Kenros Nominees Pty Ltd v Tipperary Group Pty Ltd
[2009] VSC 524
•20 November 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
No. 4441 of 2008
| KENROS NOMINEES PTY LTD & ORS | Plaintiffs |
| v | |
| TIPPERARY GROUP PTY LTD (FORMERLY DPC TIPPERARY PTY LTD) & ORS | Defendants |
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JUDGE: | HOLLINGWORTH J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 25-27 August 2009 | |
DATE OF JUDGMENT | 20 November 2009 | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 524 | |
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Contract – Shareholders agreement – Pre-emptive purchase of shares – Market value to be assessed by “the auditor” – Meaning of “the auditor” – When auditor appointed – Whether auditor disqualified from performing valuation because of mere appearance of partiality
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr R K J Meldrum QC Mr S Marantelli Mr M D Dean | Kennedy Guy |
| For the 1st to 3rd and 5th and 6th Defendants | Mr J D Elliott SC Mr D W Bennett Mr A G Cameron | Norton Gledhill |
| For the 4th Defendant | No appearance | O’Keefe Lawyers |
HER HONOUR:
Introduction
The first defendant (“Tipperary”) and the second defendant (”Dunkeld”) are companies associated with the family of the third defendant, Mr Myers. In 2003, Tipperary bought the shares in the fifth defendant (“Branir”) and the sixth defendant (“Tovehead”), which in turn owned the shares in Tipperary Exports Pty Ltd (“Exports”), thereby effectively acquiring the Tipperary group of pastoral stations in the Northern Territory. The price paid for those shares was around $34 million.
The first plaintiff (“Kenros”) is a company controlled by the third plaintiff, Mr Vereker. The second plaintiff (“Raza”) is a company controlled by the fourth plaintiff, Mr Illingworth.
Kenros and Raza each bought 10% of the shares in Tipperary from Dunkeld. Dunkeld retained ownership of the remaining 80% of the Tipperary shares.
By a shareholders agreement dated 19 August 2003, Kenros and Raza agreed to manage the business conducted by Tipperary and its subsidiaries, for a fee of $150,000 each per year (clause 1(a)). Tipperary and the subsidiaries were entitled to terminate the employment of Kenros and Raza at any time, upon six months’ notice in writing or payment in lieu thereof (clause 1(c)).
Clause 1(d) of the shareholders agreement provided that if Tipperary terminated the employment of Kenros or Raza, they would be obliged to sell, and Dunkeld would be obliged to buy, their shares within 90 days, at the market value as determined by the auditor or other person agreed by Dunkeld and the relevant vendor. The person conducting the valuation was to act as an expert, not an arbitrator, and his or her decision would be final (clause 1(e)).
At a meeting held on 6 December 2007 (“the December meeting”), the directors of Tipperary resolved to terminate the employment of Kenros and Raza. Shortly after the December meeting, Tipperary gave written notice to the plaintiffs of that fact (“the notice of termination”).
Earlier at the December meeting, the directors had passed a resolution to appoint the fourth defendant, Mr Cogger, as auditor of Tipperary. In the early afternoon of the following day, a letter was sent by email to Mr Cogger, enclosing a copy of a document headed “Notice to [sic] Appointment of Expert” (“the notice of appointment”).
There is no dispute that Mr Cogger was validly appointed as the auditor of Tipperary, by no later than 7 December 2007. However, the plaintiffs allege that he is not “the auditor” for the purposes of determining the market value of the shares under clauses 1(d) and (e) of the shareholders agreement, because:
(a) On the proper construction of those clauses, “the auditor” means a person who, at the time of the termination of employment, was the “formerly appointed” auditor of Tipperary. The plaintiffs say that Mr Cogger was not appointed as auditor until he received the notice of appointment on 7 December, which was after the termination had already occurred on 6 December; and/or
(b) On the proper construction of those clauses, alternatively as an implied term of the shareholders agreement, “the auditor” means a person whose appointment is not attended by a credible appearance or soundly-based apprehension of partiality. The plaintiffs say that because of Mr Cogger’s longstanding professional relationship with the Myers family and Myers-related entities, Mr Cogger is not a person who fits that description.
The plaintiffs seek declarations and an injunction restraining Mr Cogger from performing any valuation of the shares. The plaintiffs also say that, in the absence of any agreement as to who the valuer should be, the court should appoint an independent person to value the shares.
The defendants other than Mr Cogger (“the Myers defendants”) say that Mr Cogger is the person who is to assess market value, for the following reasons:
(a) As a matter of construction, there is no requirement that “the auditor” must have already been appointed at the time of the termination of employment. Even if there is such a requirement, they say that Mr Cogger satisfies it, because he was appointed auditor by the resolution passed at the December meeting, before the termination of Kenros and Raza; and
(b) There is no contractual requirement that “the auditor” means a person whose appointment is not attended by a credible appearance or soundly-based apprehension of partiality.
Until a few days before the commencement of the trial, the plaintiffs also made a number of allegations of what might broadly be called impropriety on the part of the defendants. Once it became apparent that the impropriety allegations were going to be abandoned, Mr Cogger chose to play no role at the trial.[1]
[1]It is unfortunate that various impropriety allegations were made and persisted with for such a long time. Because those allegations raised questions of credit, I determined that the plaintiffs’ claim and the Myers defendants’ large and complex counterclaim would have to be heard and determined at the same time. Had the plaintiffs’ claim been confined earlier to its current, narrow scope, the question of whether Mr Cogger could perform the valuation might have been heard and determined in early 2008, and not been held up by the counterclaim.
The shareholders agreement
The parties to the shareholders agreement are Tipperary, Dunkeld, Kenros, Raza and Messrs Vereker, Illingworth and Myers. In general terms, the shareholders agreement sets out the parties’ respective rights and obligations in relation to the Tipperary shares owned by Kenros and Raza, the minority shareholders.
Clauses 1(d) and (e) of the shareholders agreement provide as follows:
(d) If:
(i) [Tipperary] or any of its related companies terminates the employment of either [Kenros or Raza] under clause 1(c) hereof; or
(ii) any of [the plaintiffs] breaches this agreement or any other agreement between any of them and [Dunkeld] in a material way,
then [Dunkeld] will be obliged to purchase within 90 days at the market value as determined by the auditor or other person agreed by [Dunkeld] and the vendor of the shares in [Tipperary] held by the company whose employment has been terminated under clause 1(c) hereof or in respect of whom a material breach has been committed and [Kenros or Raza], as the case may be, shall sell those shares to [Dunkeld].
(e) The auditor or other person appointed under clause 1(d) shall act as an expert and not as an arbitrator, his decision shall be final and his costs shall be paid by [Tipperary].
The agreement contains restrictions on Kenros and Raza’s rights to sell their shares (clauses 4 and 5), and imposes obligations on them to sell their shares if Dunkeld wants to sell its shares to an arms length purchaser (clause 3).
In any case where Dunkeld has a right to buy the shares of Kenros or Raza, or to require them to sell their shares, each of Kenros and Raza irrevocably appoints Dunkeld as its agent, with power to execute all documents necessary to complete the transaction (clause 7).
Each of the parties to the agreement, other than Tipperary, agrees to act in relation to the other parties in good faith, in relation to Tipperary and the business of Tipperary and its subsidiaries (clause 2).
Messrs Myers, Illingworth and Vereker agree to use their best endeavours to ensure that the obligations of their respective companies are fully performed (clause 6).
The trial proceeded on the basis of the pleadings and tendered documents; no oral evidence was called. No evidence was led as to the surrounding circumstances known to the parties at the time of entering into the shareholders agreement. The court is therefore left to ascertain the (objective) common intention of the parties largely from the language in which the parties have expressed their agreement, having regard to the apparent purpose and object of the transaction: what would a reasonable person have understood the words to mean at that time?[2]
[2]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (219) CLR 165 at [40] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ.
The appointment issues
Can the auditor be appointed after termination?
The plaintiffs argue that, on the proper construction of the shareholders agreement, “the auditor” means a person who, at the time of the termination of employment, had already been appointed as the auditor of Tipperary.[3]
[3] That is what the pleaded expression “formerly appointed” is said to mean.
In paragraph 10 of their defence, the Myers defendants had admitted that the valuation of the shares was to be determined “by the auditor … at the time that the clause is enlivened”. However, in their written outline of submissions, and orally at trial, the Myers defendants sought to change their position, to argue that Tipperary could appoint the auditor after the termination of employment. The Myers defendants nether sought, nor obtained, leave to withdraw the earlier admission.
The Myers defendants argue that the auditor could be appointed some days, perhaps three or four days, after the termination occurred. There is no particular logic to the selection of three or four days. If their submission is right, the auditor could be appointed any time within the 90 day period; such a construction seems uncommercial and improbable.
For the reasons which follow, I do not accept the Myers defendants’ new argument, even assuming leave were granted to withdraw their earlier admission.
There is no definition of “the auditor” in the shareholders agreement. It is true that clause 1(d) itself does not explicitly address the question of when the auditor is to be appointed. But, when regard is had to the structure and purpose of the clause, it supports the plaintiffs’ argument.
The rights and obligations under clause 1(d) may be triggered in one of two ways: either by the termination of the employment of one or more of the minority shareholders, or after the commission of a material breach by one of the plaintiffs. In either of those situations, the relevant minority shareholder(s) is or are required to sell their shares to the majority shareholder, within a relatively short period of time, at a price to be determined by the auditor or any other person agreed by the relevant shareholders. The valuer is to act as an expert, and his or her decision is final.
It is common ground that until there is a valuation, the minority shareholders have no claim for a sum certain, hence no right to claim interest if there is any delay in the completion of the valuation. That means that there is a significant commercial value in having the valuation performed and the sale completed on time.
There is also a practical desirability in having value determined quickly, given that the pre-emptive rights are triggered either by a minority shareholder’s breach, or the majority shareholder’s decision to terminate the minority shareholder’s employment; in either event, relationships between the shareholders are likely to be strained.
It is not uncommon for a company’s auditor to be nominated as the expert valuer in a contractual provision such as this, for various reasons, including cost, speed and independence.
Ordinarily, an auditor would have a detailed knowledge and understanding of the company’s business and financial affairs, which would enable the auditor to arrive at a share valuation more quickly and cost-effectively than somebody without that background. There would be no such saving of time or cost if the auditor had not previously performed an audit of the company, and was only appointed after clause 1(d) had been triggered.
There is a further commercially-sensible reason for parties to agree that the company’s existing auditor will be the person to value their shares in the event of a forced sale and purchase. Auditors are subject to various statutory requirements of independence in connection with their audit activity,[4] which makes it likely that they would be able to perform the share valuation with a degree of impartiality as between the shareholders.
[4]For example, s 324CA of the Act makes it an offence for an individual auditor or audit company to engage in audit activity in relation to an audited body, at a time when “a conflict of interest situation” exists in relation to the audited body. A “conflict of interest situation” is defined in s 324CD to include a situation in which a reasonable person, with full knowledge of all relevant facts, would conclude that the auditor was not capable of exercising objective and impartial judgment in relation to the conduct of the audit.
That significant benefit would not exist if the majority shareholder could, after the triggering of the pre-emptive clause, unilaterally appoint the person who was to value the shares, simply by procuring the directors to appoint that person as the company’s auditor. There would be the real possibility that the majority shareholder would procure the appointment of somebody who it perceived to be likely to come to a conclusion favourable to it. Such a person may not be able to perform an audit, due to a lack of independence, but in that case, the majority shareholder could always have them removed as auditor after the completion of the share valuation and prior to the performance of any audit.
The construction contended for by the plaintiffs is more likely to achieve all of these benefits than that contended for by the Myers defendants, and is therefore more likely to accord with what a reasonable person would have understood the words to mean.
Another problem with the Myers defendants’ argument is this. Clause 1(d) provides that the value will be determined by the auditor “or other person agreed by [the purchaser and vendor of the shares]”. If the majority shareholder could effectively choose the valuer after the triggering event, simply by procuring the appointment of that person as the auditor, there would be no need for the majority shareholder to try to reach agreement with the vendor as to who the valuer would be. I assume these words were meant to have some meaning.
In their written outline, the Myers defendants refer to the obligation in clause 2 of the shareholders agreement for the parties to act in good faith towards each other. They say that the minority shareholders could rely upon that provision were “an inappropriate audit appointment” to be made after the triggering of the pre-emptive clause. There are several problems with this argument. First, the good faith obligation exists “in relation to Tipperary and the business of Tipperary and its subsidiaries”; it is not clear whether or how that would apply to the sale and purchase of the minority shares. Secondly, it is not clear what an “inappropriate” appointment is said to be in this regard. Thirdly, it seems commercially undesirable that the valuation process could be held up while there is litigation over whether the majority shareholder has procured the appointment of the auditor in breach of the duty of good faith.
It does not make commercial sense to construe clauses 1(d) and (e) in such a way as to permit the appointment of the auditor after the relevant triggering event has occurred.
For these reasons, I find that “the auditor” in clause 1(d) means a person already holding that office at the time that the pre-emptive clause is triggered. Therefore, in order to be the person who is to conduct the valuation, Mr Cogger must have been appointed as the auditor of Tipperary prior to the termination of the employment of Kenros and Raza.
When was the employment of Raza and Kenros terminated?
The parties now agree that termination of the employment of Raza and Kenros occurred during the morning of 6 December 2007.[5] There is no dispute that the termination was valid, or that the 90 day period under clause 1(d) of the shareholders agreement started to run from that date.[6]
[5]Earlier versions of the statement of claim had alleged that the employment of Kenros and Raza was terminated by a letter on 5 December, or orally on 5 December, however, those allegations were abandoned before trial.
[6]The 90 day period has effectively been suspended by interlocutory injunctions granted by this court on 8 February 2008.
The minutes of the December meeting, held at 8.30 a.m. on the 6th, record as resolution 7 that it was resolved “to terminate” the appointment of Kenros and Raza, and to authorise Steve Dumsday, an employee of Tipperary, “to confirm these terminations in writing.”
Mr Dumsday sent the notice of termination and covering letter by fax to the plaintiffs around 10.45 a.m. on the 6th. Those documents were also sent by email that morning.[7]
[7]The evidence does not enable me to determine whether the transmission time of “9:23 AM” shown on the email was eastern summer time (where the sender was located) or central time (where the recipients were located). However, it is not necessary to resolve that issue.
Recital C to the notice of termination records that at the December meeting, the directors of Tipperary had terminated the employment of Kenros and Raza. The recital should, more accurately, have recorded that the directors had resolved to terminate their employment. Their employment could not be terminated merely by a resolution by the Tipperary directors; that is because clause 1(c) of the shareholders agreement provides that termination only occurs upon giving six months’ notice in writing or payment in lieu thereof.[8]
[8]The notice said that the sum of $75,000 would be paid into each of Kenros and Raza’s accounts, in lieu of six months’ notice. There is no suggestion that the money was not paid.
Whatever the Tipperary directors may have thought was the effect of resolution 7 at the time it was passed, the Myers defendants now admit that Kenros and Raza’s employment was terminated by the written notice dated 6 December 2007.[9]
[9]Defence [21] and [27C].
I find that Kenros and Raza’s employment was terminated when they received the notice of termination, which occurred no later than 10.45 a.m. on 6 December 2007.
When did Mr Cogger become the auditor of Tipperary?
The parties agree that Mr Cogger has been validly appointed as the auditor. They disagree as to when that occurred.
The Myers defendants say that Mr Cogger was appointed as auditor by resolution 5, passed by the Tipperary directors at the December meeting.
The plaintiffs dispute that any appointment occurred at the December meeting. They say that the appointment did not occur until Mr Cogger received the notice of appointment at 1.58 p.m. on the 7th.
If the Myers defendants are right, then Mr Cogger was appointed auditor before the termination of employment. If the plaintiffs are right, he was appointed after termination, and therefore is not “the auditor” for the purposes of clauses 1(d) and (e).
Legal principles relating to the appointment of auditors
Part 2M.4 of Chapter 2M of the Corporations Act 2001 (“the Act”) is headed “Appointment and removal of auditors” and deals with a range of matters, including auditor eligibility and registration, disqualification, appointment, removal and resignation, and fees and expenses.
“Appoint” and “appointment” are not defined terms in the Act.
Public companies are required to have an auditor (s 327A). Proprietary companies, such as Tipperary, may, but are not required to, appoint an auditor.
Section 325 of the Act provides that the directors of a proprietary company may appoint an auditor, if one has not been appointed by the company in general meeting.
Section 328A(1) of the Act relevantly provides that the directors of a company must not appoint an individual as auditor unless, before the appointment, the individual has consented to act as auditor and has not withdrawn their consent. A consent or withdrawal of consent must be given by written notice.
If the directors appoint somebody as auditor in contravention of s 328A(1), the purported appointment is ineffective, and the directors are also guilty of an offence (s 328A(4)).
The plaintiffs argue that, because the Act does not prescribe how the directors may appoint an auditor, the law of contract must govern the appointment. They say that, as a matter of law, there can be no valid appointment of an auditor unless and until there is a concluded contract between the parties. Alternatively, they say that there can be no appointment until the company or directors give notice to the auditor of the appointment. I do not agree with either of those propositions, for a number of reasons.
Unlike some other provisions in this part of the Act, which do require written notice to be given,[10] s 325 contains no requirement that the auditor be given notice of the appointment. As long as the proposed auditor has provided and not withdrawn written consent to act, a proprietary company can appoint the person as auditor at a general meeting of the company or by the directors. In the case of the directors, however else they might legally appoint, they are at least able to do so by passing the necessary resolution at a duly-convened directors’ meeting. There is no reason to read into the Act words which are not there, namely, an additional requirement that notice be given to the auditor before the appointment is effective.
[10]For example, s 329 requires the company to give certain written notice to an auditor, before removing her or him from office, and an auditor to give notice of resignation.
The plaintiffs say that if an appointment could take effect by directors’ resolution, prior to the auditor being notified of that fact, that would amount to a “unilateral declaration” of an audit relationship, which is something the law should not support. But the Act does not allow for any such situation to arise. Unless the proposed auditor has given prior written consent to act as auditor, any resolution by the directors would simply have no legal effect (s 328A(1)).
In paragraphs [28] to [32] of their written outline, the plaintiffs put forward several hypothetical scenarios, which they say would lead to “incongruous results” if Tipperary appointed Mr Cogger as auditor, but did not communicate to Mr Cogger its acceptance of his offer to act as auditor. But all of the plaintiffs’ hypothetical questions are capable of simple, logical answers. For example, paragraph [30] asks the following questions, on the premise that the Tipperary directors appointed Mr Cogger, did not tell him of that fact, and then, five days later, met again and decided to remove him as auditor and appoint somebody else:
The plaintiffs’ question The court’s answer Would the company have to comply with the provisions of s 329 of the Act to remove Mr Cogger? Yes, because his statutory appointment can only be terminated in accordance with the Act. Would Mr Cogger be able to sue for breach of contract? Only if he had entered into a binding contract with the company, which gave rise to a relevant contractual right. Would Mr Cogger have been governed by any of the provisions of Part 2M.4 of Chapter 2M of the Act in the interim? Yes, if and to the extent that he had commenced any audit activity covered by that Part.[11] [11]This situation is perhaps unlikely to happen in practice, if the directors have not notified of their resolution. But, somebody might conceivably commence audit activities before notification, because they have previously been appointed, or are told that their appointment is expected to be made at the forthcoming meeting.
There would be no incongruity in those results, they simply serve to highlight that the concept of appointment under the Act is separate from the terms and conditions of any contract between the parties.
It is true that the auditing standards[12] envisage that the auditor and audited entity will agree upon written terms of engagement “to help avoid misunderstandings with respect to the engagement”. But neither the Act, nor the standards, suggests that an appointment under the Act is invalid unless and until written terms of engagement are executed.
[12]Auditing Standard ASA 210 (effective April 2006) made pursuant to s 336 of the Act. This essentially restated, with a few minor amendments, the earlier standard (effective June 2000).
The Act does not impose any obligation on a person who has been appointed as auditor to actually perform an audit, or carry out any audit-related activities. Rather, it imposes various obligations on an auditor in the performance of any audit activities which she or he in fact undertakes. In the ordinary course of events, it seems unlikely, as a matter of practicality, that an auditor would actually commence audit activities until:
(a) Some agreement had been reached with the company about the precise scope of the work to be performed and the auditor’s remuneration; and
(b) The auditor had been informed that the company, or the directors, as the case may be, had resolved to appoint him or her as the auditor.
But that does not mean (as the plaintiffs assert) that the auditor has not been validly appointed until those steps have occurred.
The plaintiffs eventually conceded that an auditor might be validly appointed and remunerated for work done, on several bases, without there ever being a binding contract of engagement. First, s 331 of the Act provides that the reasonable fees and expenses of an auditor are payable by the company. Secondly, quite apart from that provision, the plaintiffs accept that, even in the absence of a contract, a person who in fact carried out audit work at the request of a company would be entitled to compensation on a quantum meruit basis. In Pavey & Matthews Pty Ltd v Paul,[13] the majority of the High Court confirmed that the right to recover payment of a reasonable remuneration or compensation on a quantum meruit no longer depends on any implied contract, but on a claim to restitution based on unjust enrichment.[14]
[13](1986) 162 CLR 221.
[14]At 227 per Mason and Wilson JJ, 256-7 per Deane J.
For these reasons, I find that, as a matter of law, it is not necessary for there to be a binding contract in order for an auditor to have been validly appointed. An auditor may be appointed by the directors prior to (or, indeed, absent) the entry into of any contract or the giving of notice of the appointment to the auditor.
It is necessary to consider what in fact occurred in this case, against that legal framework.
The December meeting
The Myers defendants argue that Mr Cogger was appointed auditor by resolution 5 passed at the December meeting, which was in the following terms:
It was resolved to appoint Laurie Cogger as the auditor of the company, a signed consent to act as auditor having been tabled at the meeting.
There was no oral evidence from any person present at the December meeting, as to what the directors discussed or actually intended by resolution 5.[15] It is therefore necessary to consider the language used in the minutes. In doing so, I bear in mind that, although resolutions represent the formal embodiment of directors’ decisions:
it would be a mistake to read them as if they were acts of legislation. I must bear in mind that, for the most part (as their wording often evidences) they are formulated on the spur of the moment …; it is essential, therefore, to look at the circumstances in which the resolution or proposition was made if it is to be given its fair and natural meaning.[16]
[15]Such oral evidence may have been admissible on the basis discussed by the Full Court in The Westralia Proprietary Gold Mining Company No Liability v Long (1897) 23 VLR 36.
[16]Myer Queenstown Garden Plaza Pty Ltd v Corporation of the City of Port Adelaide (1975) 11 SASR 504 at 520 per Wells J.
Resolution 5 was a resolution “to appoint” Mr Cogger as auditor. The plaintiffs say that expression indicates an intention to do something in the future, not to appoint at the December meeting itself. The plaintiffs seek to draw comfort from the fact that the author of the minutes of the meeting used both the expressions “resolved that” and “resolved to” at various places in the minutes. They say the former indicates a resolution intended to have immediate effect, whereas the latter indicates one which is merely an intention to do something in the future.
Unfortunately, the author of the minutes has frequently used the two expressions interchangeably. Some resolutions which use the expression “resolved to” were clearly intended to operate immediately, such as resolution 2 (the appointment of Bruce Cameron as the alternate director of Mr Myers), resolution 3 (the appointment of Mr Cameron as chair of the meeting and the cessation of Mrs Myers in that role), and resolution 4 (noting that the meeting had been validly convened). Therefore, the use of the expression “resolved to” in resolution 5 is not in itself conclusive, or necessarily significant.
The plaintiffs also seek to rely on the difference in the language used in the minutes of the December meeting and that used at earlier directors’ meetings of related companies. In June 2003, Mr Cogger had been appointed auditor of the operating subsidiaries of Tipperary, namely Branir, Tovehead and Exports. The minutes of the directors’ meetings of those subsidiaries note that it was resolved that Mr Cogger “be appointed” auditor of the company. The plaintiffs say that “be appointed” equates to “is hereby appointed”, but “to appoint” equates to “will appoint by future notice”.
It is not clear, as a matter of ordinary language, why such a distinction should be drawn. Furthermore, it appears that the 2003 minutes and the minutes of the December meeting were probably drafted by different persons,[17] and there is no evidence that the drafter of the December minutes had seen or was aware of the 2003 minutes. In those circumstances, I would give little, if any, weight to the slightly different language used by the respective authors.
[17]Mr Myers in the case of the 2003 minutes, and Mr Cameron in the case of the December minutes.
The agenda for the December meeting, dated and circulated late on 5 December 2007, noted that the issues to be dealt with at the meeting included “the appointment of Laurie Cogger as the auditor”. The agenda suggests that meetings of the directors of six Tipperary subsidiaries were to occur at the same time as the December meeting, and that Laurie Cogger was to be appointed as auditor of each of the subsidiaries as well. Those subsidiaries included Branir, Tovehead and Exports, the companies of which Mr Cogger had been appointed auditor in 2003. There is no evidence as to whether Mr Cogger had ceased to be auditor of those three subsidiaries, some time between 2003 and December 2007, whether the fact that he was already their auditor had been overlooked, or why he was to be appointed to them. In respect of Tipperary and each of the subsidiaries, Mr Cogger signed a consent to act as auditor, dated 5 December 2007.
A number of the resolutions in the December minutes refer to the need to give various notices or to take certain steps. However, there is no mention in resolution 5 of sending any notice to Mr Cogger, the person affected by the resolution, or needing to take any other steps to give effect to the resolution.
The directors of Tipperary were legally able to appoint Mr Cogger as auditor, by resolution at the December meeting, he having provided and not withdrawn his written consent to act. I conclude that the fair and natural reading of the minutes (supported by the agenda) is that the directors intended to and did exercise that power at the meeting, without any requirement to give notice or take further steps in order to make the appointment effective.
The notice of appointment
The plaintiffs argue that I should interpret the minutes having regard to what happened after the December meeting, in particular, having regard to the notice of appointment. Even assuming that is a permissible exercise to undertake, I conclude that it would not assist the plaintiffs, for the following reasons.
The document is headed “Notice to (sic) Appointment of Expert.” It is addressed to Mr Cogger from Tipperary, Dunkeld and Mr Myers. Mr Myers signed the notice as “a person having authority to sign” on behalf of both companies, as well as personally.
After a recital of the facts relevant to the triggering of clause 1(d) of the shareholders agreement, recital C says:
The market value of the [shares] is to be determined by the auditor of [Tipperary] (“the Auditor”) in the absence of any other agreement, and there is no such agreement.
The operative provisions are in the following terms:
1. We, [Tipperary, Dunkeld and Mr Myers] hereby appoint Mr Cogger as the Auditor for the purposes of determining the market value of the [shares] in accordance with the shareholders agreement.
2. [Tipperary] agrees to pay the costs of Mr Cogger in acting as Auditor under the shareholders agreement.
It is a curious document, for several reasons. First, the only person with power to appoint an auditor to Tipperary was that company, either in general meeting or through its directors. Why Dunkeld or Mr Myers were parties to the notice, or purported to have any role in the appointment of Mr Cogger, is a mystery.
Next, there is no contractual requirement to have an “appointment of expert”, as the heading asserts. Nor is there a need to appoint somebody as “Auditor for the purposes of determining the market value”, as the first operative provision asserts. If a person has been appointed as the auditor, then they are automatically the person who will value the shares as an expert (absent any contrary agreement between the shareholders). The shareholders agreement does not contemplate that the person who is to perform the valuation would have two appointments, one as auditor and one as expert.
The covering letter from Mr Myers to Mr Cogger is equally confusing, for similar reasons. It is headed “Appointment as Expert under [the shareholders agreement]”. The first paragraph says that “enclosed is a notice effecting your appointment as the expert charged with the responsibility of determining the market value of the shares”, even though the shareholders agreement does not provide for any appointment as expert (other than by agreement).
The covering letter goes on to make some comments about how Mr Cogger might go about his role as expert, including consulting with the parties. It points out the need for the expert determination to be made within 90 days of 6 December. It also notes that “as the auditor of [Tipperary] and its subsidiaries you have access to all relevant records”, but Mr Cogger should indicate if further information is required.
Although dated 6 December 2007, the notice of appointment and covering letter were not served until the following day. There is no evidence as to precisely when or in what circumstances they were prepared and served. From the various grammatical errors and the confusing language, both documents appear to have been prepared in some haste. Although Mr Myers signed the documents, I do not know who actually drafted them.
Both sides urged me to draw certain inferences as to the intended effect of the notice of appointment and covering letter, having regard to the fact that Mr Myers is a very experienced commercial Queen’s Counsel. However, given the confusing features discussed above, and in the absence of oral evidence, it is difficult to come to any conclusion as to what the documents were intended to achieve. Perhaps Mr Myers thought that he and the two companies were in fact appointing Mr Cogger as auditor by the notice. Or, perhaps he thought that Mr Cogger had already been appointed at the December meeting, but needed to be told of that fact, so that he would know he had to undertake the expert valuation process within the specified time. Perhaps he had some other intention.
Mr Myers was not present at the December meeting, and there is no evidence that he played any role in drafting the minutes of that meeting. As mentioned above, I do not know when or in what circumstances the notice of appointment and covering letter were prepared, or what they were intended to achieve. Given all those matters, I am not assisted in interpreting the minutes of the December meeting by having regard to what Mr Myers did after the December meeting (even if that were permissible as a matter of construction).
In particular, I am not prepared to disregard what I have described as the fair and natural reading of the minutes, namely, that the directors intended to and did exercise their power to appoint Mr Cogger as auditor at the December meeting, without any requirement to give notice or take further steps in order to make the appointment effective.
Conclusions on appointment
For the reasons set out in this part of my reasons, I conclude that:
(a) “The auditor” in clauses 1(d) and (e) of the shareholders agreement means a person already appointed as auditor at the time of the relevant event which triggers the pre-emptive rights;
(b) In this case, the relevant triggering event was the service of the notice of termination on Kenros and Raza, which occurred on the morning of 6 December, after the December meeting;
(c) Mr Cogger was appointed as the auditor of Tipperary by resolution 5 passed at the December meeting;
(d) Therefore, Mr Cogger was the auditor at the relevant time.
Appearance of partiality
There is no dispute that:
(a) Mr Cogger and his accounting firms have earned substantial amounts of money, from providing accounting and taxation services to the Myers family and Myers-related interests, over a period of at least 20 years;
(b) Mr Cogger was a company secretary of Dunkeld for more than 20 years, only resigning on 19 December 2007, almost a fortnight after his appointment as auditor of Tipperary; and
(c) There have been commercial dealings between Cogger-related companies and Myers-related companies.
The plaintiffs say that these matters satisfy the objective test of apparent bias, and Mr Cogger should be permanently enjoined from performing the valuation of the shares.
The Myers defendants deny that these matters are capable of giving rise to apparent bias. They also dispute the accuracy or relevance of some of the specific factual matters alleged by the plaintiffs in relation to the various Cogger-Myer relationships.
Given the state of the evidence, it is not possible for me to determine the precise extent of the relationships between Mr Cogger and the Myers family and related interests. Nor is it necessary for me to do so, given my findings below. I assume, for the purposes of this discussion only, that some or all of the matters relied upon by the plaintiffs may be capable of satisfying the objective test of apparent bias.
The plaintiffs have not challenged Mr Cogger’s appointment as auditor, on the basis that he could not satisfy the independence requirements of the Act.[18] Rather, their challenge is to him performing the expert valuation task. The legal basis upon which the plaintiffs say the court should act is that, as a matter of contract, “the auditor” in clauses 1(d) and (e) “means and intends a person whose appointment is not attended by a credible appearance or soundly-based apprehension of partiality” (“apparent bias”). That is put either as a matter of the proper construction of the relevant clauses, or as an implied term of the shareholders agreement. Although not particularised, the plaintiffs allege in their submissions that the term should be implied as a matter of fact, not law, in order to give business efficacy to the shareholders agreement. The Myers defendants deny the existence of any such contractual term.
[18]It is not clear why they have not challenged his appointment as auditor on this basis. Perhaps it is because, as mentioned earlier, Mr Cogger was appointed auditor of the operating subsidiaries of Tipperary in 2003, apparently without objection from the plaintiffs. There is no evidence as to what, if any, audit activities Mr Cogger has carried out in respect of those subsidiaries.
It must be remembered that clauses 1(d) and (e) are to be construed as at the time of entry into the shareholders agreement, not by looking at what subsequently happened in this case.
For the reasons discussed below, I agree with the Myers defendants that the proposed term does not satisfy the requirements for the implication of terms.[19] Nor does “the auditor” have the suggested meaning, as a matter of proper construction.
[19]The requirements are set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283, namely, the proposed term must: (1) be reasonable and equitable; (2) be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) be so obvious that “it goes without saying”; (4) be capable of clear expression; and (5) not contradict any express term of the contract.
Clause 1(e) provides that the relevant person is to act as an expert, not an arbitrator, and that his or her decision is to be final. However, it is well-established that, even where an expert determination is otherwise final, parties will not be required to abide by that determination if the expert has not acted honestly and impartially in reaching his or her conclusions, or where the determination is not made in accordance with the contract. So, the plaintiffs would not be left without any remedy if the shareholders agreement does not have the meaning or term for which they contend, and Mr Cogger displays actual bias.[20]
[20]In making that observation, I accept that it is not always easy to demonstrate relevant error, particularly if the expert determination is brief and lacking in reasons.
The alleged construction or implied term has gone through a number of formulations, in the various versions of the statement of claim. Indeed, the current version was the result of further amendments made during the running of the trial, after discussion with the bench.[21] That hardly satisfies the requirements that the term must be capable of clear expression and “so obvious it goes without saying”. Nor does it make the construction obviously the “proper” one.
[21]The version which was in the pleading at the commencement of the trial was: “’the auditor’ for the purpose of making the expert determination of market value of the shares held by the company who has been terminated means and intends a person … whose appointment to conduct the valuation is not attended by a credible appearance or soundly based apprehension of partiality.” The italicised words were deleted in the final amended version at trial.
I am also not persuaded that the proposed term is necessary to give business efficacy to the shareholders agreement. As mentioned earlier, there is a relatively short time period within which the valuation is to be performed and the shares sold. In that context, it is desirable that there be certainty as to who the expert is, so that the person can get on with the task. If there is a person who is undoubtedly the auditor at the time that clause 1(d) is triggered, business efficacy would be best achieved by that person getting on with the job, rather than starting a debate and possible litigation about matters which may or may not show apparent bias. Of course, the valuation may be impeached, if actual bias can be made out, after it has been completed.
The parties to the shareholders agreement agreed that the auditor of Tipperary was to determine the market value, even though a reasonable person in the position of Kenros and Raza should have realised that, as small minority shareholders, they would be unlikely to have much say in the selection of the company’s auditor. Where, as here, a company has a substantial majority shareholder, there is always the potential for there to be the appearance of partiality with an auditor/valuer who has a professional relationship with the company or related companies. In those circumstances, an allegation as to the appearance of partiality, as opposed to actual partiality, can too readily be made, and the valuation process derailed by litigation about apparent bias. It is not reasonable and equitable to imply the suggested term into the shareholders agreement.
The plaintiffs cannot point to any case in which an injunction has been granted to prevent a valuation by a person acting as expert, or even where an actual valuation has been set aside, on the basis of apparent bias. All of the cases to which the parties referred deal with the setting aside of a valuation after it has been performed, on the basis of actual bias.
In Macro v Thompson (No 3)[22], in considering a valuation which had already been performed, Robert Walker J said that:
On the authorities as a whole I accept the submission … that when the court is considering a decision reached by an expert valuer who is not an arbitrator performing a quasi-judicial function, it is actual partiality, rather than the appearance of partiality, that is the crucial test. Otherwise auditors (like architects and actuaries) who have a long-standing professional relationship with one party (or persons associated with one party) to a contract might be unduly inhibited, in continuing to discharge their professional duty to their client, by too high an insistence on avoiding even an impression of partiality.
[22][1997] 2 BCLC 36 at 65 (“Macro”).
In Beevers v Port Phillip Sea Pilots,[23] Dodds-Streeton J considered an attack on a share valuation, which had been performed by the company’s auditor, pursuant to the relevant contract. Her Honour referred in some detail to the various authorities dealing with the grounds on which expert determinations might be impugned, including referring to the above passage in Macro. She then made the following observation, upon which the plaintiffs seek to rely:
Given the sometimes fine distinction between an appearance of partiality and a finding of partiality on the balance of probabilities, I am not persuaded that the parties would intend to be bound by a valuation attended by a credible appearance, or soundly based apprehension, of partiality. It is not necessary, however, to determine that question in the present case, because I conclude, on the balance of probabilities, that although [the expert] was not guilty of collusion, dishonesty or conscious partiality, he did not perform the valuation with the degree of independent skill and judgment and impartiality required of an expert acting between two parties.[24]
[23][2007] VSC 556 (“Beevers”).
[24]At [300].
Elsewhere in her reasons,[25] her Honour appeared to have distinguished Macro only on the facts, not as a matter of principle, so it is not clear how her Honour would reconcile Macro with her obiter dicta remarks set out above.
[25]See for example at [305].
In Ceneavenue Pty Ltd v Martin,[26] the Full Court of the Supreme Court of South Australia referred to the above-quoted passage in Macro with approval:
With respect, there seems to be much to commend that view. The task of the valuer is not infrequently assigned to a person such as an auditor or an accountant who has a professional or other association with one of the parties. To apply the test of the appearance of partiality could, therefore, have a real potential to invalidate the valuation made by such a person.[27]
[26](2008) 67 ACSR 130 (“Ceneavenue”).
[27]At [71] per Debelle J, with whom Duggan and Anderson JJ agreed.
The Full Court then referred to Dodds-Streeton J’s obiter dicta remarks and noted that “it is clear that her Honour was not expressing a concluded view.”[28] As neither party had addressed the matter in Ceneavenue, the Full Court found it undesirable to express a concluded view on this aspect of the question of impartiality.
[28]At [71].
More recently, in Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd(No 2),[29] Hargrave J referred with apparent approval to the finding in Macro that actual partiality, rather than the mere appearance of partiality, was necessary in order to justify setting aside a contractual determination.[30] In that case, the parties had agreed to the appointment of Ernst & Young to determine the fair value of certain shares, under a put option deed. The deed provided that the expert’s determination would be binding on the parties.
[29][2008] VSC 478 (“Candoora (No 2)”).
[30]At [25]. His Honour noted by way of footnote that Dodds-Streeton J in Beevers had left open the question of whether Macro should be followed on this point.
However, the court had previously determined in an earlier case between the same parties,[31] that the valuation performed by Ernst & Young should be set aside, because it had not been made in accordance with the deed. In Candoora (No 2), the court had to decide whether to remit the valuation back to Ernst & Young for re-determination, or whether a different valuer should be appointed. The plaintiff argued that a fair-minded observer would have a reasonable apprehension that Ernst & Young would not bring an impartial mind to bear, if the further valuation was remitted back to them for re-determination.
[31]Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd [2008] VSC 367.
Hargrave J held that, viewed objectively, there were reasonable grounds to doubt that Ernst & Young would bring a fair and balanced mind to any further valuation. He came to that conclusion based on evidence as to how they had gone about the original valuation, and their subsequent conduct which demonstrated a propensity to support the impugned valuation.
I do not accept the plaintiffs’ argument that Candoora (No 2) is authority for the bald proposition that a person can be prevented from acting as valuer on the basis of apparent bias. Hargrave J was dealing with a case in which an expert determination had been performed and then set aside for error. Unlike here, the contractual power to appoint the valuer had been exercised and exhausted. His Honour had to consider whether the court should refer the valuation task back to the same expert or appoint a new expert. With respect, it is not entirely clear from the relatively brief reasons for decision what the jurisprudential basis was, on which his Honour concluded that the valuation would not be remitted back to Ernst & Young; at times he seems to be dealing with it as a matter of judicial discretion, in other places as a matter of contractual principles. Rather curiously, one of the parties had sought to argue the matter by reference to administrative law principles.
His Honour considered what the parties would have intended to happen on a re-determination, after the valuation contemplated by the contract had been performed and set aside, and in the particular circumstances before him. That is a completely different situation to the present case, where the valuation contemplated by the contract has not yet been performed. His Honour made it perfectly clear that each case had to be considered on its own facts, in determining whether to remit to the original valuer or appoint a new valuer.
Even if Candoora (No 2) could be read as authority for the proposition that a valuer can be prevented from performing his or her original contractual task on the basis of apparent bias (which I doubt), it represents a very recent development in the law, which could not have been within the reasonable contemplation of the parties at the time of contracting in this case.
Of the cases discussed above, Macro (and the various cases referred to in it) was the only one decided before the shareholders agreement was executed. If one were to construe the shareholders agreement on the assumption that the shareholders were aware of the law at the time of contracting, they would have been aware that actual, and not apparent, bias was necessary before a valuation could be impugned, and that a valuer could not be prevented from performing a valuation on the basis of apparent bias.
For these various reasons, I am not persuaded, either as a matter of proper construction or an implied term, that “the auditor” in clauses 1(d) and (e) “means and intends a person whose appointment is not attended by a credible appearance or soundly-based apprehension of partiality”.
Summary of conclusions
I reject the plaintiffs’ submissions that Mr Cogger is not “the auditor” for the purposes of clauses 1(d) and (e) of the shareholders agreement.
Mr Cogger is the person who is to determine the market value of the Kenros and Raza shares, unless the parties reach agreement that some other person should perform the task. If Mr Cogger makes a reviewable error in the performance of that task, Raza and Kenros may be able to bring fresh proceedings, seeking to have the valuation set aside.
It is therefore unnecessary for me to consider the various arguments relating to the plaintiffs’ prayer for relief, which seeks an order appointing an independent valuer to value the shares.[32]
[32]The only pleaded basis for such a claim was said to be an implied term of the shareholders agreement, to the effect that the court would appoint an independent expert if Mr Cogger was not “the auditor” and the parties were unable to agree on an expert. However, in their submissions, the plaintiffs sought to rely on order 50 of the Supreme Court (General Civil Procedure) Rules, although they subsequently did not press that submission.
I will hear from the parties as to the appropriate form of orders, including orders discharging the interlocutory injunction, and as to costs.
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SCHEDULE OF PARTIES
| No. 4441 of 2008 | |
| BETWEEN: | |
| KENROS NOMINEES PTY LTD (ACN 105 714 789) | Firstnamed Plaintiff |
| RAZA HOLDINGS PTY LTD (ACN 105 695 145) | Secondnamed Plaintiff |
| JOHN MICHELE VEREKER | Thirdnamed Plaintiff |
| RODNEY GRANT ILLINGWORTH | Fourthnamed Plaintiff |
| - and - | |
| TIPPERARY PTY LTD (ACN 103 546 489) (FORMERLY DPC TIPPERARY PTY LTD) | Firstnamed Defendant |
| DUNKELD PASTORAL CO PTY LTD (ACN 005 217 283) | Secondnamed Defendant |
| ALLAN JAMES MYERS QC | Thirdnamed Defendant |
| LAWRENCE RAYMOND COGGER | Fourthnamed Defendant |
| AND BETWEEN: | |
| TIPPERARY PTY LTD (ACN 103 546 489) (FORMERLY DPC TIPPERARY PTY LTD) | Firstnamed Plaintiff by Counterclaim |
| DUNKELD PASTORAL CO PTY LTD (ACN 005 217 283) | Secondnamed Plaintiff by Counterclaim |
| BRANIR PTY LTD (ACN 061 718 876) | Thirdnamed Plaintiff by Counterclaim |
| TOVEHEAD PTY LTD (ACN 003 745 140) | Fourthnamed Plaintiff by Counterclaim |
| - and - | |
| KENROS NOMINEES PTY LTD (ACN 105 714 789) | Firstnamed Defendant by Counterclaim |
| RAZA HOLDINGS PTY LTD (ACN 105 695 145) | Secondnamed Defendant by Counterclaim |
| JOHN MICHELE VEREKER | Thirdnamed Defendant by Counterclaim |
| RODNEY GRANT ILLINGWORTH | Fourthnamed Defendant by Counterclaim |
| CHINO RESOURCES PTY LTD (ACN 082 830) | Fifthnamed Defendant by Counterclaim |
| VERUCCI PASTORAL CO PTY LTD (ACN 005 359 955) | Sixthnamed Defendant by Counterclaim |
| NORTHERN TERRITORY CATTLE CO PTY LTD (ACN 101 111 095) | Seventhnamed Defendant by Counterclaim |