Fedsure International Limited v NSP Financial Services Group Pty Limited

[2001] NSWSC 910

CITATION:	Fedsure International Limited v NSP Financial Services Group Pty Limited and Ors [2001] NSWSC 910
CURRENT JURISDICTION:	Equity Division Commercial List
FILE NUMBER(S):	SC 50143/01
HEARING DATE(S):	16 October, 2001
JUDGMENT DATE:	16 October 2001
PARTIES :	Fedsure International Limited [Plaintiff] NSP Financial Services Group Pty Limited [First Defendant] Kiahan Trading Limited [Second Defendant] Wayland Nominees Pty Limited [Third Defendant] Neuberg Pty Limited [Fourth Defendant]
JUDGMENT OF:	Palmer J

COUNSEL :	G.A.A. Nettle QC, I.G. Waller [Plaintiff] S.L. Doyle SC [First Defendant] S.G. Finch SC, A.J. Payne [Second to Fourth Defendants]
SOLICITORS:	Clayton Utz [Plaintiff] Deacons [First Defendant] Gilbert & Tobin [Second to Fourth Defendants]
CATCHWORDS:	CONTRACT - CONSTRUCTION - CORPORATIONS - PRE-EMPTIVE RIGHTS - Construction of a contract for the grant of pre-emptive rights to acquire the shares of a shareholder where control of that shareholder has changed - offer to sell to other shareholders deemed to be made - whether offer is capable of acceptance if price not stipulated - held offer capable of acceptance.
CASES CITED:	Secured Income Real Estate (Australia) Limited v St Martins Investments Proprietary Limited (1979) 144 CLR 596
DECISION:	Declarations and orders as sought by the Plaintiff.

Introduction
1    The First Defendant is a company involved in the business of providing consulting and administration services in relation to employment benefits and superannuation. The Plaintiff and the Second to Fourth Defendants are the sole shareholders of the First Defendant.

2    By a Summons filed on 21 September 2001 the Plaintiff seeks declarations as to the construction of pre-emptive rights clauses in a Deed dated 9 June 1999 between the Plaintiff and the Defendants (“the Shareholders Agreement”). Clause 14 provides that where a change in the control of a particular shareholder occurs, such shareholder will be deemed to have made an offer to sell its shares to the other shareholders on the day prior to such change in control occurring, upon certain terms and conditions.

3    It is now agreed between the parties that a change in control of the Plaintiff within the meaning of Clause 14 took place on 5 June 2001, that the Plaintiff was deemed to have offered its shares in the First Defendant to the Second, Third and Fourth Defendants on 4 June 2001 for the purpose of Clause 14, that the Second to Fourth Defendants had notice of the events giving rise to the deemed offer on 6 June 2001 and that on 6 September 2001, alternatively on 18 and 19 September 2001, the Second to Fourth Defendants gave notice to the Plaintiff that they accepted the offer.

4    The issues to be resolved are: first, the date upon which, on the proper construction of the Shareholders Agreement, the deemed offer was open to be accepted by the Second to Fourth Defendants; and second, whether the deemed offer was, in fact, accepted within the time that such deemed offer was open to be accepted.

The facts
5    The Plaintiff and the Second to Third Defendants are the original shareholders of the First Defendant, the Fourth Defendant being a new trustee appointed in place of a previous trustee. Under the Shareholders Agreement each shareholder has the right to representation on the First Defendant’s Board of Directors. I assume that that right has been exercised and that all shareholders of the First Defendant have, through their Board representation, been aware of all matters significantly affecting the company’s position.

6    There are only two clauses in the Shareholders Agreement which need to be considered. In so far as is relevant, they are as follows:
“13. PRE-EMPTIVE RIGHTS
13.1 Except as otherwise provided in this deed, including the put options referred to in 2.5.6 and the call options referred to in clause 2.5.4 and 2.5.5, the shareholders agree that they shall not be entitled to sell, alienate, transfer in any manner or otherwise dispose of, pledge or in any manner otherwise encumber (collectively referred to as ‘sell’ for the purposes of this clause 13) any of their shares and/or all portion of their claims on loan account against the company otherwise than in terms of this 13.
13.2 Should any of the shareholders (‘the offeror’) wish to sell any of the shares (‘the sale shares’) held by it in the issued share capital of the company, then the offeror shall first offer the sale shares and an equivalent percentage proportion of the offeror’s claims by way of loan account (‘the sale claims’) against the company in writing, to the other of shareholders (‘the offerees’) pro rata to their shareholdings in the company.
13.3 The offer shall –
13.3.1 be open for acceptance by the offerees for a period of thirty days following the date of receipt of the offer by the offerees;
13.3.2 stipulate a price (which shall be expressed and payable in Australian currency) at which and the other terms and conditions on which, the offeror wishes to sell the sale shares and the sale claims to a bona fide third party, who shall be named in the offer;
13.4 Not be subject to any other terms or conditions except that –
13.4.1 the whole and not a part of the offer must be accepted;
13.4.2 the offerees may be required to indemnify the offeror against any claim made against the offeror by virtue of its liability as surety or guarantor, for any of the obligations of the company.
13.5 If any one of the offerees (‘the declining offeree’) does not accept the offer, the offeree/s who has/have accepted the offer shall be entitled within seven days after –
13.5.1 the offerees have been notified of that fact; or
13.5.2 the expiry of the thirty day period referred to in 13.3.1,
whichever is the later, to accept, in the proportions in which the offer is accepted by them, the offer in respect of the declining offeree’s share of the sale shares and sale claims, at the price and on the conditions set out in 13.3.2 and ?, and the procedure prescribed by this 13.4 shall be repeated as often as is necessary (within the seven days referred to in 13.4) until the offerees have declined the declining offeree’s offer or until the whole offer has been accepted in full.
13.6 Should the offerees not accept the whole of the offer in terms of 13.3 and 13.4, the offeror shall be entitled within thirty days after such non acceptance to sell and transfer all the sale shares (but not a part only) to a bona fide third party, provided that –
13.6.1 the sale shares and sale claims are sold to a bona fide third party at not less than the price at and on conditions which are not more favourable to the third party purchaser than those at which the offerees were entitled to purchase the sale shares and sale claims in terms of 13.3; and
13.6.2 such third party shall first agree, in writing, to be bound by the provisions of this deed, in which event each reference in this deed to the offeror shall be deemed thereafter to be a reference to the third party purchaser.
13.7 To the extent that the offeror does not sell the sale shares and sale claims in terms of 13.5, all the provisions of this clause 13 shall again apply, mutatis mutandis, to the sale shares.
…
14. CHANGE IN CONTROL
.1 …
.2 Notwithstanding any of the provisions for the time being of the company’s constitution or any other provision of this deed and subject to 13.7 should a shareholder which is a legal person cease to be controlled by the person/s who controlled it when it became a party to this deed or becomes controlled whether directly or indirectly, by a person/s other than the person/s who controlled it at the signature date, then such shareholder (‘the deemed offeror’) will be deemed to have made an offer in terms of 14.3.
.3 The deemed offeror shall be deemed, on the day prior to that on which the event giving rise to the deemed offer takes place, to have offered to sell all of its shares in the company (‘offered shares’) and its corresponding claims on loan account to the other shareholders upon the terms and conditions stated in 13, which shall apply to the deemed offer, mutatis mutandis.
.4 The price of the offered shares and loan account shall be determined by the company’s auditors as the fair market value of the offered shares and corresponding loan account, expressed as a price per share. In determining such value, no deduction shall be made for the fact that the offer shares constitute a minority interest in the company. In all other respects, the methods of valuing those shares shall be at the discretion of the auditors, who may be requested to make such determination by any party at any time after a deemed offer has been made.
.5 Should any dispute arise in connection with the valuation of the price per share in 14.4, any party shall be entitled to require that such valuation be referred for determination to an independent auditor, appointed by the company’s auditors, who shall act as an expert and not as an arbitrator and save for any manifest error in calculation, his decision shall be final and binding on the parties.
…”

7    At all material times prior to 24 December 2000 the Plaintiff was a wholly owned subsidiary of Fedsure Holdings Limited (“Fedsure Holdings”), a public listed company. By an agreement dated 24 December 2000 between Fedsure Holdings and Investec Group Limited, Fedsure Holdings sold its shares in the Plaintiff and assigned the debts owed to it by the Plaintiff to Investec with effect from 31 December 2000, subject to the fulfilment of certain conditions precedent.

8    On 4 June 2001 the First Defendant informed its auditors, KPMG Corporate Finance (Aust) Pty Ltd (“KPMG”) that it believed that a change in control of the Plaintiff had occurred and instructed KPMG to prepare a valuation pursuant to Clause 14.4 of the Shareholders Agreement.

9    On 6 June 2001 Fedsure Holdings, Investec and Investec Holdings issued a press release which stated that the conditions precedent to the acquisition by Investec of the Plaintiff had now been fulfilled.

10    On 8 June 2001 the First Defendant wrote to the Plaintiff and the Second to Fourth Defendants stating that the First Defendant believed, on the basis of publicly available information, that a change in control had occurred on or around 7 June 2001 and advising that the First Defendant had instructed KPMG to prepare a valuation pursuant to Clause 14.4 of the Shareholders Agreement.

11    On 9 August 2001, KPMG determined the price of the Deemed Offer pursuant to Clause 14.4 of the Shareholders Agreement (“the KPMG Report”).

12    On 10 August 2001 the First Defendant wrote to the Plaintiff and the Second to Fourth Defendants enclosing the KPMG Report and advising them of their rights under the Shareholders Agreement. The letter was received by the Second Defendant on or around 14 August 2001 and by each of the Third and Fourth Defendants on or about 13 August 2001.

13    On 23 August 2001 the Plaintiff wrote to the First Defendant requesting a further determination of the KPMG Report by an independent auditor, pursuant to Clause 14.5 of the Shareholders Agreement.

14    On 24 August 2001 KPMG appointed Deloitte Corporate Finance (“Deloitte”) to review the KPMG Report pursuant to Clause 14.5 of the Shareholders Agreement. On 6 September 2001 each of the Second to Fourth Defendants wrote to the Plaintiff accepting the Deemed Offer. On or about 14 September 2001 Deloitte determined, pursuant to Clause 14.5 of the Shareholders Agreement, that the calculations in the KPMG Report were appropriate.

15    On or about 18 September 2001 the First Defendant wrote to each of the Plaintiff and the Second to Fourth Defendants attaching a copy of the Deloitte determination. On 18 September 2001 the Second Defendant wrote to the Plaintiff repeating its acceptance of the Deemed Offer. On 19 September 2001 each of the Third and Fourth Defendants wrote to the Plaintiff repeating their acceptance of the Deemed Offer.

Parties’ contentions

16    Mr Nettle QC, who appears with Mr Waller for the Plaintiff, contends that, on the true construction of Clause 14.3, the Plaintiff is deemed to have made an offer to sell its shares in the First Defendant to the Second to Fourth Defendants on 4 June 2001, being the day prior to the change in control of the Plaintiff, so that pursuant to Clause 13.3.1 the offer was open for acceptance for thirty days thereafter, despite the fact that the sale price for the shares had not yet been determined in accordance with the procedures in Clauses 14.4 and 14.5 of the Shareholders Agreement. The Plaintiff says that the offer which was deemed to have been made contained a term that the price to be paid by the offeree upon acceptance would be the price per share as determined by the auditor in accordance with the mechanisms provided by Clauses 14.4 and 14.5.

17    Mr Nettle says that the deemed offer could only be accepted by the Second to Fourth Defendants within thirty days after 4 June, i.e. by 4 July 2001, that none of the Second to Fourth Defendants accepted by that date, that the Deemed Offer lapsed on that date, and that the purported acceptances by the Second to Fourth Defendants after that date are of no effect.

18    Mr Finch SC, who appears with Mr Payne for the Second to Fourth Defendants, contends that, on the true construction of Clause 14.3 read with Clause 13, a deemed offer could not be made so as to set the thirty day acceptance period running for the purposes of Clause 13.3.1 until the offerees had been notified of a price per share in accordance with Clause 13.3.2. The Second to Fourth Defendants say that they were not notified of such price prior to receipt of the KPMG Report on 10 August 2001 at the earliest, or the Deloitte report on 18 September 2001 at the latest. They say that they accepted the Deemed Offer within the thirty day period commencing on either of those two dates.

19    Mr Doyle QC, who appears for the First Defendant, contends that on the true construction of Clauses 13 and 14 a deemed offer could not be made so as to set the thirty day acceptance period running until the deemed offeror gives written communication of the offer to the other shareholders.

20    In my opinion, the construction of Clause 14 advanced by the Plaintiff should be accepted.

21    Clause 13 is directed to the circumstance where a shareholder desires to sell its shares in the First Defendant and negotiates and agrees with a third party the price and the terms upon which the sale will be made. The shareholder is then compelled to give the other shareholders the right to acquire the shares upon the same terms and conditions. In such a situation, the other shareholders will have clear notice in writing of all of the terms of the proposed contract between the vendor shareholder and the putative purchaser.

22    Clause 14 is directed to an entirely different circumstance. It operates where the relevant shareholder has suffered a change of control, most usually where its own shareholders have negotiated a sale, not of shares in the First Defendant but of shares in the First Defendant’s shareholder. At the time that the change of control in the shareholder occurs there would, normally, be no agreement between the vendor shareholder in the First Defendant and the third party purchaser whereby a price and terms of sale of the shares held by the vendor shareholder in the First Defendant are fixed.

23    Nevertheless, when a change of control in one shareholder occurs, one would expect that the other shareholders would wish to have the earliest opportunity of exercising a right to acquire the shares of the shareholder whose control has changed so that the new controller should have no influence over the conduct of the company’s affairs.

24    These fairly commonplace commercial circumstances, often encountered and almost uniformly providing the rationale for pre-emptive rights clauses in the constitutions of closely held companies or partnerships, indicate the approach which should be taken to construction of the pre-emptive rights clauses in the present case.

25    Under Clause 14.2, where a change of control occurs in a shareholder (called the “deemed offeror”), then regardless of any intention, act or omission of the deemed offeror, an offer for sale is deemed to have been made. The structure of Clauses 14.2 to 14.5 is clearly designed to remove the right to acquire a deemed offeror’s shares from the control of the deemed offeror.

26    By Clause 14.3, the deemed offeror is deemed to have offered to sell all of its shares upon the terms and conditions stated in Clause 13, mutatis mutandis. The Defendants construe the Clause as requiring the deemed offer to be made in accordance with the terms of Clause 13, including the requirements of Clause 13.3.2 that there be a notice of offer stating a price per share in Australian dollars. In other words, they construe Clause 14.3 as requiring something to be done by the deemed offeror before its deemed offer is capable of acceptance.

27    However, I construe Clause 14.3 as deeming that an offer has been made by the deemed offeror, on the day prior to change of control, without anything further to be done by the offeror. It is significant, in my opinion, that Clauses 14.2 and 14.3 employ the past perfect tense; they deem the offer to have been made and they do not expressly require the deemed offeror to do anything further. The price at which the deemed offeror is to sell is to be as determined by a third party according to market value, a commonplace mechanism in commercial contracts.

28    The deemed offer is, therefore, capable upon acceptance of maturing into a binding contract. Its terms as to price and number of shares to be sold are ascertainable by the mechanisms provided by Clauses 14.4 and 14.5. By virtue of Clause 13.5, the deemed offer is deemed also to have been made to each shareholder so that, if one shareholder declines to take up its proportion of the offered shares, the deemed offeror must continue to offer those shares to the remaining shareholders at the price determined under Clauses 14.4 and 14.5.

29    This construction of Clauses 14.2 to 14.5 is, in my opinion, in accordance with the ordinary and natural meaning of the words employed in those clauses. The construction provides a workable commercial mechanism for the exercise of pre-emptive rights in a closely held corporation.

30    It follows that I cannot accept Mr Finch’s contention that a deemed offer for the purpose of Clause 14.3 is not an offer at all until it is married with a price per share determined in accordance with Clauses 14.4 and 14.5. Mr Finch submits that the deemed offer is merely a “creature of the contract”, an ethereal thing with no reality. He asks rhetorically, how could a deemed offer, made on the facts of the present case on 4 June 2001, have been accepted on 4 June by the other shareholders when the circumstance bringing about their right to acquire the subject shares, namely change of control, had not occurred until 5 June and was not known to those other shareholders until 6 June.

31    This submission, in my respectful opinion, overlooks the dual purpose of Clause 14.3. The first purpose is to provide that, without anything further to be done by a shareholder suffering a change of control, the other shareholders are to have a pre-emptive right. The second purpose is to set running the time during which the pre-emptive right may be exercised. It is not to the point that the commencement date for exercise of the pre-emptive right is artificially determined. That is the way in which the parties have agreed their rights will be regulated; it is just as artificial as the commonplace provision in a contract stipulating that written notice under the contract will be deemed to have been received within a specified time after its posting or that the contract is deemed to take effect as from a date preceding its very existence. A deeming provision recognises that the reality may be quite to the contrary of what actually occurs, yet the parties regulate their rights as if the deemed occurrence had actually occurred.

32    It is then protested that Clause 14.3, if construed as the Plaintiff contends, can produce a commercially absurd result. A shareholder may suffer a change of control and yet be completely unaware of it at the time, or else may determine to keep the change of control secret from the other shareholders. Notwithstanding that the other shareholders have no notice of the change of control, the pre-emptive right period will commence to run on the day prior to change of control and may expire long before the other shareholders realise that their pre-emptive right has been lost.

33    In my opinion, there are two answers to this submission. First, it is unreal to suppose that, except in an extraordinary and bizarre case, a subsidiary of a public listed company such as the Plaintiff or the directors of the other corporate defendant shareholders will not be aware of a change of control as soon as it happens and, usually, well before it happens. A commercial contract should not be construed so as to produce an absurd result in a quite unrealistic set of supposed circumstances.

34    Second, there would be an implied term in the Shareholders Agreement, as in every contract, that each party will do all things necessary to allow the others to have the benefit of the contract: Secured Income Real Estate (Australia) Limited v St Martins Investments Proprietary Limited (1979) 144 CLR 596, at 607. Accordingly, there would be an implied term in the Shareholders Agreement that, as soon as a shareholder became aware of a change in its control or as soon as the First Defendant became aware of a change in control of one of its shareholders, notice of that fact would be given to the other shareholders. The contract should be construed in the light of that implied term and in the light of the presumption that it would be duly performed.

35    In the result, the Plaintiff succeeds in the present case. I hold that a deemed offer was duly made by the Plaintiff to the Second to Fourth Defendants in accordance with the provisions of Clause 14.3 of the Shareholders Agreement on 4 June 2001 and that none of the Second to Fourth Defendants has accepted that offer within the thirty day period commencing on that day. The Plaintiff is entitled to declarations and orders accordingly. I will stand the matter over for a short time to enable the bringing in of Short Minutes to reflect these reasons.

– oOo –

Last Modified: 10/22/2001