GFS Management Services Pty Ltd v Ground and Foundation Supports Pty Ltd
[2001] WASC 143
•11 JUNE 2001
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: GFS MANAGEMENT SERVICES PTY LTD -v- GROUND AND FOUNDATION SUPPORTS PTY LTD & ORS [2001] WASC 143
CORAM: SCOTT J
HEARD: 4-6, 9 & 23 APRIL 2001
DELIVERED : 11 JUNE 2001
FILE NO/S: COR 164 of 1999
BETWEEN: GFS MANAGEMENT SERVICES PTY LTD (ACN 051 681 077)
Applicant
AND
GROUND AND FOUNDATION SUPPORTS PTY LTD (ACN 009 432 964)
First RespondentKERIN FRANCIS SMART
Second RespondentBRENCOLDA NOMINEES PTY LTD (ACN 008 783 175)
Third Respondent
Catchwords:
Corporations Law - s 246AA oppression - Allegation by managing director of oppressive conduct by company directors and majority shareholders - Summary dismissal of managing director - Unduly oppressive - No notice of resolution to dismiss and no opportunity given to answer - Basis for share valuation and date of valuation - Issue as to party to pay for applicant's shares stood over
Legislation:
Corporation Law, Part 2F.1 s 246A, s 246AA(2), 246AA(5)
Result:
Oppression made out
Order for sale of shares
Representation:
Counsel:
Applicant: Mr P I Jooste QC & Ms I C K Burford
First Respondent : Mr J C Vaughan
Second Respondent : Mr A R Beech & Mr P G Donovan
Third Respondent : Mr A R Beech & Mr P G Donovan
Solicitors:
Applicant: MacKinlay & Co
First Respondent : Deacons Graham & James
Second Respondent : McCallum Donovan & Sweeney
Third Respondent : McCallum Doovan & Sweeney
Case(s) referred to in judgment(s):
Diligenti v RWMD Operations Kelowna Ltd (No 2) 4 BCLR 134
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688
Guerinoni v Argyle Concrete & Quarry Supplies Pty Ltd (2000) 34 ACSR 469
Hogg v Dymock (1993) 11 ACSR 14
In re Bird Precision [1984] 1 Ch 419
O'Neill v Phillips & Ors [1999] 1 WLR 1092
R & H Electric Ltd & Anor v Haden Bill Electrical Ltd [1995] 2 BCLC 280
Re Dalkeith Investments Pty Ltd (1985) 3 ACLC 74
Re Golden Bread Pty Ltd The Queensland Co-operative Milling Association v Hutchison (1977-1978) ACLC 29,490
Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324
Shamsallah Holdings Pty Ltd & Anor v CBD Refrigeration and Airconditioning Services Pty Ltd & Ors [2001] WASC 8
Case(s) also cited:
DTR Nominees Pty Ltd v Mona Homes (1978) 138 CLR 423
Dynasty Pty Ltd v Coombs (1995) 13 ACLC 1290
E S Gordon Pt Ltd v Idamenco (No 123) Pty Ltd (1995) 15 ACSR 536
John J Starr (Real Estate) Pty Ltd v Robert R Andrew ("A'Asia) Pty Ltd (1991) 6 ACSR 63
Rankine v Rankine (1995) 18 ACSR 725
Re Wondoflex Textiles Pty Ltd [1951] VLR 458
Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 882
Sirianos (1995) 13 C&SLJ 88
Thomas v MacKay Investments Pty Ltd (1996) 22 ACSR 294
SCOTT J:
Background
The applicant is a family trust company holding the shareholding and other interests of Graham Menz ("Menz") in the first respondent.
The first respondent was initially incorporated as Greenvale Pty Ltd on 15 December 1989. On 22 February 1990 the company changed its name to Ground and Foundation Supports Pty Ltd, the first respondent, ("GFS").
The second respondent is the trustee of the Philco Trust of which Phillip Patterson ('Patterson") is a beneficiary. The third respondent is a trust company representing the interests of Brent Black ("Black").
In early 1989 Menz became interested in a sheet piling system for ground retention which was seen as having some particular benefit in the sandy soils around the Perth metropolitan area. At that time Patterson was Menz's solicitor in relation to matters unconnected with this proposed sheet piling business. Towards the end of 1989 Menz told Patterson that he was attempting to obtain the rights to a franchise or licence in Western Australia and other States for the purpose of establishing a sheet piling business. In order to establish the business, Menz, however, required finance. Black was a friend of Patterson and an investor who became interested in the proposal.
Eventually, towards the end of 1989 following discussions between Menz, Black, Patterson and another potential investor by the name of Walker, arrangements were made for the establishment of a corporate structure. Whilst some adjustment was made to the ultimate shareholding, eventually it was agreed that Black would hold 35 per cent of the issued capital, Patterson 35 per cent and Menz 30 per cent. Some of the shares were, however, partly paid shares. Black and Patterson paid for their shares in cash but Menz only paid for a portion of his shares in cash, the balance being allotted in consideration of his providing the intellectual property to the company. The intellectual property was valued at $40,000 and Menz was allotted a 20 per cent shareholding in the company in exchange for that intellectual property. Eventually Menz took over Walker's interest subscribing $12,000 for 20,000 $1 shares partly paid to 60 cents.
In the end result the share ratios were, as I have said earlier in these reasons, 35 per cent to each of Patterson and Black and 30 per cent to Menz.
Whilst GFS was set up in this way, it was always Menz's desire and intention that he should one day totally own and control GFS. After the company was established, Menz was appointed managing director on a salary which was varied from time to time. Details of Menz's salary and the negotiations concerning it will be discussed later in these reasons. In addition, Menz, Black and Patterson each became directors of GFS and were paid directors' fees. As all of the issued shares were of the same class, dividends, if any, were to be paid in accordance with the ratio in which the shares were held.
In June 1993 an application was made for an international patent for the sheet piling technology. That application was in the name of Menz because, as Menz told the other directors, it could not be in a company name.
It is common ground that GFS got off to a shaky start and was slow to become established. No doubt that was in part due to the fact that it utilised new technology and as a result it took some time for the company to become established. Eventually, however, GFS became both successful and highly profitable.
In the course of its history GFS, from time to time, paid both directors' fees and dividends.
In 1995, Menz sought to purchase Black and Patterson's shares. That proposal eventually did not come to fruition because Black and Patterson realised that Menz was proposing to fund the purchase from the profits of GFS rather than from his own resources.
The company first made a profit in the year ending 30 June 1996, following which it was agreed that Menz would continue as managing director with an annual salary package worth $80,000 with $30,000 to be distributed to shareholders by way of dividend in proportion to their respective shareholding.
In August 1996, the directors resolved that dividends should be paid by monthly payments of $1,946 to each of the Black and Patterson interests and $1,666 to the Menz interests to reflect the 35-35-30 shareholding in the company. The company continued to trade profitably and in the year ending 30 June 1998 GFS had a turnover of $2.8M with a profit of $409,053. At that stage, as the figures reveal, GFS had become a successful and profitable company and at least up until that stage the three directors, Black, Patterson and Menz, advanced the interests of GFS amicably.
The first matter of concern arose in July 1998 when Menz employed his stepson Luke Martin ("Martin") in the business. Initially Martin was employed as a site worker. Menz however realised that Martin had skills in computer aided drafting and quality assurance and so sought to utilise his skills as an office worker in that capacity rather than as a site worker.
At the end of July 1998, Menz was seeking a revised salary package. Menz sought an increase of his salary component from $40,000 to $70,000. Patterson, on behalf of the Black and Patterson interests, offered to increase his salary from $40,000 to $45,000 with superannuation to stay at $10,000 and dividends to be increased from $20,000 to $30,000 per year payable monthly, plus the supply to Menz of a new vehicle. Menz was not happy with that proposal as he wanted a salary increase to $70,000.
Menz was dissatisfied with the package offered to him and sought independent accounting advice both as to an appropriate salary and in relation to buying out the Black and Patterson interests. Menz believed that his salary should have been in excess of $120,000.
Matters between the three directors continued to deteriorate and Menz sought legal advice from solicitors Lenhoff &Co in relation to his position. Lenhoff & Co wrote a letter, dated 11 February 1999, to Patterson addressed to Taylor Smart, Solicitors, where Patterson worked as a solicitor. The letter is in many respects central to the issues between the parties in these proceedings and therefore I set it out in full.
"Dear Sir
Ground and Foundation Services Pty Ltd ('GFS')
We represent Graham Menz and GFS Management Services Pty Ltd ('GFS Management Services') which acts as trustee for the Menz Family Trust.
As you are no doubt aware Mr Menz has 30% of the equity in GFS, you have 35% and the remaining 35% is held by Mr Brent Black and Mr Darryl Black. How Mr Menz came to be a minority shareholder in a company which was his brainchild and which conducts its business activities solely through his efforts may well be the subject matter of another enquiry which need not be considered at this stage.
Be that as it may Mr Menz, as you know, is dissatisfied with the current arrangement regarding the management and control of GFS.
One of the grounds of complaint is that Mr Menz is currently on a remuneration package (excluding dividends which, strictly speaking, should not be regarded as part of any remuneration package) of $88,200. Independent advice obtained by our client from Price Waterhouse Coopers has revealed that a reasonable total package of remuneration for the position of Managing Director of a company such as GFS should be at least $150,000.
Our instructions are, however, that you have steadfastly refused to increase Mr Menz's remuneration to a reasonable and acceptable level. Having regard to the results achieved by GFS through the efforts of Mr Menz the situation is now intolerable and cannot be permitted to continue. Our instructions are that there are currently negotiations on foot and Mr Menz's grievances will be properly ventilated at the meeting which, we are instructed, will be held later today in order to establish whether the matter can be amicably resolved.
In the meantime we place on record the fact that you have indicated to Mr Menz that he can acquire your shareholding and that of the other shareholders for an amount of $1,400,000 from which it follows that you value GFS in an amount of $2,000,000. On that basis, are you prepared to acquire our client's equity in GFS for $600,000?
As far as GFS Management Services is concerned, an opinion obtained from Mr Richard McCormack of Counsel is to the effect that GFS Management Services is the owner of the intellectual property currently utilised by GFS in its business activities and we are instructed that immediate negotiations should be conducted in regard to the question of both past and future royalties and licence fees as may be appropriate.
We are further instructed that, in the absence of suitable arrangements being made between GFS and GFS Management Services, our client's rights, inter alia, to terminate the present licence whereby GFS utilises our client's intellectual property free of appropriate remuneration are strictly reserved.
We await your response
Yours faithfully
David Lenhoff"
Following receipt of that letter, it is common ground that two directors' meetings took place. The first was a meeting at which Mr Lenhoff was present and which discussed the question of the price at which the Patterson and Black interests were prepared to sell their shares or buy out the applicant's shares. Significantly, Menz's evidence was that the discussion went straight to the question of whether he was offering his shares for sale or whether he was seeking to purchase the shareholding of the Black/Patterson interests. Menz's evidence was that the meeting took about 20 minutes and the discussions revolved entirely around the purchase or sale of the issued shares so that either the Black/Patterson interests or the Menz's interests would totally own GFS. In my view it is of significance that Menz did not say in his evidence that his focus was upon obtaining proper remuneration for his services as managing director. The significance of that matter will become apparent later in these reasons.
The meeting between Black, Patterson, Menz and Lenhoff closed without resolution and a further meeting of the directors of GFS then took place. The minutes of that meeting (exhibit A page 41) show that Patterson, Black and Menz were present at the meeting and the minutes reveal the following:
"Motion
1That Graham Menz's appointment as Managing Director be terminated. Motion BB Second PP.
2Graham Menz undertook to return company vehicle on or before 15 February 1999.
3Graham Menz advised that he would cease to be signatory on bank accounts for GFS Pty Ltd.
P J Patterson
Chairman"
The significance of the second meeting of 11 February 1999 and the circumstances surrounding it, which are central to this application, will be discussed later in these reasons.
Following Menz's termination as managing director on 11 February 1999 a formal resignation as a director was signed by Menz on 15 February 1999.
Following his termination, on 18 February 1999, Menz registered a new company Compile Australia Pty Ltd ("Compile") with Menz as its sole director. It is common ground that Compile immediately went into business in opposition to GFS utilising very similar technology and similar intellectual property. It is also common ground that one of the main operators employed by GFS went with Menz to Compile, as did a company accountant.
It is also common ground that on 17 June 1999 this application was commenced and at that stage the applicant sought amongst other things an order winding up GFS. That order has not been pursued in these proceedings.
Following the termination of Menz as managing director, Black took over the management of GFS and the profitability of that company sharply declined. The evidence establishes that the decline in the profitability of GFS was due in part, to the fact that Compile was trading in opposition to GFS and also because Menz took a great deal of the goodwill of GFS with him to the new business.
Since the termination of Menz's position as managing director of GFS there has been correspondence between the Menz interests and the Patterson/Black interests concerning the value of the applicant's shares in GFS. No agreement has been reached on that issue. A substantial issue in the present proceedings is the true value of the applicant's 30 per cent shareholding in GFS and the way in which, and value at which, that shareholding should be acquired. Those issues will be discussed later in these reasons.
The application is brought under Part 2F.1 of the Corporations Law being that part of the law dealing with oppression. The relevant provisions are contained in s 246AA:
"246AA(1) [Application to Court]
An application to the Court for an order under this section in relation to a company may be made:
(a)by a member who believes:
(i)that affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members, or in a manner that is contrary to the interests of the members as a whole; or
(ii)that an act or omission, or a proposed act or omission, by or on behalf of the company, or a resolution, or a proposed resolution, of a class of members, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or was or would be contrary to the interests of the members as a whole; or
…
246AA(2)[Orders that Court may make]
If the Court is of the opinion:
(a)that affairs of a company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section called the 'oppressed member or members') or in a manner that is contrary to the interests of the members as a whole; or
(b)that an act or omission, or a proposed act or omission, by or on behalf of a company, or a resolution, or a proposed resolution, of a class of members of a company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members (in this section also called the 'oppressed member or members') or was or would be contrary to the interests of the members as a whole;
the Court may, subject to subsection (4), make such order or orders as it thinks fit, including, but not limited to, one or more of the following:
(c)an order that the company be wound up;
(d)an order for regulating the conduct of affairs of the company in the future;
(e)an order for the purchase of the shares of any member by other members;
(f)an order for the purchase of the shares of any member by the company and for the reduction accordingly of the company's capital;
(g)an order directing the company to institute, prosecute, defend or discontinue specified proceedings, or authorising a member or member of the company to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;
(h)an order appointing a receiver or a receiver and manager of property of the company;
(j)an order restraining a person from engaging in specified conduct or from doing a specified act or thing;
(k)an order requiring a person to do a specified act or thing.
…
246AA(5)[Interpretation]
In this section and in paragraphs 461(1)(f), (g) and (h):
(a)a reference to a member, in relation to a company, includes, in the case of a company limited by shares, a reference to a person to whom a share in the company has been transmitted by will or by operation of law;
(b)a reference to affairs of a company being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member is a reference to affairs of a company being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a person who is a member, whether in his capacity as a member or in any other capacity; and
(c)a reference to an act or omission by or on behalf of a company or a resolution of a class of members of a company being oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member is a reference to an act or omission by or on behalf of a company or a resolution of a class of members of a company being oppressive or unfairly prejudicial to, or unfairly discriminatory against, a person who is a member, whether in the person's capacity as a member or in any other capacity."
Oppression
There are three separate matters which senior counsel for the applicant maintains constitute oppressive conduct by the majority shareholders and directors in this case:
1That Menz was grossly underpaid for his services in acting as managing director of GFS. More accurately expressed the complaint is that the applicant was underpaid for its role in providing the services of Menz to GFS.
2The circumstances surrounding the dismissal of Menz's stepson, Martin as an employee of GFS.
3The summary dismissal of Menz as the manager of GFS on 11 February 1999.
As I understand the case for the applicant, each of these three matters constituted oppression either individually or collectively so as to entitle the applicant to relief under s 246AA of the Corporations Law set out earlier in these reasons.
Before turning to the circumstances surrounding each of those individual matters, it is necessary to consider the legal principles governing a finding of oppression. Those principles are conveniently collected in Ford's "Principles of Corporations Law" at par 11.430 et seq.
In Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, Lord Wilberforce reviewed the relevant authorities at 376-377 and said at 378:
"This series of cases (and there are others: In re Davis & Collett Ltd, [1935] Ch 693; Baird v Lees 1924 SC 83; Elder v Elder & Watson 1952 SC 49; In re Swaledale Cleaners Ltd [1968] 1 WLR 1710; In re Fildes Bros Ltd [1970] 1 WLR 592; In re Leadenhall General Hardware Stores Ltd (unreported) February 4, 1971), amounts to a considerable body of authority in favour of the use of the just and equitable provision in a wide variety of situations, including those of expulsion from office. The principle has found acceptance in a number of Commonwealth jurisdictions. Though these were not cited at the Bar I refer to some of them since they usefully illustrate the principle which has been held to underlie this jurisdiction and show it applicable to exclusion cases."
Lord Wilberforce then went on to consider a number of cases from varying jurisdictions in Australia and New Zealand and said at 379:
"My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words 'just and equitable' and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from the management, he cannot take out his stake and go elsewhere."
It is contended by senior counsel for the applicant that GFS in this case is just such a company which evolved from an agreement between friends who shared a personal relationship involving mutual confidence. In that respect Menz was to bring intellectual property into the company in exchange for shares which he was ultimately allotted and the Patterson/Black interests were to bring in capital to enable the venture to commence. In that respect this is a case in which the just and equitable considerations of which Lord Wilberforce speaks in Ebrahimi's case should apply.
In O'Neill v Phillips & Ors [1999] 1 WLR 1092, Lord Hoffmann said at 1099-1100:
"I should make it clear that the parallel I have drawn between the notion of 'just and equitable' is explained by Lord Wilberforce in In re Westbourne Galleries Ltd and the notion of fairness in section 459 does not mean that conduct will not be unfair unless it would have justified an order to wind up the company. There was such a requirement in section 210 of the Companies Act 1948 but it was not repeated in section 459. As Mummery J observed in In re A Company (No 00314 of 1989), Ex parte Estate Acquisition and Development Ltd [1991] BCLC 154, 161, the grant of one remedy will not necessarily require proof of conduct which would have justified a different remedy:
'Under sections 459 to 461 the court is not … faced with a death sentence decision dependent on establishing just and equitable grounds for such a decision. The court is more in the position of a medical practitioner presented with a patient who is alleged to be suffering from one or more ailments which can be treated by an appropriate remedy applied during the course of the continuing life of the company.'
The parallel is not in the conduct which the court will treat as justifying a particular remedy but in the principles upon which it decides that the conduct is unjust, inequitable or unfair.
An example of such equitable principles in action is Blisset v Daniel (1853) 10 Hare 493 to which Lord Wilberforce referred in In re Westbourne Galleries Ltd [1973] AC 360, 381. Page Wood V-C held that upon the true construction of the articles, two-thirds of the partners could expel a partner by serving a notice upon him without holding any meeting or giving any reason. But he held that the power must be exercised in good faith. He said, 10 Hare 493, 523 that 'the literal construction of these articles cannot be enforced' and, after citing from the title 'De Societate' in Justinian's Institutes, went on, at pp 523-524:
'It must be plain, that you can neither exercise a power of this description by dissolving the partnership, nor do any other act for purposes contrary to the plain general meaning of the deed, which must be this - that this power is inserted, not for the benefit of any particular parties holding two-thirds of the shares, but for the benefit of the whole society and partnership …'.
In the Australian case of In re Wondoflex Textiles Pty Ltd [1951] VLR 458, 467, Smith J, also contrasted the literal meaning of the articles with the true intentions of the parties:
'It is also true, I think, that, generally speaking, a petition for winding up, based upon the partnership analogy, cannot succeed if what is complained of is merely a valid exercise of powers conferred in terms by the articles … To hold otherwise would enable a member to be relieved from the consequences of a bargain knowingly entered into by him … But this, I think, is subject to an important qualification. Acts which, in law, are a valid exercise of powers conferred by the articles may nevertheless be entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company; and in such cases the fact that what has been done is not in excess of power will not necessarily be an answer to a claim for winding up. Indeed, it may be said that one purpose of [the just and equitable provision] is to enable the court to relieve a party from his bargain in such cases'."
Senior counsel for the applicant relies upon these authorities as containing the principles upon which it can be said that oppressive conduct occurred in this case.
In R & H Electric Ltd & Anor v Haden Bill Electrical Ltd [1995] 2 BCLC 280, Robert Walker J had occasion to consider a case in which a chairman of directors was a minority shareholder who was removed from office. In that case, the relationship between the chairman of directors and the other directors had broken down and as a consequence the other directors gave short notice to him of a meeting at which it was proposed that he be removed. The chairman of directors, following his removal, brought proceedings seeking relief by way of declaration and injunction to establish that he had not been validly removed from effective control of the affairs of the company. The petition asserted that the company had been formed on the basis of mutual trust and confidence and that the ouster of the chairman of directors from his entrenched rights amounted to conduct of the company's affairs which was unfairly prejudicial to him. The respondent resisted relief on the grounds that no prejudice had been caused to the chairman of directors in his capacity as shareholder and that the company should not be regarded as a quasi partnership founded on mutual trust. Robert Walker J said at 294:
"On the last of Mr Farrow's four points, I feel no doubt but that Haden Bill was, during 1989 and 1990, planned, formed and set up in business on the basis of mutual trust. At that time there was certainly trust between Mr Pitt (the chairman of directors) and Mr Watkins as a pair, between Mr and Mrs Hogg as a pair, and between Mr Pitt and Mr Hogg as a pair. Such reservations as there may have been between the Hoggs and Mr Watkins, or on the part of Mrs Hogg towards Mr Pitt, cannot in my judgment negate that conclusion. The fact is that numerous contractual documents which were discussed or drafted (including the two already mentioned, and also a service agreement for Mr Hogg) were never completed because the parties decided to proceed on the basis of trust. The situation was the antithesis of one where a petitioner has entered into 'massively detailed and professionally drawn agreements' … Conversely, however unmeritorious Mr Pitt's personal conduct, it could not in my judgment justify the majority shareholders in summarily ejecting him without consultation or discussion about the future of Mr Pitt's equity capital, and R & H's loan capital, in Haden Bill. It was largely for that reason that I would have rejected any suggestion (which was only mentioned, and not pressed) that the personal troubles should be investigated by recall of witnesses and further cross‑examination.
Had the position been considered and discussed between the majority shareholder and Mr Pitt in February 1994, I think the solution likely to have emerged, and a fair solution, would have been that Mr Pitt should cease to be chairman and a director of Haden Bill, that his shares should be bought by the majority shareholders without a discount for its being a minority holding, and that R & H's loans to Haden Bill should be repaid as soon as reasonably possible (either by refinancing or out of retained profits, but in any event substantially sooner than if the minimum instalments fixed by the deed of 5 April 1993 had continued)."
In Guerinoni v Argyle Concrete & Quarry Supplies Pty Ltd (2000) 34 ACSR 469, Malcolm CJ, Kennedy and Pidgeon JJ had occasion to consider an appeal from the decision of a Master refusing to grant an order to wind up a company in circumstances where two of the directors did not enjoy a good relationship. The Master had refused to make an order that the company be wound up, one reason being that one of the directors had entered into the corporate structure knowing that it would be difficult to work with another. In that case, Kennedy J (with whom Malcolm CJ and Pidgeon J agreed) said at 478:
"Nevertheless, we are not left in a wilderness of single instances and certain principles have emerged in relation to the just and equitable ground for winding up a company. In Re a Company (No 00709 of 1992); O'Neill v Phillips [1999] 1 WLR 1092, although the House of Lords was concerned with an application under s 459(1) of the Companies Act 1985 (UK), a section which is broadly comparable to our s 461(1)(f) of the Corporations Law, Lord Hoffmann regarded his approach to the concept of 'unfairness' in s 459 to run parallel to that which had been adopted in Ebrahimi v Westbourne Galleries Ltd, supra, in giving content to the concept of 'just and equitable' as a ground for winding up. At 1098-9 his Lordship said:
'In section 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (which I discussed in In re Saul D Harrison & Sons plc [1995] 1 BCLC 14, 17-20) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content, which it is given by the courts, must be based upon rational principles. As Warner J said in In re J E Cade & Son Ltd [1992] BCLC 213, 227:
"The court … has a very wide discretion, but it does not sit under a palm tree".'"
In Guerinoni's case the Full Court approved the principles set out earlier in Ebrahimi v Westbourne Galleries and O'Neill v Phillips.
On this issue I would finally refer to the judgment of Owen J in Shamsallah Holdings Pty Ltd & Anor v CBD Refrigeration and Airconditioning Services Pty Ltd & Ors [2001] WASC 8, where his Honour said at 7:
"In applying s 246AA the courts must respect the traditional roles of the directors and shareholders in relation to management of the company. Accordingly, the powers should not be lightly exercised, especially when a lack of probity or want of good faith is not established: Thomas v HW Thomas Ltd (1984) 2 ACLC 610 at 620; New South Wales Rugby League Ltd v Wayde (1985) 1 NSWLR 86 at 102.
The concept that the courts must have respect for business and commercial decision making processes was also the subject of comment by Young J in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 at 739. In the same passage his Honour stressed the importance of having regard to the circumstances as a whole and of assessing the cumulative effect of the impugned conduct:
'Although, there may well be cases where each single allegation in itself could not be regarded as oppressive, I must assess the totality of the allegations to see if there is oppression. The authorities show that this type of case has to be judged on all the circumstances; see eg Re Horwood & Co Ltd (1921) 21 SR (NSW) 750, affirmed by the High Court as Menard v Horwood & Co Ltd (1922) 31 CLR 32. Although that was a "just and equitable" winding up case, the principle is the same under [s 246AA] as appears from Re Ashby Bergh & Company Ltd (1988) 4 NZCLC 96-194 at p 64,141 and Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452, 474.
It is important when assessing corporate activities to see if there has been oppression that judges do not remain in their ivory tower. The business world is replete with individuals who quite legitimately are seeking the best for themselves. For mutual enrichment, they may enter into contractual regimes or corporate structures. They may also take on fiduciary obligations. However, subject to these obligations, they can act as they like in their own interests'."
With those principles in mind it is necessary to examine each of the three aspects of oppression, which senior counsel for the applicant contends apply in this case.
The first of those issues identified on par [27] of these reasons relates to Menz's salary during the period that he was acting as managing director. Before dealing specifically with that aspect of the plaintiff's case, it is necessary to mention that generally speaking, in my view, the evidence given by the defendants' witnesses, Black and Patterson, is to be preferred to that of the plaintiff. That having been said, however, the evidence of all three witnesses was that the salary of Menz was agreed by the directors of GFS from year to year prior to 1999. The evidence indicates at the end of each year there were discussions as to the remuneration to be paid to Menz. Because of the amicable relationship between the three directors that issue was usually resolved without difficulty.
The real difficulty between the three directors appears to have arisen out of the second of the three matters referred to at par [27] of these reasons, that is what was referred to in evidence as, "the Luke Martin affair". In summary, Martin was the stepson of Menz. Menz employed him in GFS, initially as a site worker but later, utilising his computer skills, he was employed as a computer-aided draftsman and in relation to quality assurance work. I accept Menz's evidence that Martin was an able and competent worker and of value to GFS in the capacity in which he was employed. I also accept that Menz employed Martin without telling Black and Patterson, at least initially, that Martin was his stepson. Eventually, when the matter became known to Black and Patterson, they indicated that they opposed what they called "nepotism" and for that reason insisted that Martin's employment be terminated. It is common ground that Martin was properly paid out on termination.
Whilst senior counsel for the applicant maintains that the dismissal of Martin was an act of oppression within the meaning of s 246AA, in my view, that is not so. It was properly open to the directors of GFS, or a majority of them, to resolve that the employment of relatives was inappropriate and to have the managing director act upon that resolution. The fact that in this case such a decision caused embarrassment to Menz by reason of his having to terminate the employment of his stepson was an unfortunate consequence of the implementation of that decision by the board of directors. Nonetheless, in my view, the resolution of the board of directors was properly open and a responsible commercial decision for GFS to make in the interests of all shareholders. That being the case, it cannot be said that the termination of the employment of Martin was an act of oppression in relation to the applicant: see Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 at 720.
Looking at the evidence overall, it was because of the break-down in the relationship between Patterson and Black on the one hand and Menz on the other arising out of the Martin dismissal that the resolution of the salary for Menz became such a matter of contention.
It is common ground that Menz was dismissed as manager of GFS following two meetings held on 11 February 1999. Prior to the holding of those meetings Menz had consulted solicitors Lenhoff & Co and the letter of 11 February 1999 from that firm to GFS was the result of that consultation.
Patterson's evidence, which I accept, was that the Lenhoff letter took him by surprise because in July 1998 Black and he had agreed to Menz's request for a total salary package of approximately $100,000 (being $45,000 salary, the provision of a leased vehicle - valued at $23,000 - superannuation of $10,000 and dividends of $30,000). In addition, a bonus incentive of 2.5 per cent of the net profit of the company was to be provided for. Patterson's evidence, however, was that at a later meeting at Patterson's house, Menz indicated that from his point of view the salary proposed was not acceptable and he believed that he was being underpaid. In addition, a dispute arose between Menz, Black and Patterson over the decision made by Black and Patterson not to pay Menz director's fees, in view of the fact that as manager he was obliged to attend directors' meetings in any event. That decision was a further matter of contention. Whilst it was submitted that the underpayment of Menz was an act of oppression, having regard to all of the evidence, I am not persuaded that was so, even although it may properly be said that the salary paid to Menz was at the lower end of the appropriate salary range.
Upon receipt of the Lenhoff letter of 11 February 1999, Patterson took the view that Menz's position as managing director of GFS had become untenable. In my opinion, that was a view properly open, because the letter written on behalf of Menz suggested that the intellectual property which was the basis of GFS' business, belonged to Menz and not GFS. It had always been understood by Patterson and Black that in exchange for the capital contributions they made to GFS, the intellectual property had been acquired by that company. The suggestion by Menz that this was not so, and the threatened litigation between he and GFS, in my opinion, put him in a position where he could no longer properly act as managing director of GFS.
In my view, however, the critical matter in relation to oppression and the matter central to the applicant's claim relates to the summary dismissal of Menz on 11 February 1999. In that respect it is common ground that following the meeting with Lenhoff and Menz, a directors' meeting of GFS at which only Black and Patterson attended, resolved to terminate Menz's position as managing director. No notice was given to Menz of that resolution and he was never given an opportunity to put his case in relation to the proposal that he be dismissed. In that respect, however, Patterson's evidence was that from his point of view, it was neither in the interests of Menz nor GFS for Menz's position to be terminated. Menz, as I have said, had been a personal friend of Patterson and his future employment was a matter of concern. In addition, Menz's work as managing director was the reason why GFS had become a successful and profitable company.
Significantly, however, when the meeting at which Lenhoff attended commenced, according to Patterson's evidence the approach taken by Lenhoff was to discuss the price at which either Menz was prepared to sell his shares or at which the Black/Patterson interests were prepared to sell their shares. The attitude, according to Patterson, was that Menz was either going to take over GFS or to dispose of his interests therein. Patterson's evidence was that he was shocked and did not know if Menz was genuine in that approach, but nonetheless in all the circumstances the decision was made to terminate Menz's employment as managing director.
The central question that falls for determination therefore, so far as this aspect of the applicant's claim is concerned, is whether the act of Patterson and Black in summarily terminating Menz's position as managing director of the company was an act of oppression. It is important in considering that aspect of the matter to bear in mind that in my view, Menz's approach to the problem, as exhibited at the meeting at which Lenhoff attended, was that he was not pursuing his future employment with GFS.
Significantly, as I have said, very shortly after Menz's position as managing director was terminated, he resigned as a director of GFS and set up the business of Compile, which immediately went into business in opposition to GFS with Menz as its manager. In those circumstances it was hardly surprising that the profitability of GFS thereafter declined. Black took over as managing director and the evidence indicates that although profitability of GFS has been gradually improving, it has not returned to anything like the position it enjoyed at the time of Menz's termination.
All of these matters need to be taken into account in determining not only the question as to whether or not there has been an act of oppression, but equally importantly, the question as to the basis upon which the applicant's interest in GFS is to be valued.
On balance I have come to the view that the act of Black and Patterson in dismissing Menz as managing director of GFS, without giving him notice of that proposed course, was, in all the circumstances, an act of oppression. I have come to that conclusion notwithstanding the fact that at the meeting with Lenhoff, Menz did not seek to continue his employment as managing director. Nonetheless, in my view before Menz could properly have been summarily dismissed, he should have been given the opportunity of stating his position and answering the allegations which Patterson and Black considered had made his position untenable. In that respect the case is not unlike that in Haden Bill discussed earlier in these reasons. See also: Hogg v Dymock (1993) 11 ACSR 14 per Malcolm CJ at 20
It is also to be noted that following his dismissal, Menz applied to the Western Australian Industrial Commission for relief from what he claimed was an unfair dismissal. That application failed. Beech C concluded that the applicant failed to establish that his dismissal was harsh, oppressive or unfair.
Having reached the conclusion that there was oppression, the question that arises is the proper basis of payment for the applicant's shareholding in GFS.
Just and Equitable Payment to the Applicant for its Shares in GFS
In relation to this issue I have been greatly assisted by the article by Steven Sirianos, published in Vol 13 "Company and Security Law Journal" page 88 et seq. That article carefully analyses the differing bases upon which share valuations can be made in circumstances such as the present.
The first matter that needs to be determined is the appropriate method of valuation of the applicant's shares and the date of valuation. In this case there has been conflicting evidence both as to the appropriate date of valuation and the appropriate basis for that valuation. Both matters are of fundamental importance in arriving at a fair and just price: see Diligenti v RWMD Operations Kelowna Ltd (No 2) 4 BCLR 134 at 165-166.
It is common ground both in this area of corporations law and from the evidence of the valuers who gave evidence at this hearing that there are two alternative methods for valuing the applicant's shares: (1) the net asset value; (2) the capitalisation of maintainable profits.
In this case, the factual circumstances surrounding the oppressive conduct, before, during and after the actual event, need to be taken into account.
The oppression arises out of the failure of the majority directors (Black and Patterson) to give Menz the appropriate opportunity to answer or explain the matters which were said to give rise to a conflict of interest of such a nature that his position as the managing director of GFS was no longer tenable. On the other hand, as I have said, the evidence points to the fact that Menz's primary concern was not to carry on as the managing director of GFS but rather to find an acceptable basis upon which either he could purchase the Black/Patterson interests or sell his own shareholding to them. In addition, it is to be noted that not only did Menz immediately go into business in opposition to GFS, but in the initial application in these proceedings he sought to have GFS wound up. In those circumstances, in my opinion, the only appropriate method of valuation in this case is the net asset value method. In arriving at that conclusion, in my view the evidence clearly establishes that the actions of Menz were such that it was highly unlikely that GFS would maintain the level of profitability that existed at the time at which he was employed by that company. By his own actions, Menz destroyed any goodwill that GFS had acquired.
In this respect the case is to be contrasted with the matter considered by Lord Denning in Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 at 369, where his Lordship said:
"One of the most useful orders mentioned in the section - which will enable the court to do justice to the injured shareholders - is to order the oppressor to buy their shares at a fair price: and a fair price would be, I think, the value which the shares would have had at the date of the petition, if there had been no oppression. Once the oppressor has bought the shares, the company can survive. It can continue to operate. That is a matter for him. It is, no doubt, true that an order of this kind gives to the oppressed shareholders what is in effect money compensation for the injury done to them: but I see no objection to this. The section gives a large discretion to the court and it is well exercised in making an oppressor make compensation to those who have suffered at his hands."
That passage was cited with approval by the Full Court of the Supreme Court of Queensland (Wanstall SPJ and WB Campbell J in Re Golden Bread Pty Ltd: The Queensland Co-operative Milling Association v Hutchison (1977-1978) ACLC 29,490 at 29,497. A similar approach was adopted by MacPherson J in Re Dalkeith Investments Pty Ltd (1985) 3 ACLC 74 at 81.
As I indicated earlier in these reasons, in my view the appropriate basis for valuation of the shares in this case is the net asset value of GFS because of the steps taken by Menz, both at the time of his termination as managing director, and immediately subsequent thereto. It would, in my view, be inequitable to value GFS on the basis of an ongoing concern. The profitability of GFS occurred at the time when Menz was its managing director. His own acts have been responsible for the company's transition from a profitable enterprise to one which immediately became unprofitable.
Once those principles are understood the appropriate basis of valuation is that propounded by the defendant's valuers, Gavin Alan Buckingham ("Buckingham") and Richard Anthony Hoile ("Hoile") which is to be preferred to that proposed by the applicant's valuer (Duncan Harvey Calder).
Using the net tangible assets method, Hoile, in his affidavit sworn 3 April 2001, valued the net assets of GFS at $652,887, which he said included bad debts totalling $50,555. If an allowance is made for that figure, the net tangible assets of GFS totalled $602,332. The applicant's 30 per cent equity on that basis was worth $180,699.
In his figures, Hoile reflects a sum of $25,000 as a loan made by GFS to GFS Management Pty Ltd. That figure was an amount which GFS advanced to Menz in circumstances where Menz was to advise Patterson and Black as to the way in which it was to be treated in the accounts of GFS. Having reviewed the evidence, I have come to the conclusion that this amount was not a loan, but treated as a dividend and reflected pro rata by the payment of corresponding dividends to both Black and Patterson. It follows that the net tangible assets position as reflected by Hoile should be slightly reduced from the figure at which he arrives.
Other items in dispute between the parties, particularly overpaid fees, overpaid annual leave, overpaid leave loading, overpaid sick leave and overpaid salary are said to have been paid wrongly to Menz. In my view these amounts were wrongly overpaid to Menz, and should also be taken into account. The figures at the end of the day are not capable of precise mathematical calculation but in the end result, in my view, the true net tangible assets of GFS after Menz's departure as managing director, are correctly valued at $600,000 making the applicant's 30 per cent shareholding worth $180,000.
Whilst there is authority for such a figure to be discounted where, as here, Menz was not interested in continuing as managing director (In re Bird Precision [1984] 1 Ch 419 per Norse J at 430-1) no such discount was sought by the respondents in this case. In those circumstances, in my opinion, no discount should be applied.
In the end result, in my view, the fair value for Menz's shares, taking all of these matters into account, is the sum of $180,000.
At the commencement of the trial, counsel appeared on behalf of GFS seeking leave to be heard only if the court reached the conclusion that there was oppression and an order was to be made for the purchase of the applicant's shares. GFS wished to make submissions as to how that share purchase should be effected. As a consequence, having reached the conclusion that there was oppression, and having valued the applicant's shares in the manner that is appropriate in all the circumstances of the case, the matter will have to be relisted so that counsel including counsel for GFS can be heard on the issue of the appropriate orders to give effect to these reasons.
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