Leadenhall Australia Ltd v Digicall Group Limited (formerly TTL Corporation Ltd)
[1995] FCA 1000
•11 DECEMBER 1995
CATCHWORDS
CORPORATIONS - Miscellaneous Matters - options to subscribe for ordinary shares - options issued subject to terms and conditions - special resolution passed by company for purpose of reducing capital - applicant purporting to exercise options - proper construction of option contract - whether interpretation of option contract to be undertaken in light of ASX listing rules.
PRACTICE - request by consent for order that a question be tried separately from any other question in the proceedings - facts not in dispute - answer might be determinative of proceedings - proper to make order.
Corporations Law s 195
Federal Court Rules O 29 r 2 and r 4
Rocklea Spinning Mills Pty Ltd v Anti-Dumping Authority (1995) 129 ALR 401
Blurton and Others v Minister for Aboriginal Affairs (1991) 29 FCR 442
Forsayth Oil & Gas N.L. v Livia Pty Ltd (1985) 3 ACLC 44
Forsayth Oil & Gas N.L. v Livia Pty Ltd (1985) 3 ACLC 697 (P.C.)
No SG 3188 of 1995
LEADENHALL AUSTRALIA LIMITED ACN 007 997 245 v DIGICALL GROUP LIMITED ACN 002 944 667 (formerly TTL CORPORATION LIMITED ACN 002 944 667)
Branson J
Adelaide
11 December 1995
IN THE FEDERAL COURT OF AUSTRALIA )
)
SOUTH AUSTRALIA DISTRICT REGISTRY ) No SG 3188 of 1995
)
GENERAL DIVISION )
BETWEEN:
LEADENHALL AUSTRALIA LIMITED
ACN 007 997 245
Applicant
- and -
DIGICALL GROUP LIMITED
ACN 002 944 667
(formerly TTL CORPORATION LIMITED ACN 002 944 667)
Respondent
REASONS FOR JUDGMENT
CORAM: Branson J
PLACE: Adelaide
DATE: 11 December 1995
By an application dated 6 October 1995 the applicant seeks:-
"1.A declaration that Digicall Group Limited ("Digicall") has engaged in conduct constituting a contravention of the conditions of the options to acquire shares in Digicall.
2.An order for specific performance requiring Digicall to allot shares pursuant to the notice to exercise 541,250 options to subscribe for ordinary shares of 20 cents each to Leadenhall Australia Limited ("Leadenhall") pursuant to Option Certificate Number 3 for the amount of $108,250.00.
3.Damages for breach of contract.
4.Interest."
The factual background to the application is not in dispute. It is outlined below.
An order pursuant to Order 29 rule 2 of the Federal Court Rules was sought by consent. Order 29 rule 2 provides as follows:-
"The Court may make orders for -
(a)the decision of any question separately from any other question, whether before, at or after any trial or further trial in the proceedings; and
(b)the statement of a case and the question for decision."
In the circumstances that the factual foundation for the determination of the question proposed is not in dispute, and the point of law raised by the question, if answered in a particular way, may be decisive of the application, I consider that it is appropriate to order that the question proposed by the parties be decided separately from all other questions arising on the application (Rocklea Spinning Mills Pty Ltd v Anti-Dumping Authority (1995) 129 ALR 401; Blurton and Others v Minister for Aboriginal Affairs (1991) 29 FCR 442 at 449).
The question proposed is in the following terms:-
"Whether, on the assumption that the resolution of November 1994 is effective according to its terms, the consequence of the resolution is:-
(a)that the applicant is entitled to options to subscribe for 1,541,250 shares of 20 cents each in the capital of the respondent at an issue price of 20 cents per share; or
(b)that the applicant is entitled to options to subscribe for 616,500 shares of 20 cents each in the capital of respondent at an issue price of 50 cents per share."
FACTUAL BACKGROUND
The applicant ("Leadenhall") is a company incorporated in South Australia. The respondent, which was formerly known as TTL Corporation Limited, is incorporated in New South Wales. In these reasons it will be referred to as "Digicall" even in relation to events which occurred before its name change.
Prior to 8 October 1993 Digicall issued 1,233,300 fully paid note options ("options") to subscribe for ordinary shares of 50 cents each in Digicall. The options were issued subject to the terms and conditions contained in a document headed "Terms and Conditions of Options". The relevant paragraphs of this document are as follows:-
"1.Each Option entitles the holder to subscribe for one Ordinary Share of $0.50 in the capital of the Company at an issue price of 50 cents per share (i.e. par value)
2.Each share issued upon exercise of an Option will rank equally in all respects with shares in the Company issued before that share.
3.An Option may be exercised at any time until 5.00 pm Sydney time 4th day of May 1998 but lapses automatically if not exercised by that date. If the holder of the Option does not already hold a marketable parcel of shares, sufficient Options must be exercised to result in the holder of the Option holding a marketable parcel of shares.
4.Options are exercisable only by completing a Notice of Exercise in the usual form and delivering it with payment (which is effective only if any cheque is paid in the ordinary course of business) for the sum of 50 cents for each Option to the registered office of the Company.
. . . . . .
7.An Option is transferable at any time prior to its expiry date. Separate option certificates will be issued.
. . . . . .
11.If all or any of the shares in the Company are subdivided or consolidated during the currency of the Option, the Option will be deemed to be for shares of the same nominal value as the shares resulting from the subdivision or consolidation, and the number of Options held and the subscription price will be reduced or increased as the case requires in proportion to the subdivision or consolidation.
12.If at any time and from time to time during the currency of the Options, the Company reduces capital so the number of shares held by members is reduced, the number of Options held be each Option holder will be correspondingly reduced as if when capital is reduced all of the Options were shares. If capital is reduced by reducing the paid up amount of shares, the Option will entitle the holder to a share of the same par value as other ordinary shares and the exercise price will be reduced in proportion to the proportion (if any) of the par value paid to holders of shares upon the reduction of capital.
13.If, in the period between the Date of Issue and the date of exercise of an Option, TTL make a Bonus Issue the number of shares to be issued upon the exercise of Options shall be increased (without payment of further consideration) to the nearest whole number derived by multiplying the number of Options being exercised by the quotient of the aggregate of all shares issued by way of Bonus Issue during that period in respect of ordinary shares on issue on the Date of Issue plus the number of ordinary shares on issue on the Date of Issue divided by the number of ordinary shares on issue on the Date of Issue. If such adjustment results in TTL being required to issue shares at a discount, such issue shall be subject to confirmation by the Court pursuant to the Corporations Law and TTL shall use its best endeavours to obtain that confirmation.
14.If, between the Date of Issue and the date of exercise of an Option, TTL shall offer ordinary shares or other securities of TTL or of any corporation for subscription or purchase by way of cash subscription or otherwise pro rata to all of its ordinary shareholders, the number of shares to be issued upon the exercise of Options shall be increased (without payment of additional consideration) to the nearest whole number derived by multiplying the number of Options being exercised by the quotient of the weighted average share price of fully paid ordinary shares in TTL sold on the stock exchange in the five (5) Business Days before the shares are quoted ex the relevant entitlement divided by the weighted average share price of fully paid ordinary shares in TTL sold on the stock exchange in the five (5) Business Days after the shares are quoted ex the relevant entitlement but if that quotient is not greater than 1 the number of shares to be issued on exercise of the Options shall not be affected by the new issue."
On 8 October 1993 Leadenhall became the registered holder of 616,500 (i.e. half) such options. The Option Certificate held by Leadenhall is in the following form:-
"TTL CORPORATION LIMITED
A.C.N. 002 944 667
Registered Office: Level 6, 16 York Street, Sydney N.S.W. 2000 Telephone (02) 2677876
Share Registry: COOPERS & LYBRAND, Locked Bag 14, Sydney South N.S.W. 2000 Australia
EXPIRY DATE OF OPTION IS 4 MAY 1998
(Exercisable from 4 May 1993 to 4 May 1998)
OPTION CERTIFICATE
OPTION HOLDER THIS IS TO CERTIFY THAT NUMBER OF OPTIONS CERTIFICATE
REFERENCE REGISTERED NUMBER DATE
Leadenhall Australia Ltd 616,500 3 8 Oct
1993
144 South Terrace
ADELAIDE S.A. 5000
REGISTER
NEW SOUTH WALES
is registered as the holder of Six Hundred and Sixteen thousand, five hundred
such FULL PAID NOTE OPTIONS TO SUBSCRIBE FOR ORDINARY SHARES OF 50 CENTS each in TTL Corporation Limited as specified above subject to the Memorandum and Articles of Association of the Company and the Terms and Conditions of the option have been provided separately.
Given under the Share Seal of the Company Director
(signed)
(Common Seal)
Secretary
(signed)
No transfer of any portion of the Notes comprised in this certificate will be recognised until the Certificate has been surrendered to the Company registered office"
There is a dispute between the parties as to whether the options are held by Leadenhall "subject to the Memorandum and Articles of Association of the Company" (see the terms of the above certificate). However, it was not suggested in argument before me that this issue has any relevance to the question which I am required to answer.
On 29 November 1994 a special resolution of Digicall was passed for the purpose of reducing its share capital (see s195 of the Corporations Law). The special resolution was in the following terms:-
"That subject to the confirmation of the Supreme Court of New South Wales and to any conditions imposed by the Supreme Court of New South Wales:-
(a)the issued capital of the Company be reduced from $6,266,448.50 made up of 12,532,895 shares to $2,506,579 divided into 12,532,895 shares of 20¢ each by cancelling paid up capital which has been lost or is unrepresented by available assets to the extent 30¢ of the paid up value of such shares without payment of any amount to the holders thereof; and
(b)The authorised capital of the Company be changed from $45,000,000.00 divided into 90,000,000 shares of 50¢ each to $45,000,000 shares (sic) divided into 220,000,000 shares of 20¢ each by such reduction of capital and the consolidation and subdivision of the existing unissued shares and creation of new shares.
This reduction of capital shall take effect on the business day after the lodgement of the certified copy of this resolution and an office copy of the order of the Supreme Court of New South Wales with the Australian Securities Commission."
The apparent arithmetical error in paragraph (b) of the special resolution may be disregarded.
By order dated 2 December 1994 the Supreme Court of New South Wales confirmed, without conditions, the reduction of share capital of Digicall. Such reduction took effect on 7 December 1994.
By a letter dated 26 September 1995 Leadenhall purported to exercise 541,250 options to subscribe for ordinary shares of 20 cents each in Digicall. Delivered with the letter was a cheque in the sum of $108,250.00. The purported exercise of the options was made on the basis that Leadenhall had an entitlement to 1,541,250 options for shares of 20 cents each at an issue price of 20 cents per share.
Digicall declined to issue shares pursuant to the purported exercise by Leadenhall of options. These proceedings followed.
THE INTERPRETATION OF THE OPTION CONTRACT
It is not in dispute that a "... share in a company is, amongst other things, an aliquot proportion of the company's share capital ..." and that an "... option to take up ordinary shares in the company may be described as a contract to issue ordinary shares in the company upon the fulfilment of the conditions of exercise ..." (see Forsayth Oil & Gas N.L. v Livia Pty Ltd (1985) 3 ACLC 44 at 47 per Wallace J and the authorities there cited).
It is common ground between the parties that the answer to the question posed is dependent upon the proper interpretation of the option contract, and thus of the document headed "Terms and Conditions of Options" set out above.
It is contended on behalf of Digicall that such interpretation should be undertaken in the light of the applicable listing rules of the Australian Stock Exchange ("the ASX") as in operation at October 1993.
Section 3G of the ASX listing rules, as in force in October 1993, was placed in evidence by consent. So far as is here relevant it provides:-
"(1)Options to take up unissued shares in a company shall only be issued if -
. . . . . .
(d)it is a condition of the option that in the event of a reconstruction (including consolidation, sub-division, reduction or return) of the issued capital of the company, the number of options and the exercise price of options shall be reconstructed in the same proportion as the issued capital of the company is reconstructed and in a manner which will not result in any additional benefits being conferred on option holders which are not conferred on shareholders .... but in all other respects the terms for the exercise of options share remain unchanged ...".
In my view, in the circumstances of this case, the listing rules of the ASX may be regarded as notorious in the sense that it may be presumed that each party had knowledge of them. The listing rules are therefore to be considered as part of
the surrounding circumstances against which the contract between Digicall and its option holders is to be construed, according to the "true rule" articulated by Mason J in Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352. His Honour there stated:-
"The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed."
There appears to be little authority of direct assistance with respect to the question here to be answered.
In Forsayth Oil & Gas N.L. v Livia Pty Ltd (reported also (1985) 3 ACLC 697 (P.C.)) Forsayth Oil & Gas N.L. ("Forsayth") had granted options to acquire fully paid $1.00 shares at 25¢ a share. Prior to the expiry date of the options, Forsayth reorganised its share capital by writing down the nominal value of its issued $1.00 shares and consolidating them on a one for ten basis into 25¢ shares. The Privy Council upheld the decision of the majority of the Full Court of the Supreme Court of Western Australia that an option holder was nonetheless entitled to be issued with $1.00 fully paid ordinary shares in the capital of Forsayth. Lord Brightman stated as follows at 700:-
"The existence of an option to take up shares in a company does not by itself impose a fetter on the exercise by the company of the powers conferred on it by the article in relation to its share capital. Short of fraud, the company remains at liberty to increase or reduce its capital, and to consolidate or subdivide its shares. A reorganisation of capital may affect option holders. An increase in the issued capital may dilute their option rights. So may a subdivision of shares. Per Contra, a consolidation of existing shares may result in a proportionate increase in the amount of the equity represented by an option which is exercised. When options are issued, the company and the prospective option holder have a choice. They may decide to take no account of the possibility of a future change in the company's capital. This has obvious rules for the option holder but it has no unavoidable risks for existing shareholders because it is their choice, or the choice of the Directors appointed by them, whether the capital remains the same or is restructured. If the option holder requires protection, as is obviously prudent, or if the company wishes to retain full liberty of action without altering the balance between option holders and shareholders, there are various devices which can be adopted to meet the situation."
His Lordship went on at 701-702:-
"Short of fraud, the company was free to reorganise its capital as it thought fit, with such advantages or disadvantages as might ensue to the option holders. The company could have protected itself as it thought fit when it decided the terms upon which the options should be granted. It elected not to do so, and indeed it did not need to do so because the whip-hand always lay with the company, which alone could decide whether or not to reorganise its capital."
In Forsayth Oil & Gas N.L. v Livia Pty Ltd there were no terms and conditions attached to the issue of the options of the kind applicable in this case.
Mr Sulan QC, who with Ms Wilton appeared for Leadenhall, contended that para.11 of the document "Terms and Conditions of Options", which is set out above, was brought into operation by sub-paragraph (b) of the special resolution set out above. Mr Sulan set out in para.20 of his outline of argument the applicant's contentions as to the effect of para.11 of the document "Terms and Conditions of Option". Para.20 of Mr Sulan's outline of argument reads as follows:-
"20.As a consequence of sub-paragraph (b) of the special resolution the total number of shares of Digicall has been increased by a factor of two and one half times. Thus, by applying the provisions of paragraph 11 of the Terms of Options:
20.1The number of shares of 20 cents each to which Leadenhall's Options apply is 616,500 (being the total number of Options held by Leadenhall) increased by a factor of 2.5, being a total of 1,541,250 shares of 20 cents; and
20.2The exercise price for shares of 20 cents to which each Option applies is the original exercise price reduced by a factor of 2.5 being an exercise price of 20 cents."
Mr Sulan further contended that para.12 of the document "Terms and Conditions of Option" has no application in circumstances in which a consolidation or subdivision of shares has occurred.
If the submissions made by Mr Sulan on behalf of Leadenhall are accepted, the reorganisation of Digicall's capital, effected by the special resolution set out above, will have had the result of significantly increasing the amount of equity in Digicall represented by Leadenhall's options should they be exercised. It may be doubted whether such an apparent windfall to Leadenhall, and other options holders, was intended by those who voted in favour of the special resolution. As to this consideration, Mr Sulan relied on the following passage from the judgment of Brinsden J, as a member of the Full Court of the Supreme Court of Western Australia, in Forsayth Oil & Gas N.L. v Livia Pty Ltd at 52:-
"Considerations of fairness or unfairness as between the company or its existing shareholders and the respondent seem to me to be of little assistance in resolution of the problems thrown up in this case, nor do I think it material that, theoretically at least, if the respondent's view is sustained, and it ultimately acquires the number of shares it seeks, it may reap considerable financial benefit. What is relevant is the construction of the contract."
Mr Emmett QC, who with Mr Hevey appeared for the respondent, contended that para.11 of the document "Terms and Conditions of Option" ("para.11") was concerned only with the subdivision or consolidation of issued shares, and thus of no application in the circumstances of this case.
The expression "shares in the Company" appearing in para.11 is, to be understood in the context in which it is found and in accordance with ordinary usage. So understood, it is, I consider, an unambiguous reference to the issued share capital of Digicall only. In common parlance a query as to the number of shares in a company will elicit a response giving the number of issued shares in a company. This is not surprising: to most people the notion of the nominal share capital of a company is arcane. The effect of the special resolution of Digicall set out above was that the issued capital of Digicall was reduced by the cancellation of paid up capital to the extent of 30 cents of the paid up value of each of its issued
shares. There was no subdivision or consolidation of the issued shares of Digicall effected by the special resolution: the cancellation of paid up capital effected by the resolution made subdivision or consolidation of such shares unnecessary. This interpretation of the special resolution is confirmed by the reference in paragraph (b) thereof to the ".... consolidation and subdivision of the existing unissued shares ....".
If I am right in my above view, para.11 was not brought into operation by the passage of the special resolution.
I turn to consider para.12 of the document "Terms and Conditions of Option" (para.12). Plainly the first part of para.12 has no application in the circumstances here under consideration: the special resolution did not have the effect of reducing capital "so the number of shares held by members is reduced."
However, the special resolution did have the effect of reducing the capital of Digicall "by reducing the paid up amount of shares." The paid up amount of shares in Digicall was by the special resolution reduced from 50 cents to 20 cents by the cancellation of 30 cents per share. The second part of para.12 was therefore brought into operation by the special resolution. As a consequence each option thereafter entitled the option holder to a share of the same par value as other ordinary shares. The expression "ordinary
shares" has, in my view, no significance other than as a reference to the class of shares for which the options were issued: they were options to subscribe for ordinary shares of 50 cents each (see the terms of the Option Certificate set out above). The capital reduction effected by the special resolution had the result that the par value of issued ordinary shares in Digicall had become 20 cents. Option holders with an entitlement to ordinary shares of the same par value as other ordinary shares thus became entitled to ordinary shares of a par value of 20 cents.
But what of the exercise price of such options? The second part of para.12 provides that "the exercise price will be reduced in proportion to the proportion (if any) of the par value paid to holders of shares upon the reduction of capital." In the circumstances which happened no amount of the par value was paid to holders of shares upon the reduction of capital effected by the special resolution. As a consequence the exercise price upon which the options may be exercised was not reduced. Para.1 of the document "Terms and Conditions of Options" provides that it is to be 50 cents.
In my view, the words of the above paragraphs from the document "Terms and Conditions of Options" are plain and unambiguous. There is, therefore, no need to call in aid evidence as to the objective background against which the option contract was entered into.
The question set out above is answered as follows:-
"On the assumption that the resolution of November 1994 is effective according to its terms, the consequence of the resolution is that the applicant is entitled to options to subscribe for 616,500 shares of 20 cents each in the capital of the respondent at an issue price of 50 cents per share."
The above answer would appear to dispose of the whole of the claim for relief in the proceedings. It would therefore seem appropriate to dismiss the proceedings (O29 r4). However, before doing so, I will hear from counsel.
I certify that this and the preceding pages are a true copy of the Reasons for Judgment of the Honourable Justice Branson.
Associate:
Dated:
Counsel for the Applicant : Mr J R Sulan QC
with him Ms J L Wilton
Solicitors for the Applicant : Phillips Fox
Counsel for the Respondent : Mr R A Emmett QC
with him Mr G B Hevey
Solicitors for the Respondent : Mellor Olsson
as agents for
Garland Hawthorn Brahe
Hearing Date : 1 December 1995
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