Lionsgate Australia Pty Ltd v. Magna Pacific (Holdings) Ltd

[2007] QSC 289

[2007] QSC 289

SUPREME COURT OF QUEENSLAND

CIVIL JURISDICTION

MUIR J

No 5776 of 2007

LIONSGATE AUSTRALIA PTY LTD ACN 122 557 260	Plaintiff
and
MAGNA PACIFIC (HOLDINGS) LIMITED ACN 010 731 718	First Defendant
and
MARK EDWARD ELLIOT	Second Defendant
and
ALLAN JOHN RADLEY	Third Defendant
and
JOHN RUSSO	Fourth Defendant
and
PRIME MEDIA COMMUNICATIONS PTY LTD ACN 23 122 697 054	Fifth Defendant

BRISBANE

..DATE 13/07/2007

JUDGMENT

HIS HONOUR:  The first respondent, Magna Pacific (Holdings)

Limited ("Magna") is a public listed company carrying on

business as an independent distributor of films and television

programs.  On 1 February 2007, the applicant, Lionsgate

Australia Pty Ltd announced a takeover bid to acquire all of

the shares in Magna for 32 cents per share.  The directors of

Magna concluded that the offer price was inadequate.

On 30 March 2007, Magna and destra Corporation Limited

announced an intention to implement a scheme of arrangement

under which destra would acquire all of Magna's shares in

consideration of payment of either 38 cents per share or 15

cents and one destra share.  The value of the cash and scrip

consideration is now about 50 cents.

The Board of Magna obtained the advice of an independent

expert which was to the effect that the proposed scheme of

arrangement was fair and reasonable.  And the Board

unanimously recommended to shareholders that in the absence of

a superior proposal, they vote in favour of the scheme.

The fifth respondent, Prime Media Communications Pty Ltd

acquired 12.7 per cent of the issued shares in the capital of

destra.  Destra and Prime entered into a further agreement

under which the Chief Executive Officer of Prime was to become

a director of destra and upon destra acquiring Magna's shares

under the proposed scheme, Prime would acquire a further 2.3

per cent of the issued share capital of destra.  It may be

that here I'm confusing Prime with its holding company, Prime

Television, but, if so, that is not material to my

determination.

Prime is a wholly owned subsidiary of Prime Television, which

is a regional, free-to-air television broadcaster in Australia

and New Zealand.  Prime also has a library of materials

available for distribution to the video/DVD market, and Magna

has established contractual relationships with members of the

Prime group.

The Lionsgate bid lapsed on 29 June 2007, by which time it had

acquired 12.49 per cent of Magna's shares.  It now holds a

little over 14 per cent.

A meeting of shareholders of Prime to consider the proposed

scheme has been convened by the Supreme Court for 30 July

2007.  Magna announced on 2 July 2007 that it was having

discussions with a view to placing up to 15 per cent of its

issued share capital.  On 4 July 2007, Magna and Prime entered

into a share placement agreement under which Magna agreed to

issue 15 per cent of its share capital to Prime for a

consideration of 42 cents per share.

Lionsgate has commenced these proceedings seeking an

injunction restraining Magna and Prime from giving effect to

the share placement agreement.

An order is sought in the alternative that any shares issued

to Prime pursuant to the share placement agreement constitute

a separate class for the purpose of voting on the scheme of

arrangement.  By the application now under consideration,

Lionsgate seeks an interlocutory injunction restraining Magna

from issuing shares under the share placement agreement until

the trial of the action.

It is Lionsgate's contention that the directors of Magna, in

resolving that Magna entered into the share placement

agreement, acted for improper purposes, namely for the

purposes of:

(a) diluting Lionsgate's percentage of the issued share

capital of Magna that would vote against the scheme and

increasing the percentage of shares held by shareholders

who would vote in favour of the scheme; and

(b) engineering an outcome which would deliver control of

Magna to destra rather than to Lionsgate.

It is contended that the directors' conduct also involved a

contravention of section 181 of the Corporations Act.

It is alleged against Prime that it entered into the share

placement agreement with knowledge that Magna's directors were

acting improperly and in order to assist the directors in

achieving their improper purpose.

The principles applicable to the grant of interlocutory

injunctions were the subject of exposition in Australian

Broadcasting Corporation v. O'Neill (2006) 80 ALJR 1672. I

was referred by Mr McKenna SC who led Mr Pomerenke for the

first to fourth respondents to paragraphs 65 and 70 to 72 in

the joint reasons of Gummow and Hayne JJ in that case and to

paragraph 19 in the joint reasons of Mason CJ and Crennan J.

It was not disputed by Mr O'Donnell QC, who appeared with

Ms Klease for Lionsgate, that those passages contained an

authoritative statement of the principles to be applied, and I

propose to apply them.  I should explain that the second,

third and fourth respondents are directors of Magna.

The directors of a company are in a fiduciary relationship

with it and may not exercise their powers "for any purpose

foreign to the power".  See Mills v. Mills (1937-1938) 60 CLR

150 at 185 per Dixon J.  In Mills v. Mills, in considering the

test to be applied as to whether directors were acting for a

purpose foreign to their power in respect of the allotment of

shares, Dixon J observed at 185 and 186:

"When the law makes the object, view or purpose of a man,
     or of a body of men, the test of the validity of their
     acts, it necessarily opens up the possibility of an
     almost infinite analysis of the fears and desires,
     proximate and remote, which, in truth, form the compound
     motives usually animating human conduct.  But logically
     possible as such an analysis may seem, it would be
     impractical to adopt it as a means of determining the
     validity of the resolutions arrived at by a body of
     directors, resolutions which otherwise are ostensibly
     within their powers.  The application of the general
     equitable principle to the acts of directors managing the
     affairs of the company cannot be as nice as it is in the
     case of a trustee exercising a special power of
     appointment.  It must, as it seems to me, take the
     substantial object the accomplishment of which formed the
     real ground of the board's action.  If this is within the
     scope of the power, then the power has been validly
     exercised.  But if, except for some ulterior and
     illegitimate object, the power would not have been

exercised, that which has been attempted as an ostensible
     exercise of the power will be void, notwithstanding that
     the directors may incidentally bring about a result which
     is within the purpose of the power and which they
     consider desirable."

In Ngurli Ltd v. McCann (1954) 90 CLR 425 at 445, Williams

ACJ, Fullagher and Kitto JJ in discussing the subject test

said:

"The onus, of course, lies on the plaintiffs to prove
     that (the director) used the power for an ulterior
     purpose; that is to say to prove, in the words of the
     present Chief Justice in Mills v. Mills: 'The substantial
     object the accomplishment of which formed the real ground
     of the real board's'..."action"'."

That test was the subject of approval also in Ashburton Oil NL

v. Alpha Minerals NL (1971) 123 CLR 614. Lionsgate relies,

however, on Whitehouse v. Carlton Hotels Pty Ltd (1987) 162

CLR 285 in which the following observations were made in the

joint reasons of Mason, Dean and Dawson JJ at 294:

"As a matter of logic and principle the preferable view
     would seem to be that, regardless of whether the
     impermissible purpose was the dominant one or but one of
     a number of significantly contributing causes, the
     allotment will be invalidated if the impermissible
     purpose was causative in the sense that, but for its
     presence, 'the power would not have been exercised'."

Their Honours expressly stated that the view expressed by them

was tentative only.

Mr McKenna, whilst urging that the correct test is that

stated in Mills v. Mills and Ngurli v. McCann submitted that

his clients should succeed, whichever test was applied.  I will return to the application of the test or tests later.

Lionsgate's case, as is usual in these circumstances, is

largely a circumstantial one.  It is submitted that when one

looks at the circumstances under which the placement agreement

was entered into, the reasons put forward by Magna's directors

for entering into the placement agreement should not be

accepted.

Without attempting to be exhaustive, the following matters

were pointed to by Mr O'Donnell:

(1) The proximity of the announcement of the share

placement to the expiration of Lionsgate's offer and the

fact that it was to take effect shortly before the

shareholders' meeting on 30 July.

(2) The directors had been vigorously endorsing the

scheme of arrangement.

(3) The directors had been publicly discussing the

capacity of Lionsgate to defeat the destra scheme.

(4) It is "almost certain" that Prime, on becoming a

shareholder of Magna, will vote in favour of the scheme.

(5) Prior to the share placement agreement Magna's

directors made numerous statements to shareholders to the

effect that it was able to fund its business activities

without needing to raise additional equity or obtain

additional debt funding.

(6) Magna, in fact, does not need to raise capital to

repay borrowings.

(7) Magna already has a long-term distribution agreement

with Becker Group Limited of which company Prime

Television is a major shareholder.  The alleged benefit

of a "strategic alliance" said to arise from issuing

shares to Prime Media can do no more than confirm an

existing long-term relationship.

(8) The time of the share placement gives rise to the

inference that its purpose is to realign the voting power

within Magna to enhance the prospect of the schemes being

approved.

(9) Magna rejected Lionsgate's offer to meet Magna's

short-term working capital requirements by a loan after

considering it for less than 10 hours.

(10) Magna did not offer a percentage of any proposed

additional share placement to Lionsgate or to any other

shareholders.

Magna's contentions are to the effect that the edifice

constructed by Lionsgate to support its case is impressive

only if one fails to consider the true facts sworn to by its

directors and by Mr Evans, a director of Prime.  The true

facts, it asserts, are as follows:

(1) There is no suggestion that Magna gave consideration

to the issue of further shares to anyone prior to 1 July

2007.

(2) On that date, after Lionsgate's bid lapsed without

being raised beyond 32 cents, Magna received an

unsolicited approach from Prime.

(3) At the time of the approach, Magna had no particular

anxiety about the success of the scheme.  The effective

consideration was then about 50 cents per share,

Lionsgate had shown no interest in raising its bid from

32 cents, and there is no suggestion of shareholders

having an expectation of receiving any other offer.

There was no reason to suppose that Lionsgate would not

have been content to take its profits from the scheme.

The proposal put by Prime, although commercially attractive,

was not accepted by Magna's board.  Mr Radley on behalf of

Magna intimated that an offer of not less than 42 cents would

gain approval.  That was in the course of negotiations with

representatives of Prime.  In consequence, Prime raised its

offer to 42 cents on 2 July 2007, and Magna then accepted.

The Prime offer was very attractive to Magna on any objective

test:

(a) it provided a strong commercial aligns for the major

business associates;

(b) it provided at no cost to Magna cash reserves of

about $6 million at a time when cash reserves were

desirable; and

(c) the new price offered was far in excess of the

Lionsgate offer and in excess of destra's cash

consideration.

When these matters are taken into account, the circumstantial

case, based largely around timing and fiscal matters of

historical interest only, is seen to lack substance.  I should

observe here, that I'm continuing to summarise the submissions

made on behalf of the first to fourth respondents.

The timing cannot give rise to any adverse inference, as it

was not of Magna's making.  The directors were obliged to

consider Prime's offer and accept it if, in their view, it was

in the best interests of Magna.  It is not suggested by

Mr Edwards, the expert on whom Lionsgate relies, that Magna's

directors erred in concluding that the placement was for the

benefit of Magna.

In general, it is said, pointing to the precise details of the

dealings between Prime and Magna, that there is nothing which

would suggest any impropriety on the part of Magna's board.

In my view, there is substance in the respondent's

contentions.  Looking at it firstly from the perspective of

Prime, there is no reason why Prime could not look to its own

interests in making its offer.  That offer must have been

regarded as desirable for its purposes, and no doubt Prime had

in mind that, if it were to be accepted, it would enhance the

prospects of approval of the scheme.  But the offer was an

attractive one from Magna's perspective applying normal

commercial criteria.  There was thus little reason for Prime

to conclude that in accepting it, the board of Magna might act

improperly.  Indeed, the way in which negotiations proceeded

would have suggested to the contrary.

The circumstantial case against Magna is, I think, somewhat

stronger when reference is had to the combination of

circumstances pointed to by Mr O'Donnell.  I am doubtful,

though, that Lionsgate has shown "a sufficient likelihood of

success to justify, in the circumstances, the preservation of

the status quo pending the trial".  But having regard to the

limited time available to me, I do not propose to explore this

question further as, in my view, the balance of convenience

favours the respondents.  Nor do I propose to further canvass

the arguments persuasively advanced by Mr Sweeney on behalf of

Prime.

Mr O'Donnell submits in relation to the balance of convenience

that Magna will suffer no harm if the placement is deferred

until after the final hearing of this matter.  He points out

that the evidence does not disclose any urgent need for the

placement moneys or for the "strategic alliance" said by

directors of Magna to confer business advantages on Magna.  He

submits also that any prejudice which could be said to arise

from the granting of the interlocutory injunction can be

avoided by Magna's deferring the scheme meeting.   He relies

also on the evidence of Mr Edwards concerning the difficulty

in determining whether or not the existence of the placement

will have an effect on voting patterns so that it may be

impossible to tell later, if Lionsgate succeeds and the scheme

is approved, whether it would have failed but for the

placement.

Mr McKenna points to the possible loss by Magna of the

commercial benefit of the placement agreement, should the

injunction be granted.  He submits that on the other side of

the ledger it is plain that Lionsgate stands to benefit

financially from the approval of the scheme and has identified

no possible loss.

When I raised the question of Magna's detriment with

Mr O'Donnell, he identified it as the loss of a prospective

ability on the part of Lionsgate to make a successful offer to

acquire Magna's share capital.  There is no evidence of any

present intention in this regard or any evidence as to the

prospects of success of such an offer should Magna make it.

The evidence as to Magna's identified loss is modest also.  I

accept, however, Mr McKenna's submission to the effect that

Prime will be free to pursue its own commercial interests and

that those interests may dictate that it seek to terminate the

placement agreement should there be a significant fall in

Magna's share price.  The evidence is that the placement price

was at an historically high level.  I'm not particularly

impressed with the argument, based on inability to unscramble

matters, and the possibility that losses may be sustained by

some persons trading in Magna's shares, should Lionsgate

succeed in its claims.  Appropriate steps can be taken to

inform the market as to the nature of Prime's claims, and of

the fact that the placement may be set aside in the event that

Lionsgate is successful.

Mr Edwards can do no more than speculate as to the possibility

that the votes of some shareholders might be affected.  That

speculation does not permit a conclusion as to whether voting

may be affected for or against the interests of Lionsgate.

When consideration is being given to the voting of

shareholders, other than the parties, regard must be had also

to the possible effect on such voting of the granting of the

injunction which Lionsgate seeks.  On Mr Edwards' reasoning,

one may well ask rhetorically why would the injunction not

have some impact on such voting, the nature and extent of

which can only be the subject of speculation similar to that

to which I have previously referred.

In my view, the rights of Lionsgate will be able to be amply

vindicated if it succeeds in the proceedings.  For these

reasons, I decline to grant the relief sought.

An additional consideration is the desirability that Courts

proceed with caution when invited to interfere on an

interlocutory basis in arrangements between corporations, one

or more of which are publicly listed, the disturbance of which

may affect the trading of shares in those corporations in ways

which are difficult, if not impossible to predict.

I invite Mr McKenna to formulate an undertaking or proposal

which will ensure that the effect of the voting of the

placement shares can be precisely ascertained.  Are you in a

position to do that now, Mr McKenna?

MR McKENNA:  I wish I had formulated it before I - I've
prepared a draft order, your Honour, but that hasn't been
formulated, but the gist of it, I'd imagine, your Honour, is
that the counting of any shares by - cast by Prime shares are
separately tabulated and recorded by the returning officer at
the meeting, an undertaking along those lines.  Is that really
what your Honour has in mind?

HIS HONOUR:  Yes, I don't think it need be elaborate, and it
will be an undertaking - I suppose the shares will then be
held by Prime, won't they?

MR McKENNA:  Yes, so-----

HIS HONOUR:  So, it will need to be joined in, I suppose, by
Mr Sweeney's client.

MR McKENNA:  I was about to suggest perhaps even an
undertaking isn't necessary because directions are given by
the Court in connection with the scheme proceedings about the
whole process, and I'd certainly submit to a direction by the
Court that we proceed in that way - we conduct the meeting in
that way.

HIS HONOUR:  Yes, that should be perfectly adequate.

MR SWEENEY:  Can I say, your Honour, we won't be appearing on
Monday, because we're not in that, but the undertaking your
Honour sought, if needed from me, would be given from my
client.

HIS HONOUR:  What's on Monday?

MR McKENNA:  I'd hope that we could put before your Honour a
supplementary information booklet encapsulating what it is
that your Honour has determined today, and that's the context
in which your Honour could make the direction along the lines
we have just discussed.

HIS HONOUR:  Yes, all right.  This, then, can be attended to
then.

MR McKENNA:  It can.  May I hand my learned friends and your
Honour the draft.

HIS HONOUR:  Thank you.

...

HIS HONOUR:  With some reservations, it seems to me it is

desirable that I proceed with some caution in this matter.

Paragraph 3 will read:  "The costs of and incidental to this

application be reserved."

I order in terms of the draft initialled by me.

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