MTQ Holdings Pty Ltd v RCR Tomlinson Ltd
[2005] WASC 20
•22 DECEMBER 2004
| JURISDICTION | : | SUPREME COURT OF WESTERN AUSTRALIA IN CHAMBERS |
| CITATION | : | MTQ HOLDINGS PTY LTD & ANOR -v- RCR TOMLINSON LTD [2005] WASC 20 |
| CORAM | : MASTER SANDERSON | ||
| HEARD | : 21 DECEMBER 2004 | ||
| DELIVERED | : 22 DECEMBER 2004 | ||
| PUBLISHED | : 2 MARCH 2005 | ||
| FILE NO/S |
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| BETWEEN |
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MTQ ENGINE SYSTEMS PTY LTD
(ACN 089 558 878)Second Plaintiff
AND
RCR TOMLINSON LTD (ACN 008 898 486)
Defendant
Catchwords:
Corporations Act 2002 - Application to prevent issue of shares to underwriter -
Turns on own facts
Legislation:
Corporations Act 2002, s 712, s 713
[2005] WASC 20
Result:
Limited injunction granted
Category: B
Representation:
Counsel:
| First Plaintiff | : | Mr M L Bennett |
| Second Plaintiff | : | Mr M L Bennett |
| Defendant | : | Mr G M Abbott |
Solicitors:
| First Plaintiff | : | Bennett & Co |
| Second Plaintiff | : | Bennett & Co |
| Defendant | : | Q Legal |
Case(s) referred to in judgment(s):
Nil
Case(s) also cited:
Australian Broadcasting Commission v Australasian Performing Right
Association Ltd [1973] 129 CLR 99
Broker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600
Fitzgerald v Masters (1956) 95 CLR 420
Investors Compensation Scheme Ltd v West Bromich Building Society [1998] 1
All ER 98
Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd & Ors [1997] 3
All ER 352
McGuire v Ralph McKay Ltd & Ors (1987) 5 ACLC 891
Ngurli Ltd & Anor v McCann & Anor (1953) 90 CLR 425
Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979)
144 CLR 596
[2005] WASC 20
MASTER SANDERSON
MASTER SANDERSON: By originating process filed 16 December 2004 the plaintiffs, relying upon s 233, s 728 and s 1324 of the Corporations Act 2001 sought the following order:
"(1) An injunction be granted:
1.1 restraining the Defendant from allotting a shortfall arising from subscriptions to the Defendant's rights issue prospectus dated 16 November 2004 to Hartleys Limited; and 1.2 requiring the Defendant to allot the shortfall arising from subscriptions to the Defendant's prospectus on a pro-rata basis to all shareholders of the Defendant entitled to participate in the rights issue who as at 10 December 2004 had applied to participate in the allotment of the shortfall to the extent of any such applications made."
2 At the time of filing the originating process the plaintiffs also filed an
interlocutory process seeking an injunction pro tem in terms of par 1.1 of the originating process. The matter came before Commissioner Braddock SC on 16 December 2004. On an undertaking of the defendant in terms of par 1.1 of the originating process as amended, the matter was adjourned to 20 December 2004. When the matter came before Master Newnes on that day, the undertaking was renewed until 2.30 pm on 21 December 2004. When the matter came before me on 21 December 2004 the defendant indicated that the undertaking would not be renewed. The plaintiffs then sought to pursue their application for the interlocutory injunction. Given the limited nature of the issues between the parties I offered to hear the originating process that same day. To their credit, both parties accepted that offer. After hearing argument, I reserved my decision until 22 December. I then made orders in terms of par 1.1 of the originating process. I indicated to the parties that I would publish reasons for my decision. These are those reasons.
3 The facts are not seriously in dispute. The two plaintiffs are
shareholders in the defendant. The defendant is an engineering concern and riding on the back of the present resources boom, it has decided to raise further capital to allow for expansion of its business. On 16 December 2004 the defendant issued a prospectus dealing with a non-pronounceable rights issue made to each of its shareholders. A copy
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MASTER SANDERSON
of that prospectus appears as annexure "MAM1" to the affidavit of Mark Alan MacLennan ("Mr MacLennan"), sworn 16 December 2004 and filed in support of this application. The rights issue was looking to raise approximately $3,311,094 by way of the issue of 5,808,936 shares at an issue price of 57 cents each.
4 The prospectus was in a form described by the Corporations Act as being a "Short Form Prospectus": see s 712 and s 713 of the Corporations Act. Clause 4.1 details in a broad sense the offer of the shares. Clause 4.2 is titled "How to Accept the Offer". This clause is central to the dispute between the parties and I will quote it in full:
"4.2 How to Accept the Offer Your acceptance of the Offer must be made on the Entitlement and Acceptance Form accompanying this Prospectus. Your acceptance must not exceed your Entitlement as shown on that form. If it does, your acceptance will be deemed to be the maximum Entitlement. You may participate in the Offer as follows:
(a) if you wish to accept your Entitlement in full: (i) complete the Entitlement and Acceptance Form, filling in the details in the spaces provided; and
(ii) attach your cheque for the amount indicated on the Entitlement and Acceptance Form; or
(b)
if you only wish to accept part of your Entitlement:
(iii)
fill in the number of Shares you wish to accept in the space provided on the Entitlement and Acceptance Form; and
(iv)
attach your cheque for the appropriate application monies (at $0.57 per Share); or
(c)
if you do not wish to accept all or part of your Entitlement, you are not obliged to do anything.
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MASTER SANDERSON
If you wish to participate in the Offer you must forward the completed Entitlement and Acceptance Form, together with your cheque drawn on an Australian bank or bank draft made payable in Australian currency to 'RCR Tomlinson Ltd - Entitlement Offer Account' and crossed 'Not Negotiable' in the enclosed envelope to Computershare Investor Services Pty Limited at Level 2, Reserve Bank Building, 45 St George's Terrace, Perth, WA, 6000.
Your completed Entitlement and Acceptance Form and cheque must reach the share registry no later than 5pm WST on the Closing Date.
The Company also requests that you provide your e-mail address on the Entitlement and Acceptance Form. This will then enable the Company to send announcements and other important Shareholder information to you in a cost effective manner.
The Offer is non-renounceable. Accordingly, a holder of Shares may not sell or transfer all or part of their Entitlement."
5 Being a rights issue, it was to be expected that some shareholders
may not take up the shares offered to them. In other words, some of the 5,808,936 shares on offer might not be issued because individual shareholders decided not to exercise their rights. Any such leftover shares are referred to in the prospectus as the "Shortfall". Clause 4.5 deals with this shortfall. Again, it is a clause of central importance and I will quote it in full:
"4.5 Shortfall
This Prospectus constitutes a separate offer for the
Shortfall Shares.If you wish to apply for more Shares than your Entitlement, or if you are not a Shareholder and wish to apply for Shortfall Shares, you may complete the Shortfall Application Form accompanying this Prospectus.
[2005] WASC 20
MASTER SANDERSON
The Directors, in consultation with the Underwriter, reserve the right to issue Shortfall Shares pursuant to any Shortfall Application Forms at their absolute discretion.
The Directors cannot guarantee that any application to participate in the Shortfall Offer will be successful. In relation to the Shortfall Offer the Directors reserve the right to allot to an applicant a lesser number of Shares than the number for which the applicant applies, or to reject an application or to not proceed with the placing of the Shortfall pursuant to this Prospectus. If the number of Shares allotted is fewer than the number applied for, surplus application monies will be refunded in full. Interest will not be paid on monies refunded."
6 By cl 4.8, shareholders are advised that the offer is fully
underwritten. Shareholders are directed to cl 8.2 for details of the underwriting agreement. Clause 8.2 deals with "Material Contracts". One of those material contracts is the "Underwriting Agreement" ("the agreement"). It is said that the agreement was entered into on 16 November 2004 between Hartleys Limited ("Hartleys") and the Company. Without going into detail, the defendant agreed to pay Hartleys an underwriting commission equal to 6 per cent (plus GST) of the total amount raised under the issue. There then follows a long list of circumstances which might bring the agreement to an end. The clause concludes with the following provision:
"The Underwriting Agreement contains covenants, warranties, representations and other terms normal for an agreement of this nature."
7 Appearing at the back of the prospectus are two forms. One is titled
"Entitlement and Acceptance Form" and a "Shortfall Application Form". Neither of these forms is remarkable. The prospectus makes it clear that to take up an entitlement under the prospectus a shareholder must use the Entitlement and Acceptance Form and to apply for shares in the Shortfall, the Shortfall Application Form must be used. No other form of application is permissible.
8 It is helpful at this point to stand back and view this method of
capital raising from the perspective of a reasonably sophisticated retail investor. Such an investor would be familiar with the process of raising capital through a rights issue. The investor would know that each
[2005] WASC 20
MASTER SANDERSON
shareholder had the right to participate in the issue, the number of shares available to each shareholder being in proportion to their shareholding in the company. While each shareholder had the right to take up shares, there was no obligation to do so. It was possible that not all shareholders would participate in the rights issue so there would be a shortfall. Shareholders - and indeed any member of the public - could then apply for the shares not issued to shareholders pursuant to the rights issue. The investor would be aware that if an application was made for these Shortfall Shares, it might or might not be successful. The investor would probably assume that an application made for Shortfall Shares would be successful unless applications were made for more shares than were available. Then the investor might expect that a pro-rata allotment would be made to those applying for the Shortfall Shares, although that expectation could not arise out of anything contained in the prospectus. If, on the other hand, there was a shortfall and there were no applications for the Shortfall Shares, or insufficient applications to see all the Shortfall Shares issued, then the underwriters would step in. That would ensure the amount the defendant was seeking to raise pursuant to the prospectus was in fact raised. In short, the investor would see this capital raising as common place and in every sense, unexceptional.
9 The plaintiffs duly applied for the shares to which they were entitled
based upon their shareholding. The first-named plaintiff was entitled to apply for 520,149 shares at a cost of $296,484.93. The second-named plaintiff was entitled to apply for 1,013,653 shares at a cost of $577,782.21. Both plaintiffs made applications for Shortfall Shares. The first-named plaintiff applied for 340,000 shares at a cost of $193,800. The second-named plaintiff applied for 660,000 shares at a cost of $376,200. There was, in fact, a shortfall of 1,033,463 shares. The shortfall applications totalled 1,680,828 shares. So there were not enough shares available to satisfy the requirements of all of the applications for Shortfall Shares. It would then be a reasonable expectation that the Board would issue the Shortfall Shares to the shortfall applicants pro rata, or at least that the shares would be issued to shortfall applicants. So far as the underwriter was concerned, it might be thought that they would take their fee, allow themselves a moment of quiet satisfaction, content in the knowledge they had undertaken a pain free profitable transaction and moved on to other activities. But that is not what happened.
10 On either 14 or 15 December (the evidence is not clear which is the
correct date), the defendant made an announcement to the Australian Stock Exchange ("ASX") in relation to the rights issue. That announcement read, in part (see annexure "MAM3"):
[2005] WASC 20
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"A total of 12 million shares were allotted and issued at 59 cents to institutional and retail investors raising $7,080,000 and 5.8 million shares will be allotted at 57 cents to existing shareholders pursuant to the Rights Issue Prospectus raising $3.3 million. The rights issue shortfall of $590,000 was taken up by the underwriter to the issue."
11 This announcement provoked correspondence from the plaintiffs'
solicitors. Without going into detail, the solicitors suggested that in the circumstances the issue of shares to the underwriter was inappropriate. This letter then led to a further announcement by the defendant to the ASX. This announcement was made on 16 December 2004. Relevantly, it reads as follows (see annexure "KAD1" to the affidavit of Kevin Anthony Dundo, sworn 21 December 2004):
"As to the rights issue prospectus to raise $3.3 million (which is fully underwritten), whereby 5.8 million shares will be allotted at 57 cents to the existing shareholders (subject to any shortfall being taken up by the underwriter), those shares will be allotted following formal board approval and the company will advise the market once that approval is obtained."
12 There then followed a further announcement by the defendant to the
ASX. This announcement was made on 17 December 2004 and is in the following terms (see annexure "KAD1"):
"The company refers to its announcement dated 16 December 2004 and advises that the Board has unanimously approved the allotment and issue of 4,773,473 shares in respect of applications received from shareholders' entitlements under the Rights Issue Prospectus.
The shortfall of 1,033,463 shares will be allotted and issued pursuant to the terms of the underwriting agreement. The Board, together with the underwriter, is currently considering the allocation of the shortfall between the shareholders and the underwriter and the Company will advise the market once that process is completed and Board approval is obtained."
13 It must be said that these three separate conflicting announcements
bespeak a certain confusion on the part of the defendant as to exactly what was to be done with the Shortfall Shares. But what is clear is that the Board intended to allot part of the shortfall to the underwriter. In fact, the Board held a meeting on 21 December 2004. Bearing in mind that at the
[2005] WASC 20
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time the Board meeting was held, the defendant had given an undertaking to the Court not to issue shares, the Board resolved as follows (see annexure "KAD2"):
"That upon expiration of the Company's undertaking to the Court and provided that no Court Order has been obtained restraining the Company from allotting and issuing the shortfall shares, the shortfall shares will be allotted and issued as follows:
(a) up to 250,000 shares to applicants (existing shareholders) for the shortfall, excluding any directors or their associates, on the basis of up to 4,000 shares per applicant; and (b) the balance then remaining to Hunter Hall Management Limited."
14 In fact, pursuant to this resolution, the Board proposes to issue
239,922 shares to the 81 applicants for Shortfall Shares. The maximum number of shares issued to any one shareholder will be 4000. So the second-named plaintiff who applied for 660,000 Shortfall Shares will receive only 4000. On the other hand, a shareholder who applied for 5000 shares will receive 4000 shares. The remaining 793,541 shares will then go to Hunter Hall Management Ltd. It would seem that Hunter Hall Management Ltd is an "institutional investor" and was a subunderwriter to the Hartleys Ltd underwriting agreement.
15 In issuing the shares as it proposes, the defendant says that it is
acting pursuant to the terms of the agreement. The agreement appears as annexure "MAM2" to Mr MacLennan's affidavit. It is between Hartleys Ltd and the defendant. Unfortunately, the agreement has been drawn in a sloppy fashion.
16 Clause 1.1 of the agreement contains definitions. "Shortfall Shares"
are defined in terms consistent with cl 4.5 of the prospectus. The phrase
is said to mean:"… the number of Underwritten Shares less the number of Shares for which Applications have been received by the Registrar on or prior to 5.00pm on the Closing Date or such other time agreed between the parties."
[2005] WASC 20
MASTER SANDERSON
17 Clause 3 of the agreement deals with "Applications and Issue of
Shares". Essentially, what is required is that the Company must accept proper applications and that shares are issued in accordance with the prospectus. There then follows cl 4, which is titled "Shortfall". The clause is in the following terms:
"4.1 Calculation of Shortfall
As soon as practicable after the Closing Date, the
Company must calculate the Shortfall.
4.2 Notice of Shortfall and Certificate If there is a Shortfall, the Company must, within 3 Business Days after the Closing Date (or such later date as the Underwriter in its absolute discretion allows), give the Underwriter:
(a) a notice in writing stating the Shortfall and setting out the calculations made by the Company under clause 3.1; and (b) the Certificate executed on behalf of the Company date the same date as the notice. 4.3 Applications for Shortfall Subject to clause 3.2 and clause 9, the Underwriter must lodge Applications with the Company for the Shortfall within 6 Business Days of receiving the notice under clause 3.2. 4.4 Issue of Shares Subject to the Corporations Act, the Company must issue the Shares in respect of any Applications lodged under clause 4.3 as soon as possible and, in any event, within 3 Business Days after receiving the Applications."
18 It was the defendant's position that pursuant to cl 4.3, as soon as the
Company advised the underwriter of the shortfall, the underwriter was obliged within six business days of receiving the notice, to lodge "Applications" for the shortfall. Once that was done, it was then up to the Board to allot the Shortfall Shares in any way they saw fit. In other words, the Board might have before it applications from shareholders for
[2005] WASC 20
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Shortfall Shares and would certainly have an application for all of the Shortfall Shares by the underwriter. The Board would then have a discretion as to how the Shortfall Shares were allotted.
19 The reasonably sophisticated retail investor might well be puzzled by
that interpretation of the agreement. At the very least, the investor might reasonably have expected that the prospectus would have advised that the Board might choose to ignore some or all of the applications by shareholders for Shortfall Shares in favour of issuing these shares to the underwriter. The absence of any advice in the prospectus to that extent suggests that it was not what was intended. Were the position otherwise there would have been a material non-disclosure in the prospectus and it is safe to assume that was not the defendant's intention.
There is a further difficulty with cl 4. Pursuant to cl 4.3 the underwriter must lodge "Applications" for "the Shortfall". Clause 1.1 defines application to mean:
"… a duly completed and executed application to subscribe for Underwritten Shares in the form of an entitlement and acceptance form attached to or accompanying the Prospectus accompanied by the Application Monies, together with any other required accompanying documents."
21 It may be that the document referred to as "an entitlement and
acceptance form" is the same document as the Entitlement and Acceptance Form as referred to in the prospectus. But even if that is so, that is not the document to be used when applying for Shortfall Shares. That application must be made on a Shortfall Application Form. So the mechanism by which the underwriters apply for the Shortfall Shares is not clearly set out in the agreement. All of this makes giving effect to the agreement very difficult.
22 However, it is not necessary for me to determine the precise
contractual relationship between the defendant and Hartleys. I am satisfied that the terms of the agreement do not require that any proportion of the Shortfall Shares be issued to the underwriter. The agreement is too imprecise and vague in its terms to warrant such a conclusion being drawn. Furthermore, given that there is nothing in the prospectus about any obligation of the defendant to issue Shortfall Shares to the underwriter, the terms of any underwriting agreement would need to be clear and precise. That is not the case here. Had it been the case that there were not sufficient applications for all of the Shortfall Shares to be
[2005] WASC 20
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taken up by Shareholders, then there could have been no argument when the rest of the shares were allotted to the underwriter. But here there were more applications for Shortfall Shares than there were shares available. In those circumstances the issue of shares in terms proposed by the Board is, in my view, both improper and inappropriate.
23 The second part of the relief sought by the plaintiffs was a mandatory
injunction requiring the Board to allot the Shortfall Shares on a pro rata basis. As I indicated above, that course might have been the course the Board could have been expected to undertake. But it was not required to undertake such a course pursuant to the terms of the prospectus or pursuant to the agreement. In fact the prospectus made it clear that the Board might not allot any of the Shortfall Shares. On that basis, it would be inappropriate to make the second order sought by the plaintiffs.
24 In support of its claim, the plaintiffs sought to rely on a fiduciary
obligation on the part of the Board to issue the shares pro rata. There are numerous difficulties with that submission. The first and fatal difficulty is that the fiduciary duty articulated is said to be proscriptive. The High Court has made it clear in any number of cases that fiduciary duties are proscriptive. I need go no further. There is no basis either in equity or in contract for requiring the plaintiffs to allot these shares on a pro rata basis.
25 It is for these reasons that I indicated to the parties that I was
prepared to make an order in terms of par 1.1 of the amended originating
process. I will hear the parties as to costs.
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