Elkington v CostaExchange Limited
[2012] VSCA 10
•3 February 2012
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2011 0166
| GORDON BRADLEY ELKINGTON | Applicant |
| v | |
| COSTAEXCHANGE LIMITED | Respondent |
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| JUDGES | Neave JA and Kyrou AJA |
| WHERE HELD | Melbourne |
| DATE OF HEARING | 3 February 2012 |
| DATE OF JUDGMENT | 3 February 2012 |
| MEDIUM NEUTRAL CITATION | [2012] VSCA 10 |
| JUDGMENT APPEALED FROM | Elkington v CostaExchange Ltd [2011] VSC 501 (Ferguson J) |
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CIVIL – Application for leave to appeal against costs orders - Selective reduction of capital under Pt 2J.1 of Corporations Act 2001 (Cth) – Unsuccessful application by minority shareholder for injunction to restrain reduction – Whether costs should be paid by company – Whether trial judge erred in failing to follow first instance decision in Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 35 ACSR 363 – Application refused.
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| Appearances: | Counsel | Solicitors |
| For the Applicant | Mr B McNab | Aldgate Lawyers |
| For the Respondent | Mr P Vout | Maddocks |
NEAVE JA:
KYROU AJA:
The applicant, Dr Gordon Bradley Elkington, seeks leave to appeal against a costs order made by Ferguson J in the Supreme Court of Victoria on 5 October 2011.[1] The order arose out of an application by Dr Elkington under s 1324 of the Corporations Act 2001 (Cth), for an injunction to restrain the respondent, CostaExchange Ltd (‘the Company’) from making a selective reduction of its share capital, by cancelling the shares held by minority shareholders (including Dr Elkington).
[1]Leave is required under Supreme Court Act 1958, s 17A(1(b).
The application was made following meetings of the Company’s shareholders in mid to late 2011, in which the requisite majority of shareholders passed resolutions approving a selective reduction of the Company’s share capital, and cancelling 8% of the Company’s shares.
The amount to be paid to minority shareholders in consideration of the cancellation was $0.86 per share. An independent expert report prepared by Deloitte Corporate Finance Pty Limited valued the shares in the Company, on a control basis, at between $0.97 and $1.15 and estimated their value on a minority basis at between $0.65 and $0.78. The expert’s conclusion was that the proposed selective capital reduction was fair and reasonable to the shareholders as a whole. The expert’s report was made available to the shareholders. Dr Elkington claimed that the capital reduction was not ‘fair and reasonable to the company’s shareholders as a whole’ and therefore contravened s 256B(1)(a) and s 256D(1) of the Corporations Act 2001.
Her Honour found that the proposed selective reduction was fair and reasonable, dismissed the application for an injunction and ordered that Dr Elkington pay the Company’s costs.[2]
[2]Elkington v CostaExchange Ltd [2011] VSC 501 (‘Reasons’).
Proposed grounds of appeal .
The applicant relied on six proposed grounds of appeal. These were as follows:
1. The learned primary judge was wrong in holding that –
(a)‘…there is no basis to depart from the usual rule that costs follow the event’, where a minority shareholder applicant in respect of a selective reduction of capital is unsuccessful under the changed legislative context for reductions of capital that has prevailed since the Company Law Review Act 1998 (Cth) [removing the requirement of Court approval];
(b)the discretion as to costs of an unsuccessful minority shareholder applicant should not be exercised in accordance with the judgement [sic] of Santow J at first instance in Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd [2000] NSWSC 855 (‘Winpar’) and for the reasons therein set out;
(c)the decision of the New South Wales Court of Appeal in Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 166 FLR 144 [at para 83 per Giles JA] was to the effect that the discretion as to costs should not be exercised on the basis expressed in the judgement [sic] of Santow J in Winpar.
2. The learned primary judge ought to have found that –
(a)the Court’s discretion as to costs should be exercised in accordance with the considerations expressed by Santow J’s judgement [sic] on costs in Winpar;
(b)such considerations applied where the objector was unsuccessful and its application was brought under the changed legislative context;
3.In exercising the discretion as to costs on the basis that…the appellant’[s] case ‘was not completely hopeless, but it was weak and he has not succeeded’, the learned primary judge was wrong to so hold as the appellant’s case was strong. Alternatively, the learned Judge considered an irrelevant consideration, or gave that consideration too much weight.
4.In exercising the discretion as to costs on the basis that the appellant ‘chose as an individual, in effect, to challenge the decision by shareholders [and not] … as a representative of other minority shareholders’, the learned primary judge considered an irrelevant consideration, or alternatively gave that consideration too much weight.
5.The learned primary judge’s exercise of discretion on costs was not exercised judicially because she:
(a)failed to give weight or sufficient weight to relevant considerations, namely, those matters referred to in grounds 2, 3 and 4;
(b)made a manifest mistake
6.The result was unreasonable and plainly unjust so that it may be inferred that there was a failure by the learned trial judge to properly … exercise her discretion.
Conclusion
The Court will not grant leave to appeal unless it is satisfied that the order in respect of which leave is sought is wrong or is attended with sufficient doubt to warrant reconsideration on appeal and that substantial injustice will be caused to the applicant if the order is permitted to stand.[3]
[3]Niemann v Electronic Industries Ltd [1978] VR 431.
The principle in House v the King[4] applies to costs orders made in the exercise of a trial judge’s discretion. As this Court said in Spotless Group Ltd v Premier Building & Consulting Pty Ltd (recs apptd):[5]
It is well established that an appellate Court will not, in the absence of strong reasons, interfere with the exercise of discretion by the Court below with respect to the question of costs…
This Court may disturb the costs orders made below where an error in principle is identified, where the judge acted on a manifestly erroneous view of the facts, or where the award is manifestly unreasonable. But the applicant must satisfy a high threshold for such a grant of leave. The test to be applied is not whether the Court of Appeal would have made the same order but whether there is a ground upon which the order by his Honour could reasonably be made. Some manifest error must be exposed to take the case out of the ordinary situation in which, wherever a discretion is to be exercised, minds may differ on the result.[6]
[4](1936) 55 CLR 499.
[5][2008] VSCA 115.
[6]Ibid [10], [11] (citations omitted). See also Etna v Arif [1999] 2 VR 353 [67].
In essence, the applicant argues that the judge erred in the exercise of her discretion by:
·declining to follow the first instance decision of Santow J in Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (‘Winpar’)[7] where costs were awarded in favour of a minority shareholder who had unsuccessfully objected to a selective reduction of capital;
·applying the normal rule that costs follow the event;
·exercising her discretion on the basis that the applicant’s case ‘was not completely hopeless, but it was weak and he has not succeeded’;[8]
·exercising her discretion on the basis that the applicant ‘chose as an individual… to challenge the decision made by the shareholders [and not] as a representative of other minority shareholders’.[9]
[7](2000) 35 ACSR 363.
[8]Costs judgment delivered on 5 October 2011.
[9]Ibid.
In our view, neither the third or fourth grounds of appeal have any prospect of success. So far as the third ground is concerned, the trial judge was familiar with the evidence and heard the parties’ submissions. Dr Elkington did not call expert evidence in support of the view that the proposed reduction was not fair and reasonable to the shareholders as a whole,[10] nor has he appealed against her Honour’s decision that this was the case. Her Honour’s reasons in reaching that conclusion are persuasive.[11] In these circumstances, it would be inappropriate for the Court to take the view that the judge erred in concluding that the applicant’s case was ‘weak’.
[10]Reasons [53].
[11]Ibid [59]-[64].
Nor do we consider that the applicant could succeed in showing that her Honour should have disregarded the fact that the applicant was not acting as a representative of other minority shareholders. The requirements of shareholder approval were satisfied. At a special meeting of the minority shareholders, 81.23% of the voters approved the selective capital reduction. Though some of the minority shareholders voted against the selective reduction of capital,[12] Dr Elkington was the only shareholder to seek an injunction to restrain the Company from selectively reducing its capital. As Giles JA explained in Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd,[13] the process required by the Corporations Law (and now by s 256B(1) of the Corporations Act 2001) for a selective reduction of capital permits an expropriation of the shares of minority shareholders who did not vote in favour of this process, provided that the majority of minority shareholders approve and the reduction of capital is fair and reasonable to the shareholders as a whole.
[12]Costs judgment delivered on 5 October 2011.
[13](2001) 166 FLR 144, 172 [97] (Beasley JA and Davies AJA agreeing).
The third complaint was that her Honour should have followed the approach which Santow J in Winpar took to the award of costs, following the hearing of objection to a selective reduction of capital, which was unsuccessful. In that case, his Honour referred to s 664F(4) of the Corporations Law which provided that in the context of a compulsory acquisition of shares following a takeover:
(4) the 90% holder must bear the costs that a person incurs on legal proceedings in relation to the application unless the Court is satisfied that the person acted improperly, vexatiously or otherwise unreasonably. The 90% holder must bear their own costs.
The same provision currently appears in the Corporations Act 2001.
Santow J held that the absence of a similar provision requiring a company to bear the costs of an applicant who objected to a proposed selective reduction of capital did not require acceptance of an expressio unius argument. In his view, the introduction of s 664F was intended to overcome a long history of practice in which unsuccessful opponents to a compulsory acquisition of shares in the context of a take-over were usually ordered to bear their own costs. In the circumstances of the case he held that it was appropriate to award costs to the applicant because of:
the functional equivalence of a selective reduction of capital. It would be anomalous if the choice of process placed objectors in a materially worse position because the proponent of a proposal for compulsory acquisition chose to proceed by selective reduction of capital rather than conventional takeover or scheme of arrangement.[14]
[14](2000) 35 ACSR 363, 364 [4].
Further, his Honour said that:
While it is true that the new regime applicable to selective reductions of capital has removed the requirement of court approval, this is only in the context where there is no objector at all. The moment an objector seeks to invoke s 1324 of the Corporations Law, the proponent of the selective reduction of capital has, as in a scheme of arrangement, the reversed onus of establishing its fairness in accordance with the criteria set out earlier in ss 256B and 256C of the Corporations Law. In applying those criteria, as I said in my earlier judgment, the regime applicable to conventional takeovers exerts an interpretive influence favouring a uniform approach, reflecting the functional equivalence of the various statutory means for acquisition of minorities. Just as s 667C exerts such influence so to [sic] should s 664F(4). This is more particularly as it does so in a context where the pre-existing statutory regime applicable to reductions of capital allowing objectors their costs has not been reversed by statute. The result will be that a similar cost outcome can be expected ordinarily in each of these three functionally equivalent modes of compulsorily acquiring a minority; conventional takeover, scheme of arrangement and selective reduction of capital.[15]
[15]Ibid 365−6 [10].
The applicant, Winpar, unsuccessfully appealed against Santow J’s decision that the selective capital reduction was valid. There was no appeal against his Honour’s order that the proponent of the selective reduction of capital pay the costs of the applicant.
However, one of the issues which arose on the appeal related to whether the capital reduction which the defendant sought to achieve could have been accomplished by a different mechanism, and if so, what principles would apply in such circumstances.[16] Winpar, which sought to have the selective capital reduction declared invalid, argued that the principles applying to a compulsory acquisition of shares also applied to a selective reduction of capital because in effect this was a different way of achieving a take-over. This argument was rejected by Giles JA, with whom Beazley JA and Davies AJA agreed. His Honour said that:
In my view, the present issue is determined simply by regard to Pt 2J.1 of the Law. Descriptions of takeover by cancellation and species of takeover are really not to the point. Nor is whether the capital reduction could have been made by a scheme of arrangement. To adopt the words of Bryson J in Nicron Resources Ltd v Catto (1992) 8 ACSR 219 at 235 a scheme of arrangement procedure “is not to be followed merely because it is there; it is not Mount Everest”, and a selective capital reduction is not excluded because the same outcome could have been achieved by a scheme of arrangement. The true question is whether Pt 2J.1 authorised a capital reduction in which the shareholding of the Goldfields shareholders remained but the shareholdings of the non-Goldfields shareholders were cancelled.[17]
[16](2001) 166 FLR 144, 167 [80]. The issue was whether the capital reduction had to satisfy the principles in Gambotto v WCP Ltd (1995) 182 CLR 432 because it was a ‘take-over by cancellation’.
[17]Ibid 168, [83].
In her reasons for declining to make an order in favour of the applicant in this case, her Honour said that:
The decision as to costs of Santow J in Winpar… must be read in the context of what was said by the New South Wales Court of Appeal in that case…The Court of Appeal made it clear that in considering reductions of capital, Part 2 J.1 was what was relevant. There is no equivalent provision in that part to s 664F(4).
In effect, the applicant submits that her Honour should not have had regard to the New South Wales Court of Appeal’s rejection of the view that a selective reduction of capital was to be treated as functionally equivalent to a compulsory acquisition of shares following a takeover. Nor should she have taken account of the absence of a provision equivalent to s 664F(4) in Part 2 J.1 of the Corporations Act 2001.
In Quatro Ltd v Argo Investments Ltd,[18] Hansen J discussed the cases relating to the exercise of the discretion to order costs in cases involving a selective reduction of capital. That case was decided before the amendments to the Corporations Law which removed the requirement that a company apply to, and obtain from the Court, an order confirming a reduction of capital, even where the requisite majority of all shareholders and of minority shareholders had approved such a reduction. Hansen J noted that in such circumstances, the objectors may provide valuable assistance to the court in determining whether the reduction should be approved. However, he noted that:
The cases cited provide relevant indicators as to the proper exercise of the discretion on costs in the present type of case. They do not control let alone determine the result in this case. The task is to order what is just in the particular case and that is done by paying close regard to the facts and circumstances of the case at hand. Those facts and circumstances include the reasonableness of the conduct of the company and an objector in relation to the reduction proposal and the confirmation hearing, and the substance or lack of substance of the point or points raised by an objector. In Re Castelreagh Street C J referred to “matters proper to be brought forward” and to the objectors “properly and justifiably advancing a class right”. In Re Arrowfield Cohen J referred to the objector, in the circumstances in that case, being “entitled to have these matters which are of considerable importance, properly dealt with by the court”. I do not consider that these expressions were intended to constitute or that they do constitute a test or tests the application of which must automatically be determinative of the issue of costs in every case. Rather, I understand them to be statements by judges of the circumstances which in their opinion were relevant to the exercise of the discretion on costs in the particular case. Of course they are instructive and they do provide guidance and I take them into account. Further, the sentiment underlying them, which is concerned with the position of a minority shareholder wishing to object in the forum provided by the legislation to the loss of his or her interest on terms that he or she does not approve of, is well understandable. So also is the relative importance of the role which an objector may play on a confirmation application.[19]
[18](1999) 32 ACSR 480.
[19]Ibid 483, [13]. Citations in the quote are omitted.
It follows that even at a time when a selective reduction of capital required court approval, the judge had a discretion as to whether to order costs in favour of an objector and indeed, the existence of such a discretion was noted by Santow J in Winpar.
In our opinion, her Honour did not err in taking the view that she had a broad discretion in making costs orders, and that she was not required to follow the approach of Santow J in Winpar. Nor did she take account of irrelevant considerations in making a costs order in favour of the Company.
For these reasons, we are not satisfied that her Honour’s decision is wrong or sufficiently doubtful to justify the grant of leave to appeal. We would therefore refuse the application.
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