Mopeke Pty Ltd v Airport Fine Foods Pty Ltd

[2007] NSWSC 153

Reported Decision: 61 ACSR 395
(2007) 25 ACLC 254

New South Wales

Supreme Court

CITATION:	Mopeke Pty Ltd & Ors v Airport Fine Foods Pty Ltd & Ors [2007] NSWSC 153
HEARING DATE(S):	8-12 May 2006 Written submissions 26 May 2006
JUDGMENT DATE :	2 March 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Brereton J
DECISION:	Order for purchase of shares of minority at valuation.
CATCHWORDS:	CORPORATIONS – oppression and unfair prejudice – exclusion of member from day-to-day management – quasi-partnership – indicia of quasi-partnership corporation – valuation of shares.
LEGISLATION CITED:	(NSW) Contracts Review Act 1980 (Cth) Corporations Act 2001, s 233
CASES CITED:	Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 Elmslie v Federal Commissioner of Taxation (1993) 93 ATC 4964, 46 FCR 576 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688, [1998] NSWSC 413 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672, [2001] NSWCA 97 Hogg v Dymock (1993) 11 ACSR 14 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 Re a Company (No 00709 of 1992); O’Neill v Phillips [1999] 1 WLR 1092, [1999] 2 All ER 961 Re Bird Precision Bellows Ltd [1986] Ch 658 Re D G Brims and Sons Pty Ltd (1995) 16 ACSR 559 Thomas v H W Thomas Ltd [1984] 1 NZLR 686 Wayde v NSW Rugby League Ltd (1985) 180 CLR 459 Austin & Ramsay, Ford’s Principles of Corporations Law (12th Ed) Lonergan, The Valuation of Businesses, Shares and Other Equity (4th Ed)
PARTIES:	Mopeke Pty Ltd (first plaintiff) Steven Petrovski (second plaintiff) Katrina Petrovski (third plaintiff) Robert Bradfield (fourth plaintiff) Airport Fine Foods Pty Ltd (first defendant) Lagerlow (Holdings) Pty Ltd (second defendant) Airsas Pty Ltd (third defendant)
FILE NUMBER(S):	SC 2127/05
COUNSEL:	B McClintock SC w M Lawson (Ps) J Miller (D1) F Lever SC (D2-6)
SOLICITORS:	Redmond Hale Simpson (Ps) Bartier Perry (D1) Hall Legal (D2-6)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRERETON J

Friday 2 March 2007

2127/05 Mopeke Pty Limited & Ors v Airport Fine Foods Pty Limited & Ors

JUDGMENT

1 HIS HONOUR: The first defendant Airport Fine Foods Pty Limited (“the Company”) conducts a business involving the retail supply and export of Australian gourmet food, through the operation of concession stores at the international terminals at Sydney, Brisbane and Perth airports. Entities associated with the Bradfield family (“the Bradfields”) - the plaintiffs Mopeke Pty Ltd, and Mr Petrovski and his wife Katrina as trustee for the S&K Petrovski Trust (“the Bradfield interests”) - together hold 40% of the shares in the Company, and entities associated with the Lagerlow family (“the Lagerlows”) - the second defendant Lagerlow Holdings Pty Ltd and the third defendant Airsas Pty Ltd (“the Lagerlow interests”) - together hold 60%. There were three working directors - Mr Steven Petrovski, Mr John Lagerlow and Mr Gordon Lagerlow - until 28 January 2005, when the board of directors, comprising Mr Bradfield (representing Mopeke), Mr Petrovski, Mr John Lagerlow and Mr Gordon Lagerlow (representing Lagerlow Holdings) and Edgar Cofie (representing Airsas) required Mr Petrovski to resign as a working executive directive, under threat that his employment would otherwise be terminated.

2 The Bradfield interests claim relief for oppression, under Corporations Act, ss 232 and 233. They contend that the conduct of the affairs of the Company since January 2005 meets the description set out in s 232(e), thus triggering the right to relief under s 233. Primarily, they contend that Mopeke acquired its original 40 per cent shareholding in the Company (which is now divided between Mopeke and the Petrovskis) on the common understanding or agreement that the Bradfield interests would participate in the day-to-day management of the Company through Mr Petrovski’s position as Executive Director of Operations, and that since 28 January 2005 the affairs of the Company have been conducted in a manner unfairly prejudicial to them, in that the defendants have breached that common understanding by preventing Mr Petrovski from performing his duties as Executive Director and excluding him from the day-to-day management of the Company. Secondly, they contend that the Company has been funding the defence of the litigation, and that this is oppressive. And thirdly, they contend that the breakdown of relations in what they say is a quasi-partnership has led to their effective exclusion from meaningful participation in board deliberations. They submit that the Lagerlow interests should be required to buy out the Bradfield interests at a value calculated as at the date the oppressive conduct began, namely 28 January 2005. Other bases for relief – including duress, the (NSW) Contracts Review Act 1980, and breach of contract – were not pressed at the final hearing and do not require further consideration.

3 The Lagerlow interests, and the Company, submit that there is nothing about the establishment, development and subsequent operation (from February 1999 to the present) of the underlying businesses of the Company from which a state of affairs in the nature of a quasi-partnership can be argued to have arisen, and nothing oppressive in the conduct of the Company’s affairs.

Background and dramatis personae

4 Since 1980, the Lagerlow family has been engaged in the business of operating concession stores at Australian international airport terminals, supplying and exporting Australian gourmet food, originally through Australian Produce Airport Stores Pty Limited (“APAS”), which was a joint venture between Peter Lagerlow and Doug Baldie. Peter Lagerlow’s son, the fourth defendant John Lagerlow, was employed in the business, and by May 1992 had become its marketing manager; John’s brother, the fifth defendant Gordon Lagerlow, was also employed in the business.

5 Airsas was incorporated on 5 May 1992, presumably in contemplation of the joint venture with the Federal Airports Corporation to which reference will shortly be made. Its directors were Peter Lagerlow, his wife Shirley Lagerlow, their sons Gordon Lagerlow and John Lagerlow, and Edgar Cofie. Shirley Lagerlow is the company secretary. Its 225,000 ordinary shares were all held by Lagerlow Pty Limited.

6 On 28 May 1992, Lagerlow Pty Limited, Airsas and Peter Lagerlow agreed with the Federal Airports Corporation, Taihoh Global Co Limited (“Taihoh”), FAC Investments Pty Limited (“FAC Investments”), Taihoh Global Australia Pty Limited (“Taihoh Australia”), Kansai (Osaka) International Airport Terminal Building Co Limited and the Company (which had been incorporated on 18 November 1991), to participate in an incorporated joint venture through the Company, with the shares in the Company to be held as to 52.5% (being 1,574,998 “A” class shares) by FAC Investments, as to 40% (being 1,200,000 “B” class shares) by Taihoh Australia, and as to 7.5% (being 225,000 “C” class shares) by Airsas (“the 1992 Shareholders Agreement”). Lagerlow Pty Limited and Peter Lagerlow entered into a management agreement with the Company, pursuant to which Lagerlow Pty Limited agreed to provide the services of Peter Lagerlow to the Company; Taihoh Australia entered into a marketing services agreement with the Company, pursuant to which the Company granted Taihoh Australia the sole and exclusive right to perform certain services provided for in the agreement; and APAS entered into a business sale agreement with the Company, pursuant to which APAS agreed to transfer the APAS business to the Company as a going concern.

7 The 1992 Shareholders Agreement gave the Lagerlow interests certain rights of pre-emption in the event of a sale by the other shareholders of their interest. When the opportunity arose, Peter Lagerlow wished to acquire the business. In or about mid October 1998, he made an offer to FAC Investments and Taihoh Australia to purchase their shares in the Company; the initial offer was for $1,900,000, but Mr Lagerlow later increased it to $2,100,000.

8 Peter Lagerlow discussed this proposed acquisition with the fourth plaintiff Mr Bradfield, who was a partner in Bradfield Martin & Co, an accounting firm that provided accounting services to the Company. Mr Bradfield agreed to participate in the acquisition, through his company Mopeke. Mopeke had been incorporated on 4 March 1981, and adopted its current name on 20 May 1992. Its directors are Mr Bradfield and his wife Robin, who is also the company secretary, and its shares are held by Robin Bradfield (1 ordinary share) and Mr Bradfield (1 ordinary share). Katrina Petrovski is Mr Bradfield’s daughter, and Mr Petrovski, her husband, is his son-in-law.

9 Lagerlow Holdings was incorporated on 23 December 1998. Its directors are Peter Lagerlow, his wife Shirley Lagerlow, and their sons Gordon Lagerlow and John Lagerlow; Shirley Lagerlow is the company secretary. Its shares are held by Gordon Lagerlow (10 ordinary shares), John Lagerlow (10 ordinary shares), and Peter and Shirley Lagerlow (10 ordinary shares held jointly).

10 Between December 1998 and February 1999, there were discussions between the Lagerlow interests and the Bradfield interests about a proposed shareholders agreement, revisions to the Articles of the Company, and a proposed management agreement pursuant to which Mopeke would provide the services of Mr Petrovski to the Company (it being envisaged that Lagerlow Pty Limited would provide the services of Mr John Lagerlow and Mr Gordon Lagerlow). Drafts of these were prepared by John Lagerlow, but no such agreement was ever finalised or signed.

11 On 9 February 1999, Mopeke and Lagerlow Holdings completed the acquisition of the shares in Australian Fine Foods that had been held by FAC Investments and Taihoh Australia, as a result of which Lagerlow Holdings held 1,574,998 A class shares (52.5%); Mopeke held 1,200,000 B class shares (40%); and Airsas held 225,000 C class shares (7.5%). The Directors representing FAC Investments and Taihoh Australia resigned, and were replaced by directors representing the new shareholders. The one continuing director, Peter Lagerlow became Chairman of the directors under the articles of association as the representative of the A class shareholders. The directors of Australian Fine Foods were then, representing the A class shareholder, Peter Lagerlow, John Lagerlow, and Gordon Lagerlow; representing the B class shareholder, Robert Bradfield and Mr Petrovski; and representing the C class shareholder, Shirley Lagerlow.

12 Following the acquisition, the parties’ family companies provided the full time services of family members to the Company, as follows. Lagerlow Pty Limited provided the services of Gordon and John Lagerlow, and Mopeke provided the services of Mr Petrovski. Each of the three men was engaged in an executive management role, in return for which Mopeke and Lagerlow were paid management fees. Mr Petrovski’s effective remuneration, although a matter determined by internal management of Mopeke, was, as at January 2005, $9,725.84 per month. The executive managing committee of the Company resolved to assign “specific areas of management to individual committee members, providing the board with clear lines of responsibility and accountability”. Thus the position of purchasing director was filled by Gordon Lagerlow; that of operations director was filled by Mr Petrovski; and that of marketing director was filled by John Lagerlow. Lagerlow Pty Limited invoiced the Company monthly for the additional services provided by Peter and Shirley Lagerlow and for the expenses of members of the Lagerlow family. Mopeke invoiced monthly for the services provided by Bradfield Martin & Co and the expenses of Robert Bradfield and Mr Petrovski.

13 The management fees paid to Mopeke and Lagerlow by the Company were, at least initially, reflective of more than remuneration for the efforts of Mr Petrovski, John Lagerlow and Gordon Lagerlow, and, until May 2003, included a (fixed) “profit component”. This practice was discontinued in about May 2003, following the outbreak of the SARS virus, which resulted in a fall in turnover and profits, and thereafter profits were paid to shareholders by dividend distribution only. Thus as and from May 2003, the management fees paid by the Company to Mopeke and Lagerlow were remuneration for management services rendered pursuant to the arrangements by which Mopeke and Lagerlow respectively provided the services of Mr Petrovski, Mr John Lagerlow and Mr Gordon Lagerlow.

14 On 27 March 2000, when he attained the age of 72 years, Peter Lagerlow resigned as a director of Australian Fine Foods in accordance with its articles of association; he was replaced as a director representing the A class shareholders, by Darryl Williams, the manager of the Australian Fine Foods stores in Brisbane. When Darryl Williams subsequently resigned on 17 July 2000, he was not replaced, and thereafter remained two A class shareholder directors, two B class shareholder directors, and one C class shareholder director.

15 On 19 June 2000, the Company reduced its capital, adjusting the A, B and C class shareholdings to their current numbers: 1,212,931 “A” class shares (held by Lagerlow Holdings), 924,138 “B” class shares (then all held by Mopeke), and 173,276 “C” class shares (held by Airsas).

16 At some time during 2003, John and Gordon Lagerlow met with Mr Petrovski at the “Eskybar” at Sydney airport, raising concerns about his performance as executive director of operations of the Company, including apparently absences during work hours; late arrivals; failure to complete tasks; and inadequate management skills. Mr Petrovski does not deny that these matters were raised at the Eskybar meeting, but denies their truth. No evidence to make good the truth of the allegations was adduced.

17 On 12 August 2003, on attaining 72 years of age, Shirley Lagerlow resigned as a director of Australian Fine Foods. She was replaced, as director representing the C class shareholders, by Edgar Cofie. On 16 October 2003, with the consent of the Company, the transfer of 462,069 of Mopeke’s shares to Steven and Katrina Petrovski (as trustees for the S&K Petrovski Trust) was registered.

18 On 28 January 2005, at a directors’ meeting of the Company, without any prior notice, Mr Petrovski was given a summary of his performance as executive director of operations and asked to comment on ten specific criticisms. He was told that he could either resign, in which case he would be paid $10,000, or else would be dismissed. After a little discussion, in return for the payment of $25,000, Mr Petrovski tendered his resignation as executive director of operations at the meeting. However, within hours of agreeing to tender his resignation, Mr Petrovski purported to withdraw from that agreement. Mr Petrovski has furnished no signed letter of resignation, and the Company has paid no money to Mr Petrovski in relation to the termination, but the $25,000 is said to be still available.

19 On 31 January 2005, Mr Petrovski attended at the Sydney airport shop of the Company. He told John Lagerlow that he had not resigned and that he was there to carry out his duties; he was asked to leave the premises. A previously arranged management meeting was relocated without notice to him. On 1 February 2005, Mr Petrovski attempted to return to work as Executive Director of Operations. He telephoned John Lagerlow asserting that he had not resigned. He was told that the staff had been directed not to follow his instructions. On 2 February 2005, a letter was handed to Mr Petrovski by John Lagerlow stating that the executive/management services of Mr Petrovski’s company were terminated effective 28 January 2005, and that Mr Petrovski no longer had executive or managerial authority in relation to Airport Fine Food’s business, but that he remained a director of the Company. Mr Petrovski was advised that the locks had been changed at the premises, and that security would be called if he endeavoured to enter the premises.

20 On 4 February 2005, Mr Petrovski wrote an open letter addressed to all staff of the Company, asserting that he had not resigned as operations director of the company. The warehouse manager advised him that he had been directed to call security if Mr Petrovski was found on the premises. On 24 February, Mr Petrovski received an SMS message advising him of a management meeting for 28 February. Later, he was told that the message was sent in error. He has not attended any management meetings since.

21 Mr Bradfield and Mr Petrovski continue to attend board meetings. Since February 2005, Board meetings have been been held off-site at a nearby hotel. Mr Petrovski and Mr Bradfield have since August 2005 not attended in person but by telephone to avoid confrontation.

22 These proceedings were commenced by summons on 29 March 2005. The statement of claim was filed on 8 June 2005.

Unfairly prejudicial or oppressive – the test

23 Although the scope of the pleadings was wider, Mr McClintock SC, who appeared with Mr Lawson for the Bradfield interests, put the case on the basis of oppression under Corporations Act, s 232 and 233.

24 Corporations Act 2001, s 232, provides as follows:

The Court may make an order under s 233 if:
(a) the conduct of a company’s affairs; or
(b) an actual or proposed act or omission by or on behalf of a company; or
(c) a resolution, or a proposed resolution, of members or a class of members of a company;
is either:
(d) contrary to the interests of the members as a whole; or
(e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.

25 In Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692, Young J, as his Honour the Chief Judge then was, expressed the test in terms that inquire as to whether it can be said, after account has been taken of the nature of the business carried on by the company and the nature of the relations between its participants, that the impugned conduct could be seen to be, “objectively in the eyes of a commercial bystander … so unfair that reasonable directors who consider the matter would not have thought the decision fair” [Morgan v 45 Flers Avenue, 704]. In other words, a plaintiff has to prove conduct that, considered in light of all of the relevant circumstances, is “inequitable or unjust” [Thomas v H W Thomas Ltd [1984] 1 NZLR 686, 693; Wayde v NSW Rugby League Ltd (1985) 180 CLR 459].

Unfair prejudice - litigation costs

26 One matter on which the Bradfield interests rely as constituting relevant oppressive conduct is that the Company has been funding the litigation, and thereby expending resources of the company on the support of the majority.

27 There is nothing necessarily improper or inappropriate in a company defending an oppression suit at its own expense, but it may be oppressive for a company to do so if its defence goes beyond merely protecting the discrete interests of the company, so as to amount to support of the majority, with the consequence that the majority get at least some of their legal work done at the expense of the companies [Re D G Brims and Sons Pty Ltd (1995) 16 ACSR 559 (Byrne J); Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688, 732-4 (Young J)]. Where there is such oppression, as Young J explained in Fexuto v Bosnjak Holdings, the remedy is for the majority to compensate the company for the unauthorised expenditure; and where the minority is to be bought ought, the valuation should bring to account an actual or notional accounting for the moneys which should be returned by the majority to the company, including so much of the costs incurred in the company’s defence as were attributable to support of the majority rather than defence of the company:

In my view, the extent of the defence by the company went beyond merely protecting its discrete interests. Doubtless some part, perhaps even up to two-thirds of the company's legal costs may well have been properly incurred. However, the balance of probabilities is that at least one-third of these costs were incurred to support the majority. This was authorised by the majority who did not just instruct Mr Mostyn to look after the company's discrete interests, but to defend vigorously. This Mr Stitt QC and Freehill, Hollingdale & Page, both renowned for their vigour, duly did up to the first day of hearing. This went beyond what was a proper course for the board to take and is oppressive. The remedy again, however, is merely that the majority compensate the company for the unauthorised expenditure: Martin v Australian Squash Club Pty Ltd (1996) 14 ACLC 452 at 477. The amount of the unauthorised expenditure can be assessed by the Master or by a referee.

28 Thus in that case, his Honour was able to be satisfied, mainly from the vigour with which the company’s defence was mounted, that it went beyond merely protecting its discrete interests, so that although some part of its legal costs may well have been properly incurred, on the balance of probabilities at least a portion was incurred to support the majority, which went beyond what was proper for the board to authorise, and was oppressive.

29 However, in the present case, the conduct of the trial was such that I was not able to form a corresponding impression. Although the company and the majority were separately represented, there was significant overlap. At trial, the Company was represented by Mr Millar of counsel, although he also in effect acted as a junior to Mr Lever SC who appeared for the Lagerlow interests. The Company did not separately adduce evidence, cross-examine witnesses or make submissions. The Bradfield interests observe that this might be contrasted with the circumstance that as at the commencement of the trial, the company had paid $50,000 to its solicitors Bartier Perry, whereas the Lagerlow interests had paid $30,000 to their solicitors Hall Legal, and all the affidavits in the defendants’ case, save the valuation evidence - including those of John and Gordon Lagerlow - were prepared by Bartier Perry and filed for the Company. They submit that it is inconsistent for the Company to have spent so much effort and money in the preparation of the case, and yet to surrender the safeguarding of its interests at trial to the Lagerlow interests; that if the Company’s interests in the action were so divergent from those of the Lagerlow interests, the Court would have expected a more robust representation of those interests; and that in those circumstances, the only explanation for the Company’s legal bill of $50,000 prior to trial is that the Company was funding the Lagerlow interests’ case.

30 However, as Mr Lever SC and Mr Millar point out, although at trial the issues were limited to those that conventionally arise in an oppression suit, it was not always so. In the Statement of Claim, oppression was pleaded almost as an afterthought. The Bradfield interests’ case as pleaded included a claim for damages against the Company for breach of an alleged contract for services between Mr Petrovski and the Company; a claim for damages against the Company for breach of the (informal) agreement by which Mopeke provided Mr Petrovski’s services to the Company; and claims against the Company founded on duress and the Contracts Review Act in respect of the events of 28 January 2005, when Mr Petrovski’s employment was terminated.

31 Thus the case as pleaded and prosecuted, at least until the commencement of the trial was one in which the Company itself had a distinct interest in resisting. The fact that at the outset of the hearing the case was effectively limited to an oppression suit does not detract from the proposition that the Company’s participation in the proceedings was justified. It was not inappropriate for the Company to defend its own interest. The requisite evidence for it to do so was that of members of the Lagerlow family. There was an extensive factual overlap between the oppression claim and the pleaded claims against the Company for damages for breach of contract, duress and contract review. It would have unnecessarily increased costs for those witnesses to make separate affidavits, and somehow artificially apportion their evidence between the case of the Company and the case of the Lagerlow interests; such a course would inevitably have led to duplication of material. The individual defendants have incurred and personally paid substantial legal costs to their solicitors, Hall Legal – some $30,000 up to the commencement of the trial.

32 I am not satisfied that the fees incurred and paid to Bartier Perry by the Company were not reasonably incurred in the defence of the Company, and I would not find oppression on this ground. And, even if oppression on this basis were established, the remedy would be merely that the majority compensate the company for the inappropriate expenditure.

Unfair prejudice – Board minutes and caucusing

33 Another matter on which the Plaintiffs rely as amounting to oppression is the manner in which directors’ meetings have been conducted and recorded, particularly since 28 January 2005, which they submit involve (a) suppressing the truth of what actually occurs at the meetings, (b) giving the Chairman authority over the meeting and the minutes inconsistent with the minority shareholders participating in the company in a meaningful way; (c) allowing the Chairman and the majority shareholders control over the minutes; and (d) at least inferentially, rendering any debate merely a formality.

34 The high point of this submission is the Board Minutes of 28 January 2005, which record merely that “Steve Petrovski offered to terminate his management services to AFF” at that meeting. At the Board Meeting of 2 March 2005, when the accuracy of the Minutes of 28 January 2005 was raised, the “majority of directors confirmed the minutes as accurate”. The Chairman is recorded as saying that “he wished to run the meetings in a formal manner, with all remarks addressed through the chair and a limit of two minutes for each director in the event of debate”. At the Board Meeting of 29 April 2005 the Chairman is recorded as having said:

The minutes of the meetings will be completed during the course of the meeting with opportunity to discuss the accuracy of the proposed minutes at the conclusion of each agenda item. At the conclusion of the meeting, a copy of the minutes will be distributed to each board member if required or at the very least, a director representing each class of shareholder. The chairman will not enter into private discussions with any board member regarding the modification of the minutes at the conclusion of the board meeting. The board will be asked to confirm the minutes by majority decision at the following properly constituted board meeting.

35 It is not oppressive that accuracy of the minutes, in the event of dispute, is ultimately determined by majority vote, so long as that power is not abused. The detail and accuracy of minutes can vary widely. Minutes are not intended to be a transcript or full record of everything said at a meeting, but a record of the decisions made. While I regard the minute of 28 January 2005 as, on the most generous view, less than a full and accurate reflection of what occurred, I do not see that confirmation of a minute that incompletely describes how matters proceeded at a particular meeting is oppressive or unfairly prejudicial in the relevant sense.

36 Mr John Lagerlow gave this evidence:

Q. If there was a conflict between your family's interests and those of the Bradfield Petrovskis, you would certainly seek to advance your family interests over that of Bradfield and Petrovski?
A. The overriding issue is the interests of AFF.

Q. Would you address my question? If there was a conflict between the interests of the Lagerlow and the Bradfield Petrovskis you would certainly use the majority power that you hold or your family hold in that company to advance your family interest over those of Bradfield Petrovski, wouldn't you?
A. Only if it was not detrimental to the interests of AFF.

Q. In fact you see the interests of AFF and the interests of the Lagerlow family as being identical?
A. As an majority shareholder of AFF, that is a natural assumption.

37 Although Mr McClintock suggested that that evidence was telling, I think it amounts to no more than a statement to the effect that as the Lagerlow family were the majority shareholders in the Company, what was good for the company was good for Lagerlows.

38 Detailed board papers are distributed to all directors before each meeting, and all participate in board discussions. Regard was paid to Mr Bradfield’s views on the acquisition and payment for a point of sale system, and on negotiations with Brisbane Airport Corporation about the lease for the Company’s brasserie, with the result that “compromise” positions were adopted. The evidence of the conduct of meetings since 28 January 2005 does not manifest any general or overall oppressive approach to the conduct of the company’s affairs, or any exclusion of the Bradfield interests from a proper involvement in the affairs of the Board. Insofar as it was suggested that Mr Bradfield and Mr Petrovski were excluded from decision making at board meetings, the complaint is really no more than the majority prevailed in case of dispute. That is not of itself oppressive. While it might be oppressive for a majority to adopt a practice of effectively conducting the affairs of the company through preliminary caucuses by the majority, with Board meetings merely ratifying what the caucus has decided in advance - because that would render Board representation meaningless and establish an alternative de facto means of governance - it is not oppressive per se for members of a faction on a Board to discuss their approach to an issue between themselves in advance of a Board meeting. Nor is it oppressive for the majority to rule, so long as the rights of the minority are recognised.

39 In my judgment, the evidence does not establish a case of oppression in the conduct and recording of meetings of the directors. And even if it did, the appropriate remedy would be an order regulating the affairs of the Company in the future.

Unfair prejudice – exclusion from management

40 However, the primary matter on which the Bradfield interests relied as constituting oppression was the dismissal of Mr Petrovski as an executive director and his consequent exclusion from day-to-day management of the company. They contend that there was a common understanding, or a legitimate expectation, that the Bradfield interests would be entitled to participate in the day-to-day management of the Company through Mr Petrovski’s position as Executive Director of Operations, and that since 28 January 2005 the affairs of the Company have been conducted in a manner unfairly prejudicial to them, in that the Lagerlow interests have breached that common understanding by preventing him from performing his duties as Executive Director and excluding him from the day-to-day management of the Company.

41 The application of the law of oppression in the context of a corporate “quasi-partnership” has been authoritatively considered by the House of Lords in Re a Company (No 00709 of 1992); O’Neill v Phillips [1999] 2 All ER 961, and by the Court of Appeal in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672.

42 In O’Neill v Phillips, Lord Hoffman (with whom Lords Jauncey, Clyde, Hutton and Hobhouse agreed), explained that while a member of a company was not ordinarily entitled to complain of unfairness unless there had been some breach of the terms on which he agreed that the affairs of the company should be conducted, which were usually to be found in the corporate constitution, there were cases in which equitable considerations made it unfair for those conducting the affairs of the company to rely upon their strict legal powers, so that unfairness could be established either by a breach of the rules, or by a use of the rules in a manner which equity would regard as contrary to good faith (at 966-7):

In the case of s 459, the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.
The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.

43 His Lordship applied, to the concept of unfairness in the UK equivalent of s 232, Lord Wilberforce’s explanation in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, of equitable obligations of a personal character which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way (at 967):

This approach to the concept of unfairness in s 459 runs parallel to that which your Lordships' House, in Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360, adopted in giving content to the concept of 'just and equitable' as a ground for winding up. After referring to cases on the equitable jurisdiction to require partners to exercise their powers in good faith, Lord Wilberforce said ([1972] 2 All ER 492 at 500, [1973] AC 360 at 379):
The words ['just and equitable'] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act 1948 and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The “just and equitable” provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
I would apply the same reasoning to the concept of unfairness in s 459.

44 His Lordship proceeded to illustrate how equity intervened in such circumstances to prevent unfair insistence on strict legal rights (at 968-9, emphasis added):

An example of such equitable principles in action is Blisset v Daniel (1853) 10 Hare 493, 68 ER 1022 to which Lord Wilberforce referred in Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492 at 501, [1973] AC 360 at 381. Page Wood V-C held that upon the true construction of the articles, two-thirds of the partners could expel a partner by serving a notice upon him without holding any meeting or giving any reason. But he held that the power must be exercised in good faith. He said that 'the literal construction of these articles cannot be enforced' and, after citing from the title 'De Societate' in Justinian's Institutes , went on:
It must be plain that you can neither exercise a power of this description by dissolving the partnership, nor do any other act for purposes contrary to the plain general meaning of the deed, which must be this—that this power is inserted, not for the benefit of any particular parties holding two-thirds of the shares but for the benefit of the whole society and partnership …' (See 10 Hare 493 at 523–524, 68 ER 1022 at 1035.)
In the Australian case of Re Wondoflex Textiles Pty Ltd [1951] VLR 458 at 467 Smith J also contrasted the literal meaning of the articles with the true intentions of the parties:
It is also true, I think, that, generally speaking, a petition for winding up, based upon the partnership analogy, cannot succeed if what is complained of is merely a valid exercise of powers conferred in terms by the articles … To hold otherwise would enable a member to be relieved from the consequences of a bargain knowingly entered into by him … But this, I think, is subject to an important qualification. Acts which, in law, are a valid exercise of powers conferred by the articles may nevertheless be entirely outside what can fairly be regarded as having been in the contemplation of the parties when they became members of the company; and in such cases the fact that what has been done is not in excess of power will not necessarily be an answer to a claim for winding up. Indeed, it may be said that one purpose of [the just and equitable provision] is to enable the Court to relieve a party from his bargain in such cases.
I cite these references to 'the literal construction of the articles' contrasted with good faith and 'the plain meaning of the deed' and 'what the parties can fairly have had in contemplation' to show that there is more than one theoretical basis upon which a decision like Blisset v Daniel can be explained. Nineteenth century English law, with its division between law and equity, traditionally took the view that while literal meanings might prevail in a court of law, equity could give effect to what it considered to have been the true intentions of the parties by preventing or restraining the exercise of legal rights. So Smith J speaks of the exercise of the power being valid 'in law' but its exercise not being just and equitable because contrary to the contemplation of the parties. This way of looking at the matter is a product of English legal history which has survived the amalgamation of the courts of law and equity. But another approach, in a different legal culture, might be simply to take a less literal view of 'legal' construction and interpret the articles themselves in accordance with what Page Wood V-C called 'the plain general meaning of the deed'. Or one might, as in continental systems, achieve the same result by introducing a general requirement of good faith into contractual performance. These are all different ways of doing the same thing. I do not suggest there is any advantage in abandoning the traditional English theory, even though it is derived from arrangements for the administration of justice which were abandoned over a century ago. On the contrary, a new and unfamiliar approach could only cause uncertainty. So I agree with Jonathan Parker J when he said in Re Astec (BSR) plc [1998] 2 BCLC 556 at 588:

… in order to give rise to an equitable constraint based on “legitimate expectation” what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former.
This is putting the matter in very traditional language, reflecting in the word 'conscience' the ecclesiastical origins of the long-departed Court of Chancery. As I have said, I have no difficulty with this formulation. But I think that one useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? In Blisset v Daniel the limits were found in the 'general meaning' of the partnership articles themselves. In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore. Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as a matter of justice and equity although for one reason or another (for example, because in favour of a third party) it would not be enforceable in law.
I do not suggest that exercising rights in breach of some promise or undertaking is the only form of conduct which will be regarded as unfair for the purposes of s 459. For example, there may be some event which puts an end to the basis upon which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The analogy of contractual frustration suggests itself. The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree: non haec in foedera veni. It is well recognised that in such a case there would be power to wind up the company on the just and equitable ground (see Virdi v Abbey Leisure Ltd [1990] BCLC 342) and it seems to me that, in the absence of a winding up, it could equally be said to come within s 459 . But this form of unfairness is also based upon established equitable principles and it does not arise in this case.

45 The statement to the effect that the relevant unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree, is important: it shows that an applicant under s 232 does not necessarily have to show a breach of promise or breach of undertaking; the denial of a 'legitimate expectation' arising out of the dealings of the parties may suffice.

46 His Lordship then addressed the concept of “legitimate expectation”, explaining that such an expectation was a reflection of the equitable consequences of such circumstances as, for example, shareholders associating on the understanding, albeit unexpressed in the articles or any shareholders agreement, that each who has ventured capital will participate in management (at 970):

In Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 19 I used the term 'legitimate expectation', borrowed from public law, as a label for the 'correlative right' to which a relationship between company members may give rise in a case when, on equitable principles, it would be regarded as unfair for a majority to exercise a power conferred upon them by the articles to the prejudice of another member. I gave as an example the standard case in which shareholders have entered into association upon the understanding that each of them who has ventured his capital will also participate in the management of the company. In such a case it will usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude a member from participation in the management without giving him the opportunity to remove his capital upon reasonable terms. The aggrieved member could be said to have had a 'legitimate expectation' that he would be able to participate in the management or withdraw from the company.
It was probably a mistake to use this term, as it usually is when one introduces a new label to describe a concept which is already sufficiently defined in other terms. In saying that it was 'correlative' to the equitable restraint, I meant that it could exist only when equitable principles of the kind I have been describing would make it unfair for a party to exercise rights under the articles. It is a consequence, not a cause, of the equitable restraint. The concept of a legitimate expectation should not be allowed to lead a life of its own, capable of giving rise to equitable restraints in circumstances to which the traditional equitable principles have no application. That is what seems to have happened in this case.

47 In addressing the facts of the particular case, his Lordship restated (at 970-1) the circumstances that commonly giving rise to equitable restraints upon the exercise of powers under the articles, which had been first articulated by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, namely one or more of:

· an association formed or continued on the basis of a personal relationship involving mutual confidence,

· an understanding that all, or some, of the shareholders shall participate in the conduct of the business, and

· restrictions on the transfer of shares, so that a member cannot take out his stake and go elsewhere.

48 Lord Hoffman concluded (at 971) - in words which illustrate that the effect of the “equitable restraint” is to attach a condition to the exercise of the legal power, namely that while the majority may if it wishes exercise its legal power to dismiss the minority shareholder from participation, it must afford him the opportunity to withdraw his investment, because participation in the conduct of the business was an implicit basis on which his investment was made:

It follows that it would have been unfair of Mr Phillips to use his voting powers under the articles to remove Mr O'Neill from participation in the conduct of the business without giving him the opportunity to sell his interest in the company at a fair price.

49 In Fexuto v Bosnjak, on appeal from Young J, Priestley JA summarised significant aspects of the first instance judgment as follows (at 723-4):

[323] Young J then discussed Re Posgate & Denby , and showed that the same ideas that lay behind the decision in Ebrahimi on the just and equitable ground were adopted in oppression cases also, following amendments in England in 1980 to the statutory provisions. This happened together with the taking up of the concept of “legitimate expectation” in this area.11 The basic idea stated by Hoffmann J in Re Posgate & Denby was that in an oppression case the court might take into account “not only the rights of members under the company's constitution, but also their legitimate expectations arising from the agreements or understandings of the members inter se”. A little later, after emphasising how important it was for each case to be considered on its own facts and referring to the statement by Lord Wilberforce in Ebrahimi that in most cases the basis of association would be adequately and exhaustively laid down in the articles, so that the superimposition of equitable considerations would require something more, he said:
… in my judgment it is equally necessary for a shareholder who claims that it is “unfair” within the meaning of s 459 [the UK equivalent of s 260] for the board to exercise powers conferred by the articles to demonstrate some special circumstances which create a legitimate expectation that the board would not do so. Section 459 enables the court to give full effect to the terms and understandings on which the members of the company became associated but not to rewrite them.
[324] Young J observed that authorities outside England did not use the expression “legitimate expectation” as such, but that cases from other jurisdictions applied the same type of consideration. After referring to various of the cases, he stated that they supported the following propositions:
(1) the court looks at the constitution of the company to see if it founds a legitimate expectation claimed by a plaintiff;
(2) even if nothing in the constitution supports the claimed legitimate expectation, the court will, in appropriate cases, look to the understandings of the parties when they entered into the corporate quasi-partnership;
(3) the court looks at the question by considering the impact on the oppressed, not on the intention of the alleged oppressor;
(4) the mere fact that a company is a quasi-partnership is not enough to raise a legitimate expectation that each partner will be able to take part in management;
(5) mere failure to agree between the majority and the minority is not usually of itself sufficient to demonstrate oppression; and
(6) a legitimate expectation may be lost if it is no longer practicable for the right to the expectation to continue.

50 Later, Priestley JA said (at 742-5) [and, although there is no majority in the case for the actual result, this passage does not appear to be controversial]:

[415] Before stating my own conclusions I again mention the fact that in the interval between Young J's decision in this case and the hearing of the appeal, further consideration had been given by Lord Hoffmann to his use in earlier company law oppression cases of the term “legitimate expectation”. In Re a Company (No 00709 of 1992); O'Neill v Phillips , Lord Hoffmann referred to the fact that in earlier cases he had used the term:
… as a label for the “correlative right” to which a relationship between company members may give rise in a case when, on equitable principles, it would be regarded as unfair for a majority to exercise a power conferred upon them by the articles to the prejudice of another member.30

51 His Honour noted Lord Hoffman’s reference to the “standard case” as one of shareholders entering into association upon an understanding that each who ventured capital would participate in management, as follows (at 742-3):

[416] He mentioned that in Re Saul D Harrison & Sons plc he had used as an example what he called “the standard case” in which shareholders had entered into association upon the understanding that each of them who had ventured capital would also participate in the management of the company and that in such cases it would usually be considered unjust, inequitable or unfair for a majority to use their voting power to exclude a member from participation in the management without being given the opportunity to remove the invested capital upon reasonable terms. Lord Hoffmann had said that the aggrieved member could be said to have had a “legitimate expectation” of either participating in the management or withdrawing from the company.

52 Addressing what Lord Hoffman had said about “legitimate expectation”, his Honour observed that the phrase is a very convenient shorthand which the parties had used and his Honour proceeded to use (at 743-5):

[417] He now said that it was probably a mistake to use the term when in this area of the law the idea had already been sufficiently defined in other terms. He went on that when in Saul D Harrison he had said that legitimate expectation was correlative to the equitable restraint:
I meant that it could exist only when equitable principles of the kind I have been describing would make it unfair for a party to exercise rights under the articles. It is a consequence, not a cause, of the equitable restraint. The concept of a legitimate expectation should not be allowed to lead a life of its own, capable of giving rise to equitable restraints in circumstances in which the traditional equitable principles have no application.
[418] In his reasons for judgment, Young J had noted that although, following Lord Hoffmann's lead in earlier cases, the concept of “legitimate expectation” had been accepted in England in the area of company law presently in question, it had not been adopted in other jurisdictions, although the kind of consideration given by the courts elsewhere to the situations dealt with in England under the term was very much to the same effect. Thus, although, following Lord Hoffmann's comment in Re a Company (No 00709 of 1992) ; O'Neill v Phillips , use of the term may drop off in England, the application of the equitable principles which resulted in its adoption will continue. Lord Hoffmann discussed those equitable principles in an earlier section of Re a Company (No 00709 of 1992) ; O'Neill v Phillips under the heading “Unfairly prejudicial” in terms which, from the Australian point of view, are in my opinion substantially consistent with the way those words in s 260 of the Corporations Law have come to be understood and applied in Australia. His statement of the position provides a very useful background against which to approach the present case.
[419] Lord Hoffmann first pointed out that in company law persons become associated for an economic purpose on terms “contained in the articles of association and sometimes in collateral agreements between the shareholders” so that the affairs of the company will be conducted according to rules agreed by the shareholders. Second, however, he said:
… company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.
[420] He then briefly discussed three cases which have become well known in this area of the law, Ebrahimi , then Blisset v Daniel which was used as an example by Lord Wilberforce in Ebrahimi , and Re Wondoflex Textiles Pty Ltd (a decision of Smith J). He then continued:
I cite these references to “the literal construction of the articles” contrasted with good faith and “the plain meaning of the deed” and “what the parties can fairly have had in contemplation” to show that there is more than one theoretical basis upon which a decision like Blisset v Daniel can be explained. Nineteenth century English law, with its division between law and equity, traditionally took the view that while literal meanings might prevail in a court of law, equity could give effect to what it considered to have been the true intentions of the parties by preventing or restraining the exercise of legal rights. So Smith J speaks of the exercise of the power being valid “in law” but its exercise not being just and equitable because contrary to the contemplation of the parties. This way of looking at the matter is a product of English legal history which has survived the amalgamation of the courts of law and equity. But another approach, in a different legal culture, might be simply to take a less literal view of “legal” construction and interpret the articles themselves in accordance with what Page Wood V-C called “the plain general meaning of the deed”. Or one might, as in Continental systems, achieve the same result by introducing a general requirement of good faith into contractual performance. These are all different ways of doing the same thing. I do not suggest there is any advantage in abandoning the traditional English theory, even though it is derived from arrangements for the administration of justice which were abandoned over a century ago. On the contrary, a new and unfamiliar approach could only cause uncertainty. So I agree with Jonathan Parker J when he said in In re Astec (BSR) Plc [1998] 2 BCLC 556 , 588:
“… in order to give rise to an equitable constraint based on ‘legitimate expectation’ what is required is personal relationship or personal dealings of some kind between the party seeking to restrain such exercise, such as will affect the conscience of the former.”
This is putting the matter in very traditional language, reflecting in the word “conscience” the ecclesiastical origins of the long-departed Court of Chancery. As I have said, I have no difficulty with this formulation. But I think that one useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? In Blisset v Daniel the limits were found in the “general meaning” of the partnership articles themselves. In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore. Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as a matter of justice and equity although for one reason or another (for example, because in favour of a third party) it would not be enforceable in law.
I do not suggest that exercising rights in breach of some promise or undertaking is the only form of conduct which will be regarded as unfair for the purposes of s 459. For example, there may be some event which puts an end to the basis upon which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The analogy of contractual frustration suggests itself. The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree: non haec in foedera veni. It is well recognised that in such a case there would be power to wind up the company on the just and equitable ground (see Virdi v Abbey Leisure Ltd [1990] BCLC 342) and it seems to me that, in the absence of a winding up, it could equally be said to come within s 459 [at 1100–2].
[421] Although by the time the present appeal came to be argued, Lord Hoffmann's doubt about the wisdom of using the term “legitimate expectation” in the area of the law now in question was well-known to the parties, (a number of their submissions referred to aspects of Re a Company (No 00709 of 1992) ; O'Neill v Phillips ), they continued to use the term in both written and oral submissions. It is a convenient shorthand term, so long as Lord Hoffmann's caveat about its proper significance is kept in mind, namely that it is a consequence not a cause of equitable restraint upon legal rights. It seems to me to be a useful label for describing the result of the way in which equitable considerations operate. It is difficult to find a short counterpart for it. I will therefore use it, as counsel did, in the sense defined by Lord Hoffmann.
[422] One of the notable features in the long passage I have set out from Lord Hoffmann's opinion in Re a Company (No 00709 of 1992) ; O'Neill v Phillips is his adoption of what Jonathan Parker J said in In re Astec . That adoption and what he himself said in his following paragraph make it clear that the equitable considerations which give rise to a “legitimate expectation” themselves grow out of the relationships and dealings between the parties and the whole of their conduct in regard to one another. This seems to me to support a wider approach to the question whether equitable considerations have given rise to a “legitimate expectation” in a particular case than is recognised by the six propositions which Young J drew from the authorities.

92 He proposed using a more generic price earnings ratio, being the “consumer discretion” index provided by the Australian Stock Exchange, of 19.43 to which he applied discounts of 40% (7.77) for lack of marketability, 20% (3.89) for size, 15% (2.91) for industry outlook, and 15% of the adjusted PER (0.73) for exposure to foreign exchange risk and other factors, resulting in a multiplier of 4.13. This produced capitalised maintainable earnings of $2,040,220 ($494,000 x 4.13), to which he added surplus assets of $751,000 to produce a total value of $2,791,220.

93 Accordingly a number of valuation issues arise:

· The date of valuation. The Bradfield interests contend that the appropriate date of valuation is the date of their “exclusion”; the defendants contend that the appropriate date is the present.

· Valuation methodology. It is accepted that the appropriate methodology is capitalisation of future maintainable earnings, unless a notional liquidation would produce a higher valuation.

· Future maintainable earnings. The difference between the valuers largely turns on whether the earlier or later date of valuation is adopted.

· The price earnings ratio or multiplier. This includes questions as to the appropriate starting point, and what discounts should be made to it.

Date of Valuation

94 The Bradfield interests submit that the date of valuation should be the date on which the oppressive conduct occurred, and that Mr Russell’s valuation is the most appropriate date. The defendants submit that if Mr Russell’s valuation were used, allowance would have to be made for dividend distribution of $470,000 in 2005 (after the effective date of his valuation), and that the valuation should be as close as possible to the trial and buy out taking into account matters which had occurred in the interim.

95 Although Mr Russell said that his date of valuation was July 2005, he did not use results for the year ended June 2005. The most recent results that he used were those for the year ended June 2004. For practical purposes the effective date of his valuation was June 2004. On any view, it was not the date of the “exclusion”, January 2005.

96 The most significant change in circumstances that affects Mr Whitton’s valuation but not Mr Russell’s is the loss of the Brisbane food and beverage outlet. That occurred for reasons beyond the control of the company, and would have occurred regardless of Mr Petrovski’s exclusion from day-to-day executive management. I fully accept that in an oppression suit the question of valuation should be determined disregarding the adverse impact on value of any relevant oppressive conduct. But it is not apparent in this case that there has been any wilful running down of the company or its assets. While the Bradfield interests ought be no worse off by reason of the oppressive conduct, there is no reason why they should be better off on that account than they otherwise would have been. It is difficult to imagine that had the company’s fortunes improved following Mr Petrovski’s termination the Bradfield interests would have been denied their proportionate share in any enhancement of its value up to the date of determination. In the context of this case, justice between the parties is best achieved by adopting a valuation as close to the present as possible. The Bradfield interests have continued to derive dividends from their shareholding in the interim.

Future Maintainable Earnings

97 Mr Russell, having reviewed adjusted earnings for the five years to 30 June 2004, adopted those for the year ended 30 June 2004 being the most recent available year of $744,133, observing that the five year average was $741,486.

98 Mr Whitton included the results for the year ending 30 June 2005, of $514,000, the effect of which was to produce a six-year average of $704,000. He then deducted the contributions from the Brisbane food and beverage outlet which would cease on 30 April 2007 upon expiration of the lease with no prospect of renewal and which amounted to $210,000, to result in future maintainable earnings of $494,000. Although there was evidence and cross examination directed to the various impacts of the 2000 Olympics, the SARS outbreak, 11 September, the Bali bombings and other events, these are all typical potential hazards of a business which depends heavily upon international travel, and do not warrant giving greater or lesser weight to the years in which they occurred; their impact is accounted for in the overall averaging of previous years earnings to produce a figure for future maintainable earnings.

99 Mr Whitton’s figure is the more current; it takes into account the most recent results that Mr Russell’s does not but to which a purchaser would give considerable weight, and it incorporates the effect of the loss of the Brisbane food and beverage outlet. It is much more likely truly to reflect future maintainable earnings.

100 Moreover, Mr Russell accepted that one would not normally give significance to results six years old, and that an average of the last three years adjusted maintainable earnings was probably a better guide to future maintainable earnings. Mr Whitton agreed with this. On that basis, the three-year average is $588,660, and after exclusion of the contribution from the Brisbane food and beverage outlet, $378,660. I adopt that figure as the best assessment, based on current information, of future maintainable earnings.

The PER Multiplier

101 Initially, Mr Russell used as his starting point the average of the PERs of four supposedly comparable companies – Foodlands, Woolworths, Metcash, and Sam’s Seafood Holdings Limited. Although each of these companies have businesses which have some of the features of the Company’s business, there is nothing comparable about their size and diversity. The PER is affected by the size, stability, diversity and reputation of a corporation. Generally, the more established, larger, consistent and diverse the business, the higher its PER. In this case, the ultimate adoption by Mr Russell of a PER of 6.84 after extensive adjustments to his starting point of 20.27 itself shows that companies with a price earnings ratio of more than 20 are not comparable; in his valuation, the somewhat arbitrary adjustments are far more significant than the derived starting point PER.

102 Although Mr Russell discounted the average by 20% for “size”, that still left a discounted PER higher than the PER of Sam’s, yet Sam’s has four times the turnover and significantly greater diversity than the Company. All else being equal, one would expect the Company to have a lower PER than Sam’s. Mr Whitton took the industry average for “consumer discretion” of 19.43 and also discounted it for size. But that industry average is for publicly listed companies, which are likely to be significantly larger and more established than the Company.

103 When some of these difficulties were pointed out to the parties and their valuers, Mr Whitton inclined to the view that Sam’s was the best comparable, and adopted its PER and applied a discount of 20% for size to it. On the evidence, I agree that Sam’s - although it is much larger than the Company with four times the turnover but a comparable EBIT ratio - is by far the best available comparable, but that some discount for the difference in size is necessary. The 20% figure appears quite arbitrary, but all adjustments of this type contain elements of arbitrariness and on the available evidence the best I can do is to adopt the 20% figure, in accordance with Mr Whitton’s revised approach. I am satisfied that, before reaching issues of negotiability and minority discounts, a starting point price earnings ratio of 80% of Sam’s is a reasonable approximation; that is a PER of 10.07.

104 Both valuers proposed a further 40% discount (of the starting point) for lack of negotiability. Mr Russell says that this was sourced in Lonergan, The Valuation of Businesses, Shares and Other Equity, 4th edition. Nothing in Lonergan in fact supports a 40% discount, let alone for a large minority interest of 40%; the author suggests that the range for a discount for lack of negotiability is 25%-30%, and sometimes less. The larger the minority interest, typically the less the discount, which suggests that a large minority interest of 40% would attract a discount at the lower, not the higher, end of the range. But in my view adoption of any discount for this reason in the setting of this case is entirely misconceived. Both valuers addressed their task as valuation of the whole of the share capital in the company, not valuation of a minority interest. On that approach the relevant assumption is that the company sells all of its assets and turns itself into a cashbox. No question of negotiability of shares in the company arises. That question arises only if one is valuing a shareholding within the company. Moreover, as Lonergan explains (at 590) the purchaser of 75% or more of the issued share capital can alter the provisions of the articles and remove any restriction on transferability, and accordingly an adjustment to the rate of capitalisation in view of any restrictive provision in the articles would not normally be warranted. Here, the result of the order I will make will be that the majority will hold 100% of the shareholding. Mr Whitton explained that he had accepted Mr Russell’s 40% discount as an appropriate one for the difficulty of selling a proportional 40% interest, but when valuing the company as a whole no question of selling a 40% proportional interest arises. Mr Whitton accepted that if one were valuing not a proportional equity in a proprietary limited company, but the whole of the proprietary limited company on the basis that it was selling its business to a third party and turning itself into a cashbox, the question of discount for lack of negotiability of shares would not arise. There is a separate question as to whether there should be a discount for minority interest/lack of negotiability when valuing a proportionate interest, to which I shall return. But in valuing the whole of the capital in the Company, for present purposes, it is inappropriate to apply any discount for lack of negotiability.

105 Mr Whitton proposed a further discount for business risk of 15% of the starting point (1.88). Having regard to the progressive decline in adjusted profits over the years, the loss of the Brisbane food and beverage outlet, and the dependency of the business on short term leases without options carrying a significant risk of non-renewal, I think a further discount on this account is appropriate. However, Mr Whitton’s 15% was influenced by the loss of the Brisbane outlet, and though he endeavoured to explain that this was taken into account as a manifestation of the type of risk that continues to affect the remaining businesses, in my judgment there is an element of double counting, since his approach had already excluded the contribution to earnings of the Brisbane outlet from the calculation of future maintainable earnings. I would adopt 10%, rather than his 15%, as recognising the additional risk in this business, compared to the hypothetical average, manifested by declining profits and short-term occupancies.

106 Accordingly, I would discount the Sam’s PER of 12.59 by 20% (2.52) for size, and by 10% (1.26) for industry risk, but not at all for lack of marketability. That produces a “net” PER of 8.81. Both valuers agree and I accept that that net figure should be subject to a further discount of 15% for foreign exchange risk, resulting in an adjusted PER of 7.49, which I round to 7.5. While on the one hand that seems relatively high for a proprietary company, on the other it is a company that has no significant debt.

107 Application of that PER to maintainable earnings of $378,660 per annum produces capitalised maintainable earnings of $2,839,950. Adding the surplus assets of $751,000 produces a total valuation of $3,590,950.

108 The balance sheet of the company as at September 2005 shows net assets of $3,380,303. Accordingly the implied good will is $210,647, which is only about seven months earnings. In a company that is essentially debt free, this shows that the valuation I have reached is far from excessive.

109 Accordingly, I adopt a valuation of $3,600,000. Forty percent of that is $1,440,000. In the context of an oppression suit, and in the context that no discount for minority interest applied when the shares were purchased, it is ordinarily inappropriate to apply any discount for non-negotiability or minority interest [Re Bird Precision Bellows Limited [1986] 1 Ch 658; Elmslie v Federal Commissioner of Taxation (1993) 46 FCR 576; (1993) 118 ALR 357; (1993) 93 ATC 4964; Dynasty v Coombs (1995) 59 FCR 122; (1995) 138 ALR 64; (1995) 13 ACLC 1290].

110 The defendants submit that the price at which the Bradfield interests acquired their shares in February 1999 is strong evidence of their value; and that whereas in the 2000 financial year the value of their shares represented 7.3% of total sales ($840,000 being the purchase price and $11,145,983 being total sales), consistently as at 30 June 2005 7.3% of sales ($12,260,000) would value their shares at $895,000. They submit that there is no justification for the proposition that the fair value of the shares had increased at a higher rate. However, the price at which the shares were acquired in 1999 might have been influenced by any number of factors. Neither valuer relied on it as a comparable transaction. I do not think it is a reason for departing from valuation principle. In any event, an increase over five and a half years from $840,000 to $1,440,000 is not so extraordinarily out of line as the defendants suggest.

111 The defendants submit that allowance should be made for the uncertainties that confront the business in future years, including the uncertain nature of its leases and the loss of the concession at Brisbane airport. Those factors have been taken into account in the discounts to which I have referred, particularly that for industry risk.

Conclusion

112 My conclusions may therefore be summarised as follows.

113 I am not satisfied that the fees incurred and paid to Bartier Perry were not reasonably incurred in the defence of the Company, and I would not find oppression on that ground. Even if oppression on that basis were established, the remedy would be merely that the Largerlow interests compensate the Company for such expenditure as was found to be inappropriate.

114 The evidence does not establish a case of oppression in the conduct and recording of meetings of the directors of the Company. Again, even if it did, the appropriate remedy would merely be an order regulating the affairs of the company in the future.

115 The circumstances that the Lagerlow interests needed the involvement of the Bradfield interests to complete the acquisition of the Company, and perceived there to be an urgency about completing that acquisition; that there was no discount for minority interest in the price paid by the Bradfield interests and no premium for control in that paid by the Largerlow interests; that although negotiations for a shareholders’ agreement were incomplete, the parties through their negotiations for that agreement manifested an intention that there was more to their relationship than the articles of association; that the company was a proprietary company with restrictions on the transfer of shares, so that a member could not take out his, her or its stake and go elsewhere; and that there was an understanding between all participants that Mr Petrovski as well as Mr John Lagerlow and Mr Gordon Lagerlow would be engaged in the business on a full time basis as an executive director; together made it unfair for the Largerlow interests to use their majority voting powers under the articles to remove Mr Petrovski from participation in the daily management of the business, without giving the Bradfield interests the opportunity to sell their interest in the company at a fair price – at least in the absence of proof that Mr Petrovski had so conducted himself that his removal was necessary in the interests of the company.

116 Deferral of the question of relief is unnecessary, and reinstatement is not a realistic alternative. The appropriate relief is an order for the purchase of the Bradfield interests’ shares at valuation.

117 I value the totality of the shareholding in the Company at $3,600,000, and the Bradfield 40% interest at $1,440,000.

118 As the precise form that the order for purchase should take has not been argued, I will afford the parties an opportunity to address that issue and to bring in short minutes to give effect to this judgment, when the question of costs can also be addressed.

119 At this stage my orders are:

1. Direct that the parties bring in short minutes to give effect to this judgment.

2. Stand over the proceedings for short minutes and argument as to costs to 2.00 pm before me on Friday 9 March 2007.

**********