Connective Services Pty Ltd & Anor v Slea Pty Ltd & Ors

[2018] HCATrans 263

[2018] HCATrans 263

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne   No M131 of 2018

B e t w e e n -

CONNECTIVE SERVICES PTY LTD (ACN 107 366 496)

First Applicant

CONNECTIVE OSN PTY LTD (ACN 107 761 326)

Second Applicant

and

SLEA PTY LTD (ACN 106 752 434)

First Respondent

MINERVA FINANCIAL GROUP PTY LTD (ACN 124 171 759)

Second Respondent

MILLSAVE HOLDINGS PTY LTD (ACN 115 160 097)

Third Respondent

MARK SEAMUS HARON

Fourth Respondent

Application for special leave to appeal

KIEFEL CJ
GAGELER J
GORDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 14 DECEMBER 2018, AT 10.28 AM

Copyright in the High Court of Australia

____________________

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MR D.G. GUIDOLIN, for the applicants.  (instructed by Quinn Emanuel Urquhart & Sullivan)

MR N.C. HUTLEY, SC:   If your Honours please, I appear with my learned friend, MR G.C. KOZMINSKY, for the first and second respondents.  (instructed by Arnold Bloch Leibler Lawyers)

KIEFEL CJ:   Yes, Mr Jackson.

MR JACKSON:   Thank you, your Honours.  Your Honours, the application concerns the ambit of operation of section 260A of the Corporations Act.  The provision can be seen at page 113.  It relates, relevantly, to a company financially assisting a person to acquire its shares.  In the present case, as your Honours will see from page 96 in paragraph 77 of the Court of Appeal’s reasons – and it is at the top of page 96, your Honours, commencing about the third line – the conduct of the company said to amount to giving such assistance derived from two elements:  the companies’ liability for legal costs of instituting and pursuing legal proceedings, to which I will come in just a moment, and, on the other hand, the companies’ potential liability for costs if the proceedings were unsuccessful, and the moneys which might constitute the financial assistance were not payable to or on behalf of any shareholders except that they are payable to the courts or to the first or second respondents if we were unsuccessful.

The proceedings were brought by the companies in which they seek to enforce a common form share pre‑emption provision in their constitutions and the pre‑emption provisions are identical.  You will see the principal provision, clause 77, set out at page 76 in paragraph 6 of the Court of Appeal’s reasons.

GORDON J:   Is there any provision in the constitution which prevented the company or the shareholders bringing action for breaches of constitution?

MR JACKSON:   No, your Honour.  There is nothing, your Honour.  I am going to develop that a little in just a moment, if I may.  Your Honours will see that clause 77 is set out at page 76.  It is a common enough form.  Your Honours will also see that related to it are clauses 78 and 79 of the constitutions which are set out at page 104 in the footnote to that page.  Could I say, your Honours, that those two provisions mirror sections 1072F(2)(c) and 1072G of the Corporations Act, and your Honours will see, for example, 78.2(c) and 78 and 79.

Your Honours, the way in which the Court of Appeal held that the provisions were contravened appears at paragraphs 75 to 78 of the Court of Appeal’s reasons at page 95.  May I take your Honours very briefly to those?  First, paragraph 75 contains a reference to the basic facts.  Could I just say, your Honours, the proceedings were started by the companies after the institution of the proceedings.  There had been no trial of the matter.  There was an application for a stay or dismissal to which, in the end, the Court of Appeal acceded, so the proceedings are at an end because of the decision of the Court of Appeal.

Your Honours will see paragraph 75 and then the conclusion at paragraph 76 and the reasons appear in paragraph 77.  Your Honours, could we say this?  The reasons of the Court of Appeal come down to these matters.  First of all it is said that the – it appears to be accepted that the first respondent – I am sorry, the first respondent should have but has not, and will not unless ordered in the proceedings make the offer required by the pre‑emption proceedings.  If the first respondent is ordered to do so it is then said the third and fourth respondents will have the option of accepting the offer.

It is financial assistance because it comes at a cost.  It is financial assistance to the third and fourth respondents because they do not have to bear the costs of the proceedings themselves.  Your Honours, that is the approach taken by the Court of Appeal.  It appears to be accepted by our learned friends’ response at paragraph 16, page 120.

GAGELER J:   The underlying thought is back at page 91 in the quotation from Lord Macnaghten, I think.

MR JACKSON:   I am sorry, your Honour, I did not catch the paragraph number.

GAGELER J:   If you like, the genesis of that reasoning in paragraph 77 is in Trevor v Whitworth, or at least in the passage from Lord Macnaghten’s speech.

MR JACKSON:   Yes, your Honour, that is the origin of it.  Time has moved on a little since Trevor v Whitworth and one has a situation where the current form of section 260A, or the provision which is now section 260A, deriving originally from the notions in Trevor v Whitworth is different from that which existed beforehand.  The provisions which existed beforehand, your Honours, were to be seen in section 205 of the Corporations Act.  We have referred to that at page 107 in paragraphs 21 to 25 of our application.

GORDON J:   The short point is that it used to be prohibited, it is now permissive, subject to conditions.

MR JACKSON:   Indeed, your Honour, yes.

GORDON J:   The only question here is whether or not – what is the material prejudice here, which is one of the out clauses?

MR JACKSON:   Well, what is said, your Honour, is that the – sorry, may I start again what I was about to say?  Your Honour will see the structure of the provision is that the burden of proof of absence of material prejudice lies on, for example, our side relevantly.  You have to get to that point first of all and getting to that point there has to be something which is capable of being financial assistance within the terms of the opening words, as it were, of section 260A(1).

GORDON J:   Assuming that is right, Mr Jackson, I still do not understand what the material prejudice here is that is put against you.

MR JACKSON:   Well, the material prejudice, your Honour, is ‑ we would say two things about material prejudice, your Honour.  One is that the respondents, for whose benefit it is said by the other side, are persons who already have the – we have the right – or I should not say “we”, they have the right already, your Honour, and it is the company seeking to enforce a right which it has; it has that right because of the terms of the Corporations Act which provide, of course, that the constitution of the company is a contract, not just between each member but between the company and each member. 

So, your Honours, that is the first thing we would submit, there is no prejudice.  Secondly, in relation to prejudice, why is it prejudicial to a shareholder to have the company enforce the terms of an arrangement or contract in which the other person is a party?

Your Honours, could I just say this? Your Honours will see that the approach taken by the Court of Appeal in our submission means that despite – if one goes to section 140, and your Honours will have a copy of it separately – it provides for there to be the contract. It is referred to elsewhere in the application book but your Honours will see that. The Corporations Act itself recognises that there may be provisions of a corporation which are pre-emption provisions and which can be enforced.

Your Honours will see that from going to a combination of several provisions.  Your Honours should have a separate piece of paper which sets out the provisions to which I referred earlier.  One is section 1072G, and your Honours will see that:

The directors of a proprietary company may refuse to register a transfer of shares in the company for any reason.

A sufficient reason, one might have thought, is that the provisions of the company’s constitution dealing with transfer of shares have not been followed and inherent in the director’s powers is also section 1072F(2)(c):

The directors are not required to register a transfer . . . unless:

(c)the directors have been given any further information they reasonably require to establish the right of the person transferring the shares to make the transfer.

Your Honours, the terms of clause 77 of the constitution set out at page 76 – constitutions of the companies – if one goes to clause 77.1 your Honours will see its terms.  You will see also, if one goes through then to the provisions of clauses 78 and 79 that I referred to earlier, they contain in effect the terms of the two provisions to which I refer.  They are at page 104.

Your Honours, we would submit there are difficulties with the views adopted by the Court of Appeal.  We refer to two such difficulties in our application at page 109 in paragraphs 33 and 34.  The first such difficulty is that it is said the existing – I am sorry, your Honours – it is a fact that the existing shareholders already have the rights given by the constitution; nothing more is being given to them.  The response to that is given by our learned friends at page 121 in paragraph 19 of their response where it is said, at the concluding sentence that that “ignores the commercial realities”.

Well, the relevant commercial reality, your Honours, is that, absent the proceedings the Slea position was that being a shareholder having rights and duties provided for by the constitutions but asserting as against each company and the other shareholders that it is entitled to disregard those restrictions by refusing to make an offer which it is contractually obliged to make that the company is not entitled to insist on its constitution being followed.

The second point, your Honours, is that the decision of the Court of Appeal effectively takes away a company’s right to enforce the pre‑emption proceedings of its own constitution, and it does so again at the instance of a party which is intending to breach the statutory contract with the contract and the other shareholders.  It seems clear that the respondents accept that the decision has that consequence.  You will see that referred to at page 116 in paragraph 2 of the response which commences on the preceding page, but if one looks at lines 3 and following in that paragraph your Honours can see the view adopted by the respondents.

Now, your Honours, the respondents’ response to our contention in that regard is referred to at paragraphs 23 to 26 of their response at pages 122 and 123.  It seems to have two elements.  One in response, paragraph 25, is that our argument, our contention, in that regard cannot “withstand a moment’s scrutiny”.  Well, your Honours, perhaps I might leave that to the Court.

The second thing is in paragraph 26.  It is said that we “adduce no evidence” of material prejudice, and if I could say – which I think I said in part in response to your Honour Justice Gordon – the conduct was not open, in our submission, to be regarded as amounting to conduct in breach of section 260A.  The occasion for the burden of proof altering had not arisen.  Could I in that regard refer to the analysis of the provisions by the Court of Appeal at page 93, paragraphs 69 to 70 and 72(3).  That is not challenged by the respondent.  The second thing is ‑ ‑ ‑

GAGELER J:   Mr Jackson, does your argument embrace the need for financial assistance to take the form of a transaction?

MR JACKSON:   Well, your Honour, the answer is yes and no, and if I may say why I adopt that pendulum‑type approach.  The first is that almost certainly every occasion when the provision will be brought into operation will involve a transaction of some kind.  Now, I say no because it is possible that one can think of some circumstances in which financial assistance is given in fact but without there being a bipartite transaction - or bipartite or tripartite transaction of any kind.  That is why, your Honours, we do not say I think that there has to be a transaction in every case to which 260A would apply but there almost certainly will be.

GORDON J:   The authorities say that one must look at the commercial realities and must look at the whole of the set of circumstances.  In the end, does your proposition come down to that there is a contractual arrangement between the company and its shareholders and between each of the shareholders?  The company seeks to enforce it.  The only way you can enforce it is by the institution of proceedings and, therefore, it is not financial assistance, as I understand the way you put it ‑ ‑ ‑

MR JACKSON:   Yes, indeed.

GORDON J:   ‑ ‑ ‑ and in that context is it not financial assistance because if you looked at it – and I always go back to Justice Sheller’s analysis in – I think it was Wambo or one of those cases where he says one looks to see whether or not there has been in effect a diminution in the value of the shares which would be paid for.  As I understand the way you put it, there would be no diminution in this case.

MR JACKSON:   Well, no, your Honour ‑ ‑ ‑

GORDON J:   Because you are seeking to enforce a right you have already have.

MR JACKSON:   Yes, your Honour, that is one aspect of it.  The other aspect of it, your Honour, is what we say I think in paragraph 38 at page 110.

GORDON J:   Well, that puts it in a sense in the reverse by looking at it from the other angle.

MR JACKSON:   Yes, your Honour.  Your Honours, could I conclude by saying ‑ ‑ ‑

GAGELER J:   Mr Jackson, just so I understand this argument, just going back to page 96 in the middle of paragraph 77 which contains the gist of the reasoning, the reasoning is broken up into two stages.  One is assistance and then two is the financial nature of the assistance.  Do you dispute the sentence at the beginning of page 96:

This ‘assists’ Millsave and Mr Haron ‑ ‑ ‑

MR JACKSON:   Well, we do, your Honour.  We do because what you have – I mean, it may be they do not want to buy the shares, who knows, if they are offered, but they have at the moment an entitlement under the terms of the constitution of each company to be offered the shares if they are to be disposed of.  What this is doing is to say – and so too does the company have an entitlement to ensure that the terms of its constitution are complied with.

Now, no doubt it is possible if one deals with the section 140 contract between all shareholders, or amongst the shareholders, that it could be enforced by Millsave and Haron.  On the other hand, it can equally be enforced by the company.  Your Honour, if the company chooses to do so then one can say perhaps it saves them money they might or might not have expended but that is the highest one can put it.

Your Honour, one does need to bear in mind that companies do not always – proprietary companies do not always have just two, three or four members.  If you have a situation where a company has say 12 members, it becomes very difficult to think that the statutory contract that exists amongst them and between them and the company is one which the enforcement of which by the company necessarily involves giving financial assistance to those people.  Your Honours, in any event, one does have to read section 260A with the other provisions of the Act to which I have referred and one should treat section 260A as not covering circumstances that are permitted by those provisions.

Your Honours, could I refer finally to page 111, paragraph 43, where we submit that this is an important case involving issues of general application and also in that regard the interrelationship between section 260A and the other provisions to which I have referred a moment ago and it involves, your Honours, because of the way in which the proceedings were brought by the other side simple and undisputed facts.

KIEFEL CJ:   Mr Hutley.

MR HUTLEY:   Thank you, your Honours.  Can I deal with one question of fact?  If your Honours go to application book 76, paragraph 5, your Honours will see that the relevant shareholders, Millsave Holdings Pty Ltd, the third respondent and Mr Haron, at all material times control in effect the company, they are controlling the board, so a suggestion that they were not interested in receiving the offers as a matter of fact is highly unlikely.

KIEFEL CJ:   Mr Hutley, is the starting point whether the meaning of financial assistance is a matter of importance and general principle?

MR HUTLEY:   That is what I was going to come to, your Honour.  Financial assistance we say is just an ordinary phrase in England and it means assistance of a financial nature and that is just an objective factual inquiry.

KIEFEL CJ:   But the Court of Appeal here has something of an extension on previous authority.

MR HUTLEY:   In our respectful submission, no.  If one goes to the judgment, which is in effect focused where it all - the recent authority, it is really that of Mr Justice Hoffmann, as his Lordship then was, in Charterhouse, and your Honours will see that taken up at page 92 at paragraph 64.  He says:

The words have no technical meaning and their frame of reference is in my judgment the language of ordinary commerce.  One must examine the commercial realities –

and then there is a reference to “transaction”, but we would submit that that was really just a reference for the convenience of the case with which his Lordship was concerned:

and decide whether it can properly be described as the giving of financial assistance by the company –

Then in 65, importantly, his Lordship:

went on to explain that it was necessary to look at the relevant transaction as a whole with a view to determining ‘where the net balance of financial advantage lay’.

GORDON J:   Well, that is interesting in itself because if you know one looks to see whether or not in effect the financial advantage gives rise to a potential of effect not only on shareholders and directors but also on the ability to pay creditors; that is not an issue here.

MR HUTLEY:   Well, your Honour, just in that regard, there was some evidence as to the expense of all this, and if your Honour goes to paragraph 82 on page 34 of the application book – this is at first instance – my client adduced some evidence as to the estimated cost of running up to three‑quarters of a million dollars.  Your Honours will see that at about line 20.

Now, my learned friend’s submissions assumed that this was a good case; that is, it is a mere formality to seek to enforce this…..  Of course, it is highly disputed whether the relevant pre‑emption has been engaged or not.  So to say that a company may be taking a very significant financial risk in seeking to enforce – bring a suit alleging that there has been a breach or a threatened breach of its articles because in determining the prejudice one would have to consider the risk of failure, and if the risk of failure is high it is arguable but barely arguable, for example, one might be well advantaged if one is a shareholder in having the company which you control take that commercial risk in running the litigation rather than launching into the enforcement yourself. 

That is where the burden of proof becomes important in determining prejudice.  Our learned friends elected to engage in no way in relation to that exercise, and we say it is not simply answered by saying, I have a right and I am enforcing it.  Financial risk of taking it may be very substantial.  Secondly, we say financial assistance cannot be determined for the purposes of section 290A by whether you put it in the articles or not.

GORDON J:   Section 260A.

MR HUTLEY:   Thank you, your Honour.  Prevention provisions are common in shareholder’s agreements, often to which the company is a party; in fact, they are often the adjunct to closely held companies.  The election to put it in the articles or keep it outside in an inter partes agreement to which the company is a party would be surprising but 260A said in one case it can be financial assistance and in the other case it cannot because of the device of putting it into the articles.

Section 260A is plenary in terms.  It makes no exception as to the situs of the source of the provision and we say there is no reason to read it other than in its clear terms, that is, could a company taking proceedings essentially for the benefit by receiving – seeking to procure an offer for the benefit of a shareholder and thereby exposing itself to costs and the risks of adverse costs ‑ ‑ ‑

KIEFEL CJ:   Is it a little simpler than that?  There is the question ‑ ‑ ‑

MR HUTLEY:   I am hoping it is, your Honour.

KIEFEL CJ:   So does Mr Jackson.  Is the question whether saving others money amounts to financial assistance?

MR HUTLEY:   Your Honour, we say that must be right.  For example, a guarantee by a company saves other people money because a person may require a higher price ‑ ‑ ‑

KIEFEL CJ:   There is no provision of financial assistance.  There is nothing going out towards them providing financial assistance.

MR HUTLEY:   There is nothing in a guarantee case either.

KIEFEL CJ:   It is just it is a collateral benefit of someone else’s action.

MR HUTLEY:   Quite, but there is nothing going out to the shareholder by a guarantee.  In fact, if our learned friends are right, what is called indirect assistance such as in Darvall’s Case would not be financial assistance.

GORDON J:   I do not think that is right in that sense because of the overall commercial transaction which was an issue in that case.  It is factually substantially different.

MR HUTLEY:   Well, your Honour, in our respectful submission, to impute into the section which does not refer the word “transaction”, the concept of transaction itself ‑ ‑ ‑

GORDON J:   No, that is my point.  I mean, in Darvall’s Case it was dealing with a transactional arrangement.

MR HUTLEY:   Well, in this sense but not necessarily involving the shareholder, the purchaser.  It was the vendor who came to the company and said we are prepared to do it if, and that was the interesting thing.  So, in other words, it did not have to, as it be, a trilateral contract, it can be any understanding or any act we say whereby a potential acquirer of shares is assisted in his or her or its endeavour, and that is what the words of section ‑ ‑ ‑

KIEFEL CJ:   No receipt need be involved.

MR HUTLEY:   No receipt at all.  The guarantee case is the classic.  There is no receipt by anyone of money, or money’s worth.  There is just a guarantee, and you can have a guarantee of a guarantee and all these indirect ways.  So, in other words, what we say is financial assistance means has there been something which assists done by the company and is it of a financial character, and if so, that is financial assistance.

Now, the way out is the exception.  So there is a very simple objective test followed by a series of exceptions, and if it is not material you are able to do it.  That overcomes all the difficulties with companies assisting their shareholders to acquire shares in the company and the like because there is not material adverse change.

GORDON J:   What is the material prejudice here?

MR HUTLEY:   Exposure of the company to a very substantial costs obligation, contingent ‑ ‑ ‑

GORDON J:   A substantial company?

MR HUTLEY:   Well, your Honour, one of the problems was our learned friends did not go into evidence as to exactly what this would mean to the companies.  The companies were worth quite a lot of – had a successful business ‑ ‑ ‑

GORDON J:   Hugely successful, that is why you are fighting over them.

MR HUTLEY:   Well, except – but still, your Honour, it is a substantial detriment to, one, expose the company to nearly three‑quarters of a million of its own expense, let alone be subjected to the risk of similar expense from the other side in a costs order.  Now, we say that objectively – put it this way, if one can ask – if you were a shareholder would you rather have the company doing this than you, if, for example, particularly if the right was a right which was contestable?  The answer to that is obvious.  It assists you, in our respectful submission, if the company takes the downside risk rather than yourself.  That is all really that the Court of Appeal said at paragraph 77 and we say that is just, frankly, obvious.  The prejudice argument does not arise because of the course taken by our learned friends.  Now, that is the way we put it ‑ ‑ ‑

KIEFEL CJ:   Why would it be consistent with the policy of the Corporations Act to give such a wide meaning?

MR HUTLEY:   Because, your Honour, unless one dared give it such a wide meaning one would not take a lot of imagination to start building in assistance into the articles of companies by the controlling shareholders.  It would be the next step.  If one has, in effect, a carve‑out that as long as you are “enforcing” the articles – whatever that precisely means – or exercising a power under the articles ‑ ‑ ‑

GORDON J:   Well, it cannot be that broad, can it, Mr Hutley, because it has to be referable to the way in which the test looks at it, and that is look at all of the circumstances as a whole.  So one is looking here at a pre‑empt right not exercised or not complied with, or allegedly not complied with, giving rise to an action.

MR HUTLEY:   Quite.  But, your Honour, that is the particular circumstance and I accept that, your Honour.  But if there is some carve‑out of 260A because of section 140, which is really the gravamen of our learned friend’s position, then it becomes a matter of the imagination of draftspersons of constitutions to overcome section 260A.  Section 260A does not express itself as being subject to the provisions of the articles.  In our respectful submission, the court would simply apply its terms in ‑ ‑ ‑

GORDON J:   It is subject to the directors’ duties in 260E though, is it not?

MR HUTLEY:   Well, I accept that, your Honour, but I am assuming you have power and one is doing something, and then it, in our respectful submission, is a pure inquiry in fact.  Has, as it were, the capital of the company been deployed in a way which in fact assists someone to acquire

shares?  We say commencing a suit and exposing this company – paying for it and exposing this company to the downside risk obviously assists any person who wishes to acquire it.  We say objectively that is the case where the people who are motivating the company to do it are the people who serve to benefit by it.

KIEFEL CJ:   Your approach as a matter of construction rather parses “assist and finance” – it is a progressive approach.

MR HUTLEY:   I think I must say yes to that, your Honour.

KIEFEL CJ:   You look for assistance and then you put a dollar value to - perhaps one of the arguments is going to be it is a matter of construction.  You have to read them as a composite term.

MR HUTLEY:   I accept it has to be read as a composite term, but even read as a composite term one looks at the facts and says, is this capable of assisting financially the acquisition of the shares, and we say it clearly does.

GAGELER J:   Well, summing up your position you say it is a very important question but the Court of Appeal is correct ‑ ‑ ‑

MR HUTLEY:   Your Honour – thanks, your Honour.

GORDON J:   Let us see how you divide this – divide and conquer that, Mr Hutley.  Good luck.

MR HUTLEY:   Can I say it was once an important question, I think I would prefer to put it, your Honour.  It has now become mundane because the answer is so patently clear.  I cannot put it any other way, your Honour.  Those are our submissions.

KIEFEL CJ:   Anything in reply, Mr Jackson?

MR JACKSON:   Your Honours, if I could just say these things?  Our learned friend’s second point I think was that the question whether the proceedings would be ultimately successful and whether there was anything in our case has not been dealt with, but, of course, that is because when the proceedings were instituted the application was made to bring them to a conclusion immediately without there being any entry into the merits of them.  So, your Honours, that is not entirely our fault in that regard.

The second thing is that our learned friends referred to what was said by Lord Hoffmann at first instance at page 92 in Charterhouse.  Well, your Honours, that is a good useful general observation about the meaning of financial assistance, but as with so many other things one has to take into

account the terms of section 260A in their Australian form, current Australian form, and also take them into account with the provisions of the two other – two or three other provisions to which I have referred, 1072F(2)(c) and G.

Your Honours, in that regard, one needs to bear in mind too that if one is talking about financial assistance, even taking the general concept that Justice Hoffmann referred to in Charterhouse, what one does need to bear in mind that one is always talking about a company, a corporation, which is governed by its own constitution, and the concept of financial assistance has to be read in that light.

Your Honours, could we just say in that regard, you see first of all in the provisions of the articles ‑ I have taken your Honours to them ‑ one sees in the provisions of the statute itself, that the corporation – one of the features of the corporation, both in its constitution and in the statutory provisions with which section 260A has to be read, that the corporation is entitled, for example, to require – or the directors in effect are entitled to require that they be shown the circumstances which entitle a person to transfer the shares, or have the transfer registered in order to demonstrate that the person is entitled to do so, which means in accordance with the constitution of the company.  If your Honours please.

KIEFEL CJ:   There will be a grant of special leave in this matter.  What is your time estimate, gentlemen?

MR JACKSON:   Your Honour, I think it would take a morning, perhaps trickle into the afternoon.

MR HUTLEY:   I agree.

KIEFEL CJ:   Yes, thank you.  The Court will adjourn to reconstitute.

AT 11.05 AM THE MATTER WAS CONCLUDED