diluted
A Class Shares
Seed
4,000,000
$0.10
$400,000
4%
Directors
250,000
$0.00
$0
0%
Consultants
250,000
$0.00
$0
0%
New Investors(assumed)
10,000,000
$0.20
$2,000,000
9%
Land vendor shares (assumed)
2,000,000
$0.20
$400,000
2%
ANZIS (assumed)
72,000,000
$0.20
$14,400,000
65%
Total A Class Shares
88,500,000
$17,200,000
80%
B Class Shares
D Barron founder
7,500,000
$0.00
$18,182
7%
Financial close
2,500,000
$0.00
2%
Operations date
3,000,000
$0.00
3%
$4m NPAT Target
4,000,000
$0.00
4%
$6m NPAT Target
5,000,000
$0.00
5%
Total B Class Shares
22,000,000
$18,182
20%
Total Capital
110,500,000
$17,218,182
100%
The shareholders agreement contemplates a class of shares apart from the applicant’s ordinary shares. The applicant’s Constitution permits the directors to issue shares either as ordinary shares or shares of a named class with such rights in regard to dividend, voting, return of capital or otherwise: Article 2.1.
The Constitution also provides that if shares are divided into different classes, the rights attaching to any class may be varied with the consent in writing of the holders of three-quarters of the issued shares of that class or if authorised by special resolution passed at a separate meeting of the holders of the shares of that class: Article 2.3. That clause also provides that any variation of the rights under that sub-Article is subject to s 246B of the Corporations Act 2001 (Cth) (‘Corporations Act’).
Like the second draft, there was no provision for any transaction fee to be paid to the respondents. Clause 14 addresses the appointment of the respondents to their offices in the applicant and reads:
‘14. Personnel
14.1 ...
14.2Appoint of Barron as Managing Director
(a)The Company shall appoint Barron in the capacity of managing Director of the Company for a period of 5 years commencing on Completion. Barron will be paid an annual salary of $190,000 per annum plus superannuation at 9%.
(b)A formal executive services agreement will be executed by the Company and Barron.
14.3Appointment of Stewart as Chief Financial Officer and Company Secretary
(a)The Company shall appoint Stewart in the capacity of Chief Financial Officer and Company Secretary of the Company for a period of 5 years commencing on Commercial Operations Date. Stewart will be paid an annual salary of $140,000 per annum plus superannuation at 9%.
(b)A formal executive services agreement will be executed by the Company and Stewart.
14.4 Management bonus
Barron and Stewart are entitled to a bonus payment of the amount equal to 5% of any Government Grant received by the Company. Management costs during development of the Project
The costs of management during the construction of the Facility will be capitalised in accordance with the Financial Model. Management will not receive Directors Fees as outlined above in 7.10(a).’
The shareholders agreement was subject to conditions precedent in favour of ANZIS. Clause 2.4 provided that if the conditions precedent had not been satisfied or waived by 30 September 2004 or any later date agreed to by ANZIS, the applicant and the second respondent, the shareholders agreement would automatically terminate. The respondents’ Executive Service Agreements were executed some time before July 2004. The exact date of their execution is unclear because the documents are undated. Later evidence suggests they may have been executed in May. The applicant entered into separate Executive Service Agreements with the respondents. The relevant document for this proceeding is, of course, the agreement between the applicant and the first respondent. The agreement was executed by Dr McCully and Mr Davison ‘in accordance with s 127 of the Corporations Act’. Section 127 allows two directors to execute a document without using the company seal and, if so executed, any person may assume that the document has been duly executed by the company: s 129(5) of the Corporations Act. It may be assumed that the agreement between the applicant and the first respondent was entered into after the shareholders agreement because Recital B said:
‘B.The Company has entered into a Heads of Agreement with ANZ Infrastructure Services Ltd (ANZIS) to reach financial close for the raising of the required debt and equity capital.’
Clause 3 provides for the first respondent’s engagement:
‘3. Engagement
The Executive will serve the Company on a full-time basis as Company Secretary and Chief Financial Officer for the Term. The Executive will relocate permanently to the Location to undertake the Business and will receive Relocation Expenses as reimbursement for such relocation.’
The ‘Term’ there referred to is the period which begins from the commencement date and ends five years thereafter unless otherwise terminated in accordance with the provisions of the agreement. ‘Commencement Date’ is defined to be the date on which clause 2 is satisfied or an earlier date if approved by the Board. Clause 2 provides:
‘2. Conditions
This Agreement is conditional on the:
(a)The Company and ANZIS reaching financial close for the funding of the biodiesel plant;
(b)The commencement of operations of the biodiesel plant; and
(c)the ratification of this Agreement by the board of directors of the Company.’
The ‘Location’ referred to in that clause is ‘Albury/Wodonga’ and the ‘Relocation Expenses’ are defined to be the ‘reasonable expenses properly incurred by the Executive moving from Perth to [Albury/Wodonga] as approved in advance by the Board’.
Clause 6 of the agreement provides for the first respondent to receive a remuneration package totalling $140,000 which comprises a base salary (payable monthly) and any other components and any Fringe Benefits Tax applicable to those other components. It also provides for superannuation. The remuneration package was to be increased on each anniversary of the commencement date in accordance with CPI. The agreement further provides that the first respondent would receive 1.25% of any Federal or State Grant received by the applicant and a bonus of $50,000 per annum if the applicant achieved a NPAT of $8 million. The agreement also provides for the usual emoluments of office. Clause 13 of the agreement addresses termination and allows the applicant to terminate ‘at any time during the Term for any reason’. Clause 13 is in similar form to that contained in the draft Executive Service Agreement circulated on 2 March 2004 and commented on by Mr Clarke and responded to by Mr Pearce. However, if the applicant terminates for any reason, other than illness, poor performance, or if the applicant ceases trading, or if the applicant has grounds under clause 13.5 to summarily terminate the employment, the applicant must pay the first respondent an amount equal to the remuneration package for the remainder of the term. The agreement also provides that the first respondent could terminate on giving not less than three months written notice.
The 7.5 million shares contemplated to be held by Mr Barron were founder shares which had been allocated shortly after the applicant was incorporated.
During 2003 and 2004 Mr Barron negotiated with land owners in the Albury/Wodonga district for the purchase of land upon which the plant would be built. It was contemplated that the plant would be, as I have mentioned, designed by BDI and it would be erected by Process Design and Fabrication Pty Ltd (‘PDF’). Both before and after the execution of the shareholders agreement, steps were taken to enter into offtake and tallow agreements with suppliers in the Albury/Wodonga area so as to ensure the adequacy of supply of the raw material needed for the production of the biodiesel.
At the meeting of the Board of directors on 1 July 2004 Mr Barron reported that BDI was prepared to enter into an exclusive Australian arrangement with the applicant for the provision of the plant and he was pushing PDF for a fixed price contract. He reported to the Board on the conditions of the shareholders agreement regarding ANZIS’ subscriptions and contributions and the 30 September 2004 deadline.
On 1 July 2004 the first respondent received, by email, advice from Mr Paterson of Hardy Bowen. It said:
‘Tony
Attached are:
1.Written consent of shareholders to variation of rights of existing shares;
2.Circular directors resolution relating to the completion of the Shareholders Agreement. You have instructed me that you require resolutions for the issue of shares to ANZIS, Barron and yourself and the appointment of the ANZIS director;
3.Circular directors resolution relating to the issue of A Class Shares to further seed investors.
There are various details that you will need to confirm or complete in the above documents.
The written consent in item 1 above need to be attended to prior to the issue of the shares in items 2 and 3 otherwise the parties in items two and three will need to be included as shareholders and provide their written consent to the variation of shareholder rights.
Notice to all shareholders of the variation of their rights is required to be given within 7 days of such variation. ASIC must also be notified within 14 days of dividing the ordinary shares into classes of shares by lodging the appropriate ASIC form with the written consent of shareholders. Of course you will need to advise ASIC of the issue of the shares in the resolutions above I can assist with this if you would like.
As biodiesel is a public company it must also comply with Chapter 2E of the Corporations Act. This provides that a related party can not be given a financial benefit (the issue of shares is a financial benefit) unless shareholder approval is obtained or an exemption applies. A related party is defined widely and includes all related parties of directors. We can provide you with further information of who is a related party if you require.
The issue of Performance Shares to Dennis falls within the provisions of Chapter 2E. Shareholder approval will not be required for the issue of these shares where the issue falls within the arms length exception. This exception provides that shareholder approval is not required where the financial benefit is given on terms that would be reasonable in the circumstances if the company and the related party were dealing at arms length.
We are not aware who the new “seed” shareholders are, but advise that Chapter 2E should be considered in relation to the issue of shares to them.
I confirm that we have not been asked and have not given any advice in relation to the disclosure requirements for the issue of shares in the above resolutions or to the existing shareholders of the company. I can provide this advise (sic) if you require but would first require further information form (sic) you. Please advise if this is required.’
There are two aspects of Mr Paterson’s advice which are important. He first drew to the first respondent’s attention his concern that the issue of B Class shares might give rise to a consideration of s 246B of the Corporations Act. That section deals with the procedure to be applied for the variation of rights attached to shares in a class of shares. I have already mentioned the procedure provided for in the applicant’s Constitution. Next, he drew attention to s 208 contained in Chapter 2E of the Corporations Act which provides that a public company cannot give financial benefit to a ‘related party’ unless the company obtains the approval of its members and gives the benefit within 15 months after approval or members’ approval is not needed because an exception applies. A director is a related party. A secretary is not. The advice given related to the issue of performance shares to the second respondent. Section 210 of the Corporations Act provides for an exception to s 208 if the financial benefit is reasonable and the company and the related party are dealing at arms length.
On 6 July 2004 the second respondent was advised that the applicant’s funding of up to $9,600,000 under the Biodiesel Capital Grants Program had been successful. The funding was available in tranches. Before payment could be made, it was necessary there be a final investment decision which needed to be made within 12 months. If that occurred, $2,400,000 would become available on commencement of construction; $2,400,000 on commencement of the plant; and $4,800,000 on the first commercial sale into the domestic transport fuels material.
On 16 September 2004 the second respondent wrote to PDF advising that it intended to enter into an agreement with PDF for the construction of the plant at Barnawartha.
On 21 September 2004 Mr Clarke wrote to the directors of the applicant and the second respondent referring to the shareholders agreement and, in particular, clause 2.4 which provided for termination if a condition precedent had not been satisfied or waived prior to 30 September 2004. He wrote:
‘As you are aware, the project to develop a biodiesel plant at Barnawatha (sic) has been delayed and the conditions precedent will not be achieved by 30 September 2004. Nevertheless, good progress is being made, the project continues to appear viable and we expect that financial close will occur within the next two months. ANZIS continues to be completely committed to the finalisation of the project and is prepared to increase its level of equity in the project if a higher level of equity is required once a final capital structure is agreed.
Given this, we propose that the date in Clause 2.4 of the Agreement becomes 31 December 2004 with the Clause otherwise staying the same.
If BPL and Mr Barron agree to this amendment, please countersign the attached copies of this letter and return one to us prior to 30 September 2004.’
On 27 September the second respondent emailed the directors and the first respondent advising that he and the first respondent had taken legal advice concerning ANZIS’ request to extend the shareholders agreement to 30 December. He advised that the applicant was in a very strong position and that the applicant could obtain from ANZIS a greater amount by way of finance for the issue of fewer shares. He suggested that the applicant ought to be valued. He invited the directors to consider those matters ahead of the directors’ meeting scheduled for 30 September 2004.
Mr Pearce was not due to be present at that meeting. He emailed the directors and the respondents agreeing that the agreement with ANZIS should be tightened ‘so that we get more than $14.4m for 65%. How much more I leave to you’.
On 29 September 2004 Mr Clarke sent the respondents a paper on capital alternatives. In the email accompanying that document he wrote:
‘... Given that the project has taken longer to complete than originally envisaged, we are willing to also review the fees payable to both of you on financial close, given the uncertainty arising from the Govt grant. ...’
The shareholders agreement was to expire on 30 September 2004 unless agreement in writing was otherwise reached. A meeting of the directors of the applicant was held on that day. Mr Pearce was not present. The first respondent was. The second respondent reported to the directors that he had had discussion with other potential investors. He recommended, and the Board unanimously resolved, that ANZIS’ request to extend the shareholders agreement be rejected. The Board resolved that ANZIS be invited to reconsider their proposal. At the same time, the Board resolved to ask ABN Amro to prepare a valuation of the applicant.
ANZIS was informed that the applicant would not extend the shareholders agreement. The second respondent emailed his fellow directors advising ANZIS’ reaction:
‘The result of my telling ANZIS that we would not extend the shareholders agreement was disappointing. John Clarke went to BDI and told them BPL may not get the Govt Grant and may not get funding at all. BDI was concerned and has delayed the trip to Australia by 4 Engineers by 2 weeks.
The result of this action is that we have a delay and that BDI is now asking for another 10% or $1.3 million to be paid by October 15th.
I want to raise another $500,000 by share issue. Andrew White has indicated he will put in $200k and has another investor as well. Tony has perhaps $100k from others and I have asked Trafigura for $50-$100k.
Our strategy is to continue to talk to ANZIS, pay the money but I have already gone out to Cargill, QAF and Sumatomo.
Once BDI come in 2 weeks and we have a teaming agreement with PDF we are in a strong position. We may need $200k by next week so if anyone has someone who wishes to invest and can do it by next week, please let me know.
ANZIS will have an offer to us later this week and we can look at it.
Please let me know your thoughts.’On 5 October 2004 the first respondent emailed Dr McCully: ‘The reaction from ANZIS was not as good as I expected!’ On 5 October 2004 ANZIS wrote to Mr Barron. Relevantly, it wrote:
‘We refer to the request that we made to extend the Shareholders Agreement (“SHA”) for the above, your rejection of that and our subsequent discussions about your areas of concern.
We have discussed this position internally. ANZIS is committed to proceeding with this project and has stated that, subject to final documentation, it will seek approval to invest up to $30 million in the project. As you are aware, we have worked with you intensively for over a year to develop the project to a point where we believe that financial close of the project is only about 8 weeks away. As the daily loss in value for any delay in the project totals around $30,000, we believe that it is [in] the best interests of BPL, its shareholders’ (sic), BDI, BDF and ANZIS if we resolve these concerns quickly so we can all move forward in the most expeditious way.
We understand from your brief email and discussions with Tony Stewart the areas of concern and we attempt to address these below. This would recorded by way of a revision to the lapsed SHA that would be re-instated.
1.Shareholding. In recognition of the significant time it has taken to finalise the project, we are prepared to change the basis of the shareholding as follows:
●On financial close, 2,500,000 founder shares will be issued to you and Tony as A Class Shares.
●On Financial close, 19,500,000 shares will be issued to you and Tony as B Class shares. The immediate issue of these shares should remove your concern about the previous uncertainty of their issue.
...
3.Financial Close. We believe that we are about four weeks away from finalising the necessary EPC documentation for BDI and PDF. When this is agreed, there still remain other documents and approvals to obtain before any financial close can be achieved; these include environmental approvals, development approvals, raw material contracts and off-take contracts. Regardless of this, as soon as the SHA is signed, ANZIS would seek approval to fund the next tranche of monies due to BDI with payment made as soon as EPC contracts are signed. This will then enable BDI to prepare detail engineering draws. While this is being completed, all other project approvals could be obtained so that we can commence construction as soon as the DA is issued, expected to be in late January 2005.
4.Fees. We have previously discussed the additional time it has taken to develop this project. Dennis, both you and ANZIS have invested significant time in this project. To compensate, we propose that BPL pay you a fee on financial close of $500,000 and $100,000 to Tony. In addition, on project completion but subject to receipt of the Biofuels Capital Grant, we propose that BPL will pay another work fee to you of $500,000. In recognition of the intensive effort that ANZIS has made, it will receive $1,000,000 on financial close once all the equity has been subscribed for the project. This fee will be payment to us for the responsibility for the raising of debt on completion, as mentioned above.
5.Salaries. Given the time that has passed since we agreed salary levels, we believe that these levels should now be $220,000 for you as MD and $165,000 for Tony as CFO.
...
Dennis, we hope that this package goes a long way to reducing the concerns we understand that you had about the previous SHA. We believe that we should be able to commence construction of the project in January 2005 and complete in within 9 months. We are willing to work with you to finalise these arrangements as quickly as possible so that we can recommence and progress.’
ANZIS’ proposals contained in that letter, if accepted and completed, would have substantially advantaged both respondents. This was the first time it had been suggested that the respondents should be entitled to additional founder shares. Moreover, it was proposed that the number of B Class shares to be allotted should be increased to 19.5 million. Fees would become payable to both respondents. It was proposed that the salaries they were to receive be increased. The letter indicates ANZIS’ keenness to remain or to become the applicant’s financier. It also shows that ANZIS thought it was necessary to have the support of the respondents to achieve that end and that support could more readily be obtained by the proposed inducements. The second respondent circulated that letter to Dr McCully, Mr Davison and Mr Pearce.
On 8 October 2004 ANZIS wrote again to the second respondent. Relevantly, it stated:
‘In our letter of 5 October, we detailed our thoughts about the level of value that you, as the sponsor, should receive for your efforts to date. The value of this was as follows:
●
2,500,0007,500,000 A class shares with a subscription value of $500,000 to be issued at financial close;●$500,000 payable on financial close to you and $100,000 payable to Tony;
●$500,000 payable on completion and receipt of the grant;
●19,500,000 B Class shares issued on financial close but these participate in distributions only if the project performs above an agreed hurdle rate for financial equity. Note that under current assumptions, it appears that the project will perform materially in excess of the currently specified hurdle.
In total, this represents $1.5m of immediate consideration for you from the project that has projected costs of around $40m. This represents 3.75% of the project cost. However, the most important part of this consideration is in the B Class shares and we estimate that these have a value of between $5m to $10m depending on what assumptions are made for the key future value drivers for the project.’
In that letter of 8 October, ANZIS increased the proposed benefits which would flow to the respondents. The number of A Class shares increased to 7,500,000 although in this proposal they were to be paid for. They were no longer described as ‘founder shares’.
Mr Davison, who had been distrustful of ANZIS for some time, was unimpressed by ANZIS’ conduct both in its delay and in its later attempt to remain the financier. He emailed the respondents after receipt from the second respondent of ANZIS’ letter of 5 October 2004:
‘Hi Denis I personally want nothing to do with them.
1 They over ran the time frame.
2 They have cost the company a lot of money paying there (sic) fancy but inefficient lawyers.
3 There (sic) are wanting to bribe us with handfulls (sic) of money they haven’t invested.
4 They go behind our backs to both BDI & PDF which is costing us both time and money.
5 I would never trust them again as partners in our project. They have behaved in a unprofessional manner akin to spoilt children. They need to learn some business ethics.
6 I feel very strongly about this as I do not do business with cowboys and I can not be brought (sic). They should be informed that we will be seeking redress for any action initiated by ANZIS that in any way delays and or costs BDP additional money’s (sic).
Regards Rae’On 15 October 2004 ANZIS wrote to the directors of the applicant seeking to participate in the applicant’s project. In relation to shares it wrote:
‘A Class Shares
Based on the capital cost estimates outlined above, a total of $19.4m of equity is required for the project comprising $2.8m which has already been committed or subscribed by the current shareholders and a further $16.6m of new equity. This new equity will be provided by the issue of around 83m new A Class shares issued at $0.20 per share.
After discussion with D Barron and A Stewart (“Sponsors”), ANZIS proposes that 5.5m A Class shares be issued to the Sponsors at financial close for the development effort to date including the successful application for a Biofuels Capital Grant. This comprises a combination of 2.5m shares issued in lieu of B Class shares as described in the paragraph below and 3m shares issued in lieu of fees as described in Section 4. This will result in a total of 104.5m A Class Shares on issue.
B Class Shares
Under the previous Shareholders Agreement, the Sponsors were to be allotted 22m B Class shares, which were performance related. ANZIS now proposes that the Sponsors are issued 19.5m B Class shares at financial close, the balance being issued as 2.5m A Class shares as noted above. It is proposed that distributions on the B Class shares are subject to the A Class shares receiving a Threshold Return of 20% to equity, based on internal rate of return methodology, as more fully defined in the previous SHA. This change is expected to increase the benefits flowing to the Sponsors and reduce slightly the returns to A Class shareholders. ANZIS is comfortable with this change given the time and effort that has been provided by the Sponsors.
...
4. Fees
In recognition of the additional time taken and intensive effort required to develop the project, ANZIS proposes an increase in fees to both the Sponsor and ANZIS as follows:
●an additional Sponsors Fee of $500,000 to be paid at commencement of operations after receipt of the Biofuels Capital Grant. This is in addition to the fee of $500,000 to D Barron and $100,000 to A Stewart which will be paid at financial close by way of issue of A Class shares as noted above.
...
5.Executive Remuneration
Given the time that has passed since the setting of executive remuneration we propose that the total salary package including superannuation contributions for D Barron as Managing Director should be $220,000 pa and for A Stewart as Chief Financial Officer, $165,000 pa.’
ANZIS was still clearly keen to have the respondents’ support. This proposal was even more advantageous to the respondents than the earlier proposals. Under this proposal the respondents did not have to pay for the A Class shares which were to issue to them. All three ANZIS’ proposals after 30 September 2004 clearly recognised that the respondents would be entitled to shares at financial close. In the latest proposal they would become entitled to both A Class and B Class shares at financial close.
ABN Amro Morgans reported to the Board of the applicant in November 2004. In that report it valued the applicant at $71 million using a composite Discounted Cash Flow Analysis, Capitalisation of Future Maintainable Earnings and Net Tangible Asset Value.
At or about the same time, the applicant published an information memorandum in which it identified its achievements:
‘● Federal Government Biofuels Capital Grant of $9.6 million
● Acquiring land at Barnawatha, (sic) Victoria
● Obtaining Shire planning approval
● Lodging EPA application
● Finalising technology and construction contracts
● Teaming agreement for Australian use of BDI technology
● Entering into raw material contracts for 100% of requirements
● Signing offtake agreements for 76% of biodiesel output
● Expressions of interest for additional 86% of biodiesel output
● 162% of production under contract or subject to expression of interest
● Export agency agreement for glycerine by-product.’The information memorandum referred to the proposed location of the plant. The plant location was to be at Barnawartha which is about 22 kilometres south of Wodonga. The site was a former abattoir which the applicant assessed as being appropriate for a biodiesel plant. The adjoining land owner was a producer of tallow. The site was close to the Hume Highway. It was zoned ‘Noxious Trade’. The applicant had obtained Shire approval. It was necessary to obtain Environmental Planning approval.
In that information memorandum the applicant identified a project timeline:
‘The expected timetable of key events is:
Plant and equipment ordered January 05
Construction commencement on site February 05
Plant practical completion August 05
Purchase raw materials August 05
Plant commissioning and start of production September 05’The information memorandum also identified the current shareholding and referred to the proposed allocation of 14.5 million shares to the respondents:
‘(a) includes an additional 14.5 million shares issued to Founders upon achievement of the following milestones:
4.0 million shares upon raising required capital;
4.5 million shares upon receiving a government grant of $9.6 million; and
3.0 million shares upon achieving a NPAT of $6.0 million.’
The information memorandum referred to BDI and said:
‘BDI has entered into an agreement to build a biodiesel plant at Barnawartha in Victoria and has drafted a teaming agreement for further plants in Australia.’
A Board meeting of the applicant was held on 4 November 2004. All directors were present. The second respondent reported to the directors at this meeting that there had been an appeal against the Shire approval for the construction of the plant at Barnawartha. He explained that the appeal would be heard in the Victorian Civil Administrative Tribunal (‘VCAT’).
The question of the allocation of the shares to the respondents was discussed. The minutes record:
‘DBarron discussed remuneration for past services equivalent to 5% of grant. Resolved that such an amount be paid when funding finalized but some performance hurdle re NPAT for founder shares.
TStewart to send circular resolution’
A circular resolution had been provided to the first respondent on 1 July 2004. It was item 3 in Mr Paterson’s email of that date. It does not appear to have been circulated at any time before this Board meeting. The directors agreed at this meeting to hold the applicant’s Annual General Meeting on 30 November 2004. They also agreed that the next Board meeting would be held on 15 December 2004.
On 8 November 2004 the first respondent sent Mr Paterson a copy of the circular resolution that Mr Paterson had provided him with his advice of 1 July 2004 ‘to assist with tomorrow’s discussion’. It may be assumed that the meeting took place because, on 9 November 2004, Mr Paterson of Hardy Bowen emailed the first respondent enclosing a draft notice for the Annual General Meeting of the applicant to be held on 30 November 2004. In that email Mr Paterson wrote:
‘Tony
Attached is the draft Notice of AGM for Biodiesel.
I have not included any resolutions for the issue of shares.
The issue of shares by Biodiesel is at the discretion of Directors. The issue of shares with restricted rights that convert into ordinary shares on the achievement of performance criteria can be issued without approval of the shareholders provided that the shares do not have preferential right to dividends.
The recipients of the convertible shares will need to obtain tax advice to ensure that roll over relief is available on conversion.
Chapter 2E of the Corporations Act provides that a public company may only give a financial benefit to a related party (which includes a director or a related party of a director) if Chapter 2E exempts the giving of the financial benefit or shareholders approval is obtained for the giving of the financial benefit. The most commonly relied on exemption in chapter 2E is the arms length exemption. Member approval is not required to give a financial benefit if the public company and the related party are dealing a (sic) arm’s length.
We understand that:
1. Biodiesel is proposing to raise approximately $20,000,000 by way of share issue at an issue price of 50 cents per share to sophisticated investors only. It is proposed that one of the directors may participate in the issue by taking up to $1,000,000 worth of shares on the same terms and conditions as all other shareholders.
2. Biodiesel wishes to issue the performance shares to Dennis Barron consistent with the initial proposal. We are advised that all seed investors were informed of the pending issue of these performance shares prior to becoming a shareholder of Biodiesel.
Provided that the directors are comfortable forming the view that the issue of the above shares are at arms length then no shareholder approval is required to issue the shares.
The Notice is prepared on the basis that the directors of Biodiesel are comfortable to form the view about arms length of the above share issues. If this is not the case please advise and we can add the relevant resolution and the prescriptive information required by Chapter 2E.
Tony I am out of the office for the remainder of the week from lunch time tomorrow.
Please call me or Michael Bowen if you wish to discuss.’
This advice addressed the same topics that Mr Paterson had raised in his email sent to the first respondent on 1 July 2004. In particular, it raised for consideration Chapter 2E of the Corporations Act and the issue of shares to the second respondent. The advice highlighted that shareholder approval was not required if the directors were comfortable in forming the view that the transaction was an arms length transaction. The draft notice of the Annual General Meeting did not contemplate that the shareholders would be asked to approve the issue of the shares to the second respondent.
The applicant was continuing to have difficulty in reaching an agreement with BDI. Near this time it became known to the applicant that ANZIS was having secret correspondence with BDI seeking to obtain a commercial advantage in the event that the applicant did not accept ANZIS’ funding offer. On 9 November 2004 the second respondent wrote to Mr Clarke:
‘Dear John,
BPL would like to make an offer to ANZIS to take up 50% of the share capital. We need to agree on a price per share to take that forward.Before we give you our suggested price we would like you to confirm ANZIS will;
1. Abide by the Banks Code of Conduct
2. Not breech (sic) the signed confidentiality agreements.
3. Not use information obtained in our dealings to allow ANZIS to compete with BPL.
4. Not damage BPL by contact with any parties BPL is dealing with, especially BDI.
Please confirm your agreement with the 4 points above and we will confirm our offer.
Look forward to your reply.’
On 16 November 2004 the first respondent wrote to Mr Paterson enclosing a draft resolution, presumably for his consideration and advice. His proposed resolution stated:
‘Resolve to vary the share capital Of Biodiesel Producers Limited on the following basis:
1. Directors continue to seek debt and equity funding for the Albury Wodonga biodiesel project subject to the further issue of shares be limited to 50% of the total share capital of Biodiesel Producers Limited,
2. The B class ordinary shares be converted to 1,000 ordinary A class shares on attainment of following milestones:
Barron Stewart Total
● Raising required capital; 4.0 million 3.0 million 7.0 million
● Receiving government grant; 3.0 million 1.5 million 4.5 million
● Achieving NPAT of $6 million 2.0 million 1.0 million 3.0 million
Total 9.0 million 5.5 million 14.5 million’
Also enclosed with that draft resolution was a document which the first respondent described as a ‘history of founder shares’:
‘1.BPL issued 7.5 million shares to Dennis Barron (Barron) in January 2002.
2.An Information Memorandum was prepared in support of a seed capital raising of $400,000 around March 2003.
● The IM advised that Barron would receive a further 19.5 million shares upon the attainment of certain milestones as follows:
▪ 9.0 million shares upon raising required capital
▪2.5 million shares upon completion of the operating plant;
▪2.0 million shares upon receiving a government grant of at least $2 million;
▪3.0 million shares upon achieving a NPAT of $4.0 million; and
▪3.0 million shares upon achieving a NPAT of $6.0 million.
3.Barron agreed to grant Tony Stewart 5.5 million shares from his abovementioned entitlement based upon the attainment of similar milestones as follows:
▪ 0.5 million shares upon raising required capital
▪2.0 million shares upon completion of the operating plant;
▪1.0 million shares upon receiving a government grant of at least $2 million;
▪1.0 million shares upon achieving a NPAT of $4.0 million; and
▪1.0 million shares upon achieving a NPAT of $6.0 million.
4.The abovementioned share allocation for Barron and Stewart were formalised in the Shareholders Agreement dated 20 April 2004 whereupon Barron and Stewart were required to subscribe at 1 cent each to 9,000 and 5,500 performance shares respectively on.
5.The performance shares were each convertible to 1,000 ordinary shares upon the attainment of certain milestones as follows:
Barron Stewart Total
● Financial close 2.0 million 0.5 million 2.5 million
● Completion of operating plant 1.0 million 2.0 million 3.0 million
● Achieving a NPAT of $4.0 million 3.0 million 1.0 million 4.0 million
● Achieving a NPAT of $6.0 million 3.0 million 2.0 million 5.0 million
Total 9.0 million 5.5 million 14.5 million
6.The Shareholders Agreement should now be extended/varied so that ordinary shares are issued upon the attainment of certain milestones as outlined in the original IM follows:
Barron Stewart Total
● Raising required capital; 4.0 million 3.0 million 7.0 million
● Receiving government grant; 3.0 million 1.5 million 4.5 million
● Achieving NPAT of $6 million 2.0 million 1.0 million 3.0 million
Total 9.0 million 5.5 million 14.5 million’
The resolution which the first respondent had been seeking from Mr Paterson had not been prepared at the time that a meeting of the Board of directors was held on 17 November. The directors, apart from Mr Davison, were present. So also was Mr Clarke of ANZIS. The first respondent was present and outlined the number of founder shares. The minutes do not disclose what was said.
The chairman, Dr McCully, raised the issue of continued delays and Mr Clarke apparently expressed a willingness for ANZIS and Argent Energy to invest $15 million in the applicant immediately.
The second respondent advised the Board that the VCAT hearing was scheduled for 28 January 2005. He also said that he was meeting with BDI in November. The minutes do not disclose when the next Board meeting was to take place. The minutes of the previous meeting had not anticipated this meeting on 17 November 2004.
During November the second respondent was meeting with other financiers. He reported to his fellow directors on 19 November 2004 that ABN Amro had offered $20 million in term debt, whilst ANZIS was offering $15 million in equity at a price of $0.45 per share and $10 million in term debt. He also reported that he was ‘expecting the G.E. offer very soon’.
On 18 November the second respondent wrote to BDI advising that ANZIS would ‘come back to me tomorrow with a solid proposal’ and that the applicant now appeared to be able to go forward without interruption.
On 22 November 2004 ANZIS wrote to the directors stating that the offers and proposals contained in that letter superseded all previous offers and proposals made by ANZIS. ANZIS offered to fund the proposal in two separate ways; either by way of debt and equity funding, or by equity funding. The offer addressed the question of Mr Barron and Mr Stewart’s remuneration:
‘5. Executive Remuneration
We confirm agreement with the BPL Board’s proposal that the total salary package plus superannuation contributions for D Barron as Managing Director should be $190,000 pa and for A Stewart as Chief Financial Officer, $140,000 pa.’
This was not in fact the last offer made by ANZIS prior to the Annual General Meeting to be held on 30 November 2004. In fact, on 29 November 2004, ANZIS wrote again to the directors putting a further proposal which, again, was said to supersede all previous offers and proposals. It wrote:
‘If BPL’s board is agreeable to these arrangements, we would be pleased to move immediately to:
● work with you to finalise a new Shareholder Agreement (“SHA”);
● finalise the Pdf and BDI contracts and negotiate these changes;
●discuss in detail BPL’s debt funding plan and assist BPL in securing and finalising these debt funding arrangements;
●start our approval process.
We believe that the project can achieve financial close before 31 Jan 2005 and construction could commence when Development Approval is received and final engineering designs are received from BDI in February 2005.’
Again it addressed two separate proposals; debt and equity funding, and all equity funding. In this letter it discriminated between the 7,500,000 founder shares which were to be issued to the second respondent and the 14,500,000 B Class shares which were to be issued eventually to both respondents. Its proposal in relation to executive remuneration was the same as in the previous letter. Those two letters show that the previous generous inducements in the correspondence after 30 September 2004 were no longer available to the respondents.
The second respondent emailed the ANZIS proposal to the first respondent and the directors of the applicant. He said:
‘Gentlemen,
This is the new ANZIS offer. I think it is a very good one.
They are offering to put in $12.4m or $10m with a further $2m from Rae, Max and Andrew White.
I will ask Tony to present the offer tomorrow at 4 pm.
The offer at $10m will give ANZIS 30.3%, existing shareholders 33.3% and Tony & Dennis 33.3%. I think this gives us great comfort.
See you tomorrow at 4pm.’
In November 2004 the second respondent received advice from Mr Grant Burgess of BDO Consultants (WA) Pty Ltd relating to the tax implications of the issue and conversion of promoter shares. Mr Burgess had previously offered advice on preference shares in his letter of 14 October 2003. It appears clear from the correspondence that the second respondent met with Mr Burgess on 23 November 2004. On 29 November he emailed the first respondent:
‘Tony
Further to our earlier conversation, I have undertaken a high-level review of the tax issues associated with the assignment of dividend income. I understand that the assignment will only take place if a specified rate of return is not achieved. I also understand that the assignment is in consideration of ANZ contributing funds to the project.
My preliminary high-level review revealed the following:
▪ The contingent assignment will give rise to a CGT event. The question being what is the value of the consideration received [i.e. what portion of ANZ’s contribution is given for the contingent assignment]? It could well be that the value of the consideration is minimal [since I would assume that ANZ place little value on this right].
▪ The assignment should be effective for income tax purposes since consideration has been given for the right. This means that ANZ alone would be required to include the dividends in their assessable income.
▪ ANZ is unlikely to be entitled to the imputation credit associated with the dividends. This is because they do not hold the shares [refer to Part IIIAA, Division 1A and the 45 day rule]. It may be possible to circumvent this by having a fixed trust hold the shares where a beneficiary has a contingent right [this option would need to be examined closer].
Let me know if you require us to explore this matter further.’
On 30 November Mr Burgess wrote in a letter to the first respondent:
‘Dear Tony
TAX IMPLICATIONS ASSOCIATED WITH CONVERTING PROMOTER SHARES
Further to our meeting on 23 November 2004, as instructed we have briefly addressed the tax implications associated with the issue and conversion of certain promoter shares.
1.1 Background
We understand that:
▪ Dennis Barron and yourself have been issued with a number of converting promoter shares.
▪ These shares convert into a predetermined number of ordinary shares upon the achievement of certain milestones.
▪ These shares convert into a nominal number of ordinary shares if milestones are not achieved.
▪ The converting promoter shares were issued at a point in time when Biodiesel Producers Limited (“BPL”) had a minimal market value.
1.2 Acquisition of Converting Promoter Shares
The acquisition of the converting promoter shares is likely to be subject to Division 13A of the Income Tax Assessment Act 1936 (“1936 Act”). In particular, the converting promoter shares are likely to be treated as having been acquired under an “employee share scheme”: Sections 139B – 139C of the 1936 Act.
Unfortunately, since the converting promoter shares are not ordinary shares (Refer section 139CD of the 1936 Act), the assessable discount in relation to the acquisition of the shares must be brought to account in the income year in which the shares are acquired. However, as the market value of the shares at the date of issue is likely to be minimal, the amount of the assessable discount should not be material.
1.3 Conversion
In general, the conversion of a share does not result in a Capital Gains Tax (“CGT”) event. This principle is supported by Class Ruling 2001/5 which states that:
“No CGT event will happen if the converting preference shares are later converted into ordinary shares without being redeemed or cancelled.”
This position is strengthened by Taxation Ruling TR 94/30 which states:
“A variation in rights does not constitute a deemed disposal under subsection 160M(6): Former CGT Provision. However a variation in share rights for money or other consideration does give rise to a deemed disposal under subsection 160M(7) where the other requirements of that subsection are met.”
TR 94/30 further reinforces this view by including an example (Example 4) which clearly establishes that there are no CGT consequences from the mere conversion of a converting preference share into an ordinary share.
1.4 Conclusion
Prima facie, BPL’s share distribution to Dennis Barron and yourself will be subject to Division 13A. As such, any assessable discount in relation to the issue of the shares will have to be included as taxable income. Further, upon the conversion of the shares into ordinary shares, there should be no capital gains event and therefore no tax payable. The ultimate disposal of the shares will give rise to a CGT event.
If you have any other queries regarding this matter, please do not hesitate to contact me.’
His evidence was that as at 6 June 2005 the negotiations between the applicant and ANZIS, and the applicant and BDI, had stalled. The applicant was, he said, locked in a circle because the two contracts which needed to be completed with ANZIS and with BDI were each conditional upon each other. Further, the government grant was conditional upon the completion of a contract with ANZIS and a contract with BDI. He said that the respondents had not been able to break the circle and bring the negotiations to an end.
I accept that evidence. It seems to me to be apparent from the way in which the negotiations were continuing after the Heads of Agreement was executed on 13 October 2003 that any agreement with ANZIS was conditional upon the applicant entering into a contract with BDI for the supply of the plant whilst any agreement with BDI was conditional upon entering into a funding agreement with ANZIS.
Mr White went to Austria and met with BDI in an attempt to re-engage that company’s support for the project in Australia. He reviewed the draft contract with Austrian representatives in July 2005. Mr White negotiated a teaming agreement with BDI which gave the applicant exclusive rights to the BDI technology in Australia, except for a pre-existing agreement in relation to a plant in Queensland. On 11 July the BDI contract was executed. Immediately after his appointment, Mr White commenced negotiations with ANZIS for a funding agreement which was entered into on 5 August 2005. The ANZIS funding arrangement differed from that which had previously been negotiated by the respondents. ANZIS provided $4 million upfront to enable the applicant to pay a deposit to BDI which enabled the BDI contract to be entered into. That provision broke the circle. The funding offered by ANZIS was 100% equity but at a subscription price of $0.30 per share which represented a value uplift to the existing shareholders of 50%. Mr White also arranged other funding of $4 million.
Mr White caused the applicant to proceed with the rezoning of the application for the Barnawartha site. He instructed consultants for a meeting with the relevant Minister. He retained solicitors and an expert. On 22 August 2005 the independent panel recommended that the Barnawartha site be rezoned. The Minister accepted the recommendation and, on 17 November 2005, the rezoning of the land was gazetted. Mr White renegotiated the contract for the purchase of the Barnawartha site with Mr McKenna which was accomplished on similar terms to those which had been previously negotiated by the respondents.
The PDF teaming contract was to expire on 30 June 2005. Mr White renegotiated that agreement for a further 12 months. Eventually, a new teaming contract was negotiated. The evidence was at trial that the biodiesel plant was to complete in March 2007.
The Federal Government Grant was due to expire on 6 July 2005. Mr White negotiated an extension of that grant. All of those matters meant the conditions precedent in favour of ANZIS had been met.
In construing this resolution it is appropriate, for the reasons already given, to have regard to the factual matrix surrounding the circumstances giving rise to the circular resolution. That factual matrix includes the previous agreements between the parties which were to effect the same transaction.
The Heads of Agreement entered into on 13 October provided that the ‘Free Carry Shares’ were only to be issued so long as the respondents ‘continue to be employed by (the applicant)’: clause 5(g). The shareholders agreement also contemplated that the respondents had to achieve the performance criteria themselves so as to be entitled to the issue of the shares under that agreement. In my opinion, regard can be had to those two previous transactions to discern the objective intention of the parties in relation to the circular resolution: HIH Casualty & General Insurance Ltd v New Hampshire Insurance Company [2001] 2 Lloyd’s Report 161 at [83].
The very purpose of performance shares, in my opinion, is to induce the person to whom the shares are given to perform. That was the purpose for their issue in this case because it was important for the applicant to have those who had the responsibility of managing the applicant achieve the performance criteria. The performance shares were issued with the objective intention that the performance criteria in the performance shares would be met by the holders of the performance shares themselves. That means that the respondents had to cause the applicant to achieve the performance milestones.
It was contended by the applicant that the respondents had to raise capital with ANZIS in accordance with ANZIS’ offer of 29 November 2004 because that transaction was later embodied in the subscription agreement. Because that particular capital raising did not occur, then that criteria was not achieved. I do not think that the circular resolution necessarily obliged the respondents to raise capital only in accordance with ANZIS’ offer of 29 November 2004. I think the criterion that needed to be met was to raise sufficient capital so as to allow the second criterion also to be met. It did not need to be with ANZIS or, if it was with ANZIS, it did not need to be only in the terms of the offer made on 29 November 2004. It was only necessary that the respondents raised sufficient capital to allow the second criterion to be met. In any event, that does not weaken the applicant’s case because, whatever the criterion was, it was not met by either or both the respondents.
In my opinion, the first respondent is not entitled to claim that the performance shares converted to B Class shares after the applicant satisfied the performance criteria in the circular resolution under its new management.
It follows that if I am wrong about my conclusion that the resolution contained in the circular resolution should be rescinded and the issue of the performance shares set aside and the first respondent is entitled to the performance shares, the first respondent will never be entitled to have those shares convert to B Class shares because he and the second respondent did not satisfy the performance criteria.
It was also contended by the applicant that a term had to be implied into the circular resolution such that the performance criteria had to be satisfied within a reasonable time from the date of the circular resolution. It was put that the failure to satisfy the performance criteria was costing the applicant of in the order of $40,000 per day and, in those circumstances, it was an implied term of the circular resolution that the performance criteria must be satisfied within a reasonable time. Of course, if I am right and the performance criteria had to be satisfied personally by the respondents, then this issue does not arise because the first respondent did not satisfy any of the criteria which would give rise to the conversion of the performance shares into B Class shares.
However, in case I am wrong, I should address the contention. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, a majority of their Lordships in the Privy Council said in their view, for a term to be implied, the following conditions (which may overlap) must be satisfied:
‘(1) it must be reasonable and equitable;
(2)it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
(3)it must be so obvious that “it goes without saying”;
(4)it must be capable of clear expression;
(5)it must not contradict any express terms of the contract.’
That case was approved by the High Court in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
The performance criteria themselves announce that they need to be met as soon as possible. The term which the applicants contend should be implied satisfies each of the conditions referred to in the authorities. In my opinion, a term of the kind contended for by the applicant would be implied into the circular resolution so as to give the circular resolution business efficacy.
6. What is a reasonable time for the satisfaction of the performance criteria?
At the Board meeting of 30 November 2004 the Board had ANZIS’ latest offer contained in its letter of 29 November 2004. I think, for the reasons already given, it also had the two documents entitled ‘ANZIS EQUITY PROPOSAL 29 NOVEMBER 2004’ and ‘WHAT ARE THE REASONS TO GO WITH ANZIS’.
The first document said that financial close would occur on 31 January 2005. The ANZIS offer contained in the letter of 29 November 2004 proposed a financial close ‘before 31 January 2005’.
In determining what is a reasonable time for the satisfaction of the performance criteria, regard must be had to the events which preceded 30 November 2004.
The applicant had, through the respondents, been dealing with ANZIS since August 2003. As early as 10 September 2003 ANZIS had written to the second respondent indicating that it had completed its preliminary review and was undertaking a more detailed review. Within a week draft agreements had been commissioned by the first respondent. Heads of Agreement were entered into on 13 October 2003. It is to be recalled that at the time the Heads of Agreement were entered into, Mr Clarke wrote that ANZIS’ understanding was that the plant would be built in the Wodonga area in 2004.
In the Heads of Agreement itself the parties had agreed that the applicant and ANZIS would develop a detailed work plan for the development of a financial model and achieving financial close.
The shareholders agreement was entered into on 20 April 2004. That document was subject to conditions precedent in favour of ANZIS. The document contemplated that if a condition precedent had not been met by 30 September 2004 the agreement would terminate. The relevant condition precedent in favour of ANZIS was that it be satisfied with its due diligence investigations with respect to and concerning the company and its affairs.
The condition precedent was apparently not satisfied insofar as ANZIS was concerned and on 21 September 2004 Mr Clarke wrote seeking an extension of time until 31 December 2004. On the advice of the second respondent the Board refused that extension and the shareholders agreement terminated in accordance with clause 2.4 of that agreement. The second respondent and ANZIS continued to negotiate in October and November 2004.
By 30 November 2004 members of the Board were frustrated by the delay. The directors’ frustration was evidenced by Mr Davison’s letter to the second respondent on 5 October 2004. He also exhibited that frustration at the meeting of the Board on 30 November 2004. Correspondence with BDI shows it was also frustrated by the failure of the applicant and ANZIS to come to terms in order to reach a financial close. By that date there was a real risk that the BDI opportunity might be lost. The further failure to meet financial close had put in jeopardy the government grant.
When the Board therefore came to consider the circular resolution of 30 November 2004 and the ANZIS proposal contained in its letter of 29 November 2004, it did so with knowledge of the history of the dealings with ANZIS.
In my opinion, a reasonable time for satisfaction of the first performance criterion was by 31 January 2005. That was the date that ANZIS represented it could meet. The second respondent urged the Board to accept the ANZIS proposal.
After the meeting of 30 November 2004, the second respondent negotiated the subscription agreement which, again, was subject to conditions precedent solely for the benefit of ANZIS. That agreement provided for the final satisfaction of the conditions precedent by 31 March 2005. If I am wrong that a reasonable time for satisfaction of the first performance criterion was 31 January 2005, then at the very latest that reasonable time would be 31 March 2005.
Of course, ANZIS wrote on 21 March 2005 advising that it formally terminated its obligations under the agreement because the conditions precedent could not be met by 31 March 2005 for the reasons it gave.
The second and third performance criteria have not been met. The Court has not been asked to decide what is a reasonable time for the satisfaction of those criteria. If the first respondent was entitled to satisfy the first performance criterion within a reasonable time, that reasonable time was by 31 January 2005 or by the latest 31 March 2005. Of course, for the reasons already given in relation to issue 2, the resolution contained in the circular resolution should be rescinded and the issue of the performance shares set aside.
7. On the assumption that no performance shares were issued, could BPL’s directors, at a time before the performance criteria was satisfied, modify the terms of the circular resolution so as to: (1) impose time limits within which the performance criteria must be satisfied; and (2) provide that the performance shares would only be issued if, in the reasonable opinion of the Board, Mr Barron and Mr Stewart had played a significant part in the satisfaction of the performance criteria?
For the reasons I have already given, in my opinion, the performance shares did issue. If I am right about that, once they issued the Board could not by resolution, in my opinion, alter the terms upon which the shares issued unless, perhaps, with the consent of the shareholders. On my findings, this issue does not arise. The assumption I am being asked to make, therefore, is predicated upon the construction of the circular resolution propounded by the applicant.
The applicant contended that the Board was entitled to vary the circular resolution in accordance with the resolution passed on 18 July 2005. The first respondent argued that the authorities relied on by the applicant for that proposition did not support the proposition. However, by the same token, no other argument was put.
There is nothing in the applicant’s Constitution which would prevent the directors rescinding a resolution to issue shares to any person. Subject to at least one matter, the directors of a company must have the ability to vary, revoke or rescind any previous resolution of its Board. The power may not exist if the resolution has been put into effect. However, that is not the case here. Upon the assumption that I have been asked to make, if a company could not vary, revoke or rescind a previous resolution, the company could not change its corporate mind. That would leave a company hamstrung by its previous decisions. In my opinion, if the performance shares did not issue, the directors were entitled to amend the circular resolution.
8. Is the applicant estopped from rescinding or modifying the circular resolution?
This issue is said to arise by the pleas in paragraphs 10 and 11 of the applicant’s statement of claim and the first respondent’s reply in paragraph 29 of the first respondent’s defence.
In paragraphs 10 and 11 the applicant pleaded:
‘10.Further, by resolution dated 18 July 2005, Biodiesel’s Board clarified and or amended the Circular Resolution to provide that the Performance Criteria will only be satisfied if:-
10.1 the raising of capital was achieved by 31 December 2004;
10.2the completion of the construction of the Biodiesel Plant occurs by 31 December 2005;
10.3NPAT of $6,000,000 occurs by 30 September 2006;
10.4in the case of the issue of Performance Shares to Mr Stewart, in the reasonable opinion of Biodiesel’s Board, Mr Stewart has played a significant part in the satisfaction of the Performance Criteria;
10.5in the case of the issue of Performance Shares to Mr Barron, in the reasonable opinion of Biodiesel’s Board, Mr Barron has played a significant part in the satisfaction of the Performance Criteria.
11. None of the Performance Criteria have been satisfied.’
In paragraph 28 of the first respondent’s defence, the first respondent denies paragraph 10 of the applicant’s statement of claim and pleads that ‘the purported amendments is (sic) of no force and effect’.
In paragraph 29 the first respondent pleads:
‘29.Further, if which is denied, the Applicant’s Board purported to amend the Circular Resolution then by reason of the performance of works carried out by the First Respondent referred to in paragraph 8 hereof in so far as the work was performed after 30 November 2004 the Applicant is estopped from refusing to give force and effect to the terms upon which the performance shares were issued to the First Respondent.’
The pleas, in a sense, do not meet. The applicant’s plea must be based upon its claim that the performance shares issued when each of the criteria was met. That is clear from the arguments to which I have already referred and from paragraph 7 of the statement of claim which relevantly reads:
‘7. In support of the averment at paragraph 6, Biodiesel says:-
7.1by the terms of Annexure A, the Performance Shares were not to be issued until the following performance criteria (the Performance Criteria) had been achieved. On the achievement of each of the Performance Criteria, Mr Stewart and Mr Barron were to be issued with the number of Performance Shares set forth below:-
Mr StewartMr Barron
(a) raising of capital 3,000 4,000
(b) completion of the construction
of the Biodiesel plant 1,500 3,000(c) NPAT of $6,000,000 1,000 2,000
________ ________
5,500 9,000
...
7.3 as at the date of issue of the Performance Shares:-
(a) none of the Performance Criteria had been achieved;
(b)Mr Stewart knew that the Performance Criteria must be achieved before the Performance Shares could be issued.
PARTICULARS
Mr Stewart caused the preparation of Annexure A by Hardy Bowen, solicitors, and was aware of its terms.
(c)Mr Stewart knew that none of the Performance Criteria had been achieved.’
The applicant could not plead an inconsistent case: O 11 r 8(1) of the Federal Court Rules. Paragraph 11 is not pleaded as an alternative case: O 11 r 8(2) of the Federal Court Rules. It must be assumed therefore that paragraph 10 of the statement of claim is predicated upon the same basis as paragraph 7. That, indeed, is how it was put at trial. The first respondent has pleaded on the other hand an estoppel on the basis that the performance shares were issued. That is consistent with his plea in paragraph 6 of his defence in answer to the applicant’s plea in paragraph 7 of the applicant’s statement of claim. It is also consistent with the first respondent’s submissions at trial.
It follows, therefore, that the pleas do not engage. The applicant addresses circumstances where the performance shares have not issued whilst the first respondent’s plea assumes the performance shares have issued.
There is no point in addressing the issue on the applicant’s assumption because the first respondent does not claim an estoppel if the performance shares have not issued. Nor could he it would be thought. If the performance shares had not issued by 18 July 2005 because none of the performance criteria had been met, the variation or amendment of the performance criteria after that time could not have any practical effect. There is no point in addressing the plea on the respondent’s assumption for two reasons. First, the applicant could not amend the terms relating to the conversion of the performance shares into B Class shares once the performance shares had issued. That would be a contravention of s 246B(1) of the Corporations Act because it would be varying the rights attaching to a class of shares. That would have to be done in accordance with Article 2.3 of the applicant’s Constitution which would require the consent of the respondents. Secondly, the performance criteria attaching to the performance shares which would allow the performance shares to convert into B Class shares were never met prior to 18 July 2005 or at any time thereafter. Therefore, the performance shares could never convert into B Class shares even assuming the performance criteria attaching to the performance shares before amendment or variation. An estoppel can never arise.
Because the parties are not addressing the same assumptions, the issue cannot be resolved. Of course, on my findings, it does not need to be resolved.
In any event, on the findings made, whether an estoppel arises or not is theoretical. If it be assumed that the performance shares had not issued as the applicant contends by 18 July 2005 and the first respondent is right that by reason of the work performed after 30 November 2004 the applicant is estopped from resiling from its promise, what would be the result? The most favourable result for the first respondent would be that the applicant would have to issue the performance shares as and when the performance criteria are met by the respondents. That takes the matter back to the earlier issues which have been decided adversely to the first respondent. The plea of estoppel in paragraph 29 of the defence, however it is understood, does not advance the first respondent’s cause. For that further reason, this issue does not need to be addressed or resolved.
9. Is Mr Stewart’s Executive Service Agreement valid and has it taken effect?
I have already found that the Executive Service Agreement was signed by Dr McCully and Mr Davison in ignorance of Mr Pearce’s comments relating to an independent remuneration consultant. Moreover, I have found that Dr McCully would not have signed the document if he had been aware of Mr Pearce’s comments. Mr Davison would not have signed the Executive Service Agreement until he had received advice from that independent consultant.
The Executive Service Agreement was not executed under the authority of a Board resolution and that fact was known to the first respondent. Because the first respondent was the company secretary and privy to the resolutions of the Board, he cannot rely on the assumptions contained in s 129 of the Corporations Act: s 128(4). In particular, he cannot rely on s 129(5).
The Executive Service Agreement was subject to conditions precedent. None of the conditions precedent were met prior to the first respondent’s position as company secretary being terminated by the applicant’s Board’s resolution on 6 June 2005. On any understanding, the last condition precedent has never been met. The resolution of 18 July made it clear, beyond doubt, that the conditions precedent could never be met.
In my opinion, because the conditions precedent were never met prior to the first respondent’s dismissal, the Executive Service Agreement ceased to have any practical effect. The first respondent’s employment with the applicant never commenced because the commencement date was not to occur until the conditions precedent had been met. Moreover, there could not be a commencement date having regard to the applicant’s directors’ resolution not to ratify the Executive Service Agreement.
It follows that the Executive Service Agreement has never taken effect.
10. Is Mr Stewart entitled to damages for the applicant’s breach (repudiation) of the Executive Service Agreement and, if so, what damages?
In my opinion, having regard to the answer to the previous issue, this issue must be answered adversely to the first respondent. That follows because of the finding that the Executive Service Agreement never took effect. If it did not take effect then it was incapable of repudiation. There was no repudiation in the classical sense because condition 2(c) empowered the Board to refuse ratification of the agreement. But I have been asked to assume, contrary to my conclusion, that the Executive Service Agreement did take effect. For the reasons which follow, the assumption is difficult to make.
It was contended that the applicant repudiated the Executive Service Agreement by resolving on 9 May to terminate the first respondent’s position as company secretary. I think that is not factually correct. No resolution of that kind was passed on 9 May. On 9 May the first respondent was provided with the 15 points which were considered in a somewhat different form on 10 May 2005.
At the meeting on 10 May 2005 the Board recorded that Mr White had reached agreement with the first respondent to acquire his total interest in the applicant and ‘if possible the Board proposes to cancel all their performance shares’. That accurately recorded what was understood to be the agreement between White Associates Pty Ltd and the first respondent as at 10 May 2005. Moreover, item 16 shows that if agreements were not reached resolutions 1 to 15 became null and void and would be rescinded.
There can be no doubt that the resolutions, if they be resolutions, which were passed on 10 May 2005 were passed on the common understanding then existing between the participants that the first respondent had agreed to terminate his relationship with the applicant. Nothing done on 10 May could be construed as being an act of repudiation.
Next it was said that the applicant had repudiated the Executive Service Agreement by Mr Harris demanding, in an email of 27 May 2005, that the first respondent deliver all of the applicant’s records. I do not agree that that was an act of repudiation of the Executive Service Agreement. In the circumstances then existing, Mr Harris was entitled on behalf of the Board to require the first respondent to deliver up the applicant’s records and the request, in my opinion, is not evidence of any repudiation. But, in any event, if it were, on 30 May 2005 the first respondent wrote to Mr Harris saying that he was not obliged to accept that repudiation.
Next it is claimed that the resolution of 6 June terminating the first respondent’s appointment as company secretary was a repudiation of the Executive Service Agreement. In my opinion, that is correct. If the Executive Service Agreement was valid and had come into effect, the resolution of 6 June 2005 was an act of repudiation. Moreover, the letter of 8 June 2005, which communicated the applicant’s decision to the first respondent, was further evidence of the applicant’s repudiation of the Executive Service Agreement.
The first respondent also claimed that the applicant’s solicitors on 17 June 2005, referring to the Board’s decision of 6 June and requesting the delivery up of the applicant’s books, was an act of repudiation, as was the letter from the applicant’s solicitors of 27 June 2005 seeking delivery of the applicant’s books. In my opinion, those actions were also acts of repudiation by the applicant, because they were unequivocal expressions by the applicant that there was no binding contractual relationship between the applicant and the first respondent. It follows that, upon the assumption the Executive Service Agreement was valid and had come into effect, the applicant repudiated the agreement.
It was contended by the applicant that there was no acceptance by the first respondent of the applicant’s repudiation. I reject that contention.
On 27 June 2005 the first respondent’s solicitors wrote to the applicant’s solicitors enquiring whether the applicant repudiated the first respondent’s contract. I assume that the reference to the first respondent’s contract is to the Executive Service Agreement. On 29 June 2005 the applicant’s solicitors responded saying that the applicant was not in a position to consider that matter because the contract was part of the applicant’s records which were still in the possession of the first respondent. Some time between that date and 6 July 2005 the first respondent delivered the applicant’s books and records to Mr Harris.
The first respondent contended that the delivery of the books and records constituted an acceptance of the repudiation. The applicant contended otherwise and submitted that the delivery of the books and records to Mr Harris was merely an acceptance by the first respondent of his obligation to hand over the books and records.
In my opinion, the first respondent’s act was more than that. The books and records were delivered by the first respondent to Mr Harris in circumstances where it was clear that the applicant had repudiated the Executive Service Agreement. In my opinion, the delivery up of the books and records constituted an acceptance of that repudiation.
It follows, therefore, that if I am wrong about the Executive Service Agreement not coming into effect and if it did commence, as contended for by the first respondent, it was repudiated by the applicant. That repudiation was accepted by the first respondent. The first respondent would on that assumption and those findings be entitled to damages. That raises the question of the first respondent’s damages. The first respondent claimed damages calculated as follows:
‘9.1 Remuneration Package for 5 years @ $140,000 p.a. $ 700,000
9.2 Superannuation @ 9% p.a. for 5 years $ 63,000
9.3 1.25% of Biofuels Grant of $9.6 million $ 120,000
9.4 Bonus of $50,000 p.a. upon achievement of Net
Profit After Tax of $8 million $ 250,000Sub Total $ 1,133,000
9.5 Less actual earnings for 5 years @ $128,875.50 p.a. $ 644,380
9.6 Less superannuation @ 9% p.a. on actual earnings $ 57,994
Sub Total $ 430,626
9.7 Less 25% for contingencies and discount for present
value $ 107,657Total $ 322,969’
The first head of damage assumes that the first respondent is entitled to an amount equal to the emoluments contained in the Executive Service Agreement over the whole period of the agreement. That assumption is based on clause 13.1(b) which, as mentioned above, provides that if the applicant terminates for any reason other than specified in clause 13.2, clause 13.3, clause 13.4 or clause 13.5 the applicant must pay an amount equal to the remuneration package for the remainder of the term. The applicant contended that clause 13.1(b) amounted to a penalty.
In Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79 at 86-87, Lord Dunedin said:
‘3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach ...’
Lord Dunedin said in relation to the task of construction (at 87):
‘ 4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. ...
(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid ...
(c) There is a presumption (but no more) that it is penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage” ...’
Lord Dunedin’s speech was recently followed in the High Court in Ring Row Pty Ltd v BP Australia Pty Ltd (2005) 222 ALR 306, subject to the caveat at 309.
At the time that the Executive Service Agreement was entered into the first respondent was a chartered accountant in full-time employment which was apparently available to him for the foreseeable future.
The applicant was liable under clause 13.1(b) of the Executive Service Agreement to pay the full amount of the first respondent’s remuneration package unless the contract of employment was terminated for illness, poor performance, including summary termination, or if the company ceased to trade.
The remuneration package included the base salary and superannuation together with CPI increases. It also included 1.25% of any Federal or State grant received by the company and a bonus of $50,000 per annum if the company achieved a net profit after tax of $8 million. The remuneration package only serves to establish that the Executive Service Agreement contemplated that it had to have commenced before it was terminated by breach or otherwise. The Executive Service Agreement was not to commence until, amongst other things, the commencement of operations of the biodiesel plant. That could only have occurred if the Federal grant which was under contemplation had been received prior to the commencement of the Executive Service Agreement. The Executive Service Agreement assumed that the plant would be operating and the first respondent would have relocated permanently to Albury/Wodonga.
The clause will amount to a penalty if it advantages the first respondent beyond that which would flow from a genuine pre-estimate of the first respondent’s damages by reason of the breach of the contract by the applicant.
Having regard to my conclusions thus far, the question which is posed is not easy to answer. That is because it must be assumed, contrary to my earlier conclusion, that the Executive Service Agreement gave rise to contractual rights before the commencement date and in circumstances where it had not been ratified by the Board. That assumes that it is capable of being breached even though none of the conditions precedent had been met at the time that the contract was terminated by the breach.
If one makes those assumptions, then clause 13.1(b) will be a penalty because it requires the applicant to pay the whole of the remuneration package to the first respondent which includes the base salary together with the amount of 1.25% of the biofuels grant and, so it was contended by the first respondent, the bonus of $50,000 over the full five years. Those amounts would be payable even though the grant had not by then been received and the applicant was by then not earning any profits.
That would not be a genuine pre-estimate of the first respondent’s loss and the clause must be construed as amounting to a penalty.
In a sense, because of the way in which the first respondent has put his claim for damages, the question is more theoretical than practical. The first respondent has properly, in my opinion, recognised that if he be entitled to the remuneration package over the period, together with the superannuation and the other emoluments of office, he would have to bring into account his actual earnings and superannuation received over the same period. The first respondent has also recognised that it would not be appropriate to take in CPI in relation to his claim for damages, notwithstanding the provisions of clause 6(d) of the Executive Service Agreement, because it would be an offsetting deduction for the CPI which would have to be assumed in relation to his actual earnings.
That leaves the question as to how the first respondent’s damages are to be calculated if clause 13.1(b) is ignored. In my opinion, the first respondent has not proved any damage upon the assumptions that the termination by a breach occurred before the commencement date and before any of the conditions precedent had been met. All he has lost is the opportunity that might have arisen if all of the conditions precedent had been satisfied. That opportunity has no value because the third condition precedent was never met.
In my opinion, therefore, the cross-claim must be dismissed.
Orders
I would make the following orders:
1.That the resolution of the Board of directors of the applicant made on 30 November 2004 whereby it was resolved:
(1)to issue 9,000 performance shares to Mr Dennis Barron subject to the receipt of the subscription money;
(2)to issue 5,500 performance shares to Mr Anthony Stewart subject to the receipt of the subscription money;
be rescinded.
2.Subject to the applicant paying to the first respondent the subscription money of $55.00 paid by the first respondent on 29 March 2005, the issue of the performance shares to the first respondent be set aside.
3.The applicant’s register of members be corrected by deleting any reference to the issue of the performance shares to the first respondent on 10 January 2005 (wrongly described in the register as 2004).
4.The cross-claim be dismissed.
I will hear the parties as to the costs of the claim and of the cross-claim.
I certify that the preceding four hundred and fifty-two (452) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander. Associate:
Dated: 16 May 2007
Counsel for the Applicant: Mr D Stone with Ms L Del Fuoco Solicitor for the Applicant: Williams & Hughes Counsel for the First Respondent: Mr M Bennett with Ms J Crawford Solicitor for the First Respondent: Lavan Legal Date of Hearing: 28, 29, 30, 31 August; 1 September; 9, 10, 11, 12, 13 October 2006 Date of Judgment: 16 May 2007
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