CGU Insurance Ltd v Zurich Australian Insurance Ltd

[2003] NSWCA 366

CITATION:	CGU Insurance Ltd v Zurich Australian Insurance Ltd & Ors [2003] NSWCA 366
HEARING DATE(S):	5 December 2003
JUDGMENT DATE:	5 December 2003
JUDGMENT OF:	Mason P at 24; Sheller JA at 25; Giles JA at 2
DECISION:	Appeal dismissed with costs.
CATCHWORDS:	Company articles - offer to other shareholders at "fair value" - fair value determined "by reference to the value of the Company's net tangible assets" - whether solely by reference to value of net tangible assets - question of construction.
CASES CITED:	Griffiths v W E & D T Cave Ltd (1998) 78 P & CR 8.
PARTIES :	CGU Insurance Ltd - Appellant Zurich Australian Insurance Ltd - First Respondent Associated Marine Insurers Agents Pty Ltd - Second Respondent Michael Arthur Hill - Third Respondent Geoffrey Gerald Gauci - Fourth Respondent Anthony Earnest Day - Fifth Respondent John Leonard Butler - Sixth Respondent Ian Forbes Brown - Seventh Respondent Robert John Wagstaffe - Eighth Respondent
FILE NUMBER(S):	CA 41024/03
COUNSEL:	M Pembroke SC & T Faulkner - Appellant S Finch SC & L McCallum - First Respondent No appearance - Third Respondent Submitting appearances - Fourth to Eighth Respondents
SOLICITORS:	Mallesons Stephen Jaques - Appellant Baker & McKenzie - First Respondent

LOWER COURTJURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	ED 50086/03
LOWER COURT JUDICIAL OFFICER :	McDougall J

CA 41024/03
ED 50086/03

MASON P
SHELLER JA
GILES

Friday 5 December 2003

CGU INSURANCE LTD v ZURICH AUSTRALIAN INSURANCE LTD & ORS

Judgment

1 MASON P: I invite Giles JA to deliver the first judgment.

2 GILES JA: The principal issue in this appeal is the construction of a company’s articles providing for the sale of shares at “fair value” under a pre-emption mechanism. The subsidiary issue is the admissibility of evidence said to go to the construction of the articles. The appellant CGU Insurance Ltd (“CGU”), the seller, contended for a liberal determination of fair value. The first respondent Zurich Australian Insurance Ltd (“Zurich”), the potential purchaser, contended for a restricted determination of fair value. At the heart of the principal issue were the words “by reference to the value of the Company’s net tangible assets” in article 23(9). The judge held that the determination of fair value was solely by reference to the value of the net tangible assets and that the evidence was inadmissible.

3 More detailed facts may be found in the judge’s careful and comprehensive judgment CGU v Zurich [2003] NSWSC 951. The following is sufficient to explain why, in my opinion, the judge was correct on the principal issue and the subsidiary issue need not be decided.

4 In 1982 a joint venture was established between CGU , then known as Commercial Union Assurance Company of Australia Ltd, and GRE Insurance Ltd (“GRE”). Each was a licensed general insurer, and the first recital in their joint venture agreement stated that they -

“ … have decided to embark upon a joint venture involving the establishment and operation of a jointly and equally owned company to promote, market and write on their joint behalf Marine Insurance Business.”

5 CGU and GRE caused to be incorporated, and became equal shareholders in Associated Marine Insurers Australia Pty Ltd (“Associated Marine”). They and Associated Marine entered into an agency agreement regulating the performance by Associated Marine of its functions on behalf of the joint venturers.

6 In 1993 Zurich acquired GRE’s interest in the joint venture. It became the shareholder in Associated Marine in place of GRE, and by a deed of accession became a party to the joint venture agreement and the agency agreement in its place.

7 The joint venture agreement provided for termination of the joint venture in certain events. In early 2003 one of the events occurred, whereby the joint venture agreement will terminate on 31 December 2003. CGU was deemed to have given with respect to its shares in Associated Marine, six months prior to 31 December 2003, “a transfer notice as mentioned in the Articles of Association of the Venture Company”.

8 The deemed giving of the transfer notice called into operation articles 22 and 23 of the articles of Associated Marine, which provide -

“22. In the event of the holder for the time being of any shares in the capital of the Company desiring to sell or otherwise dispose of all of the shares so held by him (other than to a company which is the holding company or a subsidiary of such holder) such holder shall give to the Company written notice (hereinafter called ‘the transfer notice’) of its desire to transfer such shares.

23. The following rules shall apply upon receipt by the Company of a transfer notice:

(1) The directors shall thereupon and thereby be constituted the agents of the propositing transferor for the purpose of the sale of the share to which the transfer notice relates at a fair value to be determined as, provided in paragraph (9) of this Articles.

(2) The directors shall, following receipt of the transfer notice, take steps to have the fair value of the shares to which the transfer notice relates determined (in manner provided in paragraph (9) of this Article) as at the thirty-first day of December which next follows the expiration of six months from the date of the transfer notice (such thirty-first day of December being hereinafter referred to as ‘the effective date’).

(3) Upon the determination of such fair value as at the effective date the directors shall give written offers of the said shares to the other members in the proportion as nearly as may be to the shares, of whatever class, held by them respectively for sale to them at the fair value. Any such offer shall be given by notice specifying the number of shares offered and the fair value thereof and stating that if such offer be not accepted within sixty days it shall be deemed to be declined and after the expiration of that time or on the receipt of any intimation from the company or person to whom the offer is made that it or he declines to accept the shares offered for purchase at the fair value the company shall be free and shall endeavour to dispose of those shares to some other member.

(4) If within the period aforesaid the directors shall be unable to find a member or members willing to purchase all of the said shares, they may seek some other person or persons acceptable to them wishing to purchase at the fair value the shares not accepted by members of the Company.

(5) If the directors shall find a member or members or other person or persons willing to purchase the said shares they shall give notice thereof to the member giving the transfer notice who shall thereupon be bound upon payment of the fair value as at the effective date to transfer the shares to the purchaser or purchasers and to deliver to him or them the scrip certificates for the said shares.

(6) If the directors shall not within a period of three calendar months after the determination of the fair value as at the effective date as aforesaid find a member or members or other person or persons willing to purchase all of the said shares at such fair value they shall forthwith advise the member giving the transfer notice accordingly who shall then be at liberty to sell to some other person or persons the shares not accepted pursuant to the foregoing provisions at the fair value or for a higher (but not a lower) price; if he decide that he is prepared to accept a lower price the shares shall in the first place be offered to existing members of the Company in the manner aforesaid at such lower price.

(7) If in any case the member giving the transfer notice after having become bound as aforesaid makes default in complying with his obligations under paragraph (5) hereof the directors shall thereupon cause the name of each purchaser to be entered in the register as the holder of the shares and shall cancel any scrip certificates issued in respect thereof. The receipt of the directors for the purchase money shall be a good discharge to each purchaser and after his name has been entered in the register in purported exercise of the aforesaid power the validity of the proceedings shall not be questioned by any person.

(8) The directors shall not be at liberty to refuse to register any Transfer of Shares tendered to them following due compliance with the provisions of this Article 23.

(9) The fair value of any shares specified in a transfer notice shall be the amount which is determined to be, as at the effective date, the true and fair value thereof (by reference to the value of the Company’s net tangible assets as at its effective date) by agreement between the directors and proposing transferor or in default of agreement thereon by some third party agreed upon by the directors and the proposing transferor or in default of agreement thereon also, by the President or other senior officer for the time being of the Institute of Chartered Accountants in Australia (or other similar body succeeding thereto) or his nominee. Any such third party, President, officer or nominee shall be acting as an expert and not an arbitrator and his costs shall be borne by the Company.”

9 The construction of these articles should proceed from the following propositions.

10 First, in the ordinary course the fair value of shares in a company will not be determined solely by regard to the value of its net tangible assets. Companies have intangible assets, goodwill being the obvious instance, and for that and other reasons the fair value of shares in a company may be greater than an amount calculated from the value of its net tangible assets. It may also be less, for example if the company is no longer a going concern and there must be a fire sale of its assets. Evidence is not needed to establish this.

11 Secondly, the articles do not mean one thing when Associated Marine is the joint venture vehicle for the CGU and Zurich joint venture and their agent for the transaction of marine insurance business, and another thing when Associated Marine is not the joint venture vehicle and the agent. The objects of Associated Marine in its memorandum of association are directed to acting as an agent in the transaction of marine insurance business, but that may be done otherwise than in implementation of the joint venture agreement and pursuant to the agency agreement. Thus in the construction of the articles I do not think it profitable, indeed it may be misleading, to seek guidance from the terms of the joint venture agreement or the agency agreement, or from the manner in which Associated Marine performed its functions on behalf of the joint venturers.

12 Thirdly and consequentially, on the principal issue the question is whether the fair value of the shares in Associated Marine is confined from a fair value according to ordinary ascertainment to an amount calculated from the value of Associated Marine’s net tangible assets, and that is to be decided by giving the words of the articles their ordinary and natural meaning and, if there is ambiguity, with the assistance of evidence of surrounding circumstances not extending to the terms of the joint venture agreement or the agency agreement or the manner in which Associated Marine performed its functions on behalf of the joint venturers.

13 The context is a pre-emption mechanism to operate between shareholders. The seller is not taken to be disposing of its shares involuntarily – that comes from the joint venture agreement in this case, not from the articles. The seller has agreed that, if it wishes to dispose of its shares, the shares must first be offered to the other shareholders, and the other shareholders are not necessarily equal shareholders or joint venture partners – that also comes in this case from the joint venture agreement. The seller has also agreed that, to the extent that the other shareholders do not want the shares, they must first be offered to persons found by the directors. Only in default can the seller dispose of its shares as it wishes, but if at a lower price than the initial offer then the offering to existing shareholders begins again. Fixing the initial sale price is essential in order that the mechanism work.

14 The sale price is described in article 23(1) as “fair value to be determined as provided in paragraph (9) of this Articles [sic]”, and by article 23(2) the directors are to take steps to have the fair value “determined (in manner provided in paragraph (9) of this Article)” as at the effective date. These direct attention to article 23(9).

15 In article 23(9) two things are said about determining the fair value of the shares. One is the method of arriving at the fair value, and the other is the description of what is to be determined. The method is determination by the cascading alternatives of agreement between the directors and the seller, an agreed third party acting as an expert, and an unagreed but specified third party acting as an expert. What is to be determined is “the true and fair value … (by reference to the value of the Company’s net tangible assets as at its effective date)”.

16 This description of what is to be determined adds to the earlier references to fair value in two ways. The composite phrase “the true and fair value” is used. And the words in brackets “(by reference to the value of the Company’s net tangible assets as at its effective date)” are added. In my view, the ordinary and natural meaning of those words is that the value of the net tangible assets is the referent, and the only referent, for the determination of the true and fair value. There is otherwise no point in the bracketed words, because in the ordinary course the value of the net tangible assets would be one of the matters by reference to which the true and fair value of the shares would be determined. The purpose must have been to confine the frame of reference.

17 CGU submitted that this conflicted with what is fair, or true and fair, but what is fair or true and fair is then explained in article 23(9) and fairness or truth and fairness still has a part to play in the value of the net tangible assets.

18 In Griffiths v W E & D T Cave Ltd (1998) 78 P & CR 8 the grant of an option provided that the price payable upon exercise should be, in the events that happened, “16 per cent of the open market value of the subject land by reference to the existing agricultural use subject to the agricultural tenancy”. The method of determining the price was agreement between the parties “or in default of agreement fixed by a chartered surveyor” who was required to “have regard to all the circumstances of the situation, including the specific terms of this Agreement … “. It was held that “by reference to” did not mean solely by reference to the existing agricultural use subject to the agricultural tenancy. This was the only decision on somewhat equivalent words to which the parties referred, and CGU relied on it. But the circumstances were quite different. There was a direction to have regard to all the circumstances of the situation, and reference to the existing use was not a reference to value and was consistent with also having regard to any potential development value. Reference to the value of the net tangible assets, however, excludes the value of other integers in arriving at the fair value of the shares.

19 CGU submitted that the words “by reference to the value of the Company’s net tangible assets” left it open also to pay regard to the value of intangible assets. It suggested as an example that reference to the value of the net tangible assets could be used as a cross-check to the fair value as ordinarily ascertained, adverting to a passage in the report of Mr Goodwin Gower that understanding the relationship between the fair value of shares and the net tangible assets of the company enables the valuer to test the reasonableness of the estimate of the fair value of the shares. I am not persuaded that by the words in article 23(9) the value of the net tangible assets was to play a subsidiary and unelucidated part in this way. Why state one referent to which, on Mr Gower’s evidence, there would be regard even if it were not stated? There is still no point in the bracketed words if in the ordinary course the value of the net tangible assets would be one of the matters by reference to which the true and fair value of the shares would be determined, in the manner described by Mr Gower or otherwise.

20 CGU submitted that the result to which the judge came involved commercial absurdity. I do not think that this construction of the articles offends commercial commonsense. In acting as an agent in the transaction of marine insurance business, not necessarily in giving effect to the joint venture agreement and pursuant to the agency agreement to which CGU and Zurich were parties but quite possibly under different arrangements with a different principal or principals, Associated Marine may well acquire goodwill, such that the fair value of its shares according to ordinary ascertainment will be more than an amount calculated from the value of its net tangible assets. It may also not do so. But once the ascertainment of value goes beyond the relatively objective value of net tangible assets there is much more room for dispute and delay. It is understandable that shareholders in a company which commit themselves to a pre-emption mechanism should accept relative simplicity, at the possible expense of obtaining on sale of their shares less than full value. And it must not be forgotten that the shareholders are also potential purchasers, with an interest in purchasing the shares of other shareholders possibly at less than their full value. Neither the seller nor the purchaser is under compulsion to sell or purchase. It is wrong to construe the articles only from the viewpoint of the seller, and the bargain could operate for or against any shareholder. Bargains of that kind are not alien to commercial life.

21 The evidence in question was that of Mr Gower. He explained the ordinary meaning of net tangible assets, and it was from that part of his report that the passage earlier mentioned came. He described the tangible assets which a company conducting an insurance agency business under the structure required by the joint venture agreement would be expected to have and the liabilities it would be expected to have. He said that the value of the net tangible assets of that company would be expected to remain constant throughout the life of the joint venture unless further capital was subscribed. He explained “the ordinary meaning of the phrase ‘fair value’ as that concept is understood by accountants generally, and said that the shares in a company successfully conducting an insurance agency business under the financial structure required by the joint venture agreement would be expected to accumulate a fair value which would not be reflected in the value of its net tangible assets.

22 I doubt that this evidence was admissible, in particular so far as it was largely tied back to the joint venture agreement. It does not matter, because it does not cause me to come to a different conclusion on the principal issue.

23 In my opinion, the appeal should be dismissed with costs.

24 MASON P: I agree.

25 SHELLER JA: I also agree.

26 MASON P: The appeal is dismissed with costs.

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Last Modified: 12/17/2003