Knights Quest Pty Ltd v Daiwa Can Company

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS LIST

S ECI 2016 060

KNIGHTS QUEST PTY LTD (ACN 116 122 939)	First Plaintiff
SMS MANAGEMENT PTY LTD (ACN 101 453 865)	Second Plaintiff
and
BAROKES PTY LTD (ACN 079 714 579)	First Defendant
DAIWA CAN COMPANY	Second Defendant

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JUDGE:	SIFRIS J
WHERE HELD:	Melbourne
DATE OF HEARING:	26-29 March 2018, 4-5 April 2018
DATE OF JUDGMENT:	3 August 2018
CASE MAY BE CITED AS:	Knights Quest Pty Ltd v Daiwa Can Company and Anor
MEDIUM NEUTRAL CITATION:	[2018] VSC 426

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CORPORATIONS – Oppression – Whether conduct contrary to the interest of members as a whole – Whether conduct unfairly prejudicial to or unfairly discriminatory against member – Whether second defendant should have required its subsidiary to take a licence of first defendant’s intellectual property – Second defendant persistently denied infringement of intellectual property – Second defendant did not represent that it would take a licence – Ongoing discussions but issue never resolved – Conduct was not oppressive – ss 232, 233 Corporations Act 2001 (Cth).

CORPORATIONS – Oppression – Whether the second defendant’s continued competition with the first defendant constituted oppression – Restrictions on the second defendant’s business were not specifically dealt with or agreed to in discussions or contract – Conduct was not oppressive – ss 232, 233 Corporations Act 2001 (Cth).

CORPORATIONS – Winding up – Whether winding up on just and equitable ground justified – Breakdown in relationship – No mutual trust or confidence – Deadlock – Company no longer a going concern – Winding up order should be made – ss 461(1)(k), 467(4) Corporations Act 2001 (Cth).

CONTRACT – Obligation to act in good faith and use reasonable endeavours – Whether the second defendant was obliged to cease competing with the first defendant – Where obligations informed by pre-contractual discussions and conduct – Second defendant asserted throughout discussions that it was entitled to continue competing and was unwavering in its position – Plaintiffs and first defendant were aware that the second defendant would continue competing – Second defendant was entitled to continue competing with plaintiff.

CONTRACT – Obligation to act in good faith and use reasonable endeavours – Where infringement proceedings commenced by plaintiffs in the name of the first defendant against the second defendant and its subsidiary – Second defendant persistently denied infringement of intellectual property – Second defendant applied to invalidate first defendant’s patent – Invalidation was a reasonable step to protect the second defendant’s commercial position.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	JT Gleeson SC and N Bender	Yeldham Price O’Brien Lusk
For the Defendant	EN Magee QC and RET Wodak	Foster Nicholson Lawyers

HIS HONOUR:

A. Introduction

Barokes Pty Ltd (‘Barokes’) is an Australian company based in Melbourne. The plaintiffs are shareholders in Barokes holding 26.7 per cent (‘Knights Quest’) and 13.3 per cent (‘SMS Management’) respectively. Knights Quest is an Australian company associated with Mr Gregory Stokes, whereas SMS Management is an Australian company associated with Mr Steve Barics. Mr Stokes and Mr Barics are directors of Barokes.

The remaining 60 per cent of Barokes is held by Daiwa Can Company (‘Daiwa’). Daiwa, a Japanese company, acquired its majority holding in 2012 for a total consideration of about $18 million. Following its acquisition, Daiwa appointed two directors to the board of Barokes, Mr Yoshitaka Ikeda, and Mr Tetsuo Yamashita. The board is deadlocked and is, and has for some time been, unable to effectively manage the business of Barokes.

Barokes holds or is the applicant for patents referred to as ‘Vinsafe’ in 17 countries, which includes Japanese patent JP 3668240 (‘JP 240’),[1] with priority dates from 28 September 2001.
[1]This patent has subsequently been declared invalid by the Japanese Patent Office (1 March 2018) and by the Tokyo District Court in a preliminary opinion dated 30 January 2018.

In August 2015, Barokes commenced proceedings in Japan, against Daiwa, its major shareholder (and others), for infringement of JP 240 (‘the Japanese Proceeding’). As a result of challenges to its authority to do so and other matters as set out below, Knights Quest and SMS Management (holding 40 per cent of the shares in Barokes) applied nunc pro tunc under s 237 of the Corporations Act 2001 (Cth) (‘the Act’) for leave to bring (or continue) the Japanese Proceeding in the name of Barokes.

On 7 June 2016 I granted Knights Quest and SMS Management leave to sue Daiwa in the name of Barokes[2] (‘the Derivative Proceeding’).
[2]The case is mistakenly cited as Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296.

There are two further proceedings being heard together with the Derivative Proceeding.

Proceeding S ECI 2015 307 commenced on 24 August 2015 (two days before service—but after issue —of the Japanese Proceeding on Daiwa), in which Daiwa seeks to wind up Barokes on the just and equitable ground, remove Mr Stokes as a managing director and invalidate a default notice served by Knights Quest and SMS Management on Daiwa for alleged defaults under a Shareholders Deed (‘the Winding Up Proceeding’).

Proceeding S ECI 2015 309 commenced on 26 August 2015 (the day of service of the Japanese Proceeding on Daiwa), in which Knights Quest and SMS Management (‘the Minority Shareholders’) allege oppression by Daiwa and seek to buy Daiwa’s shares in Barokes, and also seek orders allowing Mr Stokes to commence and continue with litigation in the name of Barokes, including a proceeding in China and the Japanese Proceeding (‘the Oppression Proceeding’).[3]
[3]Prior to the hearing the Minority shareholders indicated that they were not buyers but sellers of their holdings in Barokes.

All proceedings were due to be heard on 27 January 2016. However, the matters were adjourned in order to enable the Derivative Proceeding to be heard.

Over the last year numerous amendments have been made to the pleadings, resulting in claims made by and against each shareholder. As these claims relate to the affairs of Barokes and are relevant to each party’s claim of oppression, it was desirable that these claims be heard together. As events transpire, they are critical to a resolution of the proceedings.

In this regard, the Minority Shareholders claim that the conduct of Daiwa was in breach of the Shareholders Deed. The alleged conduct of Daiwa is pleaded as follows:

(a) not requiring Monde Shuzo Ltd (‘Monde’), a subsidiary or related company of Daiwa, to take a licence from Barokes;

(b) carrying on the business of the sale and promotion of wine in cans with Monde and not with Barokes;

(c) instructing its nominee directors to vote against the resolution, proposed by Barokes, to institute proceedings in Japan to protect the Japanese patent;

(d) seeking to invalidate the Japanese patent;

(e) assisting in the application to invalidate the Chinese patent;

(f) seeking to call up the working capital loans made by Daiwa to Barokes;

(g) bringing proceedings to wind up Barokes.

It is also alleged that such conduct constitutes oppressive conduct within the meaning of s 232 of the Act thereby enlivening the broad provisions of s 233 relating to relief.

For its part, Daiwa claims that the Minority Shareholders and their directors engaged in misleading or deceptive conduct prior to the execution of the Shareholders Deed or the Share Purchase Agreement (pursuant to which it acquired its shareholding) effective from 27 August 2012. A further claim is made relating to breaches of the Shareholders Deed and, and in particular, a failure to achieve agreed targets. These claims were not pressed by Daiwa.

There is obviously a deadlock and Barokes cannot continue to operate as envisaged by the shareholders. The joint venture has failed. Either Barokes must be wound up or Daiwa must buy the shares of the Minority Shareholders at a fair value. The Minority Shareholders’ preferred course is to be bought out at fair value, taking into account the conduct complained of. Daiwa’s preferred course is the winding up of Barokes.

Resolution of the differing position of the parties will, for the most part, depend upon the Minority Shareholders making good their allegations as to the conduct of Daiwa. If Daiwa is in breach of the Shareholders Deed in the manner identified, its conduct will clearly be held to be oppressive and, in such circumstances, the Minority Shareholders would ordinarily be entitled to appropriate relief, namely that their shares be bought at a value that takes into account such conduct.

B. Approach

The Shareholders Deed was executed in September 2012. However, it was effective as and from 27 August 2012.

The events leading up to the execution of the Shareholders Deed are important, particularly to Daiwa’s case. Daiwa alleges that the pre-contractual negotiations, comprising meetings and correspondence, establish that by its execution of the Shareholders Deed, the Minority Shareholders and Barokes effectively abandoned any claim against Daiwa and Monde for infringement. The joint venture contemplated by the Shareholders Deed in effect resolved the previous position between 2009 and 2012, namely an assertion by Barokes of infringement of JP 240 and a denial by Daiwa. The rival positions were never resolved, but were overtaken by the Shareholders Deed. Barokes asserts that it never intended to and did not abandon such claims.

The events and matters that occurred after execution of the Shareholders Deed are of no less importance, particularly to the Minority Shareholders’ case, but also of course to Daiwa’s. The Minority Shareholders allege that the conduct of Daiwa after execution of the Shareholders Deed in the respects identified in paragraph 11 above, evidence oppression and a breach of the Shareholders Deed. Daiwa disagrees and points to the breaches by Barokes of the Shareholders Deed, particularly in relation to failing to meet the targets identified in the budget. Indeed the budget was a source of great contention between the parties. Daiwa also points to correspondence and conduct after execution of the Shareholders Deed confirming, first, its denial of any infringement and, secondly, its intention to continue with its existing business, including its involvement with Monde.

At this stage, it is not desirable to set out a detailed chronology of the relevant facts traversing the years of 2009 to 2015. This is, in my view, unnecessary, cumbersome, and will necessarily involve repetition later in the reasons. Rather, the relevant background facts and matters will be dealt with as and when required, as will the submissions made by the parties.

I propose to deal with the negotiations leading up to the Shareholders Deed first. The critical relevance is whether such negotiations (and the Shareholders Deed) contemplated Daiwa continuing its business, the source of much of the Minority Shareholders’ complaints. Thereafter I will set out the relevant terms of the Shareholders’ Deed. Finally, the events and matters after execution of the Shareholders Deed will be considered. The critical relevance is whether, and if so to what extent, there were breaches of the Shareholders Deed. As noted, this depends in many respects on the issue previously identified and also whether Barokes met the targets referred to in the budget contemplated by the Shareholders Deed.

C. Events leading up to execution of the Shareholders Deed

Barokes and the Minority Shareholders contend that the parties entered into the Shareholders Deed on the basis that:

(a) licensing or royalty fees associated with the manufacture of cans by Daiwa, the sale of those cans to Monde or anyone else, or the sale by Monde of wine in cans (‘WIC’) on the market, would be payable by Daiwa, Monde or Manns Wines Co., Ltd (‘Manns’)[4] to Barokes; and

(b) Daiwa, Monde or Manns would cease the production or sale of WIC, thereby conceding that to do so was an infringement of JP 240.

[4]Manns is a Japanese company independent of Daiwa. At the time of the execution of the Shareholders Deed Daiwa was selling cans to Manns for the purpose of filling those cans with wine.

The evidence led by Barokes and the Minority Shareholders in support of these assertions, as set out below, is unsupported by (and indeed, cannot be reconciled with) the documentary record of negotiations between the parties, including contemporaneous minutes made by both Daiwa and representatives of Barokes.

The minutes of the various meetings, emails, and other associated documents leading to the execution of the Shareholders Deed on 13 September 2012 reveal that no such assurances, to the effect alleged, were given. In fact the opposite is the case.

Barokes and the Minority Shareholders rely on Mr Stokes’ evidence in support of its central assertions as to the underlying basis upon which the parties entered into the Shareholders Deed. This evidence, together with the relevant emails, correspondence and minutes of meetings is referred to below.

The 7 September 2009 Meeting

On 7 September 2009, Mr Stokes attended a meeting with representatives of Monde and Daiwa in Tokyo. The Court was referred to hand-written notes made by Mr Stokes and a translation of detailed minutes taken by Daiwa.

In his witness statement Mr Stokes gave evidence to the effect that at this meeting representatives of Daiwa agreed that they would stop selling Monde WIC until the parties resolved the patent issue. Mr Stokes indicated there would be ‘no possible resolution or discussion regarding the patent infringement’ unless Daiwa and Monde stopped the production and sale of WIC.

Mr Stokes’ notes of the meeting record the following:

He does not want to go to court but for us to save it BTN us!
Ikeda and Iijima[5] undertook if Barokes did not prosecute Daiwa & Monde then they would stop selling Monde until we solved the patent issue.
I agreed we would suspend our infringement action as long as they stopped selling Monde WIC.

[5]Mr Tassel Ijima was, at the relevant time, President of Monde.

Daiwa’s minutes of the meeting record that Daiwa clearly indicated its position that Daiwa’s three-piece can did not infringe Barokes’ patent. The minutes also record that the parties ‘mutually agreed to not conduct any further dispute or legal fight concerning the Vinsafe patent’. Under cross-examination, Mr Stokes agreed that this was an accurate reflection of statements made during the meeting.

Despite Mr Stokes’ evidence that representatives of Daiwa and Monde indicated that both would cease the production and sale of WIC, no such assurance is recorded as having been made in Daiwa’s detailed minutes.

These minutes note that Barokes indicated:

Additionally, Barokes’ products carry the ‘Vinsafe’ logo mark and if possible we would like to put the ‘Vinsafe’ mark on Monde’s canned wine as well, and if making products with Daiwa in future, we would want to put the ‘Vinsafe’ mark on those products also.

An annotation to this comment, ostensibly added by Daiwa staff for the benefit of their reviewing of the minutes, notes that this, ‘Does not appear to be demanding royalty payments, but what this means is unclear.’

At this early stage it is clear from the documentary record that no positive assurances were given by Daiwa, despite any impression Mr Stokes may have had.

Further, Mr Stokes sought, in oral evidence, to qualify the outcome of the meeting by stating the agreement to discontinue any dispute between the companies was subject to a ‘license’. Similarly, this is not supported by Daiwa’s contemporaneous minutes or Mr Stokes’ hand-written notes.

The 13 April 2010 Meeting

On 13 April 2010, a meeting took place in Tokyo, attended by Mr Stokes and Mrs Stokes,[6] and Messrs Ozawa,[7] Ikeda, Asakura[8] and Watanabe.[9]
[6]Mrs Irene Stokes was, at the relevant time, Sales and Marketing Director of Barokes and is the wife of Mr Stokes.
[7]Mr Hiro Ozawa was, at the relevant time, General Manager of Barokes’ Japanese office.
[8]Mr Asakrua, was, at the relevant time, Project General Manager of Daiwa.
[9]Mr Watanabe was, at the relevant time, a manager of Daiwa’s.

Mr Stokes gave evidence that Mr Ikeda told him that Daiwa:

(a) was interested in using Vinsafe technology to make WIC;

(b) had no intention of working with other wineries;

(c) could produce a slim bottle can for wine (‘SBC’) by October or November 2010; and

(d) would be happy to support line changes at a filler in Australia to fill SBCs.

In her evidence, Mrs Stokes also adopted Mr Stokes’ recollection as a true and correct account of the meeting on 13 April 2010.

However, none of these matters referred to by Mr Stokes appear on a natural reading of the contemporaneous notes of Daiwa or the handwritten notes of Mrs Stokes, save for indications by Daiwa to the opposite effect, namely that they did not wish to licence the Vinsafe technology.

Several findings can be made regarding the 13 April 2010 meeting.

First, it is clear that Daiwa indicated it did not wish to licence the Vinsafe technology, and was only interested in pursuing a joint venture together and produce a new WIC product. This is readily observable from Daiwa’s minutes of the meeting and is corroborated by Mr Stokes’ evidence. Mr Ikeda indicated there would be no licence, given its view (contrary to that of Barokes) that the three piece can did not infringe the Barokes patent.

Under cross-examination, Mrs Stokes sought to qualify statements made by Mr Ikeda with regards to licensing by suggesting that Mr Ikeda’s comments were limited to Daiwa, and did not extent to Monde or ‘anyone else’. I reject this qualification. Neither Daiwa’s contemporaneous record of the meeting, nor the contemporaneous notes of each of Mr and Mrs Stokes, nor their evidence-in-chief contain any reference to such a qualification.

Secondly, Mr and Mrs Stokes were each aware at the time of the 13 April 2010 meeting that Daiwa were manufacturing and supplying the new bottle can (‘NBC’) product to the Japanese WIC market. Mrs Stokes accepted under cross-examination that she was aware at the time of the 13 April 2010 meeting that Monde was selling WIC in Japan via the NBC product.

Mr Stokes also accepted under cross-examination that he was aware Daiwa was manufacturing and supplying NBCs to various customers, who in turn were supplying those products to the Japanese market. Mr Stokes asserted he did not understand these products to include WIC – despite having recorded in his own notes of the meeting that Daiwa had ‘already received interest from wine producers to fill wine in their new can bottles’. Mr Stokes said he understood this indication by Mr Ikeda to be that they had merely received interest, ‘not that they were actually doing it’. I reject this evidence. I find that Mr Stokes was aware that the NBCs supplied to Monde were being used to distribute WIC.

The 28 July 2011 Meeting

Barokes and the Minority Shareholders assert that on 28 July 2011, a meeting took place between Mr Ozawa (Barokes’ Japanese representative) and representatives of Daiwa. They assert that at this meeting, Daiwa indicated that it would ‘utilize Vinsafe technology under the licence of Barokes.’ Mr Stokes gave evidence that this was ‘the first time that Daiwa had stated they would take out a Vinsafe licence for the SBC and NBC….I saw this as Daiwa’s offer to resolve the patent issue with Daiwa and Monde’. Mr Stokes did not attend this meeting and relies on an email he received from Mr Ozawa on 28 July 2011 (‘the Ozawa email’).

Under cross-examination, Mr Stokes was asked to identify which part of the Ozawa email supposedly reported a meeting held on 28 July 2011, to which Mr Stokes indicated the first sentence, namely, ‘I will have the second meeting with Daiwa Seikan next week’.

Although the statement clearly contains an implied assertion that Ozawa attended an earlier meeting with Daiwa, I find that it refers to the meeting of 5 July 2011. There is no evidence, within the body of the email or elsewhere, to suggest that it refers to the alleged meeting on 28 July 2011.

Further, and in any event, the email contains no record of what was discussed or agreed to at the alleged meeting. Had a meeting taken place earlier that day, it is reasonable to expect that Mr Ozawa, as Barokes’ representative in Japan, would have reported within his email to Mr Stokes on the discussions held and outcome of such a meeting. When asked to indicate which part of the e-mail records the meeting, Mr Stokes pointed to the second and third paragraphs, which read as follows:

Intention:
—       Barokes needs more sales in WIC.
—       Daiwa need more sales in can.
Possible Activities:
—       Barokes would utilize can produced by Daiwa.
—Barokes WIC would be filled in facilities in Japan prepared by Daiwa.
—Daiwa would utilize Vinsafe technology under the license of Barokes to sell to tea producer, and other beverage producers.
—Vinsafe technology would add additional patents including tea in a can, and other beverages.

Considering the context provided by the immediately preceding line, ‘[a]nd I would like to confirm following items for the future partner of Barokes:’, it is clear that the evidence of Mr Stokes in this aspect is misleading and inaccurate in that Mr Ozawa is seeking to confirm the intended items for discussion at the upcoming ‘second’ meeting to which he refers. It does not in its terms or otherwise represent a communication of the position of Daiwa.

I find that the alleged meeting did not occur, and accordingly that no assurances as contended were given. There is no evidence to suggest there was any change by 28 July 2011 of Daiwa’s previously asserted position that it would not take a licence from Barokes.

The 1 December 2011 Meeting

On 1 December 2011, representatives of Daiwa and Barokes attended a meeting at Barokes’ offices in Melbourne. Mr Stokes asserts that at this meeting, Mr Ikeda told him that Monde would only be a filler and importer of wine.

However, no such assurance is recorded in the contemporaneous minutes of the meeting as recorded by Mrs Stokes, on behalf of Barokes.

The 12 February 2012 Meeting

Mr Stokes gave evidence that at a meeting on 12 February 2012, Mr Hisakazu Yamaguchi[10] and Mr Yamaguchi Jr[11] told Mr Stokes ‘they would give their full support to Barokes with funding, equipment, cans, and whatever else was required by Barokes if [they] became “partners”’. Further, Mr Yamaguchi Jr told Mr Stokes he ‘would ensure that all WIC products produced using the Daiwa SBC or NBC cans would come under the joint venture and Barokes business plan including those produced at the Monde filling facility and any other Daiwa facility’.
[10]Mr Hisakazu Yamaguchi was, at the relevant time, the President of Daiwa.
[11]Mr Hirohisa Yamaguchi Jr was, at the relevant time, the Senior Managing Director of Daiwa and is the son of President Yamaguchi.

This evidence is entirely uncorroborated and unconvincing. Prior to the alleged representations on 12 February 2012, negotiations on behalf of Daiwa had been conducted principally by Mr Ikeda. It is inherently unlikely that commitments of the kind suggested would have been given by Mr Yamaguchi and Mr Yamaguchi Jr, and especially in such informal circumstances as was alleged. Under cross-examination, Mr Stokes could neither give a definitive answer as to whether the alleged conversation with Mr Yamaguchi Jr occurred in English or whether a translator was present, nor as to where and when the conversation took place, whether during the afternoon, inside at dinner or outside the dinner venue whilst smoking cigarettes.

Furthermore, no written record corroborating the alleged conversation exists, in the form of a file note or an email to any of the parties involved in negotiations. One would expect that assurances of this character and importance would have been the subject of a note or correspondence.

Accordingly, prior to execution of the Shareholders Deed, there is no evidence to support the contention that Daiwa had agreed to any such obligation which required it to take a licence in respect of the Vinsafe technology. In fact the evidence points to the contrary position, namely that no such licence was required and further that it could and would continue with its existing business.

D. Shareholders Deed

Under clause 3.2 of the Shareholders Deed, each of Daiwa and the Minority Shareholders were entitled to appoint two directors to the board of Barokes. Since then, as previously noted, the board of Barokes has comprised four directors:

(a) Mr Yoshitaka Ikeda, as an appointee of Daiwa;

(b) Mr Tetsuo Yamashita, as an appointee of Daiwa;

(c) Mr Stokes, as an appointee of Knights Quest; and

(d) Mr Barics, as an appointee of Knights Quest.

Clause 5 of the Shareholders Deed refers to a managing director. Mr Stokes was appointed as the managing director under the Stokes Executive Services Agreement dated 27 August 2012.

Clause 3.2 of the Stokes Executive Services Agreement states:

The Employment will commence on the Commencement Date (or a later date as agreed in writing between the Executive and the Company) and will continue for a fixed-term of 3 years where the Employment will end on the expiry of the fixed-term, unless terminated earlier in accordance with this Agreement (Initial Term).

Clause 4.8 of the Executive Services Agreement states:

The Executive acknowledges that the Executive has no authority to bind the Company except as set out in the Shareholders Deed or otherwise authorised by the Board. The Executive will not make any unauthorised representations to any third party in relation to such authority.

Mr Stokes’ employment as managing director commenced on 13 September 2012. The expiry of the fixed term was 11.59 pm on 12 September 2015.

Schedule 3 of the Shareholders Deed sets out a list of matters that require a Special Majority (75 per cent) of the Shareholders of Barokes. Item 1.18 states:

Instigate or settle any litigation, arbitration or other proceedings involving a Group Company when the aggregate amount claimed is in excess of $1 million (except the instigation of claims against debtors in the ordinary course of business).

Schedule 4 of the Shareholders Deed sets out a list of matters in relation to which the managing director has authority. Item 1.8 states:

Instigate or settle any litigation, arbitration or other proceedings involving a Group Company when the aggregate amount claimed is less than $1 million.

Clause 21.14 is in the following terms:

This Deed and any other documents referred to in this Deed or executed in connect with this Deed comprise the entire agreement of the parties about the subject matter of this Deed and supersede any prior representations, negotiations, arrangements, understandings or agreements and all other communications.

Clause 2.2 provides that ‘each Shareholder must act in good faith in relation to all matters concerning the affairs of the Company so as to achieve the Objectives.’ The ‘Objectives’ are defined in cl 2.1 as being, relevantly, to ‘carry on the Business in accordance with the Business Plan’ and to ‘maximise the sustainable value of the Company’.

Clause 5.6 provides that each party ‘will use reasonable endeavours to ensure that the Business is conducted and managed in accordance with best commercial practices and in accordance with the Business Plan.’

The ‘Business Plan’ is defined as ‘the business plan and budget for the conduct of the Business as approved from time to time’. The ‘Business’ is in turn defined as meaning the business carried on by Barokes of:

(a) producing and marketing WIC;

(b) licensing for private label for other wine producers using the Vinsafe Technology; and

(c) licensing of the Vinsafe technology to other third parties for manufacturing and filling.

E. Events after execution of the Shareholders Deed

As explained earlier in these reasons, Barokes and the Minority Shareholders assert that by the time of the Shareholders Deed was executed it was clear, and in fact agreed, that Daiwa and/or Monde would obtain a Vinsafe licence from Barokes, or alternatively cease the sale or production of its allegedly infringing products. The evidence does not support this assertion and, as set out below, the evidence does not support any change in position after execution of the Shareholders Deed.

It is convenient to deal with events that occurred after execution of the Shareholders Deed under the following headings:

(a) the development and acceptance of the initial and subsequent versions of the business plan;

(b) the conditions of funding imposed on Barokes;

(c) the discussions and negotiations concerning whether a licence fee was payable by Daiwa and/or Monde in respect of Vinsafe, as well as the jointly developed patent proposed in lieu of such a fee;

(d) the deterioration of the relationship and proceedings eventually commenced by Daiwa and Barokes against each other.

The business plan

The initial Business Plan of Barokes was attached as Schedule 5 to the Shareholders Deed. Daiwa and Barokes and the Minority Shareholders each accepted that this Business Plan was either draft or tentative in nature, and after executing the Shareholders Deed, they sought to finalise the figures contained therein.

The relevance of the negotiations and figures is three-fold:

(a) First, for the purpose of establishing which version of these figures was assented to and otherwise reflected the targets that Daiwa and the Minority Shareholders had intended Barokes to meet. Barokes and the Minority Shareholders assert that the relevant Business Plan is that of 17 September 2012, whilst Daiwa asserts it is that dated 18 October 2012. This is dealt with below.

(b) Secondly, for the purpose of measuring the finalised projections against the actual performance of Barokes. The shortfall in Barokes’ performance is indeed a relevant factor in considering the reasonableness of Daiwa’s decision to call up the working capital loans made, given that this decision is alleged to be oppressive and a breach of the Shareholders Deed.

(c) Thirdly, the gradual development of the figures is in and of itself, important and relevant. This is particularly so with regard to the revenues derived from Vinsafe licensing as a proportion of Barokes’ total sales (i.e. including those sales unrelated to Vinsafe). The ratio of licensing to total sales indicates what, if any, licensing revenue Barokes expected to receive, and whether in order to meet those targets it required Daiwa, Monde and/or Manns to take a Vinsafe licence.[12]

[12]Were sufficient licensing revenues forecasted, then it might be said that Daiwa acted oppressively in not obtaining or procuring a licence, as it would have effectively set Barokes unreasonable or unattainable targets. However, and as the documentary record establishes, this was not the case.

The parties commenced revising these figures on 20 September 2012, when Mrs Stokes emailed Mr Ikeda attaching:

(a) a revised draft of the business plan (in form of a 52 page presentation) (’17 September 2012 Figures’);

(b) updated budgets for the 2013 to 2015 financial years; and

(c) forecasts showing sales at 100 per cent and 75 per cent of total key performance indicators.

The forecasts attached to Mrs Stokes’ email are more detailed than the one-page Business Plan attached as Schedule 5 to the Shareholders Deed. The document possesses the following features:

(a) There are two sets of figures, one where Barokes is meeting 100 per cent of its key performance indicators and one where it is meeting 75 per cent of its KPIs.[13]
[13]For present purposes I will focus on the 100 per cent figures.

(b) The spreadsheet shows projected sales figures from 2013 to 2019 in terms of both overall units as well as cases.

(c) The sales targets are considerably lower than the business plan as Schedule 5 to the Shareholders Deed.[14]
[14]For example 226, 958 case sales are forecasted for 2013, which is less than half of the figure in Schedule 5. Sales eventually rise to over 10 million cases per year, but that now occurs in 2019, rather than 2018 as had been projected in Schedule 5.

(d) There is now revenue derived from the sale of licensed products under the heading ‘Vinsafe License Fees’. This is in addition to product sales under the heading ‘Total Barokes Product Sales (Cans & Can Bottle)’. These figures add to make the total sales figures.

(e) The ratio of product sales to Vinsafe product begins at around 80:20 in 2013,[15] reaching approximately 45:55 in favour of Vinsafe product in 2019.[16] That is, 55 per cent of Barokee’s product sales revenues in 2019 are expected to be derived from sources related to Vinsafe licensing.

(f) In terms of the breakdown of product sales into the SBC and the Barokes two piece can (‘2PC’), the SBC was initially projected to be 10 per cent of total product sales, rising to 80 per cent in 2019.

[15]Total sales for 2013 are forecasted to be 5,447,000 units made up of 4,330,300 product sales and 1,116,700 Vinsafe product sales.

[16]Total sales for 2019 are forecasted to be 240,467,000 units made up of 108,175,300 product sales and 132,291,700 Vinsafe product sales.

On 1 October 2012 Mr Ikeda emailed Mr Stokes commenting on the profit and revenue calculations contained in the 17 September 2012 Figures:

4. In the profit, I have noticed that Daiwa SBC’s Vinsafe licensing is included. As discussed in Melbourne, SBC can fill wine without Vinsafe, so we cannot forecast profit with SBC Vinsafe licensing. We can, include licensing for profit, only if we come up with new patent with Barokes, using SBC.

Mr Stokes replied to Mr Ikeda’s email on 4 October 2012:

This is for Vinsafe licensing to wineries etc. introduced by Barokes that we are already in discussions with and does not take into account Monde/Mann. An additional wine in a can patent (Resassure) is being developed that could be deployed via SBC which would then capture all those that wish to put wine in a can.

Mr Stokes attached revised income and sales projections to this email (‘4 October 2012 Figures’). Comparing these to the 17 September 2012 Figures it is apparent:

(a) that overall sales in this version are identical to the earlier figures prepared by Mrs Stokes;[17]

(b) the breakdown of sales as between product sales and Vinsafe product has changed. While remaining at approximately 80:20 in 2013, by 2019 the breakdown is approximately 52:48 in favour of product sales. That is, Barokes was envisaged to derive approximately 48 per cent of its product sales revenues in 2019 from sources related to Vinsafe licensing.

(c) the breakdown of sales as between the 2PC and SBC has also changed. Only 1 per cent of Barokes’ product was projected to be filled in SBC in 2013, rising to 30 per cent in 2019, compared to 80 per cent forecasted by Mrs Stokes.

[17]Ie total product sales are 5,447,000 gradually increasing to 240,267,000 in 2019.

At a meeting on 10 October 2012 the projected breakdown of product sales contained in the 4 October 2012 Figures was discussed:

According to the plan of Barokes, the ratio or product sales (SBC and 2P) and license product is set to 52% and 48% respectively. Dalwa suggested that the ratio of license product is too high and requested that the ratio of product sales should be raised up to 80% at the very least.

On 19 October 2012 Mr Ikeda emailed to Mr Stokes revised figures dated 18 October 2012 (’18 October 2012 Figures’). This version significantly changes the breakdown of product sales to Vinsafe product sales (from 52:48) to 80:20 in favour of product sales for each of the years from 2013 to 2019.[18] Mr Stokes replied to this email on the same date ‘confim[ing] that these figures can be submitted to President Yamaguchi for the purpose of obtaining funding for Barokes.’
[18]Ie. Total sales for 2019 are forecasted to be 240,467,000 units made up of 192,373,600 product sales and 48,093,400 Vinsafe product sales.

*Figures*	*2013*				*2019* [19]Figures under the heading, ‘2019’, relate to 2018 as the document does not forecast to 2019. There also is no breakdown of total sales as between product sales and Vinsafe product. [20]These figures do not breakdown total sales as between the 2PC and SBC.
*Figures*	Product Sales	Vinsafe Product	2PC	SBC	Product Sales	Vinsafe Product	2PC	SBC
Schedule 5[19]	26%	74%	29%	71%
17 Sept 2012	80%	20%	90%	10%	45%	55%	20%	80%
4 Oct 2012	80%	20%	99%	1%	52%	48%	70%	30%
18 Oct 2012[20]	80%	20%	80%	20%

Tracing the various iterations of the figures exchanged between the parties, the summary below sets out the relevant breakdowns given to Barokes’ forecasted product sales:

Barokes and the Minority Shareholders assert that the 17 September 2012 Figures are those which accurately reflect the forecasted performance of Barokes. However, as Mr Stokes accepted in evidence, the documentary record demonstrates that the 17 September 2012 Figures were subject to revision up and until 18 October 2012.

As such, it is clear that Daiwa requested, and Mr Stokes received and explicitly approved the subsequent 18 October 2012 Figures which shifted the ratio further in favour of unlicensed product. Taking into account these matters, and notwithstanding that it had not been formally adopted in accordance with the Shareholders Deed, I find that the 18 October 2012 Figures accurately reflect the sales targets that the parties had intended Barokes to achieve.

Accepting that the 18 October 2012 Figures reflect this intention, it then follows that the parties intended for only 20 per cent of Barokes’ total sales to be derived from the sale of licensed product for the period of 2013 to 2019.

Given the evidence before me, it certainly is not the case that, through the Business Plan, Daiwa encouraged a belief in the Minority Shareholders that Barokes would derive a large proportion of its revenue, from Daiwa or otherwise, through licensing fees. Accordingly, it is clear that Barokes’ principal revenue source would be independent of any such fee, and it is equally as clear that Barokes and the Minority Shareholders knew and accepted, perhaps reluctantly, that this was to be the case.

Funding and conditions of funding

The funding and financial performance of Barokes are closely related matters. Indeed, Barokes’ failure to meet its targets led Daiwa to impose more onerous conditions on it in exchange for funding, until Barokes’ performance had reached a point at which Daiwa would not sink any further funds into the joint venture.

The first two tranches of funding, each in the amount of $1.5m, were approved by Daiwa and advanced to Barokes on or around 31 October 2012 and 5 December 2012. A loan agreement was executed in respect of each.

Barokes applied for the third tranche on 10 February 2014. On 13 March 2014 Mr Ikeda emailed Mr Stokes stating that Daiwa was hesitant to continue funding Barokes due to its ‘rapidly worsening’ financial position, and as such Daiwa required Barokes to accept certain conditions of funding.

On 8 April 2014 Mr Stokes signed a document entitled ‘Funding Request from Barokes’ (‘8 April 2014 Funding Request’) which contemplated three further tranches of $1.5m being advanced for the purposes of marketing and promotion in China. The document states that ‘Barokes will undertake the following Business Plan (Sales Volume, profit, etc)’ to obtain funding and outlined a series of projected figures. Under the heading ‘Business Plan (Revised)’, the document projected that, for the 2014 financial year, Barokes would achieve:

(a) total sales of 1.218m cans, including 965,000 2PC sales; and

(b) sales revenue of $2.009m (with a net loss of $2.741m after expenses).

Under the heading, ‘Condition of Funding’, Barokes undertook:

(a) for the first tranche of funding, to achieve the business plan and more than $2m of sales and less than $3m of net loss in the 2014 financial year;

(b) for the second tranche of funding, to achieve more than 140,000 can sales (with 120,000 in China) from July to December 2014; and

(c) for the third tranche of funding, to achieve 500,000 can sales and less than $1.4m of net loss in the 2015 financial year and 1.8m cans sales and more than $4.5m of net profit in the 2016 financial year;

(d) to begin repaying all principal and interest based upon Australian interest rates (or on the Japanese standard ‘if it is legal’) from July 2016;

(e) to clarify and share with Daiwa Can how the funding has been used; and

(f) to purchase 300ml SBCs for the current price of 24JPY each until June 2016 and 187ml SBC for 25JPY.

I find that, notwithstanding that this document had not been adopted in accordance with the Shareholders Deed, Mr Stokes (and Barokes) accepted its contents and the conditions imposed upon Barokes. Barokes did not achieve the targets set out in the document, or indeed the targets set by the 18 October 2012 Figures. Regardless of which document was in fact the contractual Business Plan, Barokes did not meet its targets and Daiwa was entitled to respond in order to protect its exposure.

On 17 April 2014 Mr Ueda (on behalf of Mr Ikeda) emailed Mr Stokes requesting that Messrs Stokes and Barics each accept a condition whereby they would fund a proportion of the first advance to Barokes. Agreement was reached on or around 28 April 2014, whereby Daiwa would advance $1.4m to Barokes in May 2014 conditional upon Mr Stokes advancing the remaining $100,000. A Letter of Commitment was signed on 9 May 2014 to reflect this.

Licensing and the joint patent

Following the execution of the Shareholders Deed, and beginning with a meeting held 11 to 13 September 2012, Barokes and Daiwa discussed the prospect of combining their technologies to develop a new joint patent.

This ‘new’ patent (known ultimately as ‘Ressafe’ or ‘Resassure’) was a source of great contention between the parties. Barokes and the Minority Shareholders allege that notwithstanding the discussions, negotiations and proposals for a new patent a licence fee was also, and had always been, payable in respect of Vinsafe, the ‘old’ patent owned solely by Barokes. However, as was submitted by Daiwa, and as will be set out below, this new patent was to be a compromise between Daiwa and Barokes and the Minority Shareholders. That is, a jointly-developed and jointly-owned patent was to resolve the lingering allegations of infringement made by Barokes and this patent, not Vinsafe, would allow Barokes to obtain a licence fee in respect of its products.

One facet of this alleged infringement was an assertion by Barokes and the Minority Shareholders that the Vinsafe technology had been embedded into Daiwa and/or Monde’s plants or filling facilities during two site visits conducted by Mr Barics. The first of these took place from 8 to 9 October 2012. It is convenient to deal with this aspect at this stage.

Mr Barics gave evidence that:

(a) at a dinner on 8 October 2012 Messrs Iijima and Mizukami said ‘Monde was very interested in the Vinsafe System and wanted to know how and when it could be implemented into its filling facility’;

(b) at a dinner on 9 October 2012 Daiwa representatives communicated interest in the Vinsafe system, and were eager to know when it could implemented at the Daiwa pilot plant and the Monde filling line; and

(c) assurances were given that the discussions which had taken place during the audit were private and confidential, and that they would implement the Vinsafe system.

These exchanges are not recorded in the production report minutes of those dates. Rather, the minutes of 9 October 2012 record discussions between Mr Barics and Daiwa representatives on the proposed joint patent:

Daiwa… If we can come up with new Patent which uses SBC, it will be good for both of us, Barokes and Daiwa.
….

BarokesI [Barics] agreed with the idea of making new patent by working together.

This same topic was discussed the following day, on 10 October 2012, at a board meeting of Barokes consisting of Messrs Stokes, Barics, Yamaguchi, Yamashita, Ikeda and Ueda. The following is recorded in the minutes under the heading ‘Announcement of new products adopting SBC’:

As a future plan, we are planning acquire a new patent by fusing SBC and Vinsafe. Daiwa is considering to supply SBC to all of their customers including those who do not want SBC with new patent. On the other hand, Barokes suggested that Daiwa should limit the supply of SBC only to those who want SBC with new patent in order to get an extra revenue as a license fee so Daiwa can take full advantage of the patent. We agreed that we properly deal with this matter through future discussions.

It is difficult to reconcile the contemporaneous minutes with the evidence of Mr Barics. On one hand, Mr Barics gave evidence he was told, in effect, that Monde and Daiwa were eager to adopt the Vinsafe system. On the other, there are clear and continued references in the minutes in relation to the development and commercialisation of the new patent. In the circumstances, and doing the best I can, I find it more likely than not that the asserted assurances were not given.

Notwithstanding the negotiations with respect to the new patent, Mr Stokes continued to assert that Monde required a Vinsafe licence. On 18 January 2013 he sent an email to Mr Ikeda headed ‘Wine Filling Facility Regulations’:

In addition to this Qualification [sic] of course, as we have discussed many times, Monde would also need to obtain a Vinsafe licence through the Vinsafe Certification [sic] of their facility from Barokes before any wine in a can could be filled at the facility. Once the facility was Vinsafe licensed the facility would then pay a royalty fee to Barokes each time a wine in a can was filled.
…
NOTE; Should Mann and Monde not wish to obtain a Vinsafe licence then we would need to review their products against our Patents for possible infringement. We would need to further discuss your thoughts on this matter as we have left this matter to one side whilst the deal was being done between Spotlight and Daiwa. We will need to include this as an item at our next Board meeting.

On 29 January 2013 a board meeting of Barokes was held. The minutes record the following exchange between Messrs Stokes and Ikeda regarding whether Monde would take a Vinsafe licence:

G.S - once Monde is accredited we can fill wine from France, Spain, Italy etc. All licence fees will go to Barokes.
Y.I - Confirmed in email about Vinsafe. Need to talk to Monde about licence fees and filling fees etc
G.S - one system for wine in a can - manage the system 'the only way'
Y.I - New Patent. That way they [Monde] pay for the new patent not Vinsafe.
G.S – Yes.

At a further meeting held via Skype on 13 March 2013 Messrs Stokes and Ikeda discussed filling Barokes’ Lovers Wine at Monde:

Y.I - Prepare schedule for filling at Monde.
G.S - Good idea.
Y.I - That’s the most important thing. Not worry about Vinsafe.
G.S - Most important thing is to get product into market ASAP.
Y.I - Of course.
…
Y.I - Understand hurry Hurry
G.S - Tell Irene [Mrs Stokes] hurry hurry

There was also an exchange regarding whether Monde would take a licence:

G.S - …Once Monde becomes a Vinsafe facility you will be able to fill wine in a can. Vinsafe will earn a fee from all wine in a can produced at Monde.
Y.I - WHAT?
G.S - Three income streams for three companies.
Y.I - Next meeting

It is clear that up until at least 13 March 2013, Daiwa and Barokes had not reached any agreement with respect to licensing. This much is apparent in the nature of the discussions, and in particular the record of:

(a) the parties having previously ‘left this matter [licensing and infringement] to one side’ in Mr Stokes email of 18 January 2013;

(b) Mr Stokes agreeing with Mr Ikeda, on 29 January 2013, that Monde would ‘pay for the new patent not Vinsafe’;

(c) Mr Stokes agreeing with Mr Ikeda, on 13 March 2013, that getting the product into the market was of greater importance than working out the applicable licensing structure as between Daiwa and Barokes; and

(d) the exclaimed ‘WHAT?’ attributed to Mr Ikeda on the same date, seemingly in response to Mr Stokes’ assertion that Monde would become licensed.

Barokes’ next board meeting was held in Melbourne from 3 to 4 April 2013 between Merssrs Yamaguchi Jr (as proxy for Mr Yamashita), Ikeda, Stokes, Barics and Ueda. Mr Stokes gave evidence that Mr Yamaguchi Jr had told him that:

(a) ‘Barokes would obtain a licence fee from all participants in the WIC supply chain, i.e. wine producers, fillers and can manufacturers, including Monde.’

(b) during a break over dinner on 3 April 2013, ’Monde would license’.

These assurances are not recorded in the minutes of that meeting.[21] The minutes instead reflect a conversation relating to the status of the joint patent:
[21]I note that with respect to the first assurance, it appears in the minutes but in relation to the new patent and not Vinsafe.

Mr Stokes agreed that Barokes and Daiwa would work together to develop this new patent with May 2013 as the target deadline.
It was agreed that Barokes would obtain a licence fee from all participants in the supply chain, ie wine producers, filler and can manufacturers.
Mr Ueda stated that there were two purposes for a new patent:
1. Obtain a Licence fee.
2. Avoid competitors making bottle cans for wine, in Japan and overseas

Mr Stokes explained that the process for creating this new patent would involve comparison of both patents side by side, then expansion to form a new patent- don't lose protection.
…
It was further-suggested by Mr Stokes to modify Resvin, Daiwa's SBC and Vinsafe to form a New Patented [sic] process owned by Barokes and Daiwa jointly. The Board unanimously agreed to this strategy.

Much of what has been said previously about the assurances purportedly received by Mr Barics can be repeated here. Even if I were to dismiss the documentary record until this point, the minutes clearly set out that the topic for discussion was this ‘new’ patent, not Vinsafe. Further, and in any event, the statement attributed to Mr Ueda in the minutes is that this new patent would allow Barokes to ‘obtain’ a licence fee. This is plainly inconsistent with the proposition that Monde was always going to pay for a licence for the Vinsafe system. Accordingly, I find it quite unlikely that assurances of the kind asserted were given.

Mr Barics attended Monde’s filling facility for the second time from 4 to 8 October 2013 to supervise the filling of Lovers Wine, and in the course of doing so, observed an issue which caused excess foaming during the filling process. The production report records recommendations made by Mr Barics which appeared to rectify that issue. On 9 October 2013 Mr Barics emailed Mr Stokes:

…At our post production meeting on this day I suggested to bring down the minimum temperature of the carbonator from 2C to 1C and also monitor the line speed in order to keep the incoming wine to the filler as cold as possible. They had never thought of this as possible solution to the foaming issue!!!!!.
On the fourth day these actions were implemented and the total rejects for the day was 179. Monde were very happy with this result and the production team together with Monde management thanked me for my improved filling procedures and fixing there ‘foaming issue’. This quick fix was only part of the numerous procedures and plant upgrades required at Monde in order for them to continue with filling LW in the future.

Barokes and the Minority Shareholders pointed to the recommendations made by Mr Barics to establish that Vinsafe had indeed been embedded by this point. I do not accept this. On the face of the email referred to above, it seems quite improbable. Given that the solution to the foaming issue is described as a single ‘quick fix’ of many ‘numerous procedures and plant upgrades required’, I find it unlikely that Vinsafe had been embedded in the Monde filling facility by 8 October 2013, being the date of the second and final site audit conducted by Mr Barics.

In my opinion Barokes and the Minority Shareholders have not established with any precision what the Vinsafe technology or system entails, and how, when and to what extent it was implemented or embedded into Monde and Daiwa’s facilities.

In any event, even if the Vinsafe technology or system was implemented or embedded, it does not follow that Daiwa or Monde were required to take a licence, or that their failure to do so constituted oppression or a breach of the Shareholder’s Agreement. Daiwa was persistent and unequivocal in its refusal to take a licence, which it repeatedly communicated to Barokes and the Minority Shareholders.

Finally, it should be noted that Mr Stokes attempted, on three occasions, to have Daiwa and/or Monde execute confidentiality or non-disclosure agreements. [22] There is no evidence that any of these agreements were executed. Accordingly, the most that can be said is, that if the Vinsafe technology was embedded, this was done in the context of a joint venture in which the parties progressed forward together and shared technical know-how without obligation.
[22]On 18 January 2013, 26 February 2013, and 22 April 2013 Mr Stokes sent these agreements to Messrs Ikeda and/or Ueda. Notably, these were all sent subsequent to the first of Mr Baric’s visits to the Daiwa and Monde facilities. Whilst I need not make such a finding, it is open to consider that such confidential information had not yet been transmitted. Further, Mr Barics second site visit occurred from 4 to 8 October 2013, in circumstances where Barokes and the Minority Shareholders knew these agreements had not been executed.

Throughout the period of 11 November 2013 to 28 April 2014, Barokes and Daiwa continued their discussions in relation to whether Monde would be required to obtain a Vinsafe licence, and if so, the form, costs and scope of such a licence. As the record shows, these discussions never resolved, and indeed had reached a stalemate, beginning with an email from Mr Stokes to Mr Ijima on 12 May 2014. The email reads:

One of the primary reasons the second generation wine in a can packaging technology 'Ressafe' was developed jointly between Barokes and Daiwa was so that Monde could licence this technology and participate in the wine in a can category not only in Japan but globally. …
Should you agree with these thoughts and approach I would like to re commence our discussions in relation to Monde becoming a licensed Ressafe filling facility for wine in a can.

On 19 May 2014 Mr Iijima replied to Mr Stokes stating his belief that the existing Monde products (eg. La Petit Monteria) and OEM products were exempt from the Ressafe licence, and that:

…I feel uneasy about that further a large amount of remodeling [sic] is demanded from you about the facilities of the filling factory and it exceeds our bearing ability, and license fee is a burden for us. I would like to resolve through talks with you about these.

On 21 May 2014 Mr Stokes forwarded Mr Iijima’s email of 19 May 2014 to Mr Ikeda and added the following comments:

I have read the email below from Mr Iijima and I am concerned by his· response as I can't see anywhere that he is prepared to compromise? Can you assist me to see where is the compromise from him in this respect? Monde obtaining ISO and the upgrades required for ISO was the first step to obtaining a Ressafe licence. …
In fact he is also stating that any OEM product he is producing now or will do for 'anyone' in the future won't need to have a Ressafe licence. As we know Ressafe was developed as the Barokes compromise and we are willing to discuss further compromises only if Mr Iijima can compromise and accept a Ressafe licence if this venture with Monde is to move forward.
As you will recall the Barokes Board (including yourself and Mr Yamashita) agreed that a Ressafe licence was 'the compromise' by Barokes that would allow Monde and others to obtain a licence as they would not accept Vinsafe. But now Mr Iijima does not even agree with Ressafe, so how do we move forward with someone who appears to be unable to compromise at all?

On 23 May 2014 Mr Ikeda replied to Mr Stokes:

In your emails, you have been telling us that Monde and Mans SBCs are copy product.
However, this is not correct understanding.
Before Daiwa purchased Barokes’ share, Daiwa expressed our understanding of that SBC is not infringing 2 Piece Vinsafe patent and Barokes understood our opinion.
Therefore, I find it very surprising when Barokes says that Monde, Manns, or any other SBCs that could be launched, are copy products of Vinsafe.
Please let me clarify our understanding.
I cannot make any adjustment between Monde and Barokes without confirming this.

This state of affairs was maintained until June of 2014. That is, Mr Stokes (and Barokes) continued to assert that it expected Daiwa and/or Monde to take a licence while Daiwa remained steadfast in its belief that the SBC did not infringe on Vinsafe. In any event, and as the minutes of the meeting held 23 June 2014 show, the topic ‘of the licensing for Monde (globally and domestically) [was] still under…discussion and [had] not been finalized yet’.

The next board meeting was held in Melbourne from 9 to 10 July 2014. Mr Stokes gave evidence that he was told, over the course of private conversations, a lunch and a dinner, that Mr Yamaguchi Jr:

(a) would stop the patent infringements;

(b) would require Monde and 26 of Daiwa’s other customers to take a Vinsafe licence;

(c) was committed to funding and supporting Barokes;

(d) would stop Monde from selling its products into China without a licence; and

(e) required time to resolve these matters.

While these assurances do not appear, the minutes of 9 July 2014 record an exchange on the topic of licensing:

[Mr Stokes] asked if there was agreement in principle on items 1-5, ie that all wine in a can products need to be licenced?
Mr Ikeda responded that he expected that as a group company, Monde paying a royalty fee to Barokes and upgrading the facility etc, agreement can be reached.

In my opinion, the minutes record the much more probable state of affairs, being that an ‘agreement can be reached’ on whether Monde would take a licence. This was the position repeated earlier at each of the 23 and 27 June 2014 meetings. Given the strength of the documentary record in relation to this aspect, and Daiwa’s continued belief that it and Monde’s products did not infringe, it is difficult to accept that it is more probable than not that any such assurances were given.

Ultimately, however, Daiwa and Barokes’ efforts in relation to the joint patent came to nought. On 22 May 2014 Mr Stokes forwarded advice indicating that prior art had been received by the European Patent Office which would prevent the patent from obtaining good coverage on the SBC product.

This advice stated that another patent covering the SBC, developed solely by Barokes, had been granted by the European Patent Office on 14 May 2014 (‘CO2 Patent’). Barokes had proposed, at the 9 July 2014 meeting, replacing the withdrawn Ressafe joint patent with the CO2 Patent developed by Barokes, however, Daiwa was not receptive to the idea.

At a board meeting held in Tokyo on 2 September 2014 Mr Stokes confirmed that the Ressafe patent application would be withdrawn. The joint patent’s failure effectively ended any discussions with respect to Daiwa and/or Monde taking a licence from Barokes, or any prospect of Barokes receiving a licence fee from these parties.

Commencement of proceedings and invalidation of patents

By the meeting of 2 September 2014, Daiwa and Barokes’ relationship had deteriorated significantly. Between the period of 2 September 2014 and 12 December 2014, Daiwa reiterated that it had little or no faith in the ability of Barokes to meet its commitment on the Business Plan, citing that Barokes had achieved less than 50 per cent of the sales key performance indicators it had undertaken to meet. The minutes of a meeting on 12 December 2014 record the following impasse:

[Mr Stokes] asked Mr Yamashita to confirm that Daiwa will not fund the Business Plan as agreed?
Mr Ikeda confirmed that Daiwa cannot loan further funds to Barokes as long as the business is in a negative financial position. He further commented that Daiwa had lent Barokes $4.4m to date and he was concerned that these funds had been spent without any positive impact on sales with Barokes still in a negative financial position and that Daiwa felt that Barokes were failing in their management of the business and that the operations were not sustainable.

Board meetings were held on 28 January 2015 and 10 March 2015 to consider resolutions to authorise Mr Stokes to initiate proceedings ‘against such persons [being Daiwa and its nominee directors] as [Mr Stokes] determines, so as to preserve, protect and enforce the rights of Barokes…’. When put to the 10 March 2015 meeting, Mr Barics supported each resolution whilst Messrs Ikeda and Yamashita opposed (with the result that they did not pass).

As noted, on 8 April 2015 the Minority Shareholders commenced proceeding S CI 2015 01529, seeking leave under s237 of the Act to commence proceedings in the name of Barokes against Daiwa Can for its failure to fund Barokes. That application was dismissed by the Honourable Associate Justice Efthim on 30 October 2015.[23]
[23]Knights Quest Pty Ltd v Barokes Pty Ltd [2015] VSC 601.

In July 2015, and without the approval of the board of Barokes,[24] Mr Stokes caused Barokes to commence patent infringement proceedings in Chengdu, China against Seven-Eleven (Chengdu) Co., Ltd, a subsidiary of the Seven&I Group and Beijing Biaixi Foodstuffs Marketing Co (BIX), a distributor of Daiwa Can’s products in China. On 9 November 2015 the Patent Re-Examination Board in China held the Chinese patent invalid. This decision is subject to an appeal that has not yet been handed down.
[24]T288.19-22.

On 3 August 2015 without the approval of the board of Barokes, Mr Stokes caused Barokes to commence the Japanese Proceedings in the Tokyo District Court against Daiwa and Monde. On 10 June 2016 I made orders granting the Knights Quest parties leave, nunc pro tunc, to continue this proceeding.[25] On 30 January 2018 the Tokyo District Court orally expressed its opinion that the Japanese Vinsafe patent was invalid. A final opinion has not yet been handed down.
[25]Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296.

On 6 April 2016 Daiwa commenced proceedings in the Japanese Patent Office (‘JPO’) seeking to invalidate the Japanese patent. On 1 March 2018 the JPO found that the Japanese patent was invalid.

F. Critical findings

In my opinion, the evidence, as referred to above, establishes that at the time of execution of the Shareholders Deed in September 2012 Daiwa had continuously and consistently asserted that it was not infringing the Vinsafe patent and would not and was not required or prepared to take a licence or pay any royalties. Further, I find that there was no agreement by Daiwa at any stage to pay any licence fees to Barokes. The same position applied in relation to Monde.

I find further, on the basis of the evidence referred to above, that there was no agreement at any stage that Daiwa or Monde would cease production or sale of WIC. In fact the contrary is the position. As at the date of execution of the Shareholders Deed, Daiwa and Monde intended to continue their business operation unaffected by the Shareholders Deed and this was communicated and well known to Barokes. This position continued after execution of the Shareholders Deed.

Accordingly, the nature and extent of the ‘good faith’ and ‘best endeavours’ clauses under the Shareholders Deed must be assessed against the terms and context thereof including these findings. The findings will also inform the alleged conduct issues after execution of the Shareholders Deed.

In my opinion, and given the findings referred to above, Daiwa was entitled, given its position, to vote against the resolution to institute patent infringement proceedings against it. Further, the proceedings having been instituted, Daiwa was entitled to raise and argue the validity of the patent, an argument that has indeed succeeded.

Finally, in my opinion, the other action taken by Daiwa was entirely justified given the admitted failure of Barokes to achieve the budgets contained within the Business Plan. In the circumstances Daiwa was entitled to call up the loans and commence winding up proceedings.

G. Breach of the Shareholders Deed

The Minority Shareholders allege several breaches of the ‘good faith’ and ‘reasonable endeavours’ clauses in the Shareholders Deed. In giving context to the clauses and determining their ambit, extent and presumed intent —against which any breach can be assessed—it is necessary and of the first importance to have regard to the terms of the Shareholders Deed and the background facts and circumstances known to both parties, as referred to in detail above, and which inform the critical findings referred to in the previous section. It should also be recalled and emphasised that the critical obligation of the parties was to endeavour to achieve the Business Plan.

Daiwa and Monde carried on the business of producing and marketing WIC

The factual matrix in which the Shareholders Deed is to be construed includes the critical findings referred to in paragraphs 126 and 127 above. In particular and to repeat and emphasise:

(a) Monde was producing WIC for sale in the Japanese market for companies other than Barokes and, as I have found, never agreed to stop. This was known to Barokes;

(b) Monde and Daiwa did not consider that neither Monde’s doing so nor the supply by Daiwa of cans to Monde for this purpose involved any infringement of Barokes’ patent and continuously and consistently communicated this opinion to Barokes;

(c) Monde and Daiwa did not agree that Monde was obliged to pay a licence fee to Barokes in relation to the filling by of it of WIC and Monde was unwilling to do so. This was continuously and consistently communicated to Barokes; and

(d) The Minority Shareholders were, as I have found, aware of all of these matters.

There is, as was submitted by Daiwa, no express provision in the Shareholders Deed prohibiting Daiwa and Monde from continuing their business of producing and marketing WIC.

An obligation of that nature would, it was submitted, have enormous ramifications for Daiwa and the Court should, it was submitted, be very slow to construe it in the manner submitted by Barokes and the Minority Shareholders in the absence of clear words and in the context or circumstances in which the Shareholders Deed was agreed. That is, with the Minority Shareholders’ full knowledge of Monde’s operation of a WIC business.

Further, it was submitted that the Business Plan from time to time imposed no obligation on Daiwa to stop supplying cans to Monde and to cause Monde to stop selling WIC, so it must follow, it was submitted, that there has been no breach of cl 5.6, which requires reasonable endeavours only in respect of the management of the Business ‘in accordance with best commercial business practices and in accordance with the Business Plan’. Nor can there have been, it was submitted, a breach of cl 2.2 insofar as it requires Daiwa to exercise good faith so as to achieve the objective of carrying on the Business in accordance with the Business Plan.

In relation to clauses 2.1(b) and 2.2, namely that Daiwa act in good faith so as to achieve the objective of maximising the sustainable value of the company, it was submitted that it would be commercially absurd to construe that obligation so as to require Daiwa to sacrifice its existing WIC business in toto and that of its subsidiary in the absence of an express contractual provision to that effect. Such a construction would, it was submitted, be so literal as to be absurd and would, taken to its logical conclusion, also require Daiwa to transfer all of its assets to Barokes. In any event, the construction cannot, it was submitted, stand in the face of the factual context of the contract, namely that the Minority shareholders were aware at the time it was entered into that Monde was and intended to continue to supply WIC into the market.

In Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL[26] the Court of Appeal held that an obligation to act in good faith does not require the obligor to ‘prefer the interests of the other contracting party, but rather to have due regard to the interests of both parties and the benefits afforded by the contract.’
[26][2005] VSCA 228 [29].

In Electricity Generation Corporation v Woodside Energy Ltd[27] the High Court held that an obligation to use reasonable endeavours is not an absolute or unconditional obligation. The nature and extent of such an obligation is necessarily conditioned by what is reasonable in the circumstances that may affect an obligor’s business. It does not require a corporate obligor to achieve a contractual object to the certain ruin of the company or to the utter disregard of the interests of the shareholders.
[27](2014) 251 CLR 640 [41]–[43].

I accept the submissions made by Daiwa. For the reasons set out above, and which inform the critical findings, it is clear that Daiwa and Monde were entitled to carry on the business of producing and marketing WIC. They made no representations and gave no assurances to the contrary and the Shareholders Deed does not restrict such activity.

Application to invalidate the Japanese patent

Once it is found that the Minority Shareholders understood at the time that they entered into the Shareholders Deed that Daiwa considered itself and Monde free to continue to operate a WIC business without paying a licence fee to Barokes and agreed to that position, it must follow, it was submitted, that there was no breach of Daiwa’s obligations under the Shareholders’ Deed arising from its application to invalidate the Japanese patent. Mr Stokes, by causing Barokes to commence the infringement proceedings, was acting inconsistently with that understanding.

In those circumstances, the obligations of good faith and to use reasonable endeavours did not, it was submitted, prevent Daiwa from taking reasonable steps to protect its and Monde’s commercial position. To the contrary, the commencement of the proceedings, it was submitted, involved a lack of good faith on the part of the Minority Shareholders as it undermined the basis of the parties’ commercial relationship and precludes them from asserting a want of good faith against Daiwa.[28]
[28]Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228 [2].

The experts agree that the commencement of infringement proceedings by a subsidiary against its parent was a unique situation as a matter of Japanese practice but that an invalidation application would otherwise be a reasonable step for a defendant to an infringement suit to take.

The contractual claim requires the exercise of reasonable endeavours and good faith. The onus, it was submitted, lies on the Minority Shareholders to establish that the invalidation proceedings involved either a failure to exercise reasonable endeavours in the respects referred to in cl 5.6 or bad faith in the respects referred to in cl 2.2. The evidence does not, it was submitted, establish this for the reasons set out above.

I accept the submissions made by Daiwa. Clearly, in the circumstances, Daiwa was left with no choice. Daiwa had continuously and consistently denied infringement and desired to, and was permitted to, continue trading. In defence of a serious and ill-founded allegation made against it, Daiwa took a reasonable course that was available. In the circumstances, it can hardly be criticised. Indeed, it has been entirely vindicated.

Support provided to BIX in the Chinese proceedings

Again, once it is accepted that the basis of the parties’ relationship involved an understanding on the part of the Minority Shareholders that Daiwa and Monde considered themselves entitled to continue to produce and market WIC without paying licence fees to Barokes and intended to continue to do so, this alleged breach of contract, it was submitted, cannot be maintained.

Even if the provision of the drawings did assist BIX and they were provided with that intent, that conduct did not, it was submitted, amount to a failure to exercise reasonable endeavours or act in good faith in the relevant respects. BIX was a customer of Monde in China[29] such that similar considerations apply in respect of this claim as in relation to the claim of breach of contract concerning the Japanese invalidation proceedings. It was Mr Stokes’ conduct in causing Barokes to commence proceedings against BIX that undermined the basis upon which the Shareholders Deed had been agreed. Daiwa thereafter had a legitimate commercial interest in its relationship with BIX. Any minor assistance it rendered to BIX needs to be considered, it was submitted, in the context of that relationship. There was no unreasonableness or a want of good faith involved in the provision of the drawings to BIX in the circumstances.
[29]CB Vol 7, 2502.

Further, it was submitted that there is no evidence at all to suggest that this had any impact at all on the Chinese proceedings let alone that they would have been decided differently had the drawings not been provided. That being so, even if breach were established, the Minority shareholders have failed to prove any loss.

For the reasons given, with which I entirely agree, I accept the submissions made by Daiwa. The position taken by Daiwa in the circumstances cannot be criticised.

Conclusion

In my opinion, and in the circumstances as detailed above, Daiwa was entitled to vote against a resolution of Barokes authorising it to sue Daiwa. Such opposition was not only entirely justified, but has also been vindicated. There was, as the evidence has established, simply no basis to commence such a proceeding. Further, and in the circumstances, and given the obvious deadlock, Daiwa was, in my opinion, entitled to commence winding up proceedings.

Finally, given the failure to meet the targets set out in the Business Plan, Daiwa was entitled to call in the loans.

H. Oppression

In my opinion, and substantially for the reasons set out above, the oppression claim has not been made out.

The conduct relied on to contend that Daiwa was in breach of the Shareholders Deed is, for the most part, the same as the conduct relied on to contend that the conduct of Daiwa was unfair, prejudicial and consequently oppressive. I do not consider, for the reasons given, that any of the conduct was relevantly oppressive and falls within the provisions of s232 of the Act. Put simply, Daiwa did not do anything that it was not permitted to do or that fell within the provisions that qualified its behaviour, that is the requirement to act in good faith and use reasonable endeavours.

The gravamen of the case advanced by the Minority Shareholders is that it was always assumed and must have been the case that Monde (and Daiwa) was required to be licensed so that the necessary revenue could flow to meet the budgets and forecasts in effect prepared by Daiwa, and that to this end the Vinsafe technology was transferred as embedded into the Monde technology. This enabled Monde, a subsidiary of Daiwa, to compete with Barokes, a position that it is suggested could hardly have been intended. It was suicidal for Barokes.

The counterargument was that it would be hugely detrimental to Monde to require it to pay licence fees and royalties to Barokes, a position that it was suggested could hardly have been intended. Each party asserted some high moral ground.

Whatever the intentions, suspicions, paranoia and conspiracy theories of the parties, the case must be decided on the facts and relevant principles.

The fact is that the evidence does not support the case advanced by the Minority Shareholders for the reasons given. As pointed out, the critical assumption is not made out on the evidence and the opposite appears to be the case. The exposure to competition (by Monde and Daiwa) was not specifically restricted and in the circumstances and given their ongoing operations, and persistent denial (subsequently vindicated) of any infringement, any restriction would need to be specifically dealt with. It never was. There were ongoing discussions, but nothing was resolved. The good faith and reasonable endeavours mechanism are not sufficient for so serious an inroad into a party’s ability to trade, particularly when the circumstances surrounding the party sought to be restricted are known.

I. Winding up

In my opinion, and substantially for the reasons advanced by Daiwa, it follows that Barokes must be wound up. In summary, the joint venture has failed, there is the clearest of deadlock and the board cannot function properly. Indeed, there was no argument to the contrary. Barokes and the Minority Shareholders did not contend that if their claims failed a winding up order should not be made.

It is beyond doubt that the relationship between the parties has broken down irretrievably. The following matters are relevant:

(a) there have been no board meetings of Barokes for three years after very high degrees of acrimony emerged when Mr Stokes began to assert in March 2013 and thereafter that Monde was required to obtain a Vinsafe licence;

(b) the Minority Shareholders caused Barokes to sue Daiwa in Japan without the authority of the board;

(c) Daiwa responded by successfully applying to have Barokes’ patent invalidated in Japan;

(d) Mr Stokes and Mr Barics profess to believe that Daiwa and Monde have wrongfully taken the benefit of the Vinsafe system that they say represents their life’s work; and

(e) both parties seek in these proceedings relief that would have the effect of terminating their legal and commercial relationship.

Further, as submitted by Daiwa, even if the board were to meet, it would be in deadlock as Mr Stokes and Mr Barics are overwhelmingly unlikely to be able to work with Mr Ikeda and Mr Yamashita in a productive fashion in the present circumstances. Barokes is therefore currently being managed subject to undertakings to the Court given by Mr Stokes which will expire upon the determination of these proceedings. Mr Stokes’ authority to manage Barokes pursuant to the Executive Services Agreement that he entered into has expired. Barokes has not produced accounts since 2014.

For the reasons set out above, I am satisfied that a winding up order must be made and that the proviso in s 467(4) is not engaged.

J. Other Matters

During the course of the trial, Senior Counsel for Daiwa told the Court that contrary to its previously stated position, Daiwa would not call any evidence.[30] Rather, Daiwa elected to rely upon the documentary record contained within the court book, the contents of which was largely agreed upon by the parties and its cross-examination of the witnesses called by Barokes and the Minority Shareholders. Daiwa was entitled to take this course. A party is not required or compelled to call any evidence.[31] However, the consequences of a failure to do so is another, albeit related and consequential matter.
[30]This was not a ‘no case to answer’ submission. See e.g. May v O’Sullivan (1955) 92 CLR 654.
[31]Barokes and the Minority Shareholders may well have thought there was a contest on the evidence and that Daiwa would adduce evidence to counter the Stokes and Barics narrative. However, it was not obliged to do so and was entitled to challenge the adequacy of the evidence.

As a result of Daiwa’s election not to call any evidence, much of the closing submission of Barokes and the Minority Shareholders was directed to the rules in Jones v Dunkel[32] and Browne v Dunn.[33]
[32](1959) 101 CLR 298.
[33](1894) 6 R 67.

The submissions relating to the Jones v Dunkel point set out which witnesses could and should have been called by Daiwa, as well as what adverse inferences I should draw from their failure to give evidence. It was submitted, inter alia, that there was no oral or documentary evidence available which would have assisted Daiwa’s case. Indeed, Barokes and the Minority Shareholders submitted that I should only draw such inferences ‘in appropriate circumstances’.[34]
[34]Closing Submissions of the Knights Quest Parties at [37].

In Cross on Evidence[35] the learned author states a part of the rule as follows:

Thirdly, the rule only applies where a party is “required to explain or contradict” something. What a party is required to explain or contradict depends on the issues in the case as thrown up in the pleadings and by the course of evidence in the case. No inference can be drawn unless evidence is given of facts “requiring an answer”. If there is no issue between the parties on a matter, there is nothing to answer; and if there is an issue between them, but the party bearing the burden of proof has tendered no evidence of it, the opponent is not required to answer. (Emphasis added)

[35]J D Heydon, ‘Cross on Evidence’ (7^th ed, 2004) LexisNexis Butterworths, 41-2 [1215] (internal citations omitted).

The documents relied upon by Daiwa were all documents which the witnesses were otherwise referred to. They were agreed upon (and included in the court book) both before the trial, and then at its conclusion after a series of objections. If Barokes and the Minority Shareholders sought to exclude particular documents from evidence, they had ample opportunity to do so by either challenging admissibility or inclusion.

Accordingly, and as is evident, these reasons rely heavily upon the documentary record making up the negotiations, discussions and respective positions of the parties. That documentary record is, on the account of both parties, extensive, accurate and contemporaneous. A fair reading of that documentary record contradicts most (if not, every) aspect of Barokes and the Minority Shareholders’ case.

In short, all of the relevant critical findings are based on the evidence given (including cross-examination) and documents referred to by the witnesses or other documents agreed and forming part of the court book. This was, as the reasons demonstrate, sufficient to dispose of the case made by Barokes and the Minority Shareholders. Nothing, or at least nothing relevant, required an answer. The critical point is that Barokes and the Minority Shareholders failed to make out their case on the evidence presented. In fact, as demonstrated, the agreed documentary evidence undermined to a significant extent the various claims that were made. The documents were properly in evidence, spoke for themselves and put to the relevant witnesses. There was no need to shed any further light on the documents and events. Nothing of any relevance called for an answer or explanation and no further evidence was required.

Even if I draw the necessary inference to the effect that no evidence or document would have advanced or assisted Daiwa’s case and that the case should be decided solely on the evidence of Barokes and the Minority Shareholders, (which I am not obliged to do),[36] the result would be the same. In fact that is exactly what was done. The critical findings were made entirely on the weaknesses in the case put forward. It was Barokes’ and the Minority Shareholders’ own documents and evidence that led to the result. To repeat, there was nothing to answer.
[36]ASIC v Geary [2018] VSCA 103 [252].

In relation to the Browne v Dunn point, I am satisfied that all relevant matters were fairly put to the witnesses. They had every opportunity to explain all relevant matters and, in particular, all relevant documents which constituted the overwhelming case against Barokes and the Minority Shareholders. Further, nothing was put to the witnesses in cross-examination, in a way that required Daiwa to call any witness in support of, or to make good such puttage.

K. Disposition

Barokes will be wound up pursuant to s 461(1)(k) of the Corporations Act.

I will hear from the parties as to the appropriate form of orders and costs.

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Citations

Knights Quest Pty Ltd v Daiwa Can Company [2018] VSC 426

Most Recent Citation

Knights Quest Pty Ltd v Daiwa Can Company (No 2) [2018] VSC 551

Cases Citing This Decision

4

Knights Quest Pty Ltd v Daiwa Can Company [2018] VSCA 349

In the matter of Barokes Pty Ltd (in liq) [2022] VSC 642

Re Barokes Pty Ltd (in liq) [2020] VSC 555

Cases Cited

7

Statutory Material Cited

0

Daiwa Can Company v Barokes Pty Ltd [2016] VSC 296

Knights Quest Pty Ltd v Barokes Pty Ltd [2015] VSC 601

Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228

[2018] VSC 426

3 August 2018