MCLEAN v D.I.D. Piling Pty Ltd - [2009] SASC 205

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
MCLEAN v D.I.D. PILING PTY LTD
[2009] SASC 205
Reasons of Judge Lunn a Master of the Supreme Court
10 July 2009
CORPORATIONS
Application under s 247A of Corporations Act for minority shareholder to inspect books of defendant company - held plaintiff had not shown his dominant purpose was for valuing his shares for their sale by the Board of directors under a process laid down by the Articles but was also partly to assist him in deciding whether to institute an oppression action under s 233 of the Act - latter purpose not shown to be a proper purpose - application dismissed.

MCLEAN v D.I.D. PILING PTY LTD
[2009] SASC 205
Reasons on plaintiff’s application for inspection of records of the defendant.

JUDGE LUNN: The plaintiff’s application of 18 May 2009 is made under s 247A of the Corporations Act 2001 (“the Act”) which provides:
(1)On application by a member of a company ….. the Court may make an order:
(a)authorising the applicant to inspect books of the company ….. or
(b)authorising another person (whether a member or not) to inspect books of the company ….. on the applicant’s behalf.
The Court may only make the order if it is satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose.
The relevant law on such applications is conveniently summarised by Debelle J in Acehill Investments Pty Ltd v Incitec Ltd (2002) 23 LSJS 97 at 105-6 as follows:
….. Those provisions also stated that a Court may only make an order for inspection if satisfied that the applicant is acting in good faith and that the inspection is sought for a proper purpose. Although not in the same terms as s 247A, those provisions were to the same effect so that the principles have equal application to the determination of applications under s 247A. They establish the following propositions relevant to the issues in this application.
1The requirement that the applicant is acting in good faith and that the inspection is to be made for a proper purpose expresses a composite notion and the Court will determine whether each has been demonstrated by applying an objective test: …..
2The onus is on the applicant to demonstrate that he is acting in good faith and that the inspection is for a proper purpose: …..
3The section operates where the applicant seeks to protect some specific or personal right by the making of the order. Examples are where a shareholder contemplates proceedings under s 233 of the Corporations Act (the statutory successor of s 320 of the Companies Code); ….. or where a shareholder reasonably takes the view that a transaction could adversely affect his investment and he seeks to investigate the transaction for the purpose of determining what action he should take: ….. or where a shareholder seeks to ascertain facts for the purpose of considering a takeover offer: …..
4If the applicant’s primary or dominant purpose is a proper purpose, it is not to the point that an inspection may be of benefit to the applicant for some other purpose: …..
5The rights provided by s 247A should not be regarded as affecting the basic rule of company law that a shareholder should not ordinarily have recourse to the Courts to challenge a managerial decision made by or with the approval of the directors …..
…..
7Applicants do not necessarily lack a proper purpose merely because
(a)they are hostile to other directors;
…..
8The procedure under s 247A is not intended to be a process as wide-ranging as the process of discovery of documents so that, as a general rule, inspection will be confined to, say, the results of decisions of directors rather than all the documents such as board papers leading to decision: ….. I emphasise that this is a general rule. There may be occasions where it is proper to admit inspection of board papers …..
9Even where an applicant is acting bona fide and has shown a proper purpose, the Court has a discretion whether to order inspection: …..
(Citations of authorities omitted).
The following statement of the relevant facts is confined to what is necessary to dispose of the application. It is taken principally from the affidavit of the plaintiff sworn on 18 May 2009. The defendant’s counsel objected to parts of this affidavit which I received de bene esse. As I am not relying on the contentious parts of the affidavit it is not necessary to deal with those objections. As there may be other proceedings between the parties it is desirable that I confine my reasons to what is strictly necessary to dispose of the application under s 247A of the Act.
Prior to May 2003 the defendant had 1,000 issued shares of which 510 were held by entities controlled by Ian Tarbotton, 245 by entities controlled by Dominic Vieceli and 245 by the plaintiff. The defendant acted as a contractor or sub-contractor for piling work in the construction industry. A significant part of its work was as a contractor for York Civil (“York”). Mr Tarbotton and Mr Viesceli were also employees of York.
From 2004 until September 2007 the plaintiff was employed by the defendant as its construction manager. Since 2004 he has not been a director. In September 2007 he became incapacitated for work, and received WorkCover benefits. He did not again work for the defendant. His employment was terminated on 25 May 2009.
On 29 April 2009 the defendant gave notice to the plaintiff of an offer for the plaintiff to take up a further 61,250 x $1 ordinary shares in the defendant with similar offers being made to the entities controlled by Mr Tarbotton and Mr Vieceli in proportion to the number of shares held by them. On 22 May 2009 the entities associated with Mr Tarbotton and Mr Vieceli took up the offers of shares made to them, but the plaintiff did not take up the offer made to him. He has disputed the validity of this share issue on grounds of oppression but, although he was aware of the proposal for the share issue, he did not institute any proceedings to challenge it or restrain it. The effect of the further shares being issued to the entities associated with Mr Tarbotton and Mr Vieceli is that the plaintiff’s proportionate shareholding in the defendant has been reduced from 24.5% of the total to slightly less than 1%.
Article 27 of the defendant’s Articles of Association provides:
27 Right to Refuse Registration
The Board may refuse to register a transfer of shares in the Company for any reason. The Board must refuse to register a transfer of shares in the Company unless the following provisions have been followed:
(a)Any member wishing to transfer any shares in the Company must first give written notice to the Board that the member wishes to effect such transfer. Such notice constitutes the Board the member’s agent for the sale of such shares at a price to be agreed upon between the member giving notice and the Board or, in the case of difference, at a price determined by an independent chartered accountant appointed by the Board.
(b)The Board is not bound to offer the shares to the existing members of the Company but may determine to whom such shares are to be offered and is entitled, if it so desires, to have the directors take up such shares themselves in any proportions agreed upon. In the event of disagreement as to such proportions then the decision of the chairman of the Board is final and binding and if there is no chairman then such shares are to be offered to the directors equally.
(c)If the whole of the share to be transferred are not sold under the foregoing provisions of this clause, the member wishing to transfer the shares is entitled to transfer such shares to a person or persons of their choosing.
The plaintiff has not given any notice under Article 27(a) that he wishes to effect a transfer of his shares. The defendant’s solicitors have advised the plaintiff that if he does give such a notice the existing shareholders wish to purchase his shares and have indicated an independent chartered accountant who will be appointed for the valuation of those shares if no agreement can be reached about their price. Thus, if he does give such a notice, it is certain his shares will be sold to the other present shareholders.
There are only two possible ways in which the plaintiff could effect a sale of his shares. The first is pursuant to Article 27(a). If he gives a transfer notice under that Article, he will be locked into that process and, provided the due formalities are observed, he will only obtain, in the absence of an agreement, the price which is fixed by the independent chartered accountant.
The other way in which the plaintiff could dispose of his shares is by bringing an oppression action under ss 232 and 233 of the Act and obtaining an order of the Court under s 233(1)(e) for the purchase of his shares. To succeed on this alternative, he must establish a cause of action for oppressive conduct against him under s 232 of the Act. If he qualifies for an order under s 233(1)(e), the Court has a discretion about how the purchase price is to be fixed which will represent a fair value for the shares in all the circumstances. That amount will not necessarily be the price fixed by ordinary principles of share valuation and it may take into account any acts of oppressive or discriminatory conduct found against the defendant: Smith Martis Cork Pty Ltd v Benjamin Corporation Pty Ltd (2004) 207 ALR 136 at [70-78]; Dynasty Pty Ltd v Coombs (1995) 138 ALR 64. Thus, if the plaintiff were to pursue the second option of an oppression action, he may recover more for his shares than if he proceeded under Article 27(a). However, if he fails to establish oppressive conduct, he will almost certainly be liable for substantial legal costs, but he would not be precluded from then proceeding under Article 27(a).
I find that the plaintiff has not discharged the onus upon him to show that he has brought this action under s 247A in good faith and for a proper purpose for the reasons which follow.
The plaintiff has retained Phil Plummer, a chartered accountant, to advise him on the value of his shares. Mr Plummer has requested various information about the defendant’s financial affairs to assist him in preparing his valuation. Some of that information has been given by the defendant but other parts of it, which is the subject of the orders now sought, have not been given. The two principal areas of dispute relate to documents about $1.2 million of back charges which York has made to the defendant in relation to subcontracts between York and the defendant and to the alleged “normalising” of contractual arrangements between York and the defendant for subcontracts which the plaintiff alleges were not negotiated at arms length because of the involvement of Mr Tarbotton and Mr Vieceli with both York and the defendant.
The evidence of the plaintiff’s purpose in seeking access to the defendant’s documents is as follows.
Firstly, paragraph 3 of the plaintiff’s affidavit which states:
I am seeking an order (for) ….. access to documents to enable me to obtain a valuation of the Company’s shares and to obtain accounting and legal advice regarding the pre-emption provisions of the Company’s constitution for the transfer of the shares.
Secondly, in a letter of August 2008 from Mr Plummer to the plaintiff’s solicitors confirming his instructions to undertake the valuation, Mr Plummer said:
We understand that the valuation may be used for legal proceedings and confirm that we are conversant with Practice Direction 5.4 and Form 160 of the District Court of South Australia.
(Legal proceedings would only be likely if the plaintiff elected to institute an oppression action).
Thirdly, in a letter dated 12 February 2008 from the plaintiff’s solicitors to the defendant it was stated:
….. Our client requires the financial statement, profit and loss statement and trading statement of the company for the 2006-2007 financial year to ascertain the market value of the shares of the company.
…..
….. The purpose for the documents is to enable our client to give effect to the provisions of the company’s constitution relating to the transfer of shares and to provide the other shareholders, being yourself and Mr Ian Tarbotton, with the pre-emptive right to purchase and hereby gain full ownership of the company.
Fourthly, in a letter of 26 June 2009 from the plaintiff’s solicitors to the defendant’s solicitors it was stated:
Our client has requested information and documents from your client to value the shares which your client still refuses to provide. Indeed our client has been forced to institute proceedings under section 247A of the Corporations Act in order to obtain the relevant information and documentation to obtain a valuation and counsel’s advice.
We regard your client’s actions as not being in accordance with the Constitution and of no effect. Our client will take such legal action as he may be advised by counsel.
Fifthly, in a letter of 1 July 2009 to the defendant’s solicitors the plaintiff’s solicitors stated:
We again invite your client to provide our client with the documents identified in Schedule 2 to the originating process (“the requesting documents”) to enable our client to obtain counsel’s advice on the matter and to obtain a valuation of the company shares by his chartered accountant.
Our client is also taking advice as to whether your client’s conduct to date, including its most recent conduct of issuing the shares, constitutes an oppression on a minority shareholder. Our client reserved all his rights with respect to the issue of the additional new shares and the attempt by the Board to sell his shares.
I accept the contention of the defendant’s counsel that overall on the balance of probabilities this evidence is not consistent with the plaintiff primarily wanting the further documents for a valuation of his shares for their sale under Article 27(a). If the plaintiff had locked himself into the Article 27(a) process by giving notice of his wish to transfer his shares under that article, it is likely that his purpose would be found to have been to provide a proper foundation for negotiations for an agreed price for the shares. However, unlike the situation in Tinios v French Caledonia Travel Service Ltd (1994) 13 ACSR 658 it is not necessary under Article 27(a) to state a price in the request for the transfer of the shares. The plaintiff is leaving his options open at this stage whether to proceed under Article 27(a) or by an oppression action. He has not been entirely candid about that in a number of the pieces of evidence set out above. This reflects adversely on his bona fides.
The real purpose of the plaintiff at the present time appears to be to obtain information about the back charges and the “normalisation” of the contracts between the defendant and York so that he can decide on the relative advantages and disadvantages of pursuing an oppression action compared with the Article 27(a) process. While point 3 of Debelle J in Acehill Investments Pty Ltd v Incitec Ltd, quoted above, would allow an s 247A application in respect of a prospective oppression action in some circumstances, it is a matter of whether it is an appropriate exercise of the Court’s discretion in this case. It is clear from the plaintiff’s affidavit that because of his previous employment with the defendant he has considerable knowledge of the affairs of the defendant to which the documents in question relate, and apparently enough to mount an oppression action if he chose to do so. There is no reason to think that the ordinary processes of disclosure of documents in such an action would not be sufficient for him to pursue properly that action without recourse to a prior s 247A action.
Based on point 4 of Debelle J, quoted above, the plaintiff’s counsel submitted that it did not matter if the documents in question incidentally may assist the plaintiff in an oppression action if their primary purpose was to facilitate the Article 27(a) process. However, he did not dispute that if the plaintiff locked himself into the Article 27(a) process by giving a notice of transfer, he could not then negate that process by subsequently initiating an oppression action. I find that the plaintiff has not established that his primary or dominant purpose for his s 247A application is to assist in any Article 27(a) process. It may be an equal purpose to preparing for an oppression action, but it is not shown to be the primary or dominant purpose.
Accordingly, the plaintiff’s application is dismissed.
I have today made the following orders:
1Application under s 247A is dismissed.
2Costs of the application as agreed or adjudicated to be paid by the plaintiff to the defendant.
3Fit for counsel.