Eastland Medical Systems Ltd v Sims
[2010] WASC 33
•22 FEBRUARY 2010
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: EASTLAND MEDICAL SYSTEMS LTD -v- SIMS [2010] WASC 33
CORAM: MURPHY J
HEARD: 9 & 19 FEBRUARY 2010
DELIVERED : 22 FEBRUARY 2010
FILE NO/S: CIV 3039 of 2009
BETWEEN: EASTLAND MEDICAL SYSTEMS LTD (ACN 090 987 250)
Plaintiff
AND
LESLEY ANNE SIMS
First DefendantBEAD-CHEATA NOMINEES PTY LTD (ACN 009 231 832)
Second DefendantTOP CHOICE INVESTMENTS PTY LTD (ACN 104 086 311)
Third DefendantEASTLAND TECHNOLOGY AUSTRALIA PTY LTD (ACN 059 479 391)
Fourth DefendantWESTERN RESEARCH AND DEVELOPMENT PTY LTD (ACN 063 922 001)
Fifth DefendantTREVOR STRAHAN
Sixth DefendantJANET BAKER
Seventh DefendantPETER TIEDE
Eighth DefendantCHARLES SHARLAND
Ninth DefendantMARTIN NG
Tenth DefendantDOUGLAS ARTHUR SIMS
Eleventh DefendantRM CAPITAL PTY LTD (ACN 065 412 820)
Twelfth Defendant
Catchwords:
Equity - Interlocutory injunction - Preservation of the status quo - Balance of convenience - Restraint on disposition of shares - Exercise of voting rights attached to shares
Legislation:
Nil
Result:
Application to restrain exercise of voting rights denied
Category: B
Representation:
Counsel:
Plaintiff: Mr J L Sher
First Defendant : Mr J A Thomson
Second Defendant : Mr J A Thomson
Third Defendant : Mr J A Thomson
Fourth Defendant : Mr J A Thomson
Fifth Defendant : Mr J A Thomson
Sixth Defendant : No appearance
Seventh Defendant : No appearance
Eighth Defendant : No appearance
Ninth Defendant : No appearance
Tenth Defendant : No appearance
Eleventh Defendant : Mr J A Thomson
Twelfth Defendant : Mr N C Ebbs
Solicitors:
Plaintiff: Downings Legal
First Defendant : Macdonald Rudder
Second Defendant : Macdonald Rudder
Third Defendant : Macdonald Rudder
Fourth Defendant : Macdonald Rudder
Fifth Defendant : Macdonald Rudder
Sixth Defendant : No appearance
Seventh Defendant : No appearance
Eighth Defendant : No appearance
Ninth Defendant : No appearance
Tenth Defendant : No appearance
Eleventh Defendant : Macdonald Rudder
Twelfth Defendant : Lavan Legal
Case(s) referred to in judgment(s):
Adsteam Building Industries Pty Ltd v The Queensland Cement & Lime Co Ltd [1984] 2 Qd R 1
Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380
Carr Boyd Minerals Ltd v Ashton Mining Ltd (1989) 15 ACLR 599
Heavener v Loomes [1924] HCA 10; (1924) 34 CLR 306
Mott v Mount Edon Goldmines (Australia) Ltd (1994) 12 ACSR 658
SMS Rental (WA) Pty Ltd v Cahma Life Nominees Pty Ltd [2009] WASC 359
Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110
MURPHY J:
Introduction
The plaintiff applies for an interlocutory injunction against the first, second, third, fourth and fifth defendants, seeking, inter alia, to restrain them from dealing with, including exercising voting rights in, certain shares in a German company, HC Berlin Pharma AG (Berlin Pharma). The plaintiff claims that the shares are held on constructive trust for the plaintiff.
The plaintiff is a public company listed on the Australian Stock Exchange. It develops pharmaceutical products and distributes medical products for sale. It is the exclusive beneficial owner of patents and intellectual property in relation to certain malaria treatment.
The directors of the plaintiff at material times were:
•the eleventh defendant (Mr Sims), 2 March 2004 to 10 June 2009;
•the eighth defendant (Mr Tiede), 7 May 2007 to 10 March 2009;
•Mr David Whitelaw, 8 August 2002 to 10 March 2009;
•Mr Peter Jooste, 3 July 2006 and continuing; and
•Mr Dermot Patterson, 1 December 2006 and continuing.
The plaintiff alleges breaches of fiduciary duty by Mr Sims and Mr Tiede, and by other officers of the plaintiff referred to below.
The litigation
In substance, in these proceedings, the plaintiff claims that by a licence agreement dated 7 June 2008 (June 2008 licence), it licensed to Berlin Pharma its intellectual property rights in relation to malaria treatment in consideration for Berlin Pharma issuing to the plaintiff 8 million fully‑paid shares at a nominal value of €1 each. The plaintiff alleges, in effect, that instead of the plaintiff receiving 8 million shares in Berlin Pharma, Mr Sims, in breach of his fiduciary duty to the plaintiff, arranged for approximately 2 million of the shares to be issued to other persons.
The twelfth defendant (RM Capital) is in the business of acting as a nominee and custodian of shares. It is common ground on the pleadings that RM Capital is the 'custodian' of the relevant shares issued by Berlin Pharma. It is also common ground in this application that the shares in question are 'bearer' shares.
The plaintiff does not plead that RM Capital knowingly received shares in breach of fiduciary duty, or knowingly participated in the alleged breach of duty.
The other defendants are third parties who, the plaintiff alleges, received shares pursuant to the alleged breach of duty by Mr Sims and with alleged knowledge of the breach of duty. The sixth and seventh defendants, as alleged former officers of the plaintiff, and the eighth defendant as a former director of the plaintiff, are also said to have received their shares in alleged breach of fiduciary duties which they personally owed to the plaintiff.
By way of final relief, the plaintiff seeks, principally, a declaration that the shares are held on constructive trust for the plaintiff, and an order that the defendants transfer the shares to the plaintiff. Other final orders sought include injunctive relief and equitable compensation.
The first, second and third defendants have filed a defence, not admitting the allegations and saying they will abide the outcome (although they have joined with the fourth, fifth and eleventh defendants in opposing this application) . The fourth and fifth defendants (companies with which Mr Sims has connexions), and the eleventh defendant (Mr Sims), have filed a defence denying the plaintiff's claims. The sixth, seventh, eighth and tenth defendants have not filed a defence. The ninth defendant (a shareholder in the fourth and fifth defendants, a director of the third, fourth and fifth defendants, and a former director, with Mr Sims, of a company called In Vivo Systems Ltd (IVS)) has filed a defence which reflects, in substance, the defence of the fourth, fifth and eleventh defendants. The twelfth defendant (RM Capital - the present 'custodian' of the shares) has filed a defence in which it says it will abide the outcome.
These proceedings are related to other proceedings, CIV 2756 of 2009. In the latter proceedings, the first, second, third, fourth and fifth defendants in this action sought relief against RM Capital, claiming that they were the beneficial owner of 1,526,600 of the relevant shares in Berlin Pharma. Judgment in default of a defence was entered in those proceedings. RM Capital has applied to set it aside.
The plaintiff in this action applied for, and obtained from EM Heenan J on 22 December 2009, an interim injunction restraining until 18 January 2010, or further order, the first, second, third, fourth and fifth defendants from dealing with and encumbering the shares in Berlin Pharma, the subject of default judgment in CIV 2756 of 2009. His Honour also suspended, until further order, the enforcement of the default judgment in CIV 2756 of 2009. The parties, by consent, extended the operation of the injunction until the hearing of this application on 9 February 2010. The matter was then part‑heard, and the injunction was extended to 19 February 2010, and then to 22 February 2010.
This is an application by the plaintiff to continue the injunction, on the basis that the prohibition against 'dealing' in the order made by EM Heenan J also includes a restraint on voting the shares.
The plaintiff relies on its original affidavit, before EM Heenan J, of Mr Patterson sworn 1 December 2009, a further affidavit by Mr Patterson sworn 5 February 2010, an affidavit by Mr Jooste sworn 5 February 2010, and four affidavits by Mr Thomas, the plaintiff's solicitor, sworn 18 December 2009, 9 February 2010, 12 February 2010 and 18 February 2010 respectively.
The first, second, third, fourth, fifth and eleventh defendants rely on the affidavits of Mr Sims sworn 19 January 2010 and 12 February 2010. In addition, Mr Sharland (the ninth defendant), Mr Tiede (the eighth defendant), and Mr Whitelaw (a director of the plaintiff at the relevant time) have sworn affidavits which, in essence, confirm material aspects of Mr Sims' evidence. Those affidavits are also relied on by the first, second, third, fourth, fifth and eleventh defendants. The first, second, third, fourth, fifth and eleventh defendants also rely on the affidavit of their solicitor, Mr Macdonald, sworn 8 February 2010, providing evidence on information and belief based on an affidavit of the chairman of the Supervisory Board of Berlin Pharma, Mr Schotteldreier. Mr Schotteldreier broadly confirms material aspects of Mr Sims' evidence, although the cogency of that evidence is somewhat diminished by the use of the passive voice at an important part of the narrative.
Mr Macdonald has sworn a second affidavit also of 8 February 2010, referring to the prospect of an annual general meeting of Berlin Pharma and indicating a dispute as to whether his clients may exercise voting rights at the meeting. Mr Macdonald has also sworn an affidavit of 18 February 2010.
The twelfth defendant did not file evidence or make submissions other than to indicate it would abide the outcome.
The defence of the fourth, fifth and eleventh defendants
In substance, Mr Sims' evidence and pleadings indicate that the defence of the fourth, fifth and eleventh defendants is as set out below. (In this section of my reasons, I am narrating the substance of the materials relied on by the fourth, fifth and eleventh defendants; I am not making findings.)
Overview
Berlin Pharma was a company incorporated in May 2007 with a view to acquiring intellectual property rights in the medical field and being listed on the Frankfurt Stock Exchange. In 2007, anterior to the June 2008 licence, there were other agreements between, relevantly, Berlin Pharma and the plaintiff, and between Berlin Pharma and the fourth and the fifth defendants, for the transfer to Berlin Pharma of intellectual property rights in various medical applications for a total of €8 million. The purchase price was to be paid by the issue of shares in Berlin Pharma. The plaintiff was to transfer rights in relation to malaria treatment, nicotine‑addiction treatment, and safe needle technology.
Berlin Pharma proceeded to raise seed capital from investors on the basis that it would commercialise all of the intellectual property rights which it had acquired pursuant to these anterior agreements. As part of the process for listing on the Frankfurt Stock Exchange, Berlin Pharma was required to obtain a valuation which showed that the assets which it was acquiring were worth at least €8 million, to justify the proposed issue of 8 million fully paid €1 shares.
The plaintiff was under financial pressure and was anxious for Berlin Pharma to become listed as soon as possible, so that money could be raised on the basis of the plaintiff's investment in a listed company. By May or June 2008, the valuation of all of the intellectual property assets was proving difficult, and taking significantly longer than had been expected. However, the German valuer had indicated that the rights in relation to the malaria treatment alone could be valued at €8 million.
Given the financial pressure that the plaintiff was under, and in order to expedite the listing of Berlin Pharma, in about late June 2008, in substance, it was orally agreed amongst the directors of the plaintiff (including Mr Patterson and the chairman, Mr Jooste), and with representatives of Berlin Pharma, that Berlin Pharma would issue 8 million shares to the plaintiff on the strength of the rights in relation to the malaria treatment, on the basis that the plaintiff would deal with the shares in accordance with the arrangements established under the anterior agreements, and that by the issue of 8 million shares to the plaintiff, Berlin Pharma would be released from its obligations to issue shares in accordance with the anterior agreements. Relevantly, for present purposes, the oral agreement, in effect, involved the plaintiff agreeing to hold or transfer 2 million of the 8 million shares to or at the direction of the fourth and fifth defendants. The oral agreement is said to be a binding contract at law. Alternatively, the plaintiff is said to be estopped from denying its operation.
I should interpolate here to note that the plaintiff's response is that no oral agreement was made. It is not alleged that if there were an oral agreement entered into, involving Mr Patterson and Mr Jooste, then either in the making of the oral agreement, or in implementing it, the directors of the plaintiff breached their fiduciary duties to the plaintiff.
The background to the alleged oral agreement may be summarised as follows.
The intellectual property rights in the malaria treatment
The rights to the malaria treatment were originally held by an English company controlled by the inventor of the treatment, Mr Ross. By an agreement dated 2 October 2006, the English company granted an African company the right to manufacture and distribute the malaria treatment in Africa. By an agreement dated 2 February 2007, the African company appears to have subsequently granted manufacturing rights in relation to the malaria treatment to the plaintiff's South African subsidiary, Eastland Medical System South Africa Ltd (EMSSA).
In early 2007, the English company granted to the plaintiff the right to manufacture and distribute the malaria treatment in India, Asia and the Pacific.
The anterior agreements - the plaintiff and Berlin Pharma
Malaria treatment
By an agreement dated 20 April 2007, the plaintiff agreed to grant Berlin Pharma an exclusive licence to manufacture and distribute the malaria treatment in the Indian, Asian and Pacific regions, in consideration for Berlin Pharma issuing to the plaintiff 1 million fully‑paid shares and 1 million options.
By an agreement made on 1 September 2007, EMSSA granted to Berlin Pharma a right to manufacture the malaria treatment in Africa, in consideration for Berlin Pharma issuing to EMSSA 1 million fully‑paid shares and 1 million options.
Nicotine addiction treatment
By an agreement dated 20 April 2007, the plaintiff agreed to grant Berlin Pharma an exclusive licence to manufacture and distribute nicotine‑addiction treatment in Europe, in consideration for Berlin Pharma issuing to the plaintiff, initially, 2 million fully‑paid shares, and then a further 1 million fully‑paid shares upon completion of the grant of a licence and other specified events. Berlin Pharma also agreed to issue 1 million ordinary shares to Mr Ross, or his nominee.
Safe needle technology
By an agreement dated 20 April 2007, the plaintiff agreed to assign to Berlin Pharma certain patents in relation to safe needle technology in consideration for the issue of 1 million shares to the plaintiff and 1 million options.
The anterior agreements - the fourth and fifth defendants and Berlin Pharma
By an agreement dated 4 July 2007, the fourth defendant agreed to assign certain patents which it owned relating to safe needle technology to Berlin Pharma in consideration for Berlin Pharma issuing to the fourth defendant 1 million shares and 1 million options. The assignment was effected by deed dated 5 July 2007.
By an agreement dated 4 July 2007 between IVS, the fifth defendant and Berlin Pharma, IVS agreed to assign certain patents beneficially owned by the fifth defendant in relation to tamperproof technology in consideration for Berlin Pharma issuing to IVS, or at its direction, 1 million shares and 1 million options.
Summary of effect of anterior agreements as alleged by Mr Sims
By May 2008, by reason of the anterior agreements:
(a)the plaintiff and its South African subsidiary (EMSSA) were entitled to be issued 5 million shares in Berlin Pharma, in respect of the transfer of intellectual property rights in the malaria treatment and other medical applications;
(b)Mr Ross was entitled to be issued 1 million shares in Berlin Pharma in respect of the transfer of rights in the nicotine‑addiction treatment;
(c)the fourth defendant was entitled to be issued 1 million shares in Berlin Pharma in respect of the transfer of intellectual property rights in safe needle technology; and
(d)the fifth defendant (as beneficial owner of the technology) or IVS (as trustee for the fifth defendant) was entitled to be issued 1 million shares in Berlin Pharma in respect of the transfer of intellectual property rights in tamperproof technology.
The fourth, fifth and eleventh defendants contend, in effect, that the entitlements referred to in (c) and (d) above were extant in late June 2008, when the plaintiff, by the alleged oral agreement, agreed, relevantly, to apply 2 million of the 8 million shares to or at the direction of the fourth and fifth defendants.
Events after the June 2008 licence
It is common ground that Mr Patterson, in the name of the plaintiff, sent an invoice to Berlin Pharma on 23 June 2008 for €8 million in relation to the rights to the malaria treatment in connection with the June 2008 licence and signed a subscription form for the shares on 1 August 2008.
There is evidence in Mr Patterson's first affidavit indicating that on 2 July 2008, at a general meeting, Berlin Pharma resolved to increase its issued capital by 8 million €1 shares, to be taken up by the plaintiff. There is also evidence that the plaintiff forwarded to Berlin Pharma a certificate dated 2 July 2008, subscribing for 8 million shares in Berlin Pharma, and that on 6 August 2008, Berlin Pharma recorded the subscription in a document entitled 'List of Subscribers'.
On 27 June 2008, however, Mr Sims and Mr Tiede wrote to Berlin Pharma, in the name of the plaintiff, instructing it to issue 5 million of the 8 million shares to the plaintiff and its South African subsidiary, 1 million to Mr Ross, and the other 2 million as follows:
The first defendant
131,200 shares
The second defendant
145,600 shares
The third defendant
250,000 shares
The fourth defendant
932,000 shares
The fifth defendant
77,800 shares
The sixth defendant
65,000 shares
The seventh defendant
65,000 shares
The eighth defendant
65,000 shares
The ninth defendant
109,200 shares
The tenth defendant
109,200 shares
The plaintiff's chairman
50,000 shares
By this time, Mr Sims, or possibly Mr Sims and Mr Sharland, had, I infer, resolved that the fourth and fifth defendants would direct the plaintiff to apply 2 million of the shares to the persons and entities referred to in the letter of 27 June 2008.
Mr Tiede and Mr Sims wrote again to Berlin Pharma on 11 August 2008, referring to their 'letter of instruction June 2008', and giving further instructions as to the entities which would hold the plaintiff's parcel of shares.
On 20 August 2008, the fourth defendant and IVS, by Mr Sims and Mr Sharland, forwarded settlement notices to Berlin Pharma in respect of invoices issued pursuant to the anterior agreements referred to in [31] ‑ [32] above. On 21 August 2008, the plaintiff, by Mr Sims and Mr Tiede, forwarded settlement notices to Berlin Pharma in respect of invoices issued pursuant to the anterior agreements relating to the plaintiff's other medical applications.
The plaintiff's annual report for the year ended 30 June 2008, which is undated but which from its reference to 'after balance date events' suggests that it was published after 2 September 2008, included a statement by Mr Jooste to the effect that Berlin Pharma would manufacture both the malaria treatment and nicotine‑addiction treatment for the plaintiff.
On 8 September 2008, Mr Patterson forwarded an email to Berlin Pharma which identified the recipients of the Berlin Pharma shares, including recipients for 2 million of the shares, as the same persons identified in the instructions in the letter of 27 June 2008. In that email, Mr Patterson said:
I have attached a spreadsheet with the names and details for all of the shareholders from Australia who subscribed to shares in HC Berlin Pharma AG along with the details for main holding share depot account.
Also, listed is the breakdown of the recipients for the 8m in kind shares. List numbers 1.1 to 1.15 are covered by letters of direction from Eastland and should already be on file.
I have not supplied this information to [Berlin Pharma's bank], as I assume that you will create one master shareholding file for them.
On 10 September 2008, Berlin Pharma wrote to the plaintiff for the attention of Mr Sims and Mr Patterson, referring to Mr Patterson's email of 8 September 2008, and advising that it had completed a share delivery list to its bank, including the directions for the '2 Mio [million] shares of ETA [the fourth defendant] and WRD [the fifth defendant]'.
On 14 October 2008, Berlin Pharma's bank sent an email to Mr Patterson attaching a distribution list for the shares in Berlin Pharma. The list accorded with the list of recipients of the 2 million shares, as set out in Mr Patterson's email of 8 September 2008. The email said, inter alia, '[w]e checked the list with the letters of direction for transfer ... you sent us'. The line item for each recipient referred to the shares being held in 'Caecis Bank GmbH Munich RM Capital Acc'.
On 23 October 2008 Berlin Pharma was listed on the Frankfurt Stock Exchange.
On 31 October 2008 the plaintiff, by Mr Jooste and Mr Sims, signed an agreement with an investor, which recorded, inter alia, Berlin Pharma holding exclusive manufacturing rights to the nicotine‑addition treatment.
On 8 December 2008, the plaintiff, by Mr Patterson, announced to the Australian Stock Exchange a restructure of its South African subsidiaries, and referred to the transfer of 1 million shares in Berlin Pharma in satisfaction of a certain debt.
On 30 July 2009, the plaintiff, by Mr Patterson, wrote to Berlin Pharma complaining of breaches by Berlin Pharma of the anterior licence agreement dated 20 April 2007 in relation to nicotine‑addiction treatment.
On 7 October 2009 RM Capital wrote to Berlin Pharma, registering an intention to vote shares at a meeting of Berlin Pharma, and attaching a shareholding statement which reflected, relevantly, the entries in its sub‑registry (referred to below), of the names of the defendants.
On 8 October 2009, the plaintiff wrote to Berlin Pharma advising that it, and its subsidiaries, held 4,325,583 shares in Berlin Pharma.
The sub‑registry of RM Capital (adduced in evidence by Mr Patterson on behalf of the plaintiff), shows that as at 30 November 2009, RM Capital held shares in Berlin Pharma as follows:
The plaintiff (and subsidiaries)
4,744,960 shares
The plaintiff's chairman
50,000 shares
The first defendant
131,200 shares
The second defendant
145,600 shares
The third defendant
250,000 shares
The fourth defendant
922,000 shares
The fifth defendant
77,800 shares
The sixth defendant
65,000 shares
The seventh defendant
65,000 shares
The eighth defendant
65,000 shares
The ninth defendant
109,200 shares
The tenth defendant
99,200 shares
The only differences, with respect to shares in the defendants' names, between RM Capital's sub‑register and the details contained in Mr Patterson's email of 8 September 2008, are that the sub‑register reflects sales of 10,000 shares by each of the fourth and tenth defendants.
This application for an injunction relates only to the shares in the names of the first, second, third, fourth and fifth defendants. The shares in their names total 1,526,600 shares.
On 10 December 2009 the plaintiff announced to the ASX that it was requisitioning an extraordinary general meeting and wished to have the following items put on the agenda:
(a)the removal of Mr Schotteldreier and Mr Sims from the Supervisory Board of Berlin Pharma;
(b)the appointment of a special auditor;
(c)the cancellation of certain share capital.
In a business plan for Berlin Pharma of March 2008, annexed to Mr Sims' affidavit, there is a reference to the management of the company being in the hands of an 'Executive Board' and a 'Supervisory Board'. The former is said to comprise a Mr Ottmar Geiger. The latter is said to comprise several people including, relevantly, Mr Sims, Mr Patterson and Mr Schotteldreier. Mr Schotteldreier's affidavit also refers to Mr Patterson having been appointed to Berlin Pharma's Supervisory Board. At some stage, although it is not clear when, Mr Patterson apparently ceased to be a member of the Supervisory Board. According to Mr Sims' most recent affidavit Mr Geiger remains the current incumbent of the 'Executive Board', and the current members of the Supervisory Board are Mr Sims, Mr Schotteldreier, and Dr Amuah. His evidence also indicates the existence of another board called an 'Advisory Board'.
The affidavit evidence of 12 February 2010 indicates that there is an annual general meeting of Berlin Pharma scheduled for 13 April 2010, although there is the possibility that it may be postponed. Mr Thomas' most recent affidavits, on information and belief from the plaintiff's German lawyers, also indicate that members of the Supervisory Board are elected by the shareholders with simple majority of the votes cast. Also, according to this evidence, the Supervisory Board must supervise the management of the company, but it may not participate in the management itself, and that its members are legally obliged to act with the 'care and diligence of a prudent businessman'.
Recent correspondence between the parties' solicitors indicates that the plaintiff's solicitors have proposed to the solicitors for the first to fifth defendants certain arrangements involving the appointment of Mr Jooste, Mr Stewart (another director of the plaintiff) and Mr Patterson to the Supervisory Board of Berlin Pharma. Those proposals have not been accepted by the first to fifth defendants.
The current Berlin Pharma website records it as having the rights in relation to the other medical technology the subject of the anterior agreements.
The question of a prima facie case
The general principles are not in dispute - see Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110 [7] ‑ [13]; SMS Rental (WA) Pty Ltd v Cahma Life Nominees Pty Ltd [2009] WASC 359 [43].
The plaintiff's claim is in equity's exclusive jurisdiction, and the question of whether damages at law are an adequate remedy does not arise: Heavener v Loomes [1924] HCA 10; (1924) 34 CLR 306, 326; Meagher RP, Heydon JD & Leeming MJ, Meagher, Gummow & Lehane's Equity: Doctrines & Remedies (4th ed, 2002) [21‑015], [21‑345].
A prima facie case in this context does not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed. It is sufficient that the plaintiff show a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending trial. How strong a probability needs to be depends upon the nature of the rights the plaintiff asserts and the practical consequences likely to flow from the orders the plaintiff seeks.
The plaintiff by its reply and defence to counterclaim denies the alleged oral agreement. Mr Patterson, in his second affidavit, and Mr Jooste in his affidavit, deny the making of any oral agreement. Mr Patterson also says that a copy of the letter of 27 June 2008 is not in the books and records of the plaintiff. There is no mention of the alleged oral agreement recorded in the minutes of meetings of the directors of the plaintiff, or in the June 2008 licence, or in some written collateral agreement with Berlin Pharma. The June 2008 licence contains an 'entire agreement' clause.
The first, second, third, fourth, fifth and eleventh defendants, on the other hand, urge that the evidence discloses no, or no adequate, basis for the plaintiff's claim. They point to a course of conduct in the period September 2008 to July 2009 by the plaintiff which, they say, is only consistent with the oral agreement alleged.
In substance, the first, second, third, fourth, fifth and eleventh defendants refer to:
(a)Mr Patterson's positive activity in facilitating, and his apparent acquiescence in, the creation of the defendants' interests in the shares in question (see [42] ‑ [44] above);
(b)the express or implicit recognition, and enforcement by the plaintiff (through Mr Patterson and Mr Jooste), of the anterior agreements insofar as they relate to the plaintiff's other medical technology (see [41], [46] ‑ [48]).
These matters were not disclosed in the affidavits on the original application before EM Heenan J. Mr Patterson in his first affidavit said, in relation to the position of the first to fifth defendants' claim on the shares, 'I have no idea how they can assert ownership when the plaintiff is their true owner'.
Whilst the first, second, third, fourth, fifth and eleventh defendants do not contend that there has been material non‑disclosure in any relevant sense, they, nevertheless, contend that these matters call for explanation, and that no adequate explanation has been provided. The first, second, third, fourth, fifth and eleventh defendants in this regard refer, in particular, to the following matters.
First, they say that by par 12 of the reply and defence to counterclaim, the plaintiff admits that Mr Patterson sent the email dated 8 September 2008 to Berlin Pharma with the attached list of shareholders. Secondly, they say that Mr Patterson's evidence that he was unaware in May to August 2008 that Berlin Pharma was issuing shares in respect of the transfer of the plaintiff's malaria treatment only, and that he had only 'recently' come to the understanding that the shares were being issued for the malaria treatment only, lacks credibility given that he signed the June 2008 licence on behalf of the plaintiff in late June 2008 and had also signed a subscription form for the shares on 1 August 2008. Thirdly, they say that his evidence that his understanding at the time that he sent the 8 September 2008 email was that the shares would be distributed in accordance with the anterior agreements, is tantamount to confirmation of his knowledge of and participation in the alleged oral agreement. They also point to the absence, in his affidavits, of any reference to and explanation of what he did in relation to the subsequent correspondence, addressed to him in October 2008, concerning the distribution of the shares to the defendants. They also refer to the absence, in his affidavits, of any reference to the communications concerning the recognition and enforcement of the anterior agreements. Mr Patterson's explanation for signing the subscription form is that he thought it was only necessary for assisting the valuer in completing his valuation.
As is the usual course in applications of this nature, there was no cross‑examination on the affidavits. The basis upon which Mr Patterson acted as he did, and had the understanding which he said he had for so long, remains unexplored and untested.
Nevertheless, whether there was an oral agreement as alleged will be a matter to be determined at trial. The making of the agreement is denied on oath. The other matters referred to in [62] are relevant. It is not appropriate to resolve disputed questions of fact on the affidavits: Mott v Mount Edon Goldmines (Australia) Ltd (1994) 12 ACSR 658, 662. I have formed the impression that much of the story still remains to be told on both sides.
At this stage, I am satisfied that, subject to the question of the scope of the injunction concerning voting, the plaintiff has established a prima facie case in the relevant sense.
The undertaking not to dispose of or encumber the shares
In the course of argument on 9 and 19 February 2010, the first, second, third, fourth and fifth defendants, by their counsel, undertook not to dispose of, transfer an interest in, or encumber, the shares, if a prima facie case were established. The undertaking is appropriate having regard to my findings on a prima facie case. The undertaking is subject to the plaintiff continuing the usual cross‑undertaking as to damages.
This leaves, then, the question of whether the plaintiff is entitled to an injunction restraining the relevant defendants from exercising voting rights attached to the shares, having regard to the balance of convenience.
The balance of convenience
The plaintiff says that it wishes to restrain the relevant defendants from exercising their voting rights. Mr Patterson said, at pars 74 ‑ 77 of his first affidavit:
74The Plaintiff's shares which the First, Second, Third, Fourth and Fifth Defendants claim to own represent 13.7% of the issued share capital of Berlin Pharma.
75Without those shares, the Plaintiff owns 44.9% of the issued share capital of Berlin Pharma.
76With the shares referred to in paragraph 74, the Plaintiff has a controlling interest in Berlin Pharma. Without those shares it does not. A controlling interest in Berlin Pharma is of considerable strategic importance to the Plaintiff in protecting both its investment in Berlin Pharma and its [malaria treatment] asset generally.
77Further, as the distributor of [the malaria treatment], it is of considerable importance to the Plaintiff to have control over the manufacture of the product.
The shares in Berlin Pharma
The issued share capital of Berlin Pharma is 11,141,000 shares of €1 each. Mr Patterson in his first affidavit, sworn 1 December 2009, deposed that the plaintiff owns 44.9% of the issued capital of Berlin Pharma. The RM Capital sub‑register, adduced in evidence by Mr Patterson, indicates that the plaintiff beneficially owned 4,744,960 shares, representing 42.6% of the issued capital of Berlin Pharma, as at 30 November 2009.
The 50,000 shares in the name of the plaintiff's chairman, Mr Jooste, represent 0.45% of the issued share capital. Mr Jooste, in his affidavit, says that he has declared that he holds the 50,000 shares on trust for the plaintiff.
With Mr Jooste's shares, the plaintiff's beneficial holding is 45.35% (on Mr Patterson's direct evidence) or 43.05% (having regard to the evidence of the RM Capital sub‑register). The plaintiff, in its most recent submissions, says that the sub‑register of RM Capital does not accurately reflect the plaintiff's current shareholding in Berlin Pharma, and that the correct figure is the one set out in its letter to Berlin Pharma of 8 October 2009. On that figure, the plaintiff's holding (with Mr Jooste's shares) would be approximately 39%. Mr Patterson has not, however, sought to clarify, on oath, the correct position, and the evidence remains in conflict as to the true number of shares in Berlin Pharma beneficially held by the plaintiff.
The first, second, third, fourth, fifth and eleventh defendants contend that Mr Ross' 1 million shares, representing approximately 9% of the paid‑up capital, should also be taken into account when considering the plaintiff's voting power, as he is now a director of the plaintiff and, it is said, is likely to vote in accordance with the plaintiff's wishes. That is, in my view, a fair inference.
If Mr Ross' shares are grouped with the plaintiff's own beneficial holding, the plaintiff could count on between 48% and 54% of the voting shares at the forthcoming general meeting, depending upon which base figure is used for calculating the plaintiff's beneficial holding.
The 1,526,600 shares the subject of this application represent 13.7% of the issued share capital. If the sub‑register of RM Capital is accurate, the other defendants, whose shares are not the subject of this application, hold in total 403,400 shares, or 3.6% of the issued capital. Even if all the defendants combined to vote together, their vote would represent only 17.3% of the share capital of Berlin Pharma.
There is no evidence before me as to who holds the other 3,140,000 shares, and whether those shares consist of a number of small parcels, or a few large parcels.
As a group, these other shares represent 28% of the issued share capital, but I infer that, as Berlin Pharma is a listed company, at least some spread of shares would exist within this group. The plaintiff has adduced no evidence upon which it could be inferred, and it has not been suggested by the plaintiff that I should infer, that those shares would all necessarily be voted at the forthcoming meeting, or that if they were all voted, that they would necessarily be voted as a single block. Nor is there evidence, nor is it suggested, that even if they were voted as a block, those shareholders would vote contrary to the plaintiff's interests. There is no evidence that in practical terms, the plaintiff would not achieve voting control at the forthcoming meeting with even 48% of the voting shares.
There is evidence that the shares in Berlin Pharma are tightly held, and that there has been little trading on the market. I infer that it would be difficult to acquire a parcel of shares on market representing 13.7% of the share capital if the shares were disposed of prior to trial.
Status quo and discretionary considerations
In its most recent submissions the plaintiff said:
22The plaintiff is the largest shareholder by number and percentage of Berlin Pharma, yet it has no representation on the Supervisory Board. The 11th defendant was appointed as the plaintiff's representative, but he no longer represents the plaintiff's vested interests.
23.The plaintiff's investment in Berlin Pharma represents a major, if not the main part of the plaintiff's current undertaking. It should be represented at the highest level within Berlin Pharma. At the very least, if it is not so represented, the equjties [sic] favour the plaintiff gaining such representation.
In their submissions in relation to the balance of convenience, both sides appealed to the need to preserve the status quo. The plaintiff originally submitted that the status quo was the state of affairs existing as at the date of the June 2008 licence, under which the plaintiff was allegedly entitled to the 2 million shares. In its most recent submissions it accepts that the status quo is, relevantly, the state of affairs existing during the period immediately preceding the issue of the writ (this is not a case where there has been unreasonable delay between the issue of the writ and the application for an interlocutory injunction): Carr Boyd Minerals Ltd v Ashton Mining Ltd (1989) 15 ACLR 599, 605.
In this case, immediately prior to the issue of the writ, the plaintiff and the defendants were in dispute about the ownership of the 1.526 million shares in Berlin Pharma, the shares were recorded in RM Capital's sub‑register as being held for the relevant defendants, the plaintiff did not have three representatives on the Supervisory Board of Berlin Pharma, and there had been no steps taken by the plaintiff to convene a meeting of Berlin Pharma with a view to changing the composition of the Supervisory Board.
In these circumstances, in my view, the plaintiff, by seeking to restrain the defendants from voting the shares, is in substance not seeking to preserve the status quo, but to alter it. In my view, the matters of which the plaintiff complains, referred to in [83] above, are really complaints that the existing state of affairs is, from its perspective, deficient and requires correction, rather than propositions in support of the preservation of the status quo.
Moreover, the onus is on the plaintiff to prove that the balance of convenience weighs in its favour. The plaintiff says that the balance lies with it because, unless the defendants are restrained from voting at the meeting, the plaintiff will not have voting control at the forthcoming meeting. I am not satisfied, on the evidence presented, that this submission is well founded: see [74] ‑ [78] above. Certainly I would think it premature to conclude, on the evidence, that the plaintiff will not have a simple majority at the annual general meeting.
Further, if the restraint were not granted, then even if the plaintiff did not have sufficient votes to pass its proposed resolutions at the general meeting, the result would be that the constitution of the Supervisory Board of Berlin Pharma would remain as it is and as it has been for some time. There is no challenge by the plaintiff to the constitution of the Executive Board or the Advisory Board (the role of which has not been explained in the evidence). Any threatened or actual misfeasance by the Supervisory Board, could, I infer, be substantively redressed under German law in the German courts, or be the subject of scrutiny at a further general meeting convened for that purpose. In the latter case, the circumstances at the time might justify a renewal of this application. Even absent threatened or actual misfeasance, circumstances might arise in the future which might justify the proposed restraint. At this stage, however, the urgent need for a restraint appears to me to be less than compelling.
Mr Patterson summarised his concerns with respect to control in pars 79 ‑ 81 of his first affidavit. Mr Patterson said:
I have an apprehension that if the Berlin Pharma shares in the current custody of the Twelfth Defendant are transferred to the custody and control of the First to Fifth Defendants inclusive, the Plaintiff will lose those shares forever and will have lost a substantial asset and control of Berlin Pharma.
…
Unless the First, Second, Third, Fourth and Fifth defendants are restrained from their foreshadowed dealing with these shares, I am doubtful that the Plaintiff will be able to secure their return, or have any effective other or alternative remedy as control of Berlin Pharma will have passed from the Plaintiff.
In my view, those particular concerns of Mr Patterson should adequately be met by the undertaking of the first, second, third, fourth and fifth defendants referred to earlier. Such an undertaking, in the circumstances, carries with it significant weight in the assessment of the balance of convenience, particularly in light of the principle that the court should generally grant the minimum relief necessary to do justice between the parties: Cardile v LED Builders Pty Ltd [1999] HCA 18; (1999) 198 CLR 380 [70].
Also, whilst, as I have said, I am left with the impression that much of the story on both sides remains to be disclosed, at the point of weighing the balance of convenience, where the plaintiff bears the legal onus, the absence, prima facie, of a more complete and a more readily and commercially comprehensible explanation of Mr Patterson's conduct, and (albeit to a lesser extent) Mr Jooste's conduct, has some significance. It makes it difficult to make any favourable assessment, even on a preliminary basis, of the plaintiff's prospects of success, other than to say that its case is sufficiently arguable to warrant the preservation of the subject matter, ie the shares, pending a trial, having regard to the size of the parcel of the shares, the thinness of the market and the interests of the plaintiff as a licensor of the technology. Accordingly, the plaintiff cannot, in my view, point to the apparent strength of its case, on the limited evidence in this interlocutory dispute, as justifying a restraint beyond the preservation of the shares. This factor, too, leaves the balance tilting in favour of the first to fifth defendants.
Also, as McPherson J (as he then was) observed in Adsteam Building Industries Pty Ltd v The Queensland Cement & Lime Co Ltd [1984] 2 Qd R 1, 8 in relation to the efficacy of an undertaking as to damages in the context of an application to restrain the exercise of voting rights:
... there is a marked difference between restraining a disposition of the shares and restraining the exercise of voting rights attaching to them. In the latter instance the damages resulting from the restraint are likely to be virtually incalculable …
This observation reflects, of course, the obverse of the plaintiff's situation, that if the first to fifth defendants vote the disputed shares, the consequences for the plaintiff will be virtually incalculable in monetary terms. In this context, the plaintiff also says that the first to fifth defendants' refusal to accept its offer to have Mr Jooste, Mr Patterson and Mr Stewart appointed to the Supervisory Board of Berlin Pharma, should weigh against the first to fifth defendants in assessing the balance of convenience. The most recent offer is in these terms:
1Your clients undertake to abstain from voting in respect of a resolution, which will be proposed by our client at the next General Meeting of Berlin Pharma, to increase the number of members of the Berlin Pharma supervisory board from three to six.
2If the resolution referred to in paragraph 1 above is passed, your clients undertake to abstain from voting in respect of a resolution, which will be proposed by our client at the anticipated General Meeting, to appoint Peter Jooste QC, Dermot Patterson and Michael Stewart to the supervisory board of Berlin Pharma.
3Alternative to the proposal in paragraph 2 above, if the resolution referred to in paragraph 1 is passed, our clients will propose a resolution appointing Messrs Jooste, Patterson and Stewart to the supervisory board of Berlin Pharma and provide an undertaking that those individuals will not collectively cast more than two votes in respect of any board resolution, such an undertaking to take precedence over any applicable rules of the company. The undertaking would remain in place until judgment or further order in Supreme Court action CIV 3039 of 2009. Again, our client would require your clients to abstain from voting at the anticipated General Meeting in respect of such resolution.
4If a resolution referred to in paragraphs 2 and 3 above is passed:
4.1Our client undertakes not to take any steps to seek or vote for the removal of Mr Sims from the supervisory board of Berlin Pharma until, at the earliest, after judgment or further order in Supreme Court action CIV 3039 of 2009. As part of that undertaking, our client will withdraw the requested agenda item for the anticipated General Meeting seeking the removal of Mr Sims from the supervisory board of Berlin Pharma.
4.2Your client undertakes not to take any steps to seek or vote for the removal of Mr Jooste, Mr Patterson or Mr Stewart from the supervisory board of Berlin Pharma until, at the earliest, after judgment or further order in Supreme Court action CIV 3039 of 2009.
5Save in relation to the resolutions referred to at paragraphs 1, 2 and 3 above, your clients are permitted to exercise freely the voting rights for the shares that are the subject of our client's injunction until judgment or further order in Supreme Court action CIV 3039 of 2009. Such permission is strictly without prejudice to our client's asserted rights in those shares.
Whether or not the undertaking contemplated in point 3 above could legally, under German law, 'take precedence over any applicable rules of the company' has not been explored or established in this application. Nor am I satisfied that the proposed undertakings in point 4, requiring each camp not to, in effect, seek to dislodge the other from the Supervisory Board of Berlin Pharma pending the determination of this action, are appropriate. If the circumstances otherwise justified the removal of a member of the Supervisory Board under German law, the existence of such undertakings to this court might create conflicting duties and affect the proper governance of a German company.
Conclusion
In my view, taking everything into account, I am not persuaded that the balance of convenience, in the present circumstances, favours the grant of an interlocutory injunction restraining the first to fifth defendants from exercising any voting rights they may have in relation to the disputed shares. The litigation should, however, move quickly to an early trial, so that the rights of the parties can finally be determined.
In light of the above reasons, I would be prepared to accept undertakings, and make orders, along the following lines:
Upon:
(a)each of the first, second, third, fourth and fifth defendants executing and filing in court an undertaking whereby each undertakes not to, by herself or itself (as the case may be) or by her/its officers, servants, agents or otherwise, dispose of, transfer an interest in, or encumber, the shares the subject of default judgment in CIV 2756 of 2009 until after judgment in this action, or further order; and, concurrently
(b)the plaintiff executing, and filing, an amended undertaking to the court as to damages so that it applies to the first to fifth defendants' undertaking in (a);
I would order:
(i)the discharge of the injunction granted by EM Heenan J, as extended; and
(ii)that the plaintiff and the first, second, third, fourth and fifth defendants have liberty to apply in relation to the aforesaid undertakings, on two days notice.
If the parties consider that any consequential orders should be made, I will hear from them on that question. If the undertakings are not given, I will invite the parties to submit a minute of proposed injunctive orders consistent with these reasons.
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