ICM Investments Pty Ltd v San Miguel Corporation and Berri Ltd
[2014] VSCA 246
•3 October 2014
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2013 0179
| ICM INVESTMENTS PTY LIMITED (ACN 004 982 512) |
| Appellant |
| v |
| SAN MIGUEL CORPORATION |
| First Respondent |
| – and – |
| BERRI LIMITED (ACN 008 077 889) |
| Second Respondent |
---
| JUDGES: | NETTLE, SANTAMARIA and BEACH JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 4 and 5 September 2014 |
| DATE OF JUDGMENT: | 3 October 2014 |
| MEDIUM NEUTRAL CITATION: | [2014] VSCA 246 |
| JUDGMENT APPEALED FROM: | ICM Investments Pty Ltd v San Miguel Corporation & Anor (No 2) [2013] VSC 528 (Vickery J) ICM Investments Pty Ltd v San Miguel Corporation & Anor (No 3) [2013] VSC 621 (Vickery J) |
---
CONTRACT – Interpretation – Sale of shares – Transaction documents – Shareholder Agreement – Put and Call Option Deed – Whether, on proper construction, transaction documents entitling appellant to dividend in respect of period from last dividend declared prior to completion of sale of shares to date of completion – Australian Broadcasting Commission v Australian Performing Right Association Ltd (1973) 129 CLR 99; Foster v Wheeler (1888) 38 Ch D 130; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, applied.
CORPORATIONS – Directors’ duties – Dividends – Interim dividend – Whether contractual obligation of first respondent to procure payment of interim dividend by second respondent dependent on ability of directors of second respondent to form genuine opinion as to sufficiency of company profits from which to pay dividend – Profits – Whether reserves able to be treated as profits available for payment of dividends – Distinction between reserves comprised of capital profits and reserves comprised of profits on revenue account – Whether necessary to set off reserves against accumulated losses before payment of dividends - Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616, followed; Glenville Pastoral Co Pty Ltd (in liq) v Federal Commissioner of Taxation (1963) 109 CLR 199, applied; Trevor v Whitworth (1887) 12 App Cas 409; Australian Vic Exploration Ltd v Lachberg (1958) 101 CLR 119, referred to; Foster v New Trinidad Lake Asphalt Co Ltd [1901] Ch 208, explained – Corporations Act 2001 (Cth), s 245T.
ILLEGALITY – Whether incumbent on first respondent to prove not open to directors of second respondent honestly and reasonably to conclude sufficiency of profits from which to pay dividend – Holidaywise Koala Pty Ltdv Queenslodge Pty Ltd [1977] VR 164, applied; Venus Adult Shops Pty Ltd v Fraserside Holdings Ltd [2006] FCAFC 188, referred to.
---
| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr N J Young QC with Mr D C Gration | Baker & McKenzie |
| For the First Respondent | Mr N D Hopkins QC with Ms P Thiagarajan | Herbert Smith Freehill |
| For the Second Respondent | Mr D J Batt QC with Mr S H Parmenter | King and Wood Mallesons |
NETTLE JA
SANTAMARIA JA
BEACH JA:
Berri Ltd (‘Berri’) is a company that carries on the business of manufacturing and marketing fruit juices and other beverages. San Miguel Corporation (‘San Miguel’) is a large and well established publicly listed food, beverage and packaging company. ICM Investments Pty Ltd (‘ICM’) is a company in the Shears Group of companies, a privately owned agribusiness group with interests in food and beverage manufacturing and processing. In 2004, the majority of Berri’s shares were owned by companies associated with ICM. The balance were owned by institutional investors.
On 5 August 2004, ICM and San Miguel entered into certain transaction documents whereby San Miguel acquired the institutional investors’ shares in Berri, and ICM (and its related parties) agreed to sell all of their shares in Berri in tranches. As at 5 November 2004, San Miguel held 51 per cent of the shares in Berri. On 28 December 2005, following the exercise of a put option, San Miguel acquired through its wholly owned subsidiary National Foods Ltd (‘NFL’) the remaining 49 per cent of Berri from ICM.
In the proceeding below, ICM claimed damages from San Miguel and Berri in the amount of $4,960,282.91. ICM contended that Berri was required to declare and pay, and San Miguel was required to procure the declaration and payment of, a fully franked dividend to ICM of $3,472,198.04, immediately prior to completion of the transfer of ICM’s shares to San Miguel on 28 December 2005. The amount of $4,960,282.91 was comprised of the dividend and the sum of $1,488,084.87 in respect of the associated franking credits.
On 7 October 2013, following a nine day trial, a judge of the Trial Division found that San Miguel and Berri breached certain obligations under the transaction documents, but ultimately concluded that ICM had not proved it had suffered any loss and damage.[1] On 19 November 2013, after hearing further argument, the judge ordered San Miguel and Berri to pay ICM nominal damages in the sum of $10, and ICM to pay the costs of San Miguel and Berri on a standard (party/party) basis.[2]
[1]ICM Investments Pty Ltd v San Miguel Corporation & Anor (No 2) [2013] VSC 528 (‘First Reasons’).
[2]ICM Investments Pty Ltd v San Miguel Corporation & Anor (No 3) [2013] VSC 621 (‘Second Reasons’).
Following the making of the judge’s orders, ICM filed a notice of appeal and San Miguel and Berri filed notices of cross-appeal. Additionally, San Miguel and Berri have filed notices of contention in ICM’s appeal. ICM’s appeal and San Miguel’s and Berri’s cross-appeals were heard together.
Background facts
On 5 August 2004:
(a)ICM, San Miguel and others entered into a Share Sale Agreement regarding shares in Berri (‘the Share Sale Agreement’), referred to in some of the documents as ‘the SSA’;
(b)ICM, San Miguel and others entered into a Put and Call Option Deed regarding shares in Berri (‘the Option Deed’); and
(c)ICM, San Miguel, Berri and others entered into a Shareholders Agreement (‘the Shareholders Agreement’).
On 5 November 2004, San Miguel exercised the first of two call options provided for in the Option Deed, and acquired a further one per cent of the shares of Berri.
In April 2005, Berri declared and paid a dividend of $259,473 ‘out of the year-to-date 2005 financial year earnings’. In July 2005, Berri declared a dividend of $7,658,393 ‘out of the year-to-date 2005 financial year earnings’. Berri paid this second dividend in October 2005.
On 11 November 2005, ICM forwarded to San Miguel a Put Option notice in relation to ICM’s shares in Berri. On 28 December 2005:
(a)ICM, San Miguel, Berri and others entered into a deed (‘the 28 December Deed’) regarding completion of the acquisition by San Miguel of ICM’s shares in Berri; and
(b)San Miguel completed the acquisition of ICM’s shares in Berri.
Berri did not pay a dividend to San Miguel immediately prior to the completion of the transfer of ICM’s shares to San Miguel or at any time thereafter. Neither ICM nor San Miguel or any other parties to the Option Deed procured Berri:
(a)To pay a dividend to ICM immediately prior to the completion of the transfer of ICM’s shares to San Miguel; or
(b)To convene a meeting of the Board of Berri to consider whether the alleged dividend entitlement could be or would be paid. That said, there was in fact a meeting of the Board of Berri on 28 December 2005.
The relevant provisions of the transaction documents
Clause 21.8 of the Shareholders Agreement provided that the Shareholders Agreement, together with the other transaction documents (defined to mean the Shareholders Agreement, Berri’s Constitution, the Share Sale Agreement, the Option Deed and any other agreement or document that the parties agree is a transaction document), constitutes the entire agreement between the parties. To the extent of any inconsistency between any transaction document, cl 21.8 provided that such inconsistency would be resolved in the following priority: first, cl 21.8 of the Shareholders Agreement; secondly, the Share Sale Agreement; thirdly, the Option Deed; fourthly, the Shareholders Agreement other than cl 21.8; and fifthly, Berri’s Constitution. Additionally, cl 21.9 of the Shareholders Agreement provided that each party to the Shareholders Agreement ‘must do, at its own expense, everything reasonably necessary (including executing documents) to give full effect to [the Shareholders Agreement] and transactions contemplated by it’.
Central to the resolution of ICM’s claim is cl 7.7 of the Option Deed. Clause 7.7 of the Option Deed provided:
(a)On the exercise of either the Put Option (which may occur on two occasions) or the Second Call Option, the member of the Shears Group holding the Shares comprising the Entire Parcel to be acquired on such exercise will be entitled to all dividends in the period from the last declared and paid dividend until completion of that acquisition, the amount of such dividend to be determined in accordance with clause 10 of the Shareholders Agreement. The parties must procure that the Company pays this dividend entitlement to the holder of the Shares immediately prior to their transfer to SMC as a dividend determined in accordance with clause 10 of the Shareholders Agreement.
(b)Clause 7.7(a) has no operation in respect of any exercise of the First Call Option.
Clause 10 of the Shareholders Agreement provided:
(a)Subject to clause 10(c), unless resolved otherwise by the Board by Unanimous Approval, the Company will declare and pay by 30 April and 31 October each year, in respect of the results of the prior six months ending 31 December and 30 June respectively as shown in the Company's accounts for that period, a minimum cash dividend. The minimum amount of the dividend per Share will equal the product of the Rate multiplied by the Purchase Price (as defined and determined in accordance with the [Share Sale Agreement]) and then pro-rated as necessary to take account of the period in respect of which the dividend is being determined to determine the dividend per Share and the resulting amount paid as a cash dividend to Shareholders.
(b)Unless resolved otherwise by the Board by Unanimous Approval, all such dividends will be franked to the maximum extent permitted at law.
(c) To the extent that:
(i)The Company does not have sufficient distributable profits from which to pay a dividend required to be paid under clause 10(a); and/or
(ii)The Company's obligations under its financing arrangements with its principal financier prevent such a dividend being paid,
the Company is not required to pay that dividend.
The issues at trial
At trial, ICM contended (and San Miguel and Berri denied) that:
(a)On their proper construction, the transaction documents gave rise to an entitlement on the part of ICM to a dividend in respect of the period from the last dividend declared and paid prior to the exercise of the Put Option until completion of the acquisition of ICM’s shares by San Miguel on 28 December 2005;
(b)On the proper construction of the transaction documents, San Miguel and Berri were contractually obliged to procure the declaration and payment of the required dividend; and
(c)Berri had sufficient profits or anticipated profits on or shortly prior to 28 December 2005 from which to pay the required dividend.
The parties agreed that, if Berri were required to declare and pay a dividend for the period from 1 July 2005 to 28 December 2005 as contended by ICM, the correct calculation of the amount of the dividend payable to ICM (as the owner of 49 per cent of the shares in Berri immediately before completion), being the product of the ‘Rate’ and the ‘Purchase Price’ referred to in cl 10(a) of the Shareholders Agreement and then pro-rated for that period, was $3,472,198.04 (not including any amount referable to franking credits, if any) — subject of course to the parties’ contentions as to whether a lesser amount, or any dividend at all, was in fact payable.
At trial, San Miguel and Berri contended (and ICM denied) that:
(a)On their proper construction, the transaction documents only gave rise to an entitlement to be paid all dividends (if any) declared pursuant to cl 10 of the Shareholders Agreement during the period from the last dividend declared and paid prior to the exercise of the Put Option until completion of that acquisition;
(b)The declaration and payment of the alleged dividend entitlement pursuant to cl 7.7 of the Option Deed was not a ‘transaction contemplated by’ the Shareholders Agreement within the meaning of cl 21.9 of the Shareholders Agreement;
(c)Any rights which ICM had in relation to the alleged dividend entitlement were extinguished on 28 December 2005, pursuant to the 28 December Deed; and
(d)Berri did not have sufficient profits or anticipated profits to pay the claimed dividend or any dividend.
The judge’s findings
The judge found that:
(a)The transaction documents created a dividend entitlement for ICM in respect of the period from the last declared and paid dividend until completion of the acquisition, subject to the Board of Berri being in a position legitimately to declare and pay such a dividend;[3]
[3]First Reasons [119], [137], [155], [245].
(b)ICM and San Miguel were contractually bound to procure Berri to pay the dividend to ICM;[4]
[4]First Reasons [137].
(c)The payment of a dividend under cl 7.7 of the Option Deed was a transaction contemplated by cl 21.9 of the Shareholders Agreement;[5]
[5]First Reasons [173].
(d)San Miguel and Berri were contractually bound to do everything reasonably necessary to declare and pay the required dividend to ICM;[6]
(e)San Miguel and Berri would be in breach of cl 21.9 of the Shareholders Agreement if they failed to take the required positive steps to ensure that the potential benefits conferred on ICM by cl 7.7 of the Option Deed flowed to ICM;[7]
(f)The 28 December Deed did not vary or replace any substantive duty or obligation which arose under the transaction documents; and did not constitute an abandonment of rights secured under the transaction documents through an agreement by way of settlement;[8]
(g)San Miguel and Berri breached cl 21.9 of the Shareholders Agreement by failing to convene a board meeting to consider the declaration and payment of the dividend;[9]
(h)Given that the breach of the agreement arose from the failure to call a directors’ meeting, any loss and damage caused was to be judged by assessing what in all likelihood would have been determined had such a meeting been convened on the issue;[10]
(i)Berri’s profit reserves were available to fund an interim dividend in December 2005;[11]
(j)There must be reasonable grounds, whether derived from authorative preliminary accounts or from other reasonably reliable sources, that enable the directors to form a genuine opinion that the profits out of which the interim dividend are to be paid will actually exist when the final accounts for the period are produced and put before the Board;[12] and
(k)ICM had failed to prove that it had suffered loss and damage caused by a breach by San Miguel and Berri because:
[A]s at late 2005, given the range of complex adjustments foreshadowed by Berri senior management to be considered in the preparation of the end of year accounts, it would not have been possible for the directors of Berri to have arrived at a genuine opinion that the final audited accounts of the company, when they were eventually produced, would disclose sufficient distributable profits earned between 1 July and … 28 December 2005, from which any second interim dividend for the year could be paid. Further, the directors of Berri would not have formed such genuine opinion, had they convened to consider the matter.[13]
[6]First Reasons [174].
[7]First Reasons [177].
[8]First Reasons [204]–[206].
[9]First Reasons [229].
[10]First Reasons [239].
[11]First Reasons [256].
[12]First Reasons [290].
[13]First Reasons [628].
Issues to be determined
In its notice of appeal, ICM makes complaint about the judge’s treatment of damages issues. Broadly speaking, it says that the judge erred by holding that the loss and damage it suffered by reason of San Miguel’s and Berri’s breach of contract was to be judged by assessing what would have been determined by the directors of Berri if a meeting of the directors of Berri had been convened to consider the payment of a dividend on 28 December 2005. ICM contends that San Miguel and Berri were contractually obliged to procure the declaration and payment of the required dividend if Berri had sufficient distributable profits to pay that dividend lawfully.
Further, ICM submits that the judge erred in a number of respects to the extent that his Honour found either that Berri did not have sufficient distributable profits in December 2005 to pay the required dividend, or that the directors of Berri would not have been in a position to determine whether or not Berri had sufficient distributable profits at that time.
By their separate notices of contention, San Miguel and Berri seek to support the judge’s conclusion that ICM failed to establish any loss and damage. In its notice of contention, Berri contends: first, that cl 10(a) of the Shareholders Agreement was confined to the declaration of dividends out of current trading profits and not from reserves; secondly, that there were, in any event, no reserves available to Berri from which to pay dividends in December 2005; and thirdly, that Berri did not have sufficient distributable profits from which to pay an interim dividend — and therefore the exception provided for in sub-cl 10(c)(i) of the Shareholders Agreement applied. In its notice of contention, Berri also makes complaint about the judge’s conclusion that profit reserves were available for Berri to fund an interim dividend in December 2005. Further, Berri contends that there were additional findings the judge ought to have made, but did not make, that supported the judge’s ultimate conclusion on the question of damages.
In their cross-appeals, San Miguel and Berri say in summary that the judge erred in his construction of the transaction documents in:
(a)holding that cl 7.7 of the Option Deed entitled ICM to a further dividend in addition to those declared pursuant to cl 10 of the Shareholders Agreement;
(b)treating the transaction documents as comprising one entire agreement;
(c)holding that the payment of any dividend which was payable under cl 7.7 of the Option Deed was a transaction contemplated by cl 21.9 of the Shareholders Agreement; and
(d)finding that Berri was required to declare and pay, and San Miguel was required to procure the declaration and payment of, the dividend claimed by ICM.
San Miguel and Berri also contend that the judge erred in holding that they breached their obligations under the transaction documents, and also that he erred in respect of his conclusions in relation to the 28 December Deed.
Finally, San Miguel and Berri make complaint about the judge’s conclusion that ICM’s rejection of a Calderbank offer of $250,000 from each of them ($500,000 in total) was not unreasonable. San Miguel and Berri contend that the judge thereby erred in not ordering ICM to pay their costs on an indemnity basis from the time of the Calderbank offer (29 September 2012). The judge found that it was not unreasonable for ICM to reject the Calderbank offer, in substance, because ICM succeeded on all of the issues that San Miguel and Berri said in the Calderbank offer would cause it to be unsuccessful in the litigation, and only failed to establish loss and damage on an issue not addressed in the letter containing the Calderbank offer. It should at this stage be noted that, if the appeal and cross-appeals are otherwise unsuccessful, San Miguel and Berri require the leave of the Court to appeal against the judge’s costs order.
ICM’s Appeal, Ground 1: The construction of the transaction documents
(i) The proper construction of clause 7.7 of the Option Deed
The transaction documents, like any other commercial contracts, fall to be construed according to what a reasonable person in the position of the parties would have understood their terms to mean, having regard to the surrounding circumstances known to the parties and the purpose and object of the relevant transaction. Additionally, in construing each transaction document, the Court should have regard to all of the words used in the document so as to render them all harmonious with one another, and to ensure the congruent operation of the various components of the document as a whole.[14]
[14]See Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461–2 [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179 [40]; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; Western Exports Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1, 3 [5]; Retirement Services Australia v 3143 Victoria Street Doncaster Pty Ltd [2012] VSCA 134 [5]; and Electricity Generation Corporation v Woodside Energy Ltd (2014) 88 ALJR 447, 454 [35].
In the course of his analysis, the judge made a finding that the commercial object or purpose of the dividend provisions found in the transaction documents ‘was that both the six monthly dividends and the final dividend payable by Berri to ICM were commercial compensation — in effect interest — for the deferred payment of the purchase price’.[15] Having made this finding, the judge then turned to the text of cl 7.7 of the Option Deed. San Miguel and Berri submit that, in failing to start with the text of cl 7.7 and in starting with a declaration of what his Honour found to be the commercial object of the dividend provisions, the judge erred. Additionally, they contend that the judge was wrong in any event in his finding as to the commercial object and purpose of the dividend provisions in the transaction documents.
[15]First Reasons [119].
The construction of cl 7.7 of the Option Deed is not without difficulty. In substance, the competing positions are whether the clause is merely a mechanical provision designed to ensure that any dividend already declared by Berri be paid to the party that was the holder of the relevant Berri shares at time the dividend was declared, or whether the clause gives an entitlement to an extra dividend to be paid to the holder of the relevant shares during the period those shares were held up to the completion of their transfer.
With great respect to the judge, we do not think that there was a sufficient basis for concluding that the commercial object or purpose of the dividend provisions (or more particularly cl 7.7 of the Option Deed) was to provide interest for the deferred payment of the purchase price of the shares covered by the put and call options. A sounder footing on which to approach the construction of cl 7.7 is to start and end with the language of the clause. To reason from a concluded purpose to an eventual construction, in the context of transaction documents which were not without their complexities, was unsound. Further, and in any event, we take leave to doubt the correctness of the judge’s conclusion that cl 7.7 provided interest for a deferred payment of the purchase price. First, such provision as was made for any deferred consideration was to be found in cl 5 of the Option Deed. Secondly, cl 7.7 does not provide for any payment by the transferee of relevant shares, but rather for procuring payment by a third party to the Option Deed (Berri).
Clause 7.7 provides that the member of the Shears Group holding the relevant shares ‘will be entitled to all dividends in the period …, the amount of such dividend to be determined in accordance with cl 10 of the Shareholders Agreement’. Berri submitted that it was wrong to read the words ‘such dividend to be determined’ as if they contained the word ‘is’ after the word ‘dividend’. So much may be accepted. It is plain, however, that the words to which we have just referred speak as to a future event. That is, whatever the dividend entitlement may be, there is an entitlement to a dividend, the amount of which, not having been determined, will be determined at some point in the future. While the drafting of cl 7.7 might have been more felicitous if the word ‘is’ had been inserted after the words ‘such dividend’, we do not think that the omission of ‘is’ assists in the construction of cl 7.7.
San Miguel and Berri submitted that the construction for which they contend is supported by the use of the words ‘all dividends’. The argument runs that if cl 7.7 were meant to provide for an additional dividend entitlement above and beyond those provided for in cl 10 of the Shareholders Agreement then, instead of the words ‘all dividends’ being used in cl 7.7 of the Option Deed, the Option Deed would have provided for an entitlement to or of ‘a dividend’. We agree that if cl 7.7 had used the words ‘a dividend’ it would have been easier to accept the construction contended for by ICM. But we think the answer to this submission made by San Miguel and Berri is that the use of the words ‘all dividends’ could encompass the payment of an additional dividend entitlement together with any dividend already declared (but not yet paid) under cl 10 of the Shareholders Agreement.
On its face, cl 7.7 provides that the dividend entitlement referred to in the clause will be determined in accordance with cl 10 of the Shareholders Agreement. The words ‘to be determined in accordance with cl 10 of the Shareholders Agreement’ would have no work to do if the construction for which San Miguel and Berri contend were accepted. San Miguel and Berri answer this argument by submitting that these words are no more than a ‘clumsy reference back to cl 10’. We do not accept that submission. We think it clear enough that the words ‘to be determined in accordance with cl 10 of the Shareholders Agreement’ posit a situation where a dividend entitlement arises over and above those dividends which may have already been declared (but not paid) under cl 10 of the Shareholders Agreement.
The second sentence of cl 7.7(a) requires the parties to ‘procure that [Berri] pays this dividend entitlement to the holder of the Shares immediately prior to their transfer to [San Miguel] as a dividend determined in accordance with cl 10 of the Shareholders Agreement’. The parties agree that the words ‘the holder of the Shares immediately prior to their transfer to [San Miguel]’ provide for the timing of the payment rather than the identification of the entity to whom the dividend entitlement must be paid. We think that in this respect the parties are correct and, as that is the way the parties chose to conduct this proceeding, we are content to accept that construction.
San Miguel and Berri submit that the requirement that the parties must procure that Berri ‘pays this dividend entitlement’ supports their construction. They contend that if cl 7.7 had meant to provide an entitlement to an additional dividend the clause would have been expressed in a way that required the parties to procure that Berri declare and pay the dividend entitlement. San Miguel and Berri say that the use of only the words ‘pays this dividend entitlement’ rather than ‘declares and pays this dividend entitlement’ supports their construction that cl 7.7 of the Option Deed is directed to dividends that have already been declared pursuant to cl 10 of the Shareholders Agreement but not yet paid. In our view, there is little in this point. Plainly, the requirement to procure the payment of a dividend can encompass a requirement to procure any necessary anterior step such as declaring the relevant dividend.
In his analysis of the construction issues thrown up by the transaction documents, the judge referred to authority that permits a court, in an appropriate case, to modify or insert words into a contract in order to avoid absurdity or inconsistency or so as to give effect to the intention of the parties. Thus the judge said that to the extent that particular words in the transaction documents appeared to be at odds with the intent of the documents as he found them to be, ‘words may be supplied, omitted or corrected in the relevant instrument’.[16]
[16]First Reasons [150].
In their submissions before this Court, San Miguel and Berri were critical of the judge’s approach. In our view, their criticisms have force. Reading all of the transaction documents in their context, we see no basis for any modification, correction, omission or insertion of words into the relevant clauses of the transaction documents.
Notwithstanding their criticisms, however, San Miguel and Berri both submitted to this Court that the construction for which they contend is supported by reference to possible fact scenarios that were said to give rise to absurdity if ICM’s construction were preferred. Specifically, they noted the requirement in cl 7.7 that the so-called dividend entitlement is expressed to be payable immediately prior to the transfer of the relevant shares. San Miguel and Berri contended that this would impose a very difficult burden on the directors of Berri (if not an impossibility) because the directors of Berri would need time to conduct a proper analysis to ascertain whether a dividend could lawfully be paid out of the profits of Berri, and any such analysis or inquiry could not be done within the very short timeframe contemplated by cl 7.7 of the Option Deed.
We reject this submission. First, it is to be remembered that cl 7.7 imposes a contractual obligation on the parties to the Option Deed (not Berri) to procure the relevant dividend entitlement. That a party might take on a contractual obligation to procure the performance of an act by a third party (in this case Berri), which act such a third party might find onerous or difficult to perform, is no basis for adopting a construction of the relevant contractual provision contrary to its text.[17] Secondly, we think the arguments of San Miguel and Berri on this aspect of the construction of cl 7.7 are thin having regard to the matters to which we have already referred.
[17]Foster v Wheeler (1888) 38 Ch D 130,134 (Bowen LJ); Kim Lewison and David Hughes, The Interpretation of Contracts in Australia (Thomson Reuters (Professional) Australia, 2012) [7.18].
The same may be said of San Miguel’s and Berri’s submissions concerning s 254W of the Corporations Act 2001 (Cth) (‘the Corporations Act’). Section 254W(1) relevantly provides:
(1)Each share in a class of shares in a public company has the same dividend rights unless:
(a)the company has a constitution and it provides for the shares to have different dividend rights; or
(b)different dividend rights are provided for by special resolution of the company.
We do not see s 254W as any impediment to parties entering into contractual arrangements which oblige them to procure a company, in which they both hold shares, to procure the payment of a dividend to one of them upon the transfer of a particular parcel of those shares. The contractual obligation to procure the payment of a dividend in such circumstances may or may not require the party upon whom the obligation is imposed to procure the payment of a dividend in respect of all of the shares of the same class as those being transferred.
San Miguel and Berri submit that ICM’s construction of the cl 7.7 of the Option Deed involves a selective application of the elements of cl 10 of the Shareholders Agreement. That is, ICM’s construction involves an application of cl 10 of the Shareholders Agreement but ignores the timing elements of it. So much may be accepted. By its very terms, cl 7.7 is clear that it does not require the application of every element of cl 10 of the Shareholders Agreement. Clause 7.7 provides that it is the amount of the dividend provided for in that clause that is to be determined in accordance with cl 10 of the Shareholders Agreement. The parties must then procure the payment of the dividend ‘as a dividend determined in accordance with cl 10’. Nothing in cl 7.7 of the Option Deed requires compliance with the time elements in cl 10 of the Shareholders Agreement. In our view, there is no difficulty in the so-called ‘selective’ application of some of the elements of cl 10 of the Shareholders Agreement in accordance with the text of cl 7.7 of the Option Deed.
San Miguel and Berri contend that another ground for preferring their construction is the ability of the relevant member of the Shears Group (in this case ICM) to exercise the put option on two different occasions. The ability of the transferor to exercise the put option on two different occasions is specifically recognised in the first line of cl 7.7(a). Clause 3(j) of the Option Deed provides:
Notwithstanding any provision of this Deed to the contrary, the Shears Group may exercise the Put Option on two occasions, in which case the preceding provisions of clause 3 will be amended as follows:
(i)the first exercise will be for one half of the total shares held by the Shears Group (rounded up in the case of a fraction), which will constitute the ‘Entire Parcel’ in respect of that exercise for the purposes of clause 3(a); and
(ii)the second and final exercise will be for all remaining Shares held by the Shears Group (rounded up in the case of a fraction), which will constitute the ‘Entire Parcel’ in respect of that exercise for the purposes of clause 3(a).[18]
[18]We interpolate here that having rounded up in the case of a fraction when determining the number of shares on the first exercising of the put option, it is difficult to see how there can be any remaining rounding to be done in respect of the remaining shares for the second occasion upon which the put option might be exercised. The words ‘rounded up in the case of a fraction’ in cl 3(j)(ii) appear to be otiose.
San Miguel and Berri submit that, because the put option can be exercised on two occasions, there may be circumstances where shareholders would be entitled to two dividends in respect of a particular period, each calculated in accordance with the formula in cl 10 of the Shareholders Agreement. There are two answers to that submission. First, if that be the effect of the Option Deed, it is what the parties to the Option Deed have contracted for. Secondly, the submission is in any event to be doubted because cl 10 or the Shareholders Agreement requires a minimum dividend to be paid in accordance with the formula set out in it for each relevant period. Nothing in cl 7.7 of the Option Deed or cl 10 of the Shareholders Agreement requires the declaration and payment of dividends for particular periods in amounts greater than the minimum provided for in cl 10 of the Shareholders Agreement.
Although, as we have observed, the construction of cl 7.7 of the Option Deed is not free of difficulty, we think the construction posited by ICM is correct. It gives meaning to all of the words contained in it. It does not ‘flout business common sense’,[19] and it accords with ‘commercial reality’.[20] As was said by Gleeson CJ, Gummow and Hayne JJA in Maggbury Pty Ltd v Hafele Australia Pty Ltd:[21]
Of course, what in respect of a particular contract comprises ‘business commonsense’, as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible.[22]
[19]Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201.
[20]Di Dio Nominees Pty Ltd v Brian Mark Real Estate Pty Ltd (1992) 2 VR 732, 740.
[21](2001) 210 CLR 181.
[22]Ibid 198 [43] (citations omitted).
Finally, we note that, if the parties had intended cl 7.7 of the Option Deed to provide only a mechanism for the payment of dividends that had previously been declared, one might have expected cl 7.7 to provide, as some agreements in other cases do, that the relevant party was ‘entitled to all dividends declared’.[23]
(ii) The proper construction of clause 21.9 of the Shareholders Agreement
[23]See for example Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267, 270.
Although cl 7.7 of the Option Deed imposes an obligation on the parties (ICM and San Miguel) to procure the dividend to which it refers, it imposes no obligation on Berri — Berri not being a party to it. The judge concluded, however, that the transaction documents imposed a contractual obligation on Berri in respect of the cl 7.7 dividend. His Honour reached that conclusion by an application of cl 21.9 of the Shareholders Agreement. In support of the judge’s construction of cl 21.9, ICM made reference to cl 21.8 of the Shareholders Agreement.
Clauses 21.8 and 21.9 of the Shareholders Agreement provided:
21.8 Entire agreement and inconsistency
(a)This agreement, together with the other Transaction Documents,[24] constitutes the entire agreement between the parties in connection with its subject matter and supersedes all previous agreements or understandings between the parties in connection with its subject matter.
(b)To the extent of any inconsistency between any of the Transaction Documents, they will be resolved in the following priority (with a document or clause listed before another taking precedence over the other):
(i) clause 21.8;
(ii) the SSA;
(iii) the Option Deed;
(iv) this agreement other than clause 21.8;
(v) the Constitution.
[24]The expression ‘Transaction Documents’ is defined in clause 1.1 of the Shareholders Agreement to mean:
21.9 Further action
Each party must do, at its own expense, everything reasonably necessary (including executing documents) to give full effect to this agreement and transactions contemplated by it.
At one point in its submissions, ICM appeared to contend that cl 21.8 of the Shareholders Agreement had the effect of creating a single agreement between ICM, San Miguel and Berri comprised of the transaction documents. To the extent that this was San Miguel’s submission, it must be rejected. Clause 21.8 does not purport to merge the various transaction documents into one agreement. It merely provides that there is no agreement between the parties outside those contained in the terms of the transaction documents. Indeed, as we have seen,[25] the clause then goes on to provide for the resolution of any inconsistency between terms in the various documents in the priority set out in cl 21.8(b).
[25]See [11] above.
ICM submitted that the expression ‘this agreement’ in cl 21.9 encompassed the agreement constituted by the transaction documents. That submission must also be rejected. An examination of the terms of the Shareholders Agreement shows that the clauses in the Shareholders Agreement differentiate between ‘this agreement’ and the transaction documents (see, for example, cls 21.1 and 21.4). In our view, it is plain that the expression ‘this agreement’ in cl 21.9 means the Shareholders Agreement.
Further, we note that cl 11.9 of the Option Deed provides (in identical terms to cl 21.9 of the Shareholders Agreement) that each party was required to do everything reasonably necessary ‘to give full effect to this Deed and any transactions contemplated by it’.[26] If ICM’s construction of cl 21.9 were accepted, it is difficult to see what, if any, work would be left for cl 11.9 of the Option Deed. In our opinion, the better view is that each of these clauses (together with the relevantly identical cl 14.11 of the Share Sale Agreement) was designed to operate so as to require the parties to the agreements constituted by each separate transaction document to do everything reasonably necessary to give full effect to transactions contemplated by that agreement (that is, the agreement constituted by the relevant transaction document).
[26]The only difference in text is that clause 11.9 of the Option Deed referred to ‘this Deed’, whereas clause 21.9 of the Shareholders Agreement referred to ‘this Agreement’.
Next, ICM submitted that the dividend entitlement provided for in cl 7.7 of the Option Deed was a transaction contemplated by the Shareholders Agreement. While the payment of dividends pursuant to cl 10 of the Shareholders Agreement is clearly a transaction contemplated by the Shareholders Agreement, the short answer to the present issue is that the payment of the dividend entitlement created by cl 7.7 of the Option Deed is not a transaction contemplated by the Shareholders Agreement. There is nothing in the Shareholders Agreement that refers to or contemplates the existence of the obligation on the parties to the Option Deed to procure the payment of a dividend upon a put or call option being exercised — even if that dividend is to be calculated in accordance with cl 10 of the Shareholders Agreement.
It follows that the judge was wrong to conclude that cl 21.9 of the Shareholders Agreement imposed a contractual obligation on Berri in respect of the payment of the cl 7.7 Option Deed dividend entitlement. There being no other basis upon which it could be asserted that Berri had any contractual obligation in respect of the cl 7.7 dividend entitlement, the claim against Berri should have been dismissed.
During the course of argument, San Miguel submitted that, if Berri were not bound by cl 21.9 of the Shareholders Agreement to do everything reasonably necessary to give full effect to the procuring (by San Miguel) or the paying (by Berri) of an additional dividend under cl 7.7 of the Option Deed then, not only must Berri succeed in the appeal but San Miguel must also succeed. No reason was advanced for that submission. With respect, we are unable to see how the fact that there was no relevant contractual obligation imposed upon Berri could assist San Miguel on the question of whether any relevant contractual obligation was imposed on it (or in relation to any question of breach, causation or other relevant issue). San Miguel’s submission in this regard must be rejected.
San Miguel Cross-Appeal, Ground 3; Berri Cross-Appeal, Grounds 9 and 10: The 28 December 2005 Deed
On 19 December 2005, Francis Jardeleza of San Miguel emailed to Trevor Mackey of ICM as follows:
We confirm that the settlement of the purchase of the final 49% interest in Berri will be on December 30, 2005. We hope you will understand that we need to give 2 days’ notice to the lending banks before we can draw, and since December 26 and 27 are holidays in Australia, settlement cannot be earlier than December 30.
We also confirm that:
1.settlement will occur on 30 December 2005 regardless of whether or not FIRB approval has been advised to SMC;
2.at this time, the purchase price for the Berri shares and the Botanical Loan will be ‘set off’ by way of the direction notices previously forwarded to SMC – so that only one net amount need be paid; and
3.in addition, Berri will declare and pay the required dividend to ICM Investments (as the sole shareholder in respect of the 49% parcel of shares) calculated up to 16 December 2005, and SMC will pay interest from December 16-30, 2005 on the gross purchase price for the shares at the same rate that applies to calculation of the Berri dividend.
That was followed by an exchange of emails as to the precise date of settlement — at first it was suggested that it should take place on 16 December 2005, and then it was arranged that it would be on 28 December 2005 — but otherwise it appeared that settlement, including payment of the cl 7.7 dividend, would proceed.
Then, on 22 December 2005, Mr Read of NFL sent the following email to Mr Mackey stating that there would be no dividend:
I have attached a revised settlement calculation that takes into account the following matters, which are an update to the advice below:
·I have advised SMC that Berri Limited is forecast not to have any distributable earnings as at this balance date, and therefore the minimum dividend payment contemplated in the shareholder agreement is not able to be declared under Corporations Law. As the deficit position is expected to be reasonably large, even a small dividend could not be considered, in addition to consideration of the substantial exposure relating to the ACI matter.
·The applicable bbsy interest rate has been increased to 5.7241%, to bring the rate to 28\12 — using the current rate as an indication of the remaining period….
The next day, Mr Mackey responded by email to Mr Jardeleza as follows:
Our lawyers, Minter Ellison, have been provided with a completion checklist by Freehills. It refers to a ‘Berri Implementation Deed’ which we have not seen or heard of before. This is not the position that we agreed by exchange of emails recently.
Our position is that we will not be signing any new documentation, not the least because it has been raised at the last minute and even now we have not been provided with a draft of it.
…
The other issue of concern is recent advice we have received by email from Michael Read to the effect that Berri does not have available profits to pay the dividend required to be paid immediately before Completion. No detail has been provided in respect of this advice so we are unable to determine whether or not it is correct. As you are aware we have not received any Berri reports since mid-year at which time the accounts forecast indicated a comfortable ability to pay the dividend required.
We therefore propose that completion of the transfer of Berri shares occurs on 28 December 2005 and that the Botanical Loan set off arrangement take place, such that we will be paid the net amount of these two amounts plus interest.
We reserve our rights under the Shareholders Agreement and the Put and Call Option Deed in respect of the dividend. I suggest that this matter can best be dealt with by NFD [NFL] providing information to support its contention that it does not have available profits. If we accept this, that will be the end of the matter. If not, we will consider what steps are required to be taken to enforce our rights.
For completeness, we will be ready to complete the transfer of Berri shares on Wednesday, 28 December 2005 on the basis set out above.
On 28 December 2005, the parties executed a ‘Settlement Deed’ (the 28 December Deed) providing, inter alia, as follows:
4.The signatories acknowledge, for the avoidance of doubt, that subject to paragraphs 2 and 3 above, the provisions of the Deed [the Put and Call Option Deed] (including, without limitation, clauses 13 and 15 of the Deed) remain in force in accordance with their terms, despite this deed.
5.The Company [Berri], SMC, ICM, Agrifood Investments Pty Ltd, Agribusiness Investment Management Pty Ltd and Douglas Stephen Shears agree that if Completion occurs on 28 December 2005 the Shareholders Agreement is terminated with effect from such completion …
6.Paragraph 5 above in no way limits the obligations (if any) under clause 7.7 of the Deed and clause 10 of the Shareholders Agreement paying a dividend to ICM for the period from 1 July 2005 to the Completion Date, which dividend (if payable in accordance with the terms of those documents) will be calculated at the Rate multiplied by the Purchase Price (as each term is defined in clause 10(a) of the Shareholders Agreement) and if payable, will be payable as soon as practicable after the Completion Date. The signatories who are parties to the Deed acknowledge that their respective rights in relation to such dividend (or the right to seek damages or compensation for the failure to pay such dividend prior to Completion) are expressly reserved, pending the outcome of further discussion between them.
At 3.30 pm the same day, there was a meeting of the directors of Berri chaired by Mr Shears. It was noted that Completion would occur that day and would involve Berri entering into a set-off deed. It was resolved that the deed be executed; the share transfers to give effect to Completion be registered; and Mr Shears would resign as a director with effect from the time nominated in the registration to be signed by him as part of Completion.
The judge held that the 28 December Deed preserved the rights of ICM to claim payment of the cl 7.7 dividend:
Prior to completion on the agreed date, the parties, including ICM, San Miguel and Berri, entered into a deed (the ‘28 December Deed’). The 28 December Deed in effect permitted the completion of the share sale to proceed on 28 December 2005 but reserved the right of ICM to claim payment of the Second Interim Dividend pursuant to the Transaction Documents ‘pending the outcome of further discussions between them’. The terms of the 28 December Deed reflected earlier email exchanges between the parties.
Completion of the acquisition by San Miguel of ICM’s remaining 49% interest in Berri took place on 28 December 2005. Thereafter, ICM did not hold any shares in Berri.
No Second Interim Dividend, or any part of it, was declared or paid by Berri.
Berri’s financial statements for the 12 month period ending 31 December 2005 were adopted by the Berri Board (the ‘Berri Board’) on 26 April 2006.
The Berri Board did not convene in late 2005 to consider the declaration or payment of any further interim dividend for the six months ended 31 December 2005. However, on 21 April 2006 the Berri Board met and resolved not to declare any further dividend for that period.[27]
[27]First Reasons [29]–[33].
San Miguel contends that the judge should have held that the 28 December Deed constituted an abandonment of rights secured under the transaction documents and thus that any rights which ICM may have had against San Miguel and Berri in relation to the cl 7.7 dividend were extinguished.
Similarly, Berri contends that the judge erred in holding that the 28 December Deed preserved any rights against Berri in relation to the dividend under cl 21.9 of the Shareholders Agreement.
It is sufficient to dispose of this ground of appeal to say that, for the reasons already given, we do not consider that ICM had any rights against Berri under cl 21.9 of the Shareholders Agreement in relation to the cl 7.7 dividend. Otherwise, however, in view of cl 6 of the Deed of 28 December 2005, and the context in which it was executed, we think that any suggestion that ICM thereby gave up its rights as against San Miguel in relation to the cl 7.7 dividend is untenable.
San Miguel Cross-Appeal Ground 2; Berri Cross-Appeal, Grounds 6 to 8; ICM’s Appeal, Ground 1: Breach
The judge held that, because a meeting of the Berri Board was not convened to consider payment of the cl 7.7 dividend, and San Miguel and Berri did not take steps to convene such a meeting, they each breached the obligation imposed on them by cl 21.9 of the Shareholders Agreement to do what was reasonably necessary to procure payment of the cl 7.7 dividend.[28]
[28]First Reasons [227]–[228].
San Miguel contends that, because a meeting of the Berri Board was held on 28 December 2005, at which the 28 December Deed was approved, San Miguel did all that it reasonably could to procure payment of the cl 7.7 dividend and that the judge erred in holding to the contrary.
Berri contends that, because the meeting of 28 December 2005 was convened, and the judge found that San Miguel had not taken steps to procure payment of the cl 7.7 dividend, the judge erred in holding that Berri breached its obligations under cl 21.9 of the Shareholder Agreement. As counsel for Berri submitted, if the directors of Berri would not resolve to pay the dividend, what could Berri do about it?
We accept Berri’s submissions in part. As previously stated,[29] we do not accept that Berri was under an obligation under cl 21.9 of the Shareholders Agreement to procure payment of the cl 7.7 dividend. Accordingly, we think that the judge erred in holding that Berri breached cl 21.9 by failing to take steps to procure payment of the dividend. Equally, for reasons already stated, we do not accept that cl 21.9 of the Shareholders Agreement imposed any obligation on San Miguel in respect of the cl 7.7 dividend. Accordingly, in our view, the judge was wrong to hold that San Miguel breached cl 21.9 of the Shareholders’ Agreement by reason of its failure to procure a meeting of directors of Berri to consider payment of the dividend at or before Completion.
[29]See [50] above.
At the same time, however, ICM’s pleaded case[30] and its case at trial[31] was not just that San Miguel breached cl 21.9 of the Shareholders Agreement by failing to procure payment of the dividend but also, and more importantly, that it breached cl 7.7 of the Option Deed by failing to procure its payment. The judge rejected the latter contention because he was not satisfied San Miguel’s failure to procure a meeting of the Berri board to consider payment of the dividend was motivated by self-interest. In his Honour’s view, Mr Read honestly believed that Berri would not have sufficient profits out of which to pay the dividend.[32] In our view, the judge erred in approaching the question in that way.
[30]Further Amended Statement of Claim, paragraphs [22(b)] and [28].
[31]ICM’s final submissions at trial, paragraph [275].
[32]Reasons [237]–[238].
As has been explained, cl 7.7 of the Option Deed subjected San Miguel to an obligation to procure payment of the cl 7.7 dividend, except to the extent that there were insufficient distributable profits out of which to pay it. Consequently, whether or not San Miguel was motivated by self-interest (which we assume it was) and whatever Mr Read’s true opinion might have been as to the state of available profits (which we take leave to doubt was quite as the judge found it to be), was essentially irrelevant. San Miguel was bound by cl 7.7 of the Option Deed to procure payment of the dividend for which that clause provided except to the extent that there were insufficient distributable profits from which to pay it.
As will be explained in what follows, in our view there were sufficient profits from which to pay the dividend. Subject to only one qualification which remains to be mentioned, it follows that San Miguel was in breach of cl 7.7.
As part of their submissions on the issue of breach, the respondents submitted that because the Judge only made a limited finding as to breach (failing to call a directors’ meeting[33]) the appellant must now fail because, in fact, a directors’ meeting was called and held on 28 December 2005. These submissions must be rejected. Plainly, the Judge’s finding as to breach were wider than that contended for by the respondents. A fair reading of the judge’s reasons discloses that the judge did not confine consideration to a failure to call a directors’ meeting;[34] and in any event, as this is a rehearing,[35] this Court is not limited to dealing with the question of breach by the findings of breach which were made by the judge and which were sufficient for the purposes of disposing of the proceeding at first instance.
[33]First reasons [239].
[34]First reasons [38], [177], [224] and [639].
[35]Warren v Coombes (1979) 142 CLR 531; Fox v Percy (2003) 124 CLR 118.
ICM’s Appeal, Grounds 2 to 6: Assessment of damages
When the judge turned to the assessment of damages, he found that none had been proved because he was not satisfied it would have been possible for the directors of Berri acting honestly and reasonably as at the end of December 2005 to have arrived at a genuine opinion that the final audited accounts of the company when eventually produced would disclose sufficient distributable profits earned in the second half of 2005 to fund the dividend for which cl 7.7 of the Option Deed provided. His Honour reasoned as follows:[36]
[36]First Reasons [283]–[285] (emphasis added).
The declaration of an interim dividend required that the directors form genuine opinions that there are profits from which it can be paid. In other words, the directors need to be satisfied that there are sufficient available profits. Those profits may be revenue or capital profits and may include past capital profits that have been placed in a reserve. The directors must form a genuine opinion that there are sufficient distributable profits out of which they can pay the interim dividend, and that those profits will be disclosed in the financial statements for the company when they are prepared.[37]
[37]Marra Developments Ltd v BW Rofe Pty Ltd [1977] 2 NSWLR 616, 622 E–F (Hutley JA) (‘Marra Developments’).
In order to declare any interim dividend, the board of a company was required to form a genuine opinion, at the time of declaring the interim dividend, that, when the final accounts are produced, profits would actually exist from which the interim dividend could be paid, although there is scope to withdraw the declaration before the interim dividend is paid.[38]
[38]Ibid.
To these observations I add that the formation by the directors of a ‘genuine opinion of the kind in question prior to declaring an interim dividend, has a subjective and an objective element. The directors’ opinion must be honestly held and based on reasonable grounds.
…
Applying the test in Marra Developments[39] to the present facts, the question becomes: if they had been called upon to consider the matter on or prior to 16 or 28 December 2005, would the directors of Berri have formed a genuine opinion that when the final accounts for the year were produced, they would disclose actual profits existing in the company at the time when it was proposed that the interim dividend would be declared and paid, out of which the Second Interim Dividend could be paid?[40]
[39]Marra Developments [1977] 2 NSWLR 616.
[40]First Reasons [291].
… To my mind, as at late 2005, given the range of complex adjustments foreshadowed by Berri senior management to be considered in the preparation of the end of year accounts, it would not have been possible for the directors of Berri to have arrived at a genuine opinion that the final audited accounts of the company, when they were eventually produced, would disclose sufficient distributable profits earned between 1 July and 16 or 28 December 2005, from which any second interim dividend for the year could be paid. Further, the directors of Berri would not have formed such genuine opinion, had they convened to consider the matter.
…
In making the necessary decision the directors could have, and probably ought to have, sought independent expert opinion to assist them. Had they done so, they could have been provided with advice to the effect of that provided by Mr Westworth, that the availability of company reserves would also have to be considered in the process of offsetting the accumulated losses carried forward after the period of heavy losses ending in 2000. Had this been done, there would have been no distributable profits for 2005, and the Berri Board would have been so advised. A cautious approach, as illustrated by the opinions of Mr Westworth, may well have been recommended in all the circumstances which then existed for Berri in late 2005, in spite of the prior custom of Berri to declare and pay dividends without first recouping the losses of previous years.
It is also conceivable that the directors of Berri, in late 2005, could have obtained a different accounting opinion, for example to the effect of Mr Morris’ opinion. Had they done so, the Berri Board would have been in a state of uncertainty as to which path to follow.
In these circumstances, if a meeting of the Berri Board had been convened on or shortly prior to either 16 or 28 December 2005 to consider the declaration and payment of any second interim dividend for the year, in all probability each director would have either:
(a) refused to declare such a dividend, on the basis that each could not form a genuine opinion that the final accounts, when prepared, would disclose sufficient distributable profits from which such a dividend could be paid in late 2005;
(b) refused to declare such a dividend, on the basis that more time was needed to seek information on which to form the necessary opinion and make the necessary determination; or
(c) refused to declare any second interim dividend, and instead awaited the finalisation of Berri’s accounts.[41]
[41]First Reasons [628]–[631].
Test for the application of Marra Developments
ICM attacks this part of the judge’s reasoning at a number of levels. First, although it accepts, as it must, that the principle in Marra Developments[42] would have applied to any decision of directors to pay a dividend in December 2005, it contends that the proper test for the application of the principle in this context was not the opinion which the directors of Berri might have formed if they had considered the matter in December 2005 but whether Berri and San Miguel established on the balance of probabilities that it would not have been open to the directors of Berri acting honestly and reasonably to come to the view in December 2005 that there were sufficient profits out of which to pay the dividend.
[42][1977] 2 NSWLR 616.
We agree. The Shareholders Agreement and the Option Deed affected the dividend policy of Berri between the time of the making of the Shareholders Agreement and the completion of the acquisition contemplated by cl 7.7 of the Deed.
During the currency of the Shareholders Agreement, that policy was directly regulated: all shareholders were entitled to be paid a dividend at the stipulated rate by the stipulated dates. Under the Option Deed, the policy was indirectly regulated: the parties to the Deed (which included San Miguel) were to procure that Berri declare and pay a dividend to the relevant member of the Shears Group at the stipulated rate ‘in the period from the last declared and paid dividend until completion of that acquisition’.
The Shareholders Agreement had the effect of supplanting the provisions in the constitution of Berri which would normally have regulated the payment of dividends. Under article 25 of the constitution, the power of Berri to declare a dividend was delegated to the board; the power was not subject to authorisation or ratification by the general meeting. But the distribution by a constitution of the powers of a company between the board and the general meeting is always subject to the doctrine of unanimous assent.[43] The Shareholders Agreement is the evidence of that form of assent.
[43]In re Duomatic [1969] 2 Ch 365, 372; see, generally, Robert P Austin and Ian M Ramsay, Ford’s Principles of Corporations Law, (LexisNexis Butterworths, 13th ed 2007) [7.590]–[7.595].
Under the Option Deed, the obligation cast upon San Miguel was unconditional; it was not subject to best or reasonable endeavours. Subject to the provisions of cl 10 of the Agreement and to considerations of lawfulness, if Berri failed to pay the dividend, San Miguel was in breach of its covenant to procure Berri to declare and pay the dividend.
The obligation of Berri to declare the dividend could be vetoed, for example, by ‘the Board by Unanimous Approval’; it was subject to there being ‘sufficient distributable profits from which to pay a dividend required to be paid under cl 10(a)’; and it was necessarily subject to its being lawful.
In contrast, however, the obligation of San Miguel to procure the payment of the dividend provided for in cl 7.7 of the Deed was unconditional and, therefore was subject only to the requirement that payment of the dividend be not unlawful. The payment would have been unlawful if, for example, there had been no ‘profits of the company’ within s 254T of the Corporations Act.[44] It would also have been unlawful if, for example, the declaration or payment involved the directors contravening their duty to prevent insolvent trading.[45]
[44]It would also have been in direct contravention of s 10(c).
[45]Corporations Act s 588G.
In the circumstances, San Miguel had the onus of showing that the declaration and payment of a dividend by Berri was unlawful. In Holidaywise Koala Pty Ltd v Queenslodge Pty Ltd,[46] the legality of a lease granted for use of some premises as a motel where there was no development permit was held not to be on its face illegal. In discussing the onus of proof of illegality, Gillard J said:
As Lord Abinger, CB pointed out in Lewis v Davison ... ‘when the act which is the subject of the contract may, according to the circumstances, be lawful or unlawful, it will not be presumed that the contract was to do the unlawful act, the contrary is the proper inference’.[47]
[46][1977] VR 164. See also Venus Adult Shops Pty Ltd v Fraserside Holdings Ltd [2006] FCAFC 188(French and Kiefel JJ).
[47]Ibid 176.
Consistently with the principles applied by Gillard J, if San Miguel wished to establish that the payment of a dividend was unlawful, it was incumbent on it to show that there was no way in which the directors of Berri could lawfully have paid a cl 7.7 dividend as at end of December 2005; and, therefore, incumbent on San Miguel to show, not just that it would have been open to the directors to take the view that there were not sufficient profits out of which to pay the dividend (as the judge said) but also, critically, that it would have been impossible for the directors acting honestly and reasonably as at the end of December 2005 to have concluded that there were sufficient profits out of which to pay the dividend.
ICM’s Appeal, Grounds 7 to 9: Reserves
ICM’s case at trial was in part that, as at 28 December 2005, Berri had the following profit reserves available for distribution as dividends:
Reserves
General reserve $5.313 million
Asset realisation reserve $1.831 million
Other Accumulated Profits from past years
Capital profits from land and buildings that
formed part of the Asset revaluation reserve $4.530 million
Further capital profits attributable to
Intangibles that formed part of the Asset
Revaluation reserve $39.959 million
The judge held that the general reserve and the capital profit attributable to land and buildings were available for distribution as dividends but that the capital profits attributable to intangibles were not. ICM contends that the judge should have held that all of the identified reserves, including the profits attributable to intangibles, were available for distribution as dividends. San Miguel and Berri contend that the judge should have held that none of the reserves was available for distribution as dividends.
For the reasons which follow, we agree with the judge that the general reserve was available for distribution as dividends but, in our view, the capital profits attributable to land and buildings and intangibles were not.
(i) General reserve
Mr Morris, the expert accounting witness called by ICM gave evidence that, in his opinion, both the general reserve and the asset revaluation reserves were available to be distributed as dividends in December 2005:
Reserves available for distribution
I have been asked what reserves were available to be distributed as dividends on 16, 28 and 31 December 2005, assuming the directors and company in general meeting had passed the necessary resolutions to permit their distribution.
2.19My answer has required me to make the assumptions of law set out at paragraph 4.3 below.
2.20 I have concluded that:
2.20.1As Berri had a surplus of capital at the dates at which it recognised the capital profits that were set aside in the asset realisation reserve, that reserve was available to be distributed as dividends;
2.20.2As Berri’s general reserve arose out of operating profits that had been derived prior to 30 June 1985 and set aside to the general reserve and amortisation reserve at the time they were derived, that reserve was available for distribution.[48]
[48]Report of Brian Morris dated 25 November 2011, [2.16]-[2.17] (AB Vol 1, Tab E01,page 0084).
…
4.3 I have assumed as a matter of law that:
4.3.1The Corporations Act 2001(Cth) prescribed, at the relevant time, that a dividend could not be paid otherwise than out of profits.
4.3.2The Constitution of Berri provided that no dividend was to be paid otherwise than out of profits.
4.3.3The profits of Berri were the only profits that may be distributed. Profits of the group comprising Berri and its controlled entities were not relevant. No regard was to be given to reported consolidated profits of the group or the profits of the individual subsidiaries of Berri when assessing the profits that were available for distribution by Berri to its shareholders.
4.3.4Profits available for distribution included profits of the current accounting period and accumulated profits of prior accounting periods that had not been distribute to shareholders or otherwise appropriated for another purpose in a manner that rendered them unavailable for distribution.
4.3.5Profits available for distribution included profits appropriated or transferred to reserve accounts, which could be distributed from such accounts or transferred to the profits and loss account.
4.3.6Unrealised profits could be distributed provided that such profits were of a permanent character and arose out of a bona fide valuation of assets by a competent valuer.
4.3.7 Where a company had incurred losses, profits derived in subsequent period were available for distribution. It was not necessary to recoup past losses before making a distribution out of subsequent profits.
4.3.8A capital profit was available for distribution providing that there was a surplus on capital account at the time the capital profit was derived; in other words, at that time the aggregate of share capital and reserves had to exceed the company’s issued capital.[49]
[49]Ibid [4.3]
Mr Westworth, the expert accounting witness called by Berri, gave evidence to the contrary that neither the general reserve nor the asset revaluation reserve was available as a source out of which to pay dividends. In his opinion, good accounting practice necessitated that both reserves be set off against accumulated losses thus eliminating the reserves:
The legal requirements for the creation of specific reserves (such as the share premium account and capital redemption reserves) in Australia have disappeared with the reforms to the Corporations Act which removed the concept of the par value of share capital. Those reserves, which could not generally be distributed, formed, together with par value shares, a legal articulation of what accountants refer to as the concept of capital maintenance. Notwithstanding these changes, this concept of capital maintenance was nevertheless relevant to the understanding of the concept of profit in the 2005 accounting literature. The Framework considers two concepts of capital, a physical concept and a financial concept and states:
102. A financial concept of capital is adopted by most entities in preparing their financial report. Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity.
…
In other words, under the Framework, both unrealised and realised items can be considered as ‘profits’, and profit exists as long as there has been an increase in net assets over the period. In the absence of any legal requirements to the contrary, the accumulated profits and losses , both realised and unrealised are conceptually the same and can be view as one pool.
…
In my opinion, therefore, a reasonably competent accountant in 2005 would treat undistributed profits from prior periods as being comprised within a general pool of retained earnings/accumulated losses rather than retaining their identity as profits or losses from a specific period.
…
In my opinion, in 2005 it was consistent with good accounting practice to apply undistributed profits of past years towards payment of a dividend only to the extent that they exceed cumulative losses. Such a policy was commercially prudent.
…
… in order to ascertain the accumulated profits, which include reserves brought forward, available for distribution at 31 December 2005, I must first consider the situation at 30 June 2000, when Berri’s accumulated losses were $26.795 million, to see which reserves are still available for distribution in 2005. Reserves as at 30 June 2000 were as follows:
Type of reserve
Amount $000
Realised
Accumulated losses
(26,795)
General reserve
5,313
Asset realisation reserve
1,831
Net accumulated losses
(19,651)
Unrealised
Asset revaluation reserve
7,305
Total net accumulated losses
(12,346)
From the above table, it can be seen that the general reserve and asset realisation reserve were both absorbed by the accumulated losses for the purposes of distributability and were no longer available in 2005.[50]
[50]Report of Chris Waterworth dated 2 February 2012, (AB Vol 2, Tab F01, pages 0147–0155)
Berri and San Miguel contended below, and again before this Court, that the general reserve was not available for distribution as dividends because, if it had been applied in that fashion, it would have reduced the value of Berri shares being sold by ICM and acquired by San Miguel. Counsel for Berri and San Miguel also relied on the fact that the reserves had originally been created by Berri Fruit Juice Cooperative Limited before the cooperative’s activities were transferred to Berri as at 4 July 1985.
The judge rejected both arguments, as follows:
Berri advanced a number of arguments as to why its reserves were not available to pay the required dividend to ICM.
It contended that the declaration of a dividend from reserves would reduce the value of the Berri shares being sold by ICM and acquired by San Miguel. However, this is the case whether the dividend is paid from reserves, prior year profits or current year profits. This consideration does not work to alter or qualify the contractual obligations of the parties they assumed under the Transaction Documents.
Berri also contended that the reserves were not available because they were originally created by Berri Fruit Juice Cooperative Limited. The Cooperative’s activities were transferred to Berri as at 4 July 1985 by an order made under s 60 of the Co-operatives Act 1983 (SA). The effect of the order was that the undertaking of the Cooperative and all its property, rights and liabilities became the property, rights and liabilities of Berri. This did not change the legal character of the assets, reserves or liabilities. What was a profit reserve remained a profit reserve. On the publication of the order, the Cooperative was dissolved.
Not only did the legal character of the reserves not change following the assignment of the property of the Cooperative to Berri on 4 July 1985, Berri’s audited accounts have since been consistently prepared on the basis that the reserves previously held by the Cooperative became Berri’s reserves. Berri prepared its accounts on the basis that it simply stepped into the shoes of the Cooperative. The reserves appeared as such in every set of accounts prepared by Berri’s directors and approved by its auditors between 1986 and 2004.
The accounting expert called by ICM, Mr Morris, considered this issue. His evidence on the point was not disputed by the accounting expert called by San Miguel, Mr Westworth. Mr Morris concluded that the general reserve arose from operating profits earned by Berri Cooperative, which vested in Berri, and that thereafter Berri had maintained audited accounts recording a general reserve that contained those operating profits. He concluded that the profits were available for distribution as dividends.
Conclusion as to the Availability of Reserves to Pay a Dividend in December 2005
I find that both legally and practically, profit reserves were available for Berri to fund an interim dividend in December 2005. The directors of Berri technically could have proceeded on that basis if they had considered the matter, provided that they were able to form the opinion required under the ‘Marra Test’ as later described.[51]
[51]First Reasons [251]–[256].
With respect, we agree with that aspect of his Honour’s reasoning.
General reserve created out of operating profits
Counsel for San Miguel submitted in oral argument that it was not open to the judge to find that the general reserve had been created out of operating profits because Mr Morris had conceded in cross-examination that he merely assumed rather than established that the general reserve taken into the books of Berri in 1985 was created by the appropriation of profits. In counsel’s submission, mere assumption was not a sufficient basis for a finding that the reserve was created by the appropriation of profits.
We do not accept that submission. The judge’s finding is amply supported by the following sections of Mr Morris’ first report:
3.5The accumulated reserves of Berri Co-operative at 4 July 1985 became accumulated profits of Berri at that date and retained their original characteristics after that date as accumulated reserves of Berri. The reserves that were in existence at 4 July 1985 were:
3.5.1An asset revaluation reserve of $759,032 that arose from the revaluation of buildings and freehold land as at 30 June 1979.
3.5.2An amortisation reserve of $6,107,693 and a general reserve of $2,995,152 that had been created by the appropriation of the profits each year.
3.6. These reserves were reported as reserves of Berri in its 1986 financial report.
3.7.The amortisation reserve was transferred to the general reserve with effect from 4 July 1985, resulting in a general reserve of $9,102, 845.
3.8.The general reserve was reduced from $9.103 million at 4 July 1985, by:
3.8.1The capitalisation of profits of $2,781,516 for the issue of 1,390,758 ordinary shares of $2 each, during the 1986 financial year; and
3.8.2The appropriation of $1.008 million for the payment of a dividend for the 1998 financial year.
The passage of cross-examination on which counsel for San Miguel relied was as follows:
COUNSEL: If you look at page 256 you will see that the amortisation reserve is $6.1 million at the top there? ---Yes.
COUNSEL: So the amortisation reserve was $5.5 million prior to the adjustment or the transfer that you’ve referred to? --- Yes.
COUNSEL: You don’t know what the other $5.5 comprises because we don’t have the records of Berri going back any earlier do we? --- No.
COUNSEL: So you just assume, without knowing, that it’s profits? --- I have assume that it was created in the same way as the $1.3 million that was transferred in 1984 and 1985.
We are not persuaded that evidence undermines the judge’s conclusion that the general reserve was constituted out of profits. The fact that the reserve was created in the same way as the $1.3 million which was transferred in 1984 and 1985, and treated in the accounts as if it were constituted out of profits, strongly implied that it was created out of profits; and, in the absence of contrary evidence (which San Miguel did not adduce), that was a sufficient basis for the judge to find on the balance of probabilities that the reserve had been set aside out of accumulated profits.[52]
[52]First Reasons [257]–[261].
The need to deduct accumulated losses from the general reserve
Berri and San Miguel contended below, and again before this Court, that the general reserve was not available for the payment of dividends because it was required to be set off against accumulated losses in accordance with what Mr Westworth had opined was ‘good accounting practice’. The judge rejected that argument, too:
Berri submitted that there was a requirement that past losses be offset before a dividend could legally be declared out of current year profits or out of past year profits.
ICM contended below that there was no evidence from which to infer that Berri was liable to make payments to Brickwood after June 2005 and that, even if there were a prospective liability, it was at most a contingent liability and consequently did not need to be expensed through Berri’s profits and loss account for the year ended December 2005.
The judge rejected the argument, as follows:
I am satisfied that a director of Berri in late 2005, properly advised and knowing all of the relevant facts, if asked to consider a resolution to declare a second interim dividend for the year on either 16 or 28 December 2005, would in all likelihood have arrived at a conclusion that the Berri financial statements, when finally produced, would be likely to include a contingent liability to Brickwood as reflected in the Berri monthly management accounts prepared for September and November 2005.[97]
At the very least, had the matter been placed before the directors for decision in late 2005, they would have been uncertain as to how the Brickwood amounts would be treated in the final audited accounts. This uncertainty would have affected the directors determination of whether to declare and pay the Second Interim Dividend on or shortly before 16 or 28 December 2005.[98]
[97]First Reasons [440].
[98]First Reasons [530].
With respect, we disagree. In our view, the evidence did not establish that Berri was under a liability to make any payments to Brickwoods after June 200. If there were a liability, however, it was no more than a contingent liability and, therefore, prima facie there was no requirement to expense it through the profit and loss account. The proper method of bringing it to account would have been below the line as a note to the balance sheet.
We accept of course that, if there were a contingent liability, the directors would need to have had regard to it in determining whether there were sufficient profits out of which to pay an interim dividend as at December 2005. But, in that event, the directors if acting honestly and reasonably would have been bound to make an estimate of the contingency and to value it according to an honest and reasonable assessment of relevant vicissitudes. In the scheme of things, and in the absence of relevant evidence to the contrary (which it was incumbent on San Miguel to adduce), it is inherently unlikely that a valuation so undertaken would have resulted in an estimate of value anything like as great as the face value of the maximum possible exposure. Given the range of conceivable vicissitudes, and the time value of money, the proper value of such a contingent liability might well have been de minimis. But, even if it had some value, in the absence of relevant evidence it is impossible to say that the directors of Berri acting honestly and reasonably as at December 2005 would have been bound to regard it as material.
Accordingly, in our view, the judge should have concluded that it was not shown that the directors of Berri acting honestly and reasonably as at December 2005 would have been bound to make any allowance against profits for payments to Brickwood after June 2005 or to bring such an allowance to account in deciding whether to pay a dividend.
ICM’s Appeal, Ground 14: Riverland Plant
Berri’s 2005 year end accounts (prepared in April 2006) included $6.9 million as costs of a write-off of what had previously classified in Berri’s accounts as goodwill on the purchase of the ACI Riverland plant (as part of the settlement of a dispute with ACI). The judge found that the determination to write off that sum was made by the Berri’s auditors, KPMG, sometime in April 2006. In contrast, NFL’s auditors, Ernst & Young, using a discounted cash flow analysis, calculated that the ‘impairment’ of the goodwill on the acquisition was only $1.85 million and they directed that that figure of $1.85 million rather than $6.9 million be carried into the books of account of NFL.
As the judge observed, Ernst & Young’s approach was supported by Mr Morris who said that the directors of Berri as at December 2005 would not have been justified in allowing for a write-off in reduction of goodwill of any more than a $1.85 million at that time; and by KPMG’s accounting analysis in its 24 January 2006 report. It was further supported by the fact that only $1.85 million was expensed through the profit and loss account prepared by NFL for the period ended 31 December 2005. In contrast, there was nothing to commend KPMG’s approach and they were not called to defend it. The judge, however, held as follows:
I do not have to resolve the issue as to which accounting treatment of the goodwill was the most appropriate, as things stood in late 2005. It is sufficient for present purposes to identify the issue as a matter which is likely to have given rise to uncertainty in the minds of the directors of Berri as at 16 and 28 December 2005. It was uncertain how the goodwill component of the settlement would be treated in the final audited accounts, and how it would affect the ‘bottom line’ expressed in those accounts. Had the Berri Board or those advising it turned their minds to the issue at that time, they would have encountered this uncertainty.
I am satisfied that a director of Berri in late 2005, properly advised and knowing all of the relevant facts, was not in a position to have formed a genuine opinion on the difficult question as to the correct and appropriate accounting treatment for the settlement of the ACI disputes and the purchase of the Riverland plant, prior to the final accounts of Berri being prepared.
It follows, in my opinion, that the Berri Board would not have been in a position as at 16 or 28 December to take into account an adjustment that reduced the value of goodwill in Berri’s books by only $1.85 million (or less). This would have to have awaited the production of the audited financial reports of the company for the year in question.[99]
[99]First Reasons [514]–[516].
With respect, we disagree. As the evidence showed, Berri management were able to undertake a discounted cashflow analysis in respect of the ACI Riverland Plant in January 2006 only weeks after the date for payment of dividend and on that basis to conclude that goodwill was impaired to an extent of only $1.85 million. As at January 2006, KPMG supported that calculation. There was no suggestion in January 2006 by any of Berri management or San Miguel and NFLs’ auditors that the extent of the impairment was any more than $1.85 million. There was no evidence that any more than $1.85 million was incurred as an expense in settling the dispute with ACI. In those circumstances, if the directors of Berri had approached the question of dividend as at December 2005, they would almost certainly have concluded that goodwill was to be reduced by no more than $1.85 million if as much as that. And, even if there were a basis for a greater write-down than $1.85 million, there was no evidence that the directors were bound to adopt it.
ICM’s Appeal, Grounds 17 and 18: Information system assets
Beginning some years before 2005 until September 2008, Berri used an enterprise resource planning information system (‘ERP’). It was made by J D Edwards and known within Berri as ‘JDE’. The JDE operated satisfactorily. NFL used a different ERP system known as MFG Pro, and JDE and MFG Pro were not compatible. In turn, San Miguel used a third, different, ERP system, known as SAP. SAP was not compatible with either JDE or MFG Pro.
On 8 May 2006, after San Miguel acquired total control of Berri, it launched a programme to transfer Berri and NFL to the SAP system. The judge found that, until then, there had been no decision to do so. The programme was an extensive project involving numerous complex steps and was not expected to be finished before September 2008. Berri’s business was not scheduled to be ‘transitioned’ to SAP until October or November 2007 and it was planned that, until then, Berri should continue to use JDE. Despite those facts, Berri’s final accounts for 2005 (prepared in April 2006) incorporated an impairment charge of $7.743 million for property, plant and equipment which included ‘write-downs in IS-related assets of $5.4 million’.
Before the judge, ICM contended that the adjustment of $5.4 million for IS-related assets was inappropriate given that Berri was not planned to move to SAP until July 2007 at the earliest. Mr Morris gave expert evidence in support of ICM’s position that, according to proper accounting principles, the IS assets should have been depreciated over the period to 30 June 2007 at a rate which would reduce their carrying value to the realizable value at the date of transition, and that the directors of Berri were thus in a position as December 2005 to recognise or take into account an adjustment of no more than $284,000.
The judge did not accept the argument. He referred to evidence that ‘somewhere around about the end of the year [of 2005] there were indications that NFL, presumably supported by San Miguel was anticipating a change of its computer system’. His Honour also found that, by late December 2005 there was an intention within senior management of Berri for the IT systems of Berri and NFL to be integrated even though at that stage there had been no Berri board decision or approval to that effect.[100] The judge noted that Accounting Standard AASB 136 required companies to take into account objective evidence, which may include plans, in determining whether or not to impair an asset. His Honour also considered it to be of some significance that in April 2006 Berri’s auditors approved the inclusion of the impairment charge of $5.4 million for the IS system in the year end accounts for 2005. Based on those considerations, he concluded that:
In my opinion, if the directors of Berri had been called upon to consider the matter at either 16 or 28 December 2005 in relation to Berri’s IS system, it would have been open for them to conclude that an impairment adjustment may well be made in the final accounts, when they were prepared. At least there would have been sufficient doubt about the matter in late 2005 to preclude a confident assessment being made that the audited financial statements, when they were eventually prepared, would treat Berri’s IS system as other than an impairment issue to be taken into account.[101]
[100]First Reasons [562].
[101]First Reasons [565].
With respect, we disagree. In our view, the following considerations pointed ineluctably in favour of the conclusion that the only impairment charge which could properly have been taken into account in assessing distributable profits as at 28 December 2005 was the sum of $284,000:
·First, San Miguel’s auditors, Ernst & Young, stated in their audit report of 17 February 2006 that they had audited ‘the Consolidation Package of San Miguel Food Australia Holdings Pty Ltd’ (SMFAH) and ‘undertaken the audit of both SMFAH and National Foods Limited’ group. They noted in that report that the value of the IS assets would be affected ‘once a common platform for NFL and Berri is installed in 2006’. [102]
·Secondly, evidence given by Mr Westworth, the expert accounting witness called by San Miguel, was based on assumptions that Berri had made a decision before 31 December 2005 to discontinue use of its IS assets. As the judge found, those assumptions were unfounded.
·Thirdly, the only relevant possibility under contemplation in December 2005 was that a common IS platform would not be introduced until after Berri had become a 100 per cent subsidiary of NFL and it was not planned that should occur until 2006.
·Even then, as we have said, the proposal was that Berri and NFL would continue to use their existing assets until 2007 at the earliest.
[102]It was accepted that the reference to ‘2006’ was erroneous. It was intended to be a reference to 2007, when it was planned that the change of system would be installed.
In view of the facts, we do not consider that there was any demonstrated justification for an impairment charge or provision in 2005 of more than the $284,000 calculated by Mr Morris. Based on ordinary accounting principles that the value of an income producing asset should be depreciated to residual value over the duration of projected use,[103] and given the stance taken by Ernst & Young in relation to the San Miguel consolidated accounts, the charge of $5.4 million appears to have been grossly inflated and therefore unjustified. Further, even if it were possible to justify a charge of something more than the $284,000 calculated by Mr Morris, the evidence fell far short of establishing on the balance of probabilities that the directors of Berri acting honestly and reasonably in December 2005 would have been bound to consider that they should make any greater provision than the $284,000.
[103]ASC 360–10.
We observe once again, too, that San Miguel was bound by cl 7.7 of the Option Deed to procure the payment of the dividend for which that clause provided. Thus, it was incumbent on San Miguel to do what it reasonably could to ensure that there were sufficient profits in Berri out of which to pay the dividend. In our view, doing what could reasonably have been done to procure the payment of the dividend would have extended to assuring the Berri board as at December 2005 that there would be no need for an ACI provision of more than the $284,000 identified by Ernst & Young.
ICM’s Appeal, Grounds 19 and 20: Indosari
PT Berri Indosari (‘Indosari’) was an 80 per cent owned Indonesian subsidiary of Berri and, as a matter of long standing practice, Berri’s investment in Indosari was written down from time to time to bring the investment into line with Indosari’s net assets. Consistently with that practice, in a report dated 30 August 2005 from Mr Kop of Berri to Mr Erana and Mr Read of San Miguel, Mr Kop proposed that the value of the investment should be written down further as at December 2005 so as not to exceed the underlying net asset value of Indosari at the time. The same proposal was reflected in Mr Lavery’s spreadsheet of adjustments dated 5 December 2005. But, in a subsequent version of the spreadsheets dated 13 December 2005, it was noted for the first time that:
Due to doubts over recoverability of long term loan as may not be supported by cash flows, the full balance to be written off. NBV at 10/04 2w $3,767,699. The increase in the loan from then to 12/05 will be written off in 12/05.[104]
[104]First Reasons [584].
Mr Morris gave evidence that Berri was not in a position as at December 2005 to recognize or take into account any adjustment, and was not required to take into account any adjustment, in relation to the loan to Indsoari.
The judge, however, preferred the alternative view. His Honour said that:
[The propriety of writing off the investment] was corroborated by Mr Kop’s evidence that Indosari ‘was break even to small loss, small profit’. Further, the financial accounts of Indosari show that the majority of its assets were non-realisable assets.
Mr Read’s evidence was that, in the course of looking at the accounting for a number of matters within Berri, he found ‘there was some indications that [Indosari] was not performing well’. Further, he found ‘numbers that indicated that, and that the loan that had been put in place between Berri and Indosari had been amended particularly in relation to the foreign currency arrangement which did indicate an inability also of the Indosari company not to be in a sufficient stable financial position to repay the loan or to be able to absorb the losses that would result if it were to apply normal foreign currency arrangements’.
In the end, KPMG agreed that this adjustment needed to be reflected in Berri’s final audited accounts, for an amount of $1.231 million. This sum was identified as its own line item ‘Provision against intercompany loan’ under Note 3, ‘Expenses’.
In my opinion, if a director of Berri had been called upon to consider the matter at either 16 or 28 December 2005 in relation to the Indosari loan, it would have been open for that director to conclude that an adjustment for the risk was likely to be made in the final accounts, when they were prepared. It was likely to have been a matter considered by each of the directors, had the Berri Board convened to consider the declaration and payment of a second interim dividend for the 2005 year. The adjustment, or potential adjustment, would have introduced yet another element of uncertainty as to what the final audited accounts would reveal as to available distributable profits, when they were later produced.[105]
[105]First Reasons [584]–[587] (emphasis added).
With respect, we disagree. To start with, the test was not whether it was open to directors to take something into account but whether they were bound to conclude that there were insufficient profits to fund a dividend. Specifically, therefore, the test was not whether ‘it would have been open for that director to conclude that an adjustment for the risk was likely to be made in the final accounts, when they were prepared’, but whether the evidence established on the balance of probabilities that the directors, if acting honestly and reasonably, would have been bound to conclude that the investment had to be written off.
Secondly, whatever weight might justifiably be attributed to Mr Read’s evidence of his thoughts about the recoverability of the investment, the evidence as a whole fell well short of establishing that the action of writing off the whole of the value of Berri’s investment in in 2005 reflected a true and fair view of the investment. To the contrary the evidence showed that:
·Indosari’s cash flow position was the same as in previous years — about breakeven — in which Berri had consistently followed the practice of writing down the value of its investment in Indosari to the net value of Indosari assets.
·In past periods, Berri’s auditors had approved the approach of writing down the investment to the net value of Indosari assets and Mr Westworth agreed that the net asset position of Indosari was relevant to assessing the carrying value of the loan, as was the ongoing trading relationship between Berri and Indosari.
·There was no evidence that the auditors of Indosari ever requested a letter of comfort or support from Berri to the effect that Berri was satisfied with the ability of Indosari to repay the loan or have regard to its net asset position.
·KPMG stated in their 24 January 2006 memorandum that ‘the carrying value of the loan at 31 December 2005 is still support by the underlying net asset position of Indosari’.
·There was no evidence of any suggestion as at December 2005 that the previous practice would be changed or that, if Directors had considered the matter at that point, the advice which management might have given them would have been anything other than to maintain the status quo ante.
·On the evidence, it is much more likely than not that Mr Read of San Miguel was keen that Berri should write off as much of the value of its assets as KPMG could be made to accept and, to that end, in the period between January 2006 and April 2006, Mr Read managed to persuade KPMG, contrary to their opinion of January 2006, that a write off far in excess dictated by previous practice was permissible.
Thirdly, at best from San Miguel’s point of view, the evidence demonstrated that there was more than one view reasonably open as to the propriety of writing off the whole of the value of the investment in Indosari (although we do not consider that the evidence went that far). If so, the directors of Berri would still have been lawfully entitled to assume there should be no change to the previous practice.
ICM’s Appeal, Ground 21: Rootstock loans
In order to assist with the development of a new species of orange capable of being grown during the Valencia orange off-season, Berri made loans to a number of orange farmers repayable out of the proceeds of sale of fruit (‘Rootstock loans’).
At trial, Mr Read gave evidence that, when he investigated the Rootstock loan project in November or December 2005, he found that there were no legal agreements and that new trees had been planted in the middle of a drought which would not produce a commercial crop for at least seven years. He also claimed there were indications in August 2005 that the farmers involved in the project were in financial difficulty and that, by December 2005, there was evidence that it was unlikely Berri would recover any Rootstock receivables.
In his spreadsheet of December 2005, Mr Lavery included a $100,000 write-down of Rootstock receivables to reflect those vicissitudes. But, in the final end of year accounts for 2005 (prepared in April 2006) the provision was increased to $762,000.
At trial, ICM took issue with that adjustment on the basis that the loans were subject to a commercial interest rate, had a medium payment term, were entered into (or about to be entered into) in late 2005 and were secured by real property mortgages over the land in which the trees were planted. Mr Morris also gave evidence that, if the directors of Berri had been considering the matter as at December 2005, they would not have been in a position to take any such adjustment into account and certainly would not have been required to take it into account.
Even so, the judge rejected ICM’s position for the following limited reasons:
I am satisfied that the evidence demonstrates that this was an appropriate adjustment for the directors of Berri to consider in December 2005 if they were determining the state of the final accounts to be later produced, for the purpose of making a decision as to whether to declare and pay a second interim dividend for the 2005 year.[106]
[106]First Reasons [573].
Counsel for ICM contended that the following considerations demonstrated that the judge was in error:
·As has been noted, the November Operations Report included a $100,000 write down in respect of the Rootstock loans and that was also included in the full year profit forecast of $19.1 million assembled in December 2005. As an aside, the inclusion of the same $100,000 in the $8.4 million adjustment made by Mr Read to Mr Lavery’s spreadsheet and in Mr Read’s draft dividend report was double counting.
·Mr Morris’ opinion that the directors were not in a position to and were not bound to make any greater provision in respect of the Rootstock receivables was supported by KPMG’s assessment as reported in January 2006, that provisioning for the Rootstock loans appeared to be ‘overly conservative’ as at 31 December 2005.
·In cross-examination, Mr Westworth agreed that the Rootstock loans should have been included at fair value and that ’due to the loans being immaterial in the context of the overall accounts’, they ‘might not have been treated absolutely precisely as they should be’.
On balance we are inclined to agree. It is, however, sufficient to say of this aspect of the matter that, assuming without deciding it was open to conclude that the $762,000 adjustment was ‘an appropriate adjustment for the directors of Berri to consider in December 2005 if they were determining the state of the final accounts to be later produced’ (although, we doubt the evidence went that far), it is clear that the evidence did not establish that the directors acting honestly and reasonably in December 2005 would have been bound to make any more allowance for the irrecoverableness of Rootstock receivables than the $100,000 included in the spreadsheet and accounts in December 2005 and, as such, endorsed by KPMG in January 2006.
ICM’s Appeal, Ground 22: Change of accounting policies
Finally, until December 2005, Berri’s leasehold improvements were depreciated in its accounts over the full life of each lease including any optional terms. Contrary to that practice, in his December 2005 spreadsheet Mr Lavery included an adjustment of $193,000 (pre-tax) to conform Berri’s accounting policies to the accounting practices of San Miguel and NFL. Then, in Berri’s final end of year accounts (prepared in April 2006), the adjustment was further increased to $1.4 million (forming part of the $7.545 million line item for ‘Impairment of property, plant and equipment’ under Note 3, ‘Expenses’).
ICM contended below that the adjustment was wholly unwarranted for a number of reasons:
·First and perhaps foremost, the change to accounting policy was contrary to the Shareholders’ Agreement, which provided that Berri’s accounting standards and principles could only be altered with the unanimous approval of the Berri board,[107] and there was no such approval.
·Secondly, there was no evidence in support of the adjustment. Its appropriateness was dependent upon NFL acquiring 100 per cent of Berri and, until 2006, there was no commitment for NFL to acquire 100 per cent of Berri.
·Thirdly, the change was not an impairment adjustment within the accounting standard AASB 136. There was no change in the use of an asset but merely the proposed adoption by Berri of a new accounting policy to mirror the accounting policy followed by NFL, when and if NFL acquired 100 per cent of Berri.
·Fourthly, Mr Kearney of San Miguel agreed there was no basis for changing Berri’s accounting policy in that respect in 2005 and Mr Westworth agreed that the potential adoption of NFLs’ accounting policies in 2006 did not provide a basis for an adjustment in 2005.
[107]Shareholders’ Agreement, cl 5.1 and Sch 3, [9].
The judge found that, in view of those considerations ‘the treatment of this issue by KPMG in Berri’s final accounts may well have been open to challenge’.[108] Nonetheless, his Honour said that, because the integration of Berri with NFL ‘was well underway in the second half of 2005’, it would have presented the directors of Berri ‘with a range of imponderables in 2005’ and thus, if it had ‘arisen for specific consideration, the Berri/NFL integration would have been a source of uncertainty’. It followed, his Honour concluded, that:
In these circumstances, I am satisfied that the evidence demonstrates that this particular adjustment could not be dismissed in late 2005 as an inappropriate adjustment. It could well have been within the reasonable contemplation of the directors of Berri in December 2005, had they considered the matter when determining the state of the final accounts to be later produced, in the context of making a decision as to whether to declare and pay the Second Interim Dividend. On the information that was likely to have been available to the directors in late 2005 on the matter, in my view, it is doubtful that they could have confidently arrived at an opinion as to how the issue would be ultimately dealt with in the final accounts.[109]
[108]First Reasons [595].
[109]First Reasons [597].
With respect, we disagree. The evidence showed that there was no basis in 2005 for changing Berri’s accounting policy in relation to leasehold improvements in 2005. The fact that Berri’s accounting policies might change in future on adoption of NFL’s accounting policies in 2006 was not a warrant still less a requirement to change them in relation to 2005. There was, therefore, nothing to preclude the directors of Berri honestly and reasonably taking the view as at December 2005 that there should be no change in relation to the 2005. More specifically, there was nothing to preclude the directors of Berri as at December 2005 honestly and reasonably taking the view that the only allowance for leasehold depreciation which should be taken into account in the calculation of profits in December 2005 was an adjustment calculated in accordance with the process of calculation which had been used to that point.
ICM’s Appeal, Grounds 23 to 26: no excuse for non-payment of the dividend
If follows from the foregoing that, in deciding whether it was open to pay a dividend in December 2005, the position which the directors if acting honestly and reasonably would have been faced with was as follows:
· Profit as calculated by Mr Read: $8.7 million
· Add back unwarranted adjustments:
Eureka costs estimate: $2.0 million
Brickwood costs; $3.06 million
Riverland write off $5.05 million
IS write off $5.12 million
Indosari write off $1.20 million
Rootstock write off $0.66 million
Change of accounts $1.4 million
$18.49 million
· Adjusted profit $27.19 million
· Less Dividend declared Oct ‘05 $7.66 million
· Profits available for distribution $19.53 million
Accordingly, even if the directors had wished to pay off all of the accumulated losses of $6.279 million (which we have concluded they were not bound to do), and had chosen not to use the general reserve of $5.313 million for the payment of dividends (which we have concluded was available to them for the payment of dividends), it has not been shown that they could not honestly and reasonably have taken the view, as at December 2005, that there were adequate profits from which to pay the minimum cash dividend, calculated in accordance with cl 10 of the Shareholders’ Agreement, as required by cl 7.7 of the Option Deed. Hence, in our view, there was no excuse for the non-payment of that dividend.
Conclusion
For these reasons, we conclude that the appeal should be allowed, the judgment below should be set aside and, in lieu thereof, it should be ordered that there be judgment for ICM against San Miguel for damages for breach of cl 7.7 of the Put and Call Option Deed in the amount of the dividend of $3,472,198.04 together with the amount of the franking credits of $1,488,084.87, making a total of $4,960,282.91, plus interest pursuant to Statute. Berri’s cross-appeal will be allowed and San Miguel’s cross appeal will be dismissed.
- - - - -
‘(a) this agreement;
(b) the company’s constitution;
(c) the SSA;
(d) the Option Deed; and
(e) any other agreement or document that the parties agree is a Transaction Document’.
3
12
0