Kinarra Pty Ltd & Anor v On Q Group Limited
[2008] VSC 12
•7 February 2008
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 9281 of 2007
| KINARRA PTY LTD (ACN 004 986 252) and PETER JOHN McDOUGALL | First Plaintiff Second Plaintiff |
| v | |
| ON Q GROUP LIMITED (ACN 009 104 330) | Defendant |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 13 November 2007 | |
DATE OF JUDGMENT: | 7 February 2008 | |
CASE MAY BE CITED AS: | Kinarra Pty Ltd & Anor v On Q Group Ltd | |
MEDIUM NEUTRAL CITATION: | [2008] VSC 012 | |
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CORPORATIONS – Financially assist purchase of shares in contravention of s 260A of Corporations Act 2001 – Financially assist – Materially prejudice – Injunction under s 1324(1) of Act – Presumption and onus of proof under s 1324(1B) of the Act – Onus on parties where injunction sought – Sections 260A(1), 1324(1) and 1324(1B) Corporations Act 2001.
Adler v ASIC (2004) 46 ACSR 504.
Charterhouse Investment Trust v Tempest Diesels [1986] BCLC 1.
Re HIH Insurance; ASIC v Adler (2002) 41 ACSR 72.
Wambo Mining Corp Pty Ltd v Wall Street (Holding) Pty Ltd (1998) 28 ACSR 654.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J W S Peters SC with Mr D J Crennan | Minter Ellison |
| For the Defendant | Mr E N Magee QC with Mr P G Willis and Mr O Bigos | Corrs Chambers Westgarth |
Introduction
By an originating process dated 7 November 2007, Kinarra Pty Ltd (“Kinarra”) and Peter McDougall (“Mr McDougall”) apply for:
(1) A declaration that the transaction proposed by the defendant in exhibit PCMD-2 to the affidavit of Mr McDougall sworn 7 November 2007 will contravene s 260A of the Corporations Act2001 (“the Act”).
(2) An order pursuant to s 1324 of the Act restraining the defendant from entering into or proceeding with the transaction unless it is first approved by the shareholders of the defendant under s 260B of the Act.
On 5 November 2007, Cummins J made an interlocutory order that pursuant to s 1324 of the Act, On Q be restrained from agreeing to issue any shares in On Q to IPay Express Pte Ltd (“IPay”) or its associates until 4.15 p.m. on Friday 9 November 2007.
On 9 November 2007, the parties consented to extend the interlocutory order until 4.15 p.m. on Tuesday 13 November 2007.
When the application came on before me on Tuesday 13 November 2007, I was informed that the parties wished for me to decide the application finally.
The plaintiffs’ claim
The plaintiffs claim that by the transaction referred to below On Q will financially assist IPay to acquire shares in On Q to the material prejudice of On Q or its shareholders in contravention of s 260A of the Act and should be restrained from doing so under s 1324(1) of the Act unless the assistance is first approved by its shareholders under s 260B of the Act.
Legislation
Section 260A(1) “[May assist in limited circumstances]. A company may financially assist a person to acquire shares (or units of shares) in the company or a holding company of the company only if:
(a) giving the assistance does not materially prejudice;
(i) the interests of the company or its shareholders;
(ii) the company’s ability to pay its creditors; or
(b) the assistance is approved by shareholders under s 260B (that section also requires advance notice to ASIC); or
(c) the assistance is exempted under s 260C”.
Section 260A(2) “[Timing of assistance] Without limiting subsection (1), financial assistance may
(a) be given before or after the acquisition of shares (or units of shares); and
(b) take the form of paying a dividend.”
Section 1324(1) “[Court may grant injunction] Where a person has engaged, is engaging or is proposed to engage in conduct that constituted, constitutes or would constitute:
(a) a contravention of this Act; or
(b) attempting to contravene this Act; or
(c) aiding, abetting, counselling or procuring a person to contravene this Act; or
…
the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing”.
Section 1324(1A) “[Affected interest: deeming provisions] For the purposes of sub-section (1):
(b) a company’s contravention of:
…
(ii) paragraph 260A(1)(a) (financial assistance for share acquisition not to prejudice company or shareholders or ability to pay creditors)
affects the interests of creditor or member of the company….”
Section 1324(1B) “[Presumption] If the ground relied on in an application for an injunction is conduct or proposed conduct of a company or other person that it is alleged constitutes or would constitute:
(a) a contravention of paragraph … 260A(1)(a)
…
the Court must assume that the conduct constitutes, or would constitute, a contravention of that paragraph, section or provision unless the company or person proves otherwise”.
Evidence
The plaintiffs relied upon the affidavits of Mr McDougall of 7 November 2007 and 12 November 2007 and the exhibits thereto. The defendant relied upon the affidavit of Harold Edward Christiansen sworn 9 November 2007 and the affidavit of Julian Edward Forsythe Little sworn 9 November 2007 and the exhibits thereto. No deponents were cross examined by any parties.
The relevant people and companies
Mr Christiansen is the chairman of On Q and a director since 18 March 2001. Mr McDougall is also a director of On Q. His company Kinarra is a substantial shareholder in On Q holding 11.1 per cent of the ordinary shares and 78.5 per cent of the outstanding options. Mr McDougall used to be the managing director and chairman of On Q but was recently removed from those positions. On Q and Mr McDougall are already in litigation in the Supreme Court of Victoria (2017 of 2007). In that litigation, On Q is suing Mr McDougall for a failure to repay loans worth approximately $2.6million under a loan agreement dated October 2005. Mr McDougall has counterclaimed against On Q and Mr Christiansen and two other of On Q’s directors for approximately $7million. In that or other proceedings he also claims he is being oppressed by On Q. Mr Julian Little is also a director of On Q.
On Q is listed on the Australian Stock Exchange. On Q and its subsidiaries have developed an electronic business management system known as EBMS suitable for use in a number of computer based applications especially for electronic payments. The business of On Q is to exploit this system and related intellectual property (“IP”). At present On Q does so principally by licensing the system and IP to others to operate and market. The Australian licence to use and market EBMS was granted to Bill Express Limited (“Bill Express”) which was floated on the stock exchange. Bill Express obtained the licence for an initial consideration of $10,000,000 satisfied by the issue to On Q of shares in Bill Express and a royalty payment. Currently On Q holds 37.7 per cent equity in Bill Express and holds options which if exercised would increase its shareholding to 44 per cent. On Q controls Bill Express and consolidates Bill Express’ accounts with its own.
On Q has been seeking to licence EBMS for overseas use since 2005. These efforts have led to the IPay proposal that involves introducing a significant Saudi Arabian company as an equity partner in a Middle East venture.
Summary of the plaintiffs’ case
The plaintiffs, Kinarra and Mr McDougall allege that On Q proposes to issue 10 per cent of its issued capital to IPay. Inextricably interlinked with that proposal is a proposal for On Q to licence its EBMS technology to a proposed joint venture between IPAY and On Q to use and market in the Middle East and elsewhere. The proposed joint venture is to be held 22 per cent by On Q and 78 per cent by IPAY. As mentioned above the Australian licence is held by Bill Express.
The plaintiffs allege that the transaction is on materially disadvantageous terms. The plaintiffs say that although the purchase of the shares in On Q by IPay pursuant to the transaction at 30 cents per share for the 10 per cent of the issued share capital may be seen as initially advantageous to the company in that the current share price stands at 21 cents, the net effect of the transaction is materially prejudicial to the company and to its shareholders as it gives up an asset worth of $80 - $100 million in the hands of the joint venture company, IPay Me & A, for no net financial gain to On Q.
The disadvantageous terms arise not from the purchase price of the shares (which in fact is advantageous) but the terms on which the licence has been granted to IPay. The plaintiffs allege that the net effect of the transfer of the licence and associated agreements and the share purchase (that is the transaction as a whole) is that On Q has financially assisted IPay to acquire the shares to the material prejudice of On Q or its shareholders within the meaning of s 260A(1)(a)(i) of the Act. The plaintiffs do not rely on s 260A(1)(a)(ii), that the transaction materially prejudices On Q’s ability to pay its creditors.
The plaintiffs rely on s 1324(1) of the Act to seek an injunction and rely on s 1324(1A) to claim standing for Kinarra and Mr McDougall to bring the proceedings.
The defendant’s case
The defendant, On Q, on the other hand, denies that by the transaction it is providing financial assistance to IPay to acquire shares in On Q and/or says that the transaction does not materially prejudice it or its shareholders. It says further that the transaction is of great benefit and advantage to it and its shareholders.
Onus of proof
Before assessing the evidence to decide this dispute it is necessary to have regard to who bears the onus of proof in respect of what matters.
The plaintiffs seek a declaration that the transaction proposed by On Q will contravene s 260A of the Act. The plaintiffs bear the onus of establishing that the transaction (in its wider sense) does financially assist IPAY to acquire shares in On Q. As explained below, if the plaintiff satisfies that onus, On Q bears the onus of establishing the transaction does not materially prejudice the persons referred to in s 260A(1)(a).
The plaintiffs also seek an injunction pursuant to s 1324 of the Act restraining On Q from entering into or proceeding with the transaction unless it is first approved by the shareholders of On Q under s 260B of the Act. This ground of relief is contained in an application for an injunction and therefore attracts s 1324(1B) of the Act.
The parties agree that s 1324(1B) is attracted but are at issue as to the extent of the presumption the court must assume. The plaintiffs say that the court must assume that the conduct (i.e. entering into the transaction) constitutes or would constitute a contravention of s 260A(1)(a) unless the company proves otherwise.
The defendant says that the plaintiffs bear the onus of proof to show that the transaction involves the giving of financial assistance for the acquisition of shares in On Q. The defendant says that only once that is shown does the onus then shift onto On Q to show that any financial assistance identified does not materially prejudice relevant parties identified by s 260A(1)(a).
Before venturing further on this issue it is necessary to examine the nature of financial assistance.
Financial assistance
There is no dispute between the parties on the nature of financial assistance and both refer to and rely on Charterhouse Investment Trust v Tempest Diesels[1], where Hoffman J referred to the fact that there is no definition of giving financial assistance. He said that the words have no technical meaning and their “frame of reference is in my judgment the language of ordinary commerce.” Hoffman J also said that one had to look “at all interlocking elements in a commercial transaction as a whole and determine where the net balance of a financial advantage lay.”[2]
[1][1986] BCLC 1 at 10.
[2]See also Santow J in Re HIH Insurance Ltd (in liquidation): ASIC v Adler (2002) 41 ACSR 72 at [341] – [349]; approved by the New South Wales Court of Appeal in Adler v ASIC (2003) 46 ACSR 504; Wambo Mining Corp Pty Ltd v Wall Street (Holding) Pty Ltd (1998) 28 ACSR 654 per Sheller JA at 667-668.
They both also refer to and rely on Re HIH Insurance Ltd (in liquidation); ASIC v. Adler[3] where Santow J construed s 260A of the Act as opting for the impoverishment approach, that is the transaction (looking at all its interlinking elements) affects a net transfer of value to the person acquiring shares. In other words, the purpose of the transaction is no longer relevant, as it was before the 1998 amendments under its predecessor, rather the effect of the transaction.[4]
[3](2002) 41 ACSR 72 at [341] – [349].
[4]Ford’s Principles of Corporation Law [24.670]-[24710].
Further, the elements of financial assistance and material prejudice are linked. That is, the financial assistance to the acquirer is affected by the company transferring net value to the acquirer which maybe prejudicial to the company whose shares are being acquired, its shareholders or creditors.
It is useful to identify how a sale of the licence by On Q at an under value could constitute On Q financially assisting IPay to acquire shares in On Q and how that transaction may mean it is not possible to establish the assistance does not materially prejudice On Q, its shareholders or its creditor.
To do so it is convenient to simplify the elements. Let us assume the licence was granted to IPay at less than its market value. As the plaintiffs do not allege material prejudice to the creditors we shall put that issue to one side. Assume also that IPay is issued shares to the same amount as the under value for which the licence is sold and the sale of shares is linked with the sale of the licence. Further assume that the licence was worth $10million, the licence was the only asset of the company, the company had no liabilities, the licence was sold for $8million to IPay (an under value of $2million), IPay purchased from On Q $2million worth of On Q shares, and the On Q shares had a value of $2 million.
On those assumptions, On Q would begin with $10 million in assets and after the transaction end with $10 million in assets. To that extent it might be said the company is not materially prejudiced. Be that as it may, however, the existing shareholders who initially had an equity of $10million in their shares would now have their equity diluted. If the shares issued to IPay were issued at their net asset backing, the existing shareholders would have their equity diluted by some 20 per cent and it could not be established the assistance did not materially prejudice On Q’ shareholders.
If on the other hand, the licence was sold for $7million, the argument that the company had been materially prejudiced as well as the shareholders would be stronger. In this case, even taking into account the purchase of the shares there would be a net transfer of value to IPay.
On this analysis, and as the plaintiffs argue, it is not to the point that IPay is paying full value for the shares. Despite IPay paying full value for the shares, the plaintiffs claim that the transaction will financially assist IPay to acquire shares in On Q and that both the company and its shareholders are materially prejudiced.
Presumption
The New South Wales Court of Appeal dealt with onus and s 260A in Adler v ASIC[5] an appeal from the decision of Santow J in Re HIH Insurance;ASIC v Adler[6]. At issue was whether in proceedings under s 209D(2) of the Act alleging that Adler was involved in a company’s contravention of s 260A, ASIC should have proved that Adler was aware not only of the financial assistance given by HIHC to another company to acquire shares in HIHC but that he also knew that the assistance did materially prejudice HIHC or its shareholders.
[5](2003) 46 ACSR 504.
[6](2002) 41 ACSR 72.
In Re HIH Insurance; ASIC v Adler Santow J held that to make out a contravention of s 260A(1) it was only necessary to show the relevant company financially assisted a person to acquire shares in the company and the onus was on the person seeking to defend the transaction to show that the assistance does not materially prejudice the persons referred to in para (a). He said that establishing such assistance does not materially prejudice the parties referred to in para (a) was in the nature of a defence rather than an element of the contravention of s 260A(1). Accordingly this was a relevant factor in deciding whether ASIC had to establish that Mr Adler was aware that the financial assistance to acquire shares was materially prejudicial to the persons referred to in para (a).
The Court of Appeal agreed with Santow J’s view on onus and s 260A(1). Giles JA said that “the substance of s 260A(1) is that financial assistance is not to be given unless one of some conditions is satisfied, and it begins with a prohibition which does not apply in the circumstances stated in its paras (a), (b) and (c).” He said the conditions suggest that the company has the burden of proof because “it would otherwise be necessary for the plaintiff to exclude a great many matters some of which are known only to the company.” He said also that “the negative in para (a) suggests the burden is on the company, since the issue is not whether giving the assistance is prejudicial to the company, its shareholders or its creditors, but whether giving the assistance is not prejudicial to any of them, and the tenor of the provision is that the company can give the financial assistance only if it is satisfied that there will not be prejudice.”[7]
[7](2003) 476 ACSR 504, at [410].
Giles JA did not find s 1324(1B) of the Act to be of assistance for or against his view on onus and s 260A(1) “since it deals with contravening conduct in general: it does not deal with a debatable element of contravening conduct such as material prejudice in s 260A(1), let alone with s 260A(1) itself.”[8] Mason P and Beazley JA agreed with the Giles JA.
[8]Ibid at [411].
I accept the interpretation put on s 260A(1) and its operation in Adler v ASIC.
Accordingly, irrespective of the presumption raised by s 1324(1B) the company would bear the onus of establishing s 260A(1)(a) that is “giving assistance does not materially prejudice” the company, its shareholders or its creditors.
Turning to s 1324(1B), which states, “if the ground relied on in an application for an injunction is conduct or proposed conduct of a company or other person that is alleged constitutes, or would constitute a contravention of … paragraph 260A(1)(a) … the court must assume that the conduct constitutes, or would constitute, a contravention of that paragraph unless the company proves otherwise.” In other words the court must assume that by the conduct the relevant company has financially assisted or proposes to financially assist a person to acquire shares in the company unless the company proves otherwise. The onus of establishing the defence that the assistance does not materially prejudice the persons referred to in (a) rests on the company irrespective of s 1324(1B).
In my opinion, the defendant’s construction of s 1324(1B) placing the onus on the plaintiffs of establishing that the company is or proposes to financially assist IPay to acquire shares in On Q would effectively deprive the presumption in s 1324(1B) of any material work.
Accordingly, in my opinion, on the injunction application, and on the case alleged by the plaintiffs, the plaintiffs only bear the onus of proving the transaction that the plaintiffs allege constitutes or would constitute a breach of s 260A(1). In other words, the plaintiffs must prove the conduct or proposed conduct of On Q the effect of which may constitute financial assistance to a person to acquire shares in On Q.
It seems to me that consistent with this approach the assumption required to be taken by the court would only arise if the alleged effect was open on the conduct or proposed conduct proved by the plaintiffs. If the alleged effect was not open on the conduct proved then the presumption by the court that the conduct constitutes or would constitute a contravention of s 260A(1)(a) would not arise.
In this case the plaintiffs have to prove a transaction of the kind that leaves open the allegation that by the transaction On Q is financially assisting IPay to acquire shares in On Q. Thus in this case, if the plaintiffs do so the court must assume that the conduct so proved constitutes or would constitute a contravention of s 260A(1)(a) unless On Q proves otherwise or On Q makes out the defence available in par (a).
The defendant placed reliance on the distinction between basic facts and a presumed fact flowing from the establishment of the basic fact. I accept the distinction between the basic fact and a presumed fact which is drawn upon the establishment of the basic fact as referred to by J.D. Heydon in Cross on Evidence[9]. Heydon gives as an example the presumption of death arising from the fact that someone has not been heard of for seven years or more by those who would have been likely to hear from him[10].
[9]7th Australian Edition [7235] – [7255].
[10][Ibid] 7240.
The defendants say the basic fact to be proved by the plaintiffs is that the transaction involves the giving of financial assistance for the acquisition of shares in On Q. The defendant says that only once that basic fact is proved by the plaintiffs the onus then shifts onto On Q to show that any financial assistance identified does not materially prejudice relevant parties identified by s 260A(1)(a). For the reasons given above I reject that submission.
In my opinion, in this case the primary fact is the conduct or proposed conduct (i.e. the transaction) that is alleged by the plaintiffs to constitute or would constitute a contravention of s 260A(1)(a) of the Act.
Conclusions
At the conclusion of the hearing of this matter I reserved my decision. I declined to continue the existing interlocutory injunction that restrained On Q from agreeing to issue any shares in On Q to IPAY until the determination of the matter. I found that the plaintiffs had established a serious issue to be tried, but that the balance of convenience favoured the Court not prejudicing the transaction by restraining the parties from carrying it out.
On the final hearing, the plaintiffs seek a declaration that the transaction proposed by On Q will contravene s 260A of the Corporations Act. As indicated above the plaintiffs bear the onus of establishing that the transaction (in its wider sense) does financially assist IPay to acquire shares in On Q. The defendant bears the onus of establishing that the giving of the assistance does not materially prejudice the company, its shareholders or its ability to pay its creditors, if it wishes to rely on this defence.
For the reasons expressed below, the plaintiffs have not established on the balance of probabilities that by the transaction On Q will financially assist IPay to acquire shares in On Q. The plaintiffs also seek an order pursuant to s 1324 of the Act restraining On Q from entering into or proceeding with the transaction unless it is first approved by the shareholders of On Q under s 260B of the Act. As mentioned above this grant of relief is contained in an application for an injunction and attracts s 1324(1B) of the Act.
In my opinion, the plaintiffs have proved the conduct necessary to attract the presumption. In my opinion, however, for the reasons expressed below the defendant has proved “otherwise” by proving that the transaction did not provide financial assistance to IPay to acquire shares in On Q. If I am wrong about the financial assistance, I find that On Q has made out the defence that the financial assistance will not materially prejudice the company or its shareholders. It is conceded by the plaintiffs that the transaction does not materially prejudice the company’s ability to pay its creditors.
If I am wrong as to the nature of the onus of proof and the plaintiffs do have to prove that On Q financially assisted IPAY to acquire shares in On Q to raise the presumption, as the defendant asserts, then as mentioned above I find that the plaintiffs did not do so.
Accordingly, I find that the plaintiffs have not established that the transaction will contravene s 260A of the Act and is not entitled to the declaration sought.
Further, I refuse the application for an order sought pursuant to s 1324 of the Act to restrain the defendant from entering into or proceeding with the transaction unless it is first approved by the shareholders of the defendant under s 260B of the Act.
Details of the transaction
The proposed transaction is between On Q and IPay. At present, the transaction comprises agreed terms of a binding but preliminary heads of agreement governed by Australian law. On 5 November 2007, the term sheet for the transaction was signed by IPay. On Q says that, but for the interlocutory injunction granted late on that day by Cummins J, On Q would have signed the term sheet in accordance with the authority of a resolution of its board of directors passed on 1 November 2007 by a majority of four votes to one.
There are three parts to the transaction. The parties agree that these parts must be assessed as a whole in determining whether or not On Q financially assists IPay to acquire shares in On Q that materially prejudices On Q or its shareholders.
Part One – Share Subscription Agreement
Under this agreement IPay agrees to enter into an agreement to subscribe for 10 per cent of On Q’s capital at 30 cents per share ($2 million). At the trial date, the shares traded on the ASX at 21 cents per share ($1.4 million). IPay must hold them for at least twelve months. The amount is payable and shares are to be allotted within seven days of execution of the subscription agreement.
For most of the period that the transaction was under negotiation, IPay offered to subscribe for 15 per cent of On Q. Mr Christiansen deposed that Mr McDougall supported a placement of 10 per cent at the board meeting of 1 November 2007. Mr McDougall says he did so, but with qualifications.
Part Two – Joint Venture Company – Shareholder Agreement
Under the shareholder agreement, On Q and IPay agree to form an incorporated joint venture company under Singaporean law, with nominal capital held as to 22 per cent for On Q and 78 per cent for IPay to be known as IPay Me & A. On Q says that typical joint venture provisions are provided for, such as just and faithful dealings; conflict of interest and non-competition; a list of major decisions which must be agreed unanimously between the venturers; ‘sole risk’ projects; pre-emptive rights on disposal; dispute resolution; default and winding up provisions and so on, as well as normal commercial audit and reporting provisions. The shareholder agreement is to be governed by Australian law.
Under the agreement, IPay must fund the first US$20 million of expenditure by the joint venture; thereafter, the parties fund expenditure pro rata or elect to dilute their equity. On Q can never be diluted to less than 10 per cent of capital.
The term sheet states that this $20 million funding provided by IPay “shall comprise an equity contribution for IPay’s initial shareholding in the [joint venture] company”. The parties agree to use reasonable endeavours to list the joint venture company within two years.
Part Three – Licence and Services Agreement
Under the licence and services agreement, On Q agrees to grant a licence to the joint venture company to use On Q’s technology and intellectual property. The term is twenty years, subject to termination at On Q’s or IPay’s election if IPay does not within eighteen months deliver to the joint venture company two executed contracts for the implementation of profitable projects. The licence is exclusive for the Middle East and Africa and non-exclusive for Pakistan, India and the Philippines.
There is no separate licence fee or royalty payable. Instead, On Q has its interest of 22 per cent of the licensee. Mr Christiansen deposes that On Q endeavoured to negotiate a royalty but was not successful. Mr Christiansen says that IPay maintained that the choice was between equity in the joint venture or a royalty. On Q decided that equity in the joint venture was more valuable. Mr Christiansen deposes that while Mr McDougall long urged that a royalty should have been obtained, in the end, at the board’s meeting of 1 November, Mr McDougall supported the Licence without a royalty.
The joint venture company has a first right of refusal to obtain an exclusive licence for additional markets. The terms of such additional licences are at large. The plaintiffs object to this aspect of the arrangement. But On Q allege it involves no loss of ownership or autonomy by On Q of its IP.
On Q has the right under the agreement to provide services to the joint venture company on favourable terms. Its obligation is capped at $US400,000 per annum at its usual commercial rates; beyond that, for services provided it is entitled to a mark-up of between 100 per cent and 50 per cent above On Q’s costs.
Plaintiffs’ characterisation of the transaction
The plaintiffs say that On Q will licence its only real asset, the core technology and intellectual property under the Electronic Business Management Services (“EBMS”) and associated technology to the joint venture vehicle IPay Me & A. The plaintiffs say further that On Q will receive no royalties or any other direct financial benefit for doing so. As indicated above, the plaintiffs point out that On Q will own 22 per cent of the joint venture vehicle and IPay will own the remaining 78 per cent. They also point out that IPay will inject capital up to US$20 million “on an ongoing basis” to fund initial expenditure in the joint venture vehicle “as required” over twenty years on a case by case basis. The plaintiffs say, however, that On Q is not required to make an equivalent or pro rata equivalent capital investment in the joint venture vehicle. The plaintiffs say that if On Q was required to do so, the pro rata amount On Q would have been required to invest is $5.64 million.
The plaintiffs say that, in effect, IPay has received 78 per cent interest in a licence of intellectual property worth between $100 million [that figure will be shortly explained] and in return On Q is relieved of the obligation of the investment of $5.64 million in the joint venture vehicle, as well as receiving the proceeds of the share transaction which the plaintiffs adds may be of no premium as to par value or equity value or a premium of approximately $600,000 of market value.
The plaintiffs allege that the value of the Australian licence was $40 million. Mr McDougall deposed that the Australian licence was sold to Bill Express and that On Q realised $40 million on the transaction. Mr McDougall deposed that the rights to licence the same technology to countries with populations of over ten million like that of Australia is likely to be in excess of $100 million.
Furthermore, the plaintiffs say that IPay is not obliged to make any other ongoing capital investment in the joint venture vehicle by virtue of the transaction. The plaintiffs point out, that On Q, however, is obliged to provide services of up to $US200,000 for each country based on usual commercial time and material rates. The plaintiffs say that in the circumstances where On Q is unable to provide these services, the likely outcome would be that On Q would be in breach of the transaction and forced to sell its 22 per cent shareholding in the joint venture vehicle at 75 per cent of a valuation.
The plaintiffs allege that analysing these terms of the transaction alone, the financial benefit to On Q comprises, at best, the differential between:-
(a) the sale price of the shares at thirty cents and current market value of twenty cents, being approximately $600,000;
(b) the retention of the deposit of $550,000; and
(c) a 22 per cent share of the value of the joint venture vehicle.
The plaintiffs allege further that On Q licences an asset worth over $80-100 million and receives in return no royalties, dividends or other financial benefit. The value of the licence in the hands of IPay Me & A is at least $80-100 million (assuming a population of 200 million).
The allegation that the licence is worth $80-100 million is based on what Mr McDougall says is Mr Christiansen’s estimate. In particular, Mr McDougall relies upon an email dated 15 October 2007 sent by Mr Christiansen to the directors entitled “Indicative IPay Valuation”. The email begins as follows:-
”Dear Directors,
There has been discussion within board meetings about the possible value of the IPay deal to the company that have concluded that the deal would be of positive value to the company. The purpose of this email is to summarise for your consideration indicative basis for assessing the valuation as this project matures as follows.”
There follows some calculations which include calculations of the cost to On Q and the benefits to On Q, and concludes with an indicative value of $80-100 million. The email then progresses as follows:-
“As we have observed in our discussion of this matter, on the basis there is clear agreement that this project will be positive and also of long term strategic and commercial advantage to the company (and its shareholders), then… for the purpose of our decision making …, whether the project has a $5 million value or a $100 million value, the decision to support it should be the same.
Consequently while the project is in flux there is no significant advantage in seeking an independent view of the valuation. In any case a valuer would at this stage have to rely substantially on the parameters and data we would provide hence to a large extent we would simply get back the same result we gave any valuer and while this might appear to have been independently reviewed … experience would say that the cost would be substantial and the benefit of this would be low and would not alter our decision making. i.e. we are negotiating the best and most advantageous terms in any case.
If any of you disagree with this view, please put your comments forward.”
The plaintiffs have sought to construe this as a valuation of the licence, that is, the value of the asset being received by the joint venture company. On Q says the email sought to give an indicative value of the proposed transactions to On Q rather than the value of the licence to IPay M & E. In my view the email was seeking to value the potential benefit of the joint venture agreement to On Q. It does not purport to be a valuation of the assets being received by the joint venture company. This is particularly important in this case because this is one of the main pieces of evidence relied upon by Mr McDougall in establishing the financial assistance being allegedly given to IPay to acquire shares in On Q along with the value of the licence imputed by the value of the Australian licensee Bill Express.
The plaintiffs put forward what they say is a rough balance sheet of the proposed joint venture vehicle IPay Me & A, which they say starkly reveals where the net financial benefit lies:
Assets: Cash: approx AU $23,000,000 (US $20,000,000)
(proposed Capital Investment by IPay)
Intangibles: AU $80 – 100,000,000
(Value of licence)
Liabilities: AU $0 (Royalties)
Total Net Assets: AU $103 – 123,000,000
Shareholding: IPay 78%
On Q 22%
On this basis the plaintiffs allege that IPay’s shareholding is worth between approximately $80 million and $98 million. They say On Q’s shareholding is worth between approximately $22 million and $27 million. They also say that On Q also receives a $600,000 premium on the current market value on the issue of the shares. On Q retains a deposit of $550,000.
The plaintiffs say that on this analysis the net financial benefit to On Q by virtue of the transaction is at best $27,150,000 for which it has effectively exchanged an asset worth at least $80 million.
The plaintiffs conclude that IPay receives a net financial benefit of between $56 million and $72 million in exchange for capital investment of US$20 million and a share purchase of $2 million.
It follows from my finding about the true meaning of the email of 15 October 2007 headed “Indicative IPay Valuation” that a major premise of this calculation has not been made out and the calculation is of little weight.
The plaintiffs say that although the purchase of the shares in On Q by IPay pursuant to the transactions at 30 cents per share for the 10 per cent of the issued share capital may be seen as initially advantageous to the company in that the current share price stands at 21 cents, the net effect of the transaction is materially prejudicial to the company and to its shareholders as it gives up an asset worth $80 - $100 million to IPay Me & A for no net financial gain to On Q.
Further, the plaintiffs say that On Q is not able to provide the services anticipated by the transaction and it appears unlikely that it will enjoy any financial benefit by virtue of the provision of those services.
The plaintiffs say that no analysis of benefits has been provided to the board despite numerous requests by McDougall.
The plaintiffs say the “services” are to be supplied by Harold Christiansen, Ian Christiansen, Julian Little, Ian McKenzie and Sandra Di Donato by way of Technology Business Services Pty Ltd, a service provider to On Q and a related company to the three directors.
Evidence relied on by On Q
There are several pieces of evidence relied on by On Q to establish that the licence agreement will not financially assist IPay to acquire shares in On Q, or if it does the assistance will not be materially prejudicial to On Q or its shareholders.
In summary these are:
(a) The board of On Q has acted in what it considers to be the best interests of On Q and its shareholders. This includes the evidence of Mr Christiansen of why he thought the transaction was in the best interests of On Q and its shareholders.
(b) The email of Mr Christiansen of 15 October 2007 infers that the licence terms and other aspects of the transaction were not structured to financially assist IPay to purchase shares in On Q and that the transaction dos not materially prejudice On Q or its shareholders.
(c) The evidence of the reasons given by the CEO of IPay for the purchase of the shares.
(d) There was no suggestion by McDougall when the transaction was being considered by the board that the licence was being sold at an under value to financially assist IPay to acquire shares in On Q or that the issue of the shares materially prejudiced On Q or its shareholders.
(e) The matters raised by Mr McDougall do not establish that the licence was sold at an under value or that the transaction was to the material prejudice of On Q or its shareholders.
(f) Mr McDougall is a substantial shareholder and supported the share issue. The four directors who voted in favour of the transaction are all substantial shareholders.
I will now elaborate on these grounds.
Mr Christiansen deposed that he is a qualified accountant holding a Bachelor of Business-accounting degree. He says he has twenty years experience in the technology industry and he is one of the founders of the present On Q business and a founder of Dial Time Pty Ltd (now Bill Express). He says that as a software developer and CEO, he has many years’ experience in the theory and the practical aspects of selling technology with unique features. He says that he has experience in valuing prices for services arising when there is no ready market benchmark prices for services that are largely unique.
Mr Christian deposed that the key benefits to On Q of the transaction were as follows:
(a)On Q is able to retain the US$550,000 payment already made to it under the stalled 2005-6 proposal.
(b)In lieu of a royalty:
(i)On Q is to receive a subscription of A$2 million for new shares in On Q (10% of On Q capital issued at 30 cents each);
(ii)On Q to have a free carried interest of 22% in the joint venture, in exchange for the majority parties being obliged to commit US$20m of expenditure to the joint venture.
(c)On Q is to provide services at considerable profit margin (between 50%‑100% over cost).
(d)On Q’s exposure is limited to $200,000 per territory per year to a maximum of two territories per year.
(e)On Q will receive 22% share [clause 1(a)] in the joint venture “in consideration for provision of a licence and its commitment to supply goods, which it is not bound to supply if it is not feasible” [clause 1(b)].
(f)On Q is not required to contribute on a pro rata basis with IPay in order to receive its 22% of the shares in the IPay joint venture. IPay is also required to fund the first US$20million [clause (k)(a)].
(g)In the event of further capital being used, On Q has a “non‑dilutable” 10% equity if On Q elects not to participate on a pro rata basis [clause 1(h)].
(h)On Q has the right to mark up the costs of its services (provided it spends the first $200,000 at its cost if it agrees it is feasible and capped at On Q’s discretion at $400,000 in any one year across multiple countries) and to mark up by 100% the next $300,000 of services provided and to mark up 50% thereafter.
(i)On Q is granted the right of exclusive service provider (at its discretion) [clause 1(u) and (v)]. By way of comparison Mr Christian says using Bill Express’ annual services expenditure as a guide and assuming three countries were deployed (and there is potential for more) across the Middle East and Africa, then it is conceivable that these rights could be worth over $10m per year profit to On Q.
(j)There exists a further strategic opportunity for On Q for direct sales of single “electronic goods and services” from its other operating subsidiaries such as Vietnam and Australia to sell those products electronically into the Middle East venture (telephony, games, internet products et cetera). Mr Christian says this opportunity grows as more countries are deployed.
(k)On Q also has the right to a placement of 10% of its stock at a 50% premium to the current market price [clause 1(a) and (e)]. Mr Christian says a further benefit is that the company has struggled to establish an operating business in the Middle East, despite that it is has done a great deal of work and has done a joint venture in Dubai and performed substantial analysis and negotiation across Egypt, Bahrain and a broader United Arab Emirates, Tanzania. The partners of these prior ventures were introduced by On Q to IPay and as a result their decision was to propose a rearrangement of the prior joint venture to enable IPay to join and bring their substantial access to funds and their expertise for the benefit of the IPay joint venture.
(m)Mr Christian says that he was one of the principal founders of the Middle East venture but he was diagnosed with advanced prostate cancer two years ago and he has been limited and will continue to be limited in providing expertise and driving this business forward. He says he was one of the founders of On Q’s business and the partners in the prior joint venture relied somewhat on him bringing the same energy to the Middle East. He says IPay has the credentials to provide the necessary expertise required.
(n)Mr Christian says a further benefit of the IPay joint venture is that it protects On Q’s reputation in the region and avoids a fall‑out with the prior influential partners who have invested time and money to progress to this stage.
(o)Mr Christian says another benefit of the IPay proposal is the sophistication and knowledge of the IPay partners about the equity markets in the Middle East. By protecting the operating capabilities of the IPay joint venture, the opportunity to plug into the growth in the equity markets in Dubai, which is an important benefit, is provided for. [clause (c)].
(p)Finally, he says a benefit of the IPay proposal is that it incorporates the former Egyptian partner. He says these partners have been most patient, honest and resilient. It is beneficial that the IPay joint ventures includes these parties who together will as part of the new joint venture increase their equity contribution from $8mUSD to $20mUSD.
Mr Little a director of On Q deposed that on 21 October 2007 he attended a meeting at the Shangri La Hotel in Sydney to discuss the proposed IPay joint venture with On Q at which Mr McDougall was present. At the meeting Mr McDougall asked if the placement of shares in On Q was linked to the joint venture proposal. Mr Little says that Mr Queida the CEO of IPay stated that the placement was crucial to doing the licence as IPay considered it important to have an equity holding in On Q as the licensor of the technology. Mr Little deposed that Mr Abraham a director of Al Othman the existing Middle East joint venture partner of On Q said that Al Othman often invests in companies that it does business with and therefore, in his view, the investment in On Q and the licence agreement were mutually dependant. There was no evidence or suggestion by Mr McDougall that the licence was granted at an under value to provide financial assistance to IPay to acquire the shares.
Mr Christiansen deposed that as at 9 November 2007 when he swore his affidavit On Q’s shares were trading at around 21 cents. At 9 May 2007, he says the share price was 30 cents and over the last six months the price has traded in the range of a high of 44 cents and a low of 20 cents. He says as at 30 June 2007 on Q’s net assets comprised $19,854,000 or approximately 29.9 cents per share.
The board of On Q considered the transaction at great length over the period 26 September to 1 November 2007. It says there were twelve substantive board discussions or memoranda circulated in that time. It says that Mr McDougall peppered the board with questions and criticisms throughout, as his affidavit sets out at length.
There is no suggestion by Mr McDougall that the four directors who supported the transaction did so other than in the belief that the transaction was in the best interests of the company. Mr Christiansen deposes that he believes that the transaction is in the best interests of the company and its shareholders. He was not cross examined or challenged on that evidence.
Mr Christiansen’s email of 15 October 2007 to the board indicates that Mr Christiansen was of the view that the transaction was in the best interests of the company. In particular there is no suggestion that Mr Christiansen considered the company was transferring any value to IPay that was properly On Q’s.
Further, the email does not suggest that the licence was granted to the joint venture at less than its full value in order to assist IPay to acquire shares in On Q. It is also significant that despite the numerous queries that Mr McDougall made about the transaction at no stage did he suggest that the licence was granted under value to assist IPay acquire shares in On Q.
The four directors who voted in favour of the transaction are all substantial shareholders.[11] Mr McDougall through Kinarra has a holding of 11.1 per cent ordinary shares and 78.5 per cent of the options on issue. There was no suggestion by Mr McDougall that his share equity was being diluted by the transaction. Mr McDougall even supported the share issue. Nor would one expect the other directors to cause the company to enter into a transaction that had diluted their shareholding. I draw the inference from this evidence that all directors were of the view that the share issue did not dilute the equity of their own holdings.
[11]Harold Christiansen 9.5 per cent, Ian Christiansen 7.2 per cent, Stephen Fitzgerald 2.9 per cent and Julian Little 1.6 per cent, according to the 2007 annual report.
Has On Q proved otherwise?
On one hand I have assertions deposed to by Mr McDougall that the licence has been sold at an under value backed by rational arguments but not based on proven facts. I also have assertions by Mr Christiansen and Mr Little on behalf of On Q that the licence is to be sold at a value which is in the best interests of the company. Again these are mainly assertions based on rational arguments and generally unsupported by proven facts.
There is no evidence that the four majority directors were doing other than what they considered to be in the best interests of the company and its shareholders. Valuations depend to a great deal on expected earnings. These by there nature involve future estimates and opinion. Taking these expected earnings into account the directors consider the transaction is in the best interests of the company. Mr Christiansen the chairman has deposed to these matters.
In assessing whether On Q has proved otherwise, the issue arises whether or not its evidence should be assessed on its own or along with the evidence of the plaintiff. For present purposes, I assume, without deciding, that On Q must prove otherwise taking into account all evidence adduced.
The evidence relied on by the plaintiff
Mr McDougall asserts that by the transaction On Q will financially assist IPay to acquire shares in On Q. Although Mr McDougall so asserts and with rational arguments to support his assertions, he presented no factual evidence which establishes his assertions as fact. For example, what am I to do with the fact that the joint venture is not to pay a royalty or guaranteed dividend? How do I, with out further evidence weigh the disadvantage of that fact with the benefit that IPay contributes the first US$20million to the joint venture? How do I assess and use the value of the Australian licence as a guide to the value of a licence to the Middle East and elsewhere? I am unable to do so. What I am left with is merely unfounded allegations. When I raised that issue, the plaintiffs dealt with it by relying on the presumption in s 1324(1B).
Conclusion on “proved otherwise”
Taking into account both the evidence adduced by both the plaintiffs and the defendant, On Q does establish on the balance of probabilities that the transaction as a whole will not involve On Q financially assisting IPay to acquire shares in On Q to the material prejudice of On Q or its shareholders.
Accordingly, the presumption raised by s 1324(1B) of the Act is not available to the plaintiffs and the plaintiffs have not otherwise made out the contravention of s 260A(1).
Defence of not materially prejudice.
Further, if contrary to my finding, by the transaction On Q will financially assist IPay to acquire shares in On Q, I am satisfied that the defendant has made out the defence of establishing the transaction will not materially prejudice the company, its shareholders or the company’s ability to pay its creditors.
Orders
The application will be dismissed with costs including reserved costs.
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